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Saturday, February 22, 2020

SEC: Illinois' pension disclosures were misleading

By Stephanie Ostrowski | Mar 26, 2013


WASHINGTON (Legal Newsline) - The State of Illinois is charged with securities fraud for misleading municipal bond investors about the state's plan to fund its pension obligations.

The state of Illinois offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009, according to a Securities and Exchange Commission investigation.

Illinois failed to inform investors about the impact of problems with its pension funding schedule and also mislead investors about the effect of changes to its statutory plan.

Announced March 11 by the SEC, Illinois has agreed to settle the securities fraud charges. A number of remedial actions and corrective disclosures beginning in 2009 were also implemented by the state.

The schedule the state established for a 50-year pension contribution proved insufficient to cover both the cost of benefits accrued in a current year and a payment to amortize the plans' unfunded actuarial liability. The statutory plan underfunded the state's pension obligations and back-loaded the majority of pension contributions far into the future.

The situation worsened over time and a significant stress on the state's ability to meet its competing pension obligations became a reality, according to the SEC.
"Municipal investors are no less entitled to truthful risk disclosures than other investors," said George S. Canellos, Acting Director of the SEC's Division of Enforcement. "Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system."
Illinois mislead investors about the effects of changes to its funding plan, particularly pension holidays enacted in 2005, according to the SEC's order. The state disclosed the pension holidays and other legislative amendments to the plan. However they did not disclose the effect of those changes on the contribution schedule and its ability to meet its pension obligations.

As a result, Illinois did not have proper mechanisms to identify and evaluate relevant information about its pension systems into its disclosures.

According to the SEC's order, beginning in 2009 Illinois took several steps to correct errors in the process and enhance its pension disclosures.

Thereafter the state issued significantly improved disclosures of its bond offering documents, retained disclosure counsel, and instituted written policies, procedures, disclosure controls, training programs, and designated a disclosure committee.

The SEC took these actions and the states cooperation into consideration. Illinois consented to the SEC's order to cease and desist from committing or causing any violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

The state of Illinois neither admits nor denies any of the SEC allegations.

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