Today, the SEC filed an administrative proceeding against the State of Illinois alleging securities fraud for misleading municipal bond investors about the state's approach to funding its pension obligations. The case marks the second time that the SEC has charged a state with violating federal securities laws in their public pension disclosures. The agency brought a similar case against New Jersey in 2010.

According to the SEC, Illinois offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009, without disclosing to investors that its statutory plan "significantly underfunded the state's pension obligations and increased the risk to its overall financial condition." Illinois, which had already implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC's charges.

Specifically, the SEC alleged, Illinois established by statute a 50-year pension contribution schedule. The schedule, however, 

proved insufficient to cover both the cost of benefits accrued in a current year and a payment to amortize the plans' unfunded actuarial liability. The statutory plan structurally underfunded the state's pension obligations and backloaded the majority of pension contributions far into the future. This structure imposed significant stress on the pension systems and the state's ability to meet its competing obligations – a condition that worsened over time.

As pointed out in this Bloomberg article today, the SEC's action probably did not ruffle too many feathers in Illinois. The case did not allege wrongdoing on the part of any individuals and imposed no penalty other than an order prohibiting the same type of conduct in the future. In addition, as per the SEC's current standard, Illinois was permitted to settle the case without admitting (or denying) the SEC's allegations.

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