Illinois And SEC Settles Case on Underfunded Pensions

On Monday March 11th, the State of Illinois settled with the Securities and Exchange Commission on charges that it misled investors in its bonds between 2005 and 2009. The case centred on claims that the state did not correctly inform investors about the short falls in its retirement funds when it sold debt.

According to a Bloomberg article, Illinois is still being penalized on the bond market, with investors demanding 1.3 percentage points of extra yield in order to own the State’s bonds. Illinois’s State pension funds are still facing severe funding problems, and now the market knows it. The State is estimated to have $2 trillion in unfunded pension costs.

According to research in the middle of last year, only four out of 126 US state pension funds were fully funded. Low returns on investments in the last few years are being blamed for the short fall, and it’s not just government pension funds that are in trouble. Some private companies are being forced into risky investments in order to meet funding goals.

Pension funds have done more than just invest in riskier assets in order to meet funding goals. Some of them have latched onto Hail Mary plays, like last August’s attempt by several pension funds to sue JPMorgan Chase & Co. (NYSE:JPM). Other constraints on pension funding include low returns from their Private Equity investments.

Yesterday’s settlement did not include an admission of guilt from the State of Illinois, nor was it fined. That doesn’t mean the State is getting away without injury, however. The cost of borrowing has risen significantly in Illinois, and now the State has to face into realistic reforms of its pension funds.

Pension funding is one of the most often overlooked major issues in America today. Illinois is not the first state to have been charged with misleading investors about pension funding. New Jersey settled a similar case in 2010. The city of San Diego did the same in 2006. This is a pervasive problem, and its one that’s going to get worse, rather than better, with time.

Illinois pensions have just 39% of the assets needed to fund them fully. It is the worst performing state in the Union, but it is by no means that unusual. More and more states are facing problems in this area, and municipal bonds are becoming riskier by the day.

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