Market Watch

Illinois Pension System: Structural Underfunding

From Hedge, looks as if SEC thinks there is something fishy going on in the great State of Illinois…..


An issue being examined is whether Illinois was taking future savings and treating them as current reductions in the cost of the pension fund, said Robert Kurtter, a managing director in the public finance division at Moody’s Investors Service, who said his firm spoke with Illinois officials about the inquiry. One of the measures that Illinois took to save costs was to raise the retirement age for newly hired Illinois workers.

Illinois’s pension system is only about 50% funded with liabilities of about $136 billion, according to Moody’s. The underfunding, one of the  worst among states in the nation, is partly the result of the state frequently skipping its recommended contributions to fund.

Today, over two years after the above news, the SEC finally concluded HERE their analysis of one part of the massively underfunded Illinois Pension system and found the Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. The SEC also said Illinois failed to disclose that it had underfunded the state’s pension obligations, increasing the risk to its overall financial condition.

Reuters completes the already well-known picture: “Illinois has one of the worst-funded pension systems in the country. Governor Pat Quinn and the state legislature are currently locked in a political battle as to how best to fix an unfunded liability of $96.8 billion – a gap so large, it has led Illinois to have the worst credit rating among U.S. states.

The SEC’s order finds that Illinois misled investors about the effect of changes to its funding plan, particularly pension holidays enacted in 2005. Although the state disclosed the pension holidays and other legislative amendments to the plan, Illinois did not disclose the effect of those changes on the contribution schedule and its ability to meet its pension obligations. The state’s misleading disclosures resulted from various institutional failures. As a result, Illinois lacked proper mechanisms to identify and evaluate relevant information about its pension systems into its disclosures. For example, 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.

Pain trains coming to a State hopefully not near you..