A few years ago the SEC went after New Jersey for omissions and misleading disclosures in its muni offerings. According to the SEC’s litigation release, the misleading statements and omissions concerned the serious underfunding of New Jersey public pensions:
According to the SEC’s order, New Jersey offered and sold more than $26 billion worth of municipal bonds in 79 offerings between August 2001 and April 2007. The offering documents for these securities created the false impression that the Teachers’ Pension and Annuity Fund (TPAF) and the Public Employees’ Retirement System (PERS) were being adequately funded, masking the fact that New Jersey was unable to make contributions to TPAF and PERS without raising taxes, cutting other services or otherwise affecting its budget. As a result, investors were not provided adequate information to evaluate the state’s ability to fund the pensions or assess their impact on the state’s financial condition.
New Jersey is the first state ever charged by the SEC for violations of the federal securities laws. New Jersey agreed to settle the case without admitting or denying the SEC’s findings.
New Jersey is not alone: the SEC has now brought a similar action against the State of Illinois:
1. In connection with multiple bond offerings raising over $2.2 billion from approximately 2005 through early 2009, the State of Illinois misled bond investors about the adequacy of its statutory plan to fund its pension obligations and the risks created by the State’s underfunding of its pension systems.
2. The State omitted to disclose in preliminary and final official statements material information regarding the structural underfunding of its pension systems and the resulting risks to the State’s financial condition. 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.
3. During this same time period, the State also misled investors about the effect of changes to the Statutory Funding Plan, including substantially reduced pension contributions in 2006 and 2007 (“Pension Holidays”). Although the State’s preliminary and final official statements disclosed the fact of the Pension Holidays and other legislative amendments to the plan, Illinois did not disclose the effect of those changes on the contribution schedule or on the State’s ability to meet its pension obligations.
The only surprising thing to me about this development is, well, that it took so long to develop. If other states and their local muni issuers didn’t get the message about the pension obligations disclosure after New Jersey, will they get it now? I can’t believe Illinois is the only state that has had this problem–it is just the most glaring example of it.