The Last Laugh: Illinois Pension System Charged For Not Disclosing "Structural Underfunding"

Tyler Durden's picture

The topic of Illinois' various insolvent pension systems is not news to regular Zero Hedge readers. One needs but to recall our articles from mid/late 2010: "61% Underfunded Illinois Teachers Pension Fund Goes For Broke, Becomes Next AIG-In-Waiting By Selling Billions In CDS", "Illinois' Pension Fund Death Spiral Revisited: "10 Years Of Money Left" or "Illinois Teachers' Retirement System Enters The Death Spiral: AIG Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations" in which we clearly explained how the state's teachers pension fund was systematically doing everything in its power to mask its massive underfunding, and the fact that it was rapidly running out of money.

The retiremnet fund, in turn, took things very personally, prompting Dave Urbanek, Public Information Officer at the Teachers’ Retirement System of the State of Illinois (TRS), to write this response:

Please remove your post of Tyler Durden’s inaccurate analysis of the Illinois Teachers’ Retirement System. It is not excellent. It is wrong.


TRS is not in a death spiral. We’ll still be operating and paying pensions for years to come.


We could potentially sell $3 billion in assets if the Illinois General Assembly does not come up with its annual contribution to TRS. The state owes us $2.35 billion. Two other state pension systems are also selling assets until the state makes its payments to them. That is the only reason we are  selling assets.


We are not selling assets because we are on the risky side of any investments, as Mr. Durden claims. Here are the facts: We could potentially sell $3 billion in assets. Last year our investment income totaled $4.6 billion – a 13 percent return. We did not lose money. We have $33 billion in total assets. We will pay $4.1 billion in pensions and benefits during the current fiscal year. Do the math. We are not in a death spiral.


What Mr. Durden doesn’t say – and won’t because it ruins his story – is that TRS sold $1.3 billion in assets last year for the same reason: The General Assembly hadn’t yet come up with its annual contribution. The state ultimately sold bonds and made the payment, and we not only got our money back  from the assets we sold but did not have to sell any further assets.

Alas, a few months later things went from bad to worse for the entire state of Illinois' retirement system, following news that "Underfunded Illinois Pension Fund Under Investigation By The SEC For Accounting Fraud." As the WSJ then reported:

"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.


Illinois was informed by the SEC of the inquiry in September, Ms. Kraft said. Illinois has included mention of the SEC inquiry in documents being prepared for the sale expected in the next few weeks of a approximately $3.7 billion bond, said Ms. Kraft. The debt is expected to allow the state to make a required pension-fund contribution


The inquiry is the latest example of the SEC probing a state's financial disclosures related to pensions. In August, the federal agency accused New Jersey of failing to properly disclose the true health of its two largest pension funds. New Jersey authorities settled the SEC case without admitting or denying wrongdoing."

Today, over two years after the above news, the SEC finally concluded 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."

In chart form, the state's woeful situation is as follows via the WSJ:

Illinois had a response: it neither admitted nor denied the SEC charges. Of course.

Illinois "believed it to be in its best interests to enter into a settlement with the SEC," according to a statement from the governor's Office of Management and Budget. "The State has cooperated fully with the SEC throughout the inquiry."


"The state neither admits nor denies the findings in the order, which carries no fines or penalties." the statement said.

Needless to say, it would be more than ironic to fine an already broke state retirement fund a fine when its original transgression was that it was, well, broke and was misleading investors.

Finally, from the SEC charge:

According to the SEC’s order instituting settled administrative proceedings against Illinois, the state established a 50-year pension contribution schedule in the Illinois Pension Funding Act that was enacted in 1994. The schedule 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.


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.

And to think that one of these same personnel tried to take us to task over two years ago, when in reality Mr. Urbanek was llikely just as clueless as those people that the SEC described as "not adequately trained."

Sadly, in the end we know we will have the last laugh in the TRF case as well. Sadly: because it means that millions of pensioneers and still working Illinois teachers will lose all the money they have invested toward their retirement. Sadly, also, because this kind of ponzi scheme is now pervasive to all of America, its economy and its capital markets. Which is also the reason even the smallest down day has become anathema to the central-planning authorities who now run the entire economy of the US out of a small corner office in the Marriner Eccles building.

And sadly because where Bernie Madoff got an effective life sentence, when a "legitimate" entity does precisely what Madoff Securities was doing for decades, they get a slap on the wrist, and have to neither admit nor deny guilt.

