*** UPDATE *** Check this out from the October 25, 2005 edition of the Bond Buyer…
Republican lawmakers yesterday charged Illinois Democratic Gov. Rod Blagojevich’s administration with including misleading information regarding the state’s financial condition in the offering documents for a $300 million general obligation bond deal that sold last month.
The information being disputed was included on page 21 of the competitive transaction’s preliminary official statement under the section, “Fiscal Year 2006 Budget.”
The document informs readers that a reduction in some pension benefits adopted during the most recent legislative session would result in a lowering of the state’s required annual contribution to the underfunded pension systems over the next 40 years. The reforms allowed the state to lower its payment owed to the pension systems in fiscal 2006 by $1.2 billion from an original $2.5 billion.
Citing estimates provided by the independent actuary of the General Assembly’s bipartisan Commission on Government Forecasting and Accountability, the document notes that the combination of reduced benefits and revised contributions would result “in a range of net savings totaling approximately $3 billion over” the 40-year term. The state had pulled the information from a commission report that outlined three fiscal scenarios that could occur as a result of the pension legislation. After seeing the bond documents, the commission’s executive director, Dan Long, late last month sent a memorandum to Democratic and Republican Senate leaders criticizing the content.
“The above statement implies that CGFA’s estimate of the fiscal impact … is a long-term state contribution savings of $3 billion, which we believe is misleading,” Long wrote. “The impact of the three scenarios ranged from a long-term cost of almost $4.7 billion to a long-term savings of $3.1 billion. It is still too early to determine the precise impact of the significant changes to the pension system.”
Republicans, who represent the minority in the Senate, jumped on Long’s statements to criticize the governor as he was poised to address the legislature to promote passage of a program to expand health care coverage to all children living in the state. The General Assembly convened yesterday for its two-week long annual veto session. “Instead of being honest with the taxpayers, legislators, and credit rating agencies, the administration appears to have deliberately tried to mislead everyone about the state’s financial condition,” Sen. Christine Radogno, R-Lemont, said in a statement issued by Senate Republicans, who have forwarded the information to the Securities and Exchange Commission.
Prescient.
[ *** End Of Update *** ]
* Barn door, horses, etc. From an SEC press release…
The Securities and Exchange Commission today charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations.
An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.
Illinois, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC’s charges.
Nice to see that the SEC is so Johnnie on the spot. We could’ve used those insights when Blagojevich was still governor. Four years later, they push for a settlement.
From the governor’s office…
The State of Illinois and the U.S. Securities and Exchange Commission (SEC) entered into a settlement order Monday ending an inquiry into pension disclosures in bond offerings made by the State between 2005 and early 2009. The order acknowledged the proactive steps taken by the State to enhance its pension disclosures and related processes since 2009. The State began these enhancements prior to being contacted by the SEC.
The State believed it to be in its best interests to enter into a settlement with the SEC. The State has cooperated fully with the SEC throughout the inquiry. The State neither admits nor denies the findings in the order, which carries no fines or penalties.
The settlement order describes the long, complicated history of Illinois’ pension-funding issues over the decades. After taking office in early 2009, the Quinn administration began taking steps to proactively address these issues, including forming a Pension Modernization Task Force and providing additional information in its bond offering documents.
In August 2010, the SEC announced it was entering into a cease and desist order with the state of New Jersey concerning its pension disclosures. In response to the SEC’s New Jersey action, the State thought it prudent to proactively hire legal counsel to review Illinois’ pension disclosures. The State subsequently enhanced its pension disclosures in its bond offering documents and made changes to its disclosure practices, including:
· The retention of a single law firm to act as disclosure counsel to provide a consistent, proactive and continuing review of the State’s bond disclosures; and
· The adoption of formal policies and procedures that include review of the State’s pension disclosures by the pension systems themselves.
