Illinois’ pension troubles have just taken a criminal turn. The SEC hit the state with charges of securities fraud yesterday, claiming that Illinois repeatedly misled investors about the state of its pension programs over the past decade. Between 2005 and 2009, the state issued $2.2 billion dollars in bonds while claiming that its pension funds were adequately funded, neglecting to inform investors that many within the government believed the system was headed for collapse. Instead, the state used creative accounting tricks to disguise the extent of the problem. As the pensions sank deeper into their hole, the state was forced to become increasingly creative. The New York Times reports:
The S.E.C. noted that Illinois had passed a law in 1994 allowing itself to put less than the required amount into its pension system each year. It is not the only state to have done so. For the next 15 years, Illinois issued annual reports showing that it was on track with its lawful schedule, even as it fell further behind the real-world amount needed to pay all current and retired public employees.By 2003, the state was so far behind that it issued $10 billion of bonds and put the proceeds into its pension funds to make them look flush. The main underwriter of those bonds, Bear Stearns, was later found to have made an improper payment to win the business, figuring in the corruption trial of a former governor, Rod R. Blagojevich.In 2005, the state passed another law, giving itself a holiday from making even the inadequate annual pension contributions called for by its 1994 schedule. It said it would offset the missing money with bigger contributions from 2008 to 2010, but then did not do so. By 2010, the reported shortfall of the pension system was $57 billion, and senior officials were warning that the system was at risk of breaking down completely.
This is shameful behavior from Illinois’s pols, but it’s unclear whether it will matter much going forward. The pension crisis has been blindingly obvious to even the least knowledgeable investors for some time now, and given the climate in Springfield it is doubtful that anyone is rushing to buy Illinois’s bonds regardless of what the state is saying.However, the SEC’s accusations do shine a spotlight on the series of poor decisions that got Illinois into this position in the first place. Illinois has learned the hard way that in wars on arithmetic, math is always going to win in the end.