As long as this treatment of borderline criminal financial malfeasance continues, nothing can and will ever change. Until then, Illinois and all other insolvent states, will fund their underfunded status by selling bonds direct to greater yield-chasing fools. This strategy will work, until it doesn't.

Only then will the Fed's liquidity tide finally go out, revealing that absolutely everyone was swimming naked.

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McMolotov's picture

Q: How do you fine a state?

A: You don't, so they continue to give it to you right up your poop chute.

Dr Paul Krugman's picture

Let me guess - everyone here thinks Illinois will go bankrupt soon; the same people who thought Detroit would declare bankrupcy any day now.

Have any of you been outside of your bunkers in the last few years?

McMolotov's picture

Detroit didn't declare bankruptcy but is being taken over by the state. That's apparently a win in your book.

And the only time I leave my bunker is to dump my "bucket" on that fucking cat of yours, in case you've been wondering about the smell.

american eyedol's picture

maybe the tylers can be hired by the sec

Clint Liquor's picture

Your assumption that the SEC finds value in competence, is wrong.

sunaJ's picture

So what's next?  Is it federal bailout of pensions with capital controls (ie. buying up of treasuries as a retirement portfolio requirement)?  How long would that game last?

pemdas's picture

I'm from Illinois.  Rhode Island, can we borrow your legislature for a few months?

solgundy's picture

I think the total assets of the private IRA & 401-K accounts adequately cover the government pension short falls across the land, thus the truely worthy of a retirement check will thank you suckers for saving your money in those other government fraud accounts all those should have paid the taxes along the way and stayed out of the trap.

Professorlocknload's picture

 It's called "The Pension Benefit Guarantee Corporation," and it's loaded! Back end, that is.

 But, like FDIC, it has a hotline wired into Treasury, so the "wealth" will be spread.

smlbizman's picture

its amazing how they really stick to the rules when it involves wiping out the peons...(sorry, rules say we cant bail you out. wouldnt want to break dem rules) would think they have a plan....

eatthebanksters's picture

I think it is outstanding how the best and brightest in the Illinois government have now moved on to Washington bring their proven solutions to our nation!

Dingleberry's picture

Did this fucker mention Detroit as an example of fiscal prudence? What the fuck? See the new this week?

dick cheneys ghost's picture

How would you suggest Detroit deal with $14 Billion in long term debt?

Herodotus's picture

They are going to sell their water system that serves 4 million people to Goldman for $10 billion.

max2205's picture

TBTTOOTC. too big to throw out of the country

I love a good pissing contest

I am sure nobody will serve time for accounting fraud.

El Oregonian's picture

"How would you suggest Detroit deal with $14 Billion in long term debt?"

Sell the U.P. (upper peninsula) to the Chinese... er, wait... Never mind, they have already.

in4mayshun's picture

Launder drug money like the big banks?

yogibear's picture

Oh, Illinois won't go bankrupt. It's Obama's home state. It will be bailed out by the endless money printing.

LOL, Why be productive or work? Just print.

Let's keep  increasing SSI, welfare and food stamps. Print me some more money!!!



CheapBastard's picture

Meet Neil Codell an Illinois educator with a $26 million state pension. 

Look for 'Codell, Neil C' -- 4th from the top of the list.  His estimated career pension is $26,661,604.  That's almost $27 million for a single administrator within just one local Illinois school system (Niles, to be exact).





Totentänzerlied's picture

Think of the children. Or something. I'm sure there's a poor excuse somewhere. Many, in fact.

kaiserhoff's picture

Friendly amendment, Yogi,

Illinois is my home state.

Obama doesn't have one.

Whiner's picture

Whose worried? Not me. There's plenty of folks to tax in Illinoise alone. Hell, Chicago can shoulder this by itself. What's the fuss? The Land of Lincoln citizens got nowhere to go. Pull-eese don't come South.

michigan independant's picture

Yes they drained our balance sheet for our services locally and sent it to a the socialist paradise swamp in detroit you demented man.

myne's picture

We have the technology to keep coma patients alive for decades after their brains have died.

Zombie banks and states are hardly surprising. They can remain alive indefinitely while their sponsors remain able to provide.

Dr Paul Krugman's picture

Zombie is a term I use frequently - I use it to refer to those who do not understand how wrong they are concerning economics, yet can not change their viewpoint due to some fundamental flaw in their hollow head.

Thus many of you here; wrong, as the depression improves you clutch your pet rocks and believe, any day now, the world will end. 

