In what's become a pretty common procedure at the Securities and Exchange Commission lately, the SEC charged the State of Illinois with committing securities fraud Monday -- and then promptly settled the charges.
According to the SEC, Illinois sold investors $2.2 billion worth of municipal bonds between 2005 and 2009 but in so doing failed to inform investors that it's spent the past two decades chronically underfunding its pension funds and worsening its ability to pay the bonds back. As the agency explained, Illinois' "statutory plan significantly underfunded the state's pension obligations and increased the risk to its overall financial condition." The SEC continued: "The state also misled investors about the effect of changes to its statutory plan."
It all started in 1994, when Illinois enacted a 50-year-long schedule for making contributions to its pension fund. From the get-go, planned contributions weren't sufficient to cover the state's anticipated pension obligations. What's more, this "condition ... worsened over time" when, in 2005, Illinois passed "pension holidays" exempting itself from the obligation to make regularly scheduled contributions. Yet Illinois never informed investors of how bad its underfunding situation was, or how it jeopardized the fund's, and the state's, solvency.
In 2009, the SEC required Illinois to take "multiple steps" to fix the problem, primarily by improving its disclosures. Without admitting or denying the SEC's charges, Illinois agreed to "cease and desist" from doing the things that the SEC said were misleading investors.