SPRINGFIELD-Illinois broke federal securities laws and "misled investors" in misstating the true health of the state's depleted pension funds between 2005 and early 2009, the Securities and Exchange Commission announced Monday.
The finding of securities fraud doesn't subject Illinois to any fines or penalties, but it amounts to another fiscal black eye for a state burdened by the worst bond rating in the country and completely underwater by inaction in solving its $96 billion pension crisis.
The SEC finding, the second such action against a state, focuses mostly on misstatements linked to $2.2 billion worth of bond offerings issued during impeached ex-Gov. Rod Blagojevich's administration. New Jersey was cited in 2010 for similar disclosure failures regarding pension underfunding in its bond offerings.
"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 in a prepared statement.
"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," Canellos said.
In particular, the agency hit the state for misleading investors about the impact in 2006 and 2007 of "pension holidays" -- a happy-sounding budgetary misnomer used at the time to describe deeply diminished pension payments -- on the state retirement systems' overall health.
The Blagojevich administration also neglected to outline for investors how a 1995 pension-funding law created "systemic underfunding (that) imposed significant stress on the pension systems and the state's ability to meet its competing obligations." Between 1996 and 2010, the state's five pension systems took on $57 billion worth of red ink.
A spokesman for Quinn's budget office, which began including information about the state's perilous pension situation in bond documents in April 2009, said Illinois has "cooperated fully" with the SEC during its inquiry and concluded it was in the state's "best interests" to settle the matter.
"The state neither admits nor denies the findings in the order, which carries no fines or penalties," said Abdon Pallasch, assistant budget director.
The SEC report faulted Blagojevich's budget office, led during his first term by John Filan and by Ginger Ostro in Blagojevich's second term, for a series of "institutional failures."
Within that office, "the team responsible for managing the disclosure process purported to rely on its consultants, underwriters, underwriter's counsel and bond counsel to identify and evaluate the need for additional disclosures. Those parties, however, relied on the state to do the same," the report said. "The result was a process in which no one person fully accepted responsibility for identifying and analyzing potential pension disclosures."
The SEC launched its investigation after Senate Republicans in 2005 called for a federal probe into why Blagojevich's budget office, in a prospectus for a $300 million bond issue, overstated savings from a set of pension reforms enacted under Blagojevich.
In an October 2005 interview with the Bloomington Pantagraph, Becky Carroll, the spokeswoman for Blagojevich's budget office, stood by its disclosure standards and belittled the concerns as "just another desperate attempt by the Senate Republicans to twist and turn facts and rewrite the very poor fiscal history in Illinois that they created."
On Monday, Senate Minority Leader Christine Radogno (R-Lemont) aimed to set the record straight.
"I am proud to note that the Illinois Senate Republican caucus was the first to sound the alarm in 2005 and call for the SEC investigation," Radogno said. "Our work to expose these deceptive practices led to corrective action and improved disclosure."