The powerful thing about Obama's 2008 platforn was hope, you know.  Maybe you all should have hope for a better day and get off your armchairs and help out the economy for once.

dick cheneys ghost's picture

I did help the economy..............I maxed out my credit cards.......Its not my fault that I cant pay them back.........

Never One Roach's picture

dick, now you need to go back to college and major in Booze and bright-eyed, Big Titted Co-eds with a $120k loan to help you out. I'd recommend art history.

in4mayshun's picture

Responding to this idiot is like feeding a stray cat-once they know their pathetic state elicits an emotional response, they'll never leave.

dolph9's picture

Maybe you should get out of your chair and trash your office?

Because in your view, cleaning up the mess would be good for the economy, right?

20834A's picture

"Zombie is a term I use frequently - I use it to refer to those who do not understand how wrong they are concerning economics, yet can not change their viewpoint due to some fundamental flaw in their hollow head."

Funny, that is what I think about YOU!

"Thus many of you here; wrong, as the depression improves you clutch your pet rocks and believe, any day now, the world will end."

Your admit that we were in a depression, and now we're in a deep recession?

Now I have some HOPE that you may someday see the error of your ways. I'll take hope where I can *reasonably* get it.

shovelhead's picture

My pet rock is an Easter Island statue.

Hooray for extinction!

PubliusTacitus's picture



In case you hadn't noticed, Dr Shitforbrains, there is no recovery; there is 14% unemployment; there are a record number of people on foodstamps and government assistance (feature, not a bug for you), and there is massive rising poverty, caused by your policies.


It appears it is you who knows nothing about economics, dumbfuck.

Chuck Walla's picture

Dear Dr, Krugman, I have done all I can for the economy. I have lost my job, gone on unemployment and am now getting food stamps. What else is left?


archon's picture

Well, the government claims that unemployment and food stamps both return somewhere between 179% and 184%  back into the economy, so you're more productive than most people who have jobs.  Keep up the good work, citizen!

eatthebanksters's picture

You must be MDB're too stupid to be Krugman (he would not engage in a losing argument) and you have the vocabulary of a MDB.


BTW,  hope can't feed you.

archon's picture

Says the guy who predicted that the first trillion would end the depression, but when it didn't work, in hindisght concluded that it should have been more like three or four trillion, and an invasion by space aliens might have speeded things along nicely.  HAHAHAhahaha.... 

myne's picture

Well, if I was ever unsure whether this was you or not, your crude and thinnly veiled personal insults validated it.

You have a terrible reputation amoungst professional economists. They regard your arguments as child-like because you always revert to personal attacks.

How about you show some data?

How about you provide some actual analysis of the data instead of ideologically driven opinions.


The "zombies" here are not the sort to be swayed by cheap insults. 

We like facts, and sure, we like off-the-cuff cheeky analysis at times, and even a bit of chest beating here and there but we don't generally suffer boring schoolyard slanging.

eatapeach's picture

MDB, is that you?

(Edit: sorry, eathebanksters, I see you are ahead of me. I second your hypothesis.)

orez65's picture

"One of the walking dead" is the term that I use to describe you.

Your brain is dead and you fuck up everything you touch.

HD's picture

"Have any of you been outside of your bunkers in the last few years?"

I left my bunker recently for fresh supplies. Unfortunately all the store had in stock was horse meat and kool aid.

eatthebanksters's picture

Yeah...DHS had bought all the ammo...

akak's picture

Krugman's bunker lies at the top of a very tall, and very isolated, ivory tower.

Scro's picture

Dr. Paul Krugman

I up voted your comment because I feel it's beneficial and necessary to provide positive feedback to the mentally challenged.

WhyDoesItHurtWhen iPee's picture

Swimming naked is fun and liberating, you should try it sometime.  It might help your disposition.

PubliusTacitus's picture

No, Illinois is bankrupt now, asshole.

Professor Fate's picture

And, of course, there is no provision in the bankruptcy code for a state to file.  They simply go dormant...unable to access the debt markets until the great and most powerful "Bernank" eases them quantitatively back into ponzi solvency by purchasing all Illinois municipals and adding them to the Fed's balance sheet.  The future is crystal clear.

Fate the Magnificent

"Push the Button, Max"

Go Tribe's picture

Fine. You go live in that shithole. You can find cheap housing right next to some bangers and ho's. And no, I'm not referring to Georgetown.

neutrinoman's picture