A month after the New Jersey order was issued, and after the State had hired legal counsel to review its pension disclosures, the State was notified by the SEC that the agency would be examining Illinois’ pension disclosures. The State has disclosed the SEC’s inquiry in all bond offerings since the inquiry began in September, 2010, as widely covered in the press.
From the SEC order…
The State has taken significant steps to correct these process deficiencies and enhance its pension disclosures. Among other things, the State issued enhanced disclosures; retained disclosure counsel; instituted written policies and procedures, disclosure controls, and training programs; and designated a disclosure committee.
* The SEC also harshly criticized the 50-year “ramp” devised by former Gov. Jim Edgar…
Enacted in 1994, the Illinois Pension Funding Act (the “Statutory Funding Plan”) established a pension contribution schedule that was not sufficient to cover both (1) the cost of benefits accrued in the current year and (2) a payment to amortize the plans’ unfunded actuarial liability. This methodology structurally underfunded the State’s pension obligations and backloaded the majority of pension contributions far into the future. The resulting systematic underfunding imposed significant stress on the pension systems and on the State’s ability to meet its competing obligations. […]
Rather than controlling the State’s growing pension burden, the Statutory Funding Plan’s contribution schedule increased the unfunded liability, underfunded the State’s pension obligations, and deferred pension funding. This resulting underfunding of the pension systems (“Structural Underfunding”) enabled the State to shift the burden associated with its pension costs to the future and, as a result, created significant financial stress and risks for the State. […]
The 90 percent funding target allowed the State to amortize the UAAL in a manner that would not eliminate it entirely. By failing to amortize the UAAL completely, the State was able to lower its contributions. However, by assuring that some portion of the UAAL would remain outstanding, it also increased the economic cost of the pensions and delayed the cash outlays necessary to fulfill its pension obligations.
The State’s plan also spread costs over fifty years, in contrast to the thirty-year amortization period adopted by the pension plans of most other states. The longer amortization period extended the amount of time required to pay down the UAAL, reducing the State’s annual statutory contributions while increasing the real cost of the pensions over time.
The State’s phased contributions during the fifteen-year ramp period accelerated the growth of the UAAL during this time period and amplified the burden and risk associated with the State’s plan.
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- Dirt Diver - Monday, Mar 11, 13 @ 10:03 am:
As a Dem, I greatly respect Jim Edgar. I’m glad the SEC is pointing out the obvious, that the “Edgar funding plan” was about as backloaded as one could make it.
I’m sick and tired of hearing the GOP praise his funding plan. The Edgar adminstration never had to significantly craft a trim budget in order to adequately fund the pensions, he just kicked it down the road to future GAs and Governors.
- VanillaMan - Monday, Mar 11, 13 @ 10:04 am:
Illinois? Fraud? Moi?
Honest officers, we didn’t know just how rotted, corrupted and incompetent we were!
We feel so bad!
- The Captain - Monday, Mar 11, 13 @ 10:11 am:
The 1995 ramp was poorly constructed for political purposes but somehow has become sacrosanct over the years despite various proposals to change it. Now that we are in the backloaded portion of the 1995 ramp many well meaning people have proposed altering the ramp to provide some relief as the annual pension payment increases have been so steep as to almost cripple the state budget, however this criticism from the SEC seems to call for even larger payments. Sure the SEC says it shouldn’t have been so backloaded but if I’m reading this right it also says that Illinois should have set a 100% funding goal over 30 years instead of a 90% goal over 50 years. Where would the money for that come from?
- archimedes - Monday, Mar 11, 13 @ 10:15 am:
The SEC report is interesting reading. Basically, it says the penion mess is due to a structurally flawed funding choice by the State - prior to 1982 using “pay as you go”, 1982 to 1994 flat contributions, post 1994 the pension ramp (along with holidays). Even quotes actuaries and other warnings.
Hard to argue that the pension crisis wasn’t a deliberate choice by the State to spend what revenue they had on stuff other than a reasonable pension payment. So now they have to spend what revenue they have on an unreasonable pension payment to pay down the debt they built up.
