*** 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.
[ *** 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.