For years now, the Chicago Civic Federation, the Chicago Tribune, pension experts, and folks such as I have been telling anyone who would listen that the State of Illinois has been boldly and blatantly irresponsible in the managing of billions and billions in Illinois tax payer funds. The result has largely been a mix of denial, excuses, hand wringing, and obfuscations coming from the mouths of Illinois political leaders – particularly the current chief troika in Springfield: House Speaker Michael Madigan, Governor Pat Quinn, and Senate President John Cullerton.
Finally, a federal entity with regulatory and legal authority has officially declared Illinois, and its political leaders, to be what it has been and is – a “Fraud”! One week ago (March 11) the Federal Securities and Exchange Commission (SEC) charged Illinois with securities fraud, for neglecting to disclose known details inherent in its $2.2 billion of municipal bond offerings marketed between 2005-09 (dedicated to the financial support of Illinois’ crumbling public pension system).
The SEC wrote the following in its official report: “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…”. Building on that report, George Canellos of the SEC’s Enforcement Division, observed: “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.”
Allow me to oversimplify these charges:
1) Illinois chose a lengthy 50 year pension amortization schedule (longer than what is considered “best practices”) in 1994. The schedule underfunded the amount needed to cover both current obligations and future, unfunded obligations.
2) Illinois political leaders did this in order to reduce the annual amount they would need to spend on pension obligations, thereby freeing up more money for “current” projects and expenses.
3) Illinois increased benefits at several points between 1994 and 2010, but failed to provide additional funding to pay for said benefits.
4) Illinois leaders declared pension holidays (see 2005) that accelerated the underfunding of pension obligations and has been a major force in precipitating the current crisis.
5) Illinois failed to adequately inform potential bond holders of any of the above.
Some will consider the following section of the SEC report to be among the most serious charges regarding the ineptitude and incompetence of Illinois government figures: “Illinois had not adopted or implemented sufficient controls, policies, or procedures to ensure that material information about the state’s pension plan was assembled and communicated to individuals responsible for bond disclosures. The state also did not adequately train personnel involved in the disclosure process or retain disclosure counsel.” http://www.advisorone.com/2013/03/11/sec-charges-illinois-with-pension-funding-fraud
In Part II we will offer comments regarding interesting peripheral issues related to this SEC enforcement action.