- Norseman - Monday, Mar 11, 13 @ 10:25 am:
Full disclosure is good, however to say that the systems have to be 100% is ridiculous. Nice goal, but that’s not attainable for Illinois given the history of mismanagement. I think Martire’s plan is sufficient.
- Secret Square - Monday, Mar 11, 13 @ 10:32 am:
How long before the media talking heads start breathlessly reporting this as if it were some dramatic new revelation… the headline “State of Illinois charged with securities fraud” is just too good to pass up even if the proceedings are pro forma and involve stuff that happened years ago.
- wordslinger - Monday, Mar 11, 13 @ 10:43 am:
The SEC Order reads as much as an indictment of shorting pension funding since 1982 as it does of failure to fully disclose.
Anyone know what prompted the SEC review? It seems unusual.
- StayFree75 - Monday, Mar 11, 13 @ 10:46 am:
Here’s Exhibit A in a lawsuit against the State if the General Assembly insists on imposing unconstitutional diminishments to pension benefits.
I agree Martire’s plan is sufficient.
- Fair Share - Monday, Mar 11, 13 @ 10:50 am:
Well there goes the Martire plan.
And - Way to bury the lead Rich. “…Blago era…” pales in comparison to the fiscal time bomb planted by Edgar.
- Demoralized - Monday, Mar 11, 13 @ 10:55 am:
@word:
I think the SEC had been looking generally at all bond issues to see how people were handling pensions. Other governments were caught doing the same thing.
- wordslinger - Monday, Mar 11, 13 @ 10:59 am:
–I think the SEC had been looking generally at all bond issues to see how people were handling pensions. Other governments were caught doing the same thing.–
If that’s the case, I don’t know whether to laugh or cry. Because the SEC sure wasn’t looking very hard at the big dogs in the securities market up to about Sept. 2008.
- Statesman - Monday, Mar 11, 13 @ 11:08 am:
So how about all the capital and securities companies owned by friends of Rod and funders of the democrats? Will they be charged by the SEC- they were involved the “final 100 yards” of selling bad paper. That will never happen though.
- Cook County Commoner - Monday, Mar 11, 13 @ 11:11 am:
It will be interesting to see how many more states come under SEC perusal for failure to properly disclose pension funding issues. Seems the feds are getting worried about the widespread state and local government pension funding crisis. Maybe this and the Jersey SEC actions are shots over the bow to states like Illinois to take action.
- wordslinger - Monday, Mar 11, 13 @ 11:56 am:
–So how about all the capital and securities companies owned by friends of Rod and funders of the democrats?–
I don’t think any of Rod’s friends “owned” securities firms.
I do recall Big Bob Kjellander got an $800K finder’s fee from Bear Stearns for landing the $10 billion POB.
What kind of Democrat is Bob?
- T.O. - Monday, Mar 11, 13 @ 12:21 pm:
The total disbursements for SERS, JRS and GARS was around 1.7B last year. Employee contributions were around 275M. At what point does it make more sense to go back to a pay as you go system similar to the feds? If the cost shift could push the SURS and TRS off the state books the pension “liability” would completely disappear from the state’s credit report. If this was in effect last year the state pension bill would have been around 1.5 billion, + insurance. Not sure if it’s possible, just thinking out loud…
- wordslinger - Monday, Mar 11, 13 @ 1:26 pm:
–I agree with StayFree75. This SEC action settles the investors’ fraud claims but does not settle the pensioner’s fraud claims. I will sell tickets to the depositions of Madigan, Cullerton, et al regarding who knew what when–from how was bond counsel selected to which consultants were retained to place their stamp of approval on this scheme.–
What in the world are you talking about?
- shore - Monday, Mar 11, 13 @ 1:32 pm:
“50-year “ramp” devised by former Gov. Jim Edgar…”
Was Jim Edgar’s ex cos kirk dillard part of this?
- wordslinger - Monday, Mar 11, 13 @ 1:38 pm:
–Was Jim Edgar’s ex cos kirk dillard part of this?–
Yes.
- wordslinger - Monday, Mar 11, 13 @ 1:51 pm:
Re the update: Now we know why the SEC was on it. Thanks.
- House of Lords - Monday, Mar 11, 13 @ 1:56 pm:
T.O.-
Thanks for illustrating the point. The cost shift is really a liability shift. And by the way, school districts CAN file for bankruptcy and thus renegotiate the debt.
- Rich Miller - Monday, Mar 11, 13 @ 2:00 pm:
===And by the way, school districts CAN file for bankruptcy and thus renegotiate the debt. ===
Illinois absolutely does not allow local governments to file for bankruptcy and I’m pretty sure that applies to school districts as well.
- funny guy - Monday, Mar 11, 13 @ 2:10 pm:
To wordslinger:
I’m talking about the 1994 Illinois Pension Funding Act, which on its face, was not designed to fund anything.
- Mouthy - Monday, Mar 11, 13 @ 3:14 pm:
So how much does the state owe the SEC?
- funny guy - Monday, Mar 11, 13 @ 3:39 pm:
The State owes the SEC nothing. Illinois promised not to do it anymore, which raises an interesting dilemma. If the GA doesn’t adopt a constitutionally acceptable plan that actually solves the pension problem, how do they make any credible representations to the investment community about the credit worthiness of their bonds. Next time, the SEC may have the basis to indict someone–if not the legislature themselves, how about their expensive lawyers and consultants.
- Formerly Known As... - Monday, Mar 11, 13 @ 4:25 pm:
I wonder how much, if any, media play the SGOP got off that at the time? Interesting twist, gives them a bit more credibility on such issues moving forward.
- Arthur Andersen - Monday, Mar 11, 13 @ 4:47 pm:
funny guy, go read the documents.
The State didn’t agree that its funding program was fatally flawed, it agreed to do a better job of disclosing the deficiencies in the funding program when it sells bonds in the future.
H/T Steve Schnorf
- steve schnorf - Monday, Mar 11, 13 @ 9:03 pm:
I think that we could probably disclose that we were funding our pensions with monopoly money without having much negative impact on the market’s taste for full faith and credit debt from the State of Illinois, the market being well aware of what the default rate on full faith and credit debt issued by states over the past 200 years is. As a matter of fact, I want to put that proposal on the table as a solution to our pension problems, it being as likely to happen and/or to work as many of the others.
- wordslinger - Monday, Mar 11, 13 @ 9:16 pm:
I’m with you, Schnorf.
Regardless of what you think about pension funding, the SEC Order — Securities Fraud! — is weird chasing the weird.
Who didn’t know what? Who, among the bond buyers, cared, and why would they? They get paid first.
What wasn’t transparent?
Do you need a reservation for tomorrow’s press conference when Sen. Radogno takes credit for initiating this nonsense? You take your victories where you can find them.
And thanks, once again, SEC, for the bang-up job you did back in 2005, when Illinois $2 billion bond issues got on the the radar.
Pay no attention to those subprime MBS.
- funny guy - Tuesday, Mar 12, 13 @ 7:27 am:
Just because the State didn’t agree that their funding program was fatally flawed doesn’t mean that the SEC couldn’t prove it in court. The State was given a pass–but next time they may not be so fortunate.
- ejhickey - Tuesday, Mar 12, 13 @ 2:11 pm:
as i undertand the SEC decision, Illinois has not fixed its pension problem but has only fixed its disclosure problem and has promised to be more truthfull in the future. may i suggest that any full disclosure statement look something like this:
“Due to the enormity of the state’s unfunded pension-related obligations, including post-retirement health care, there is a substantial likelihood that the state’s financial resources will be depleted in the near future. Absent a federal bail-out, investors in these bonds may lose the entire amount of their principal and interest. While the Governor has requested a federal bailout, there is no assurance any such effort will succeed”
that should satisfy the SEC and let any buyers of our bonds know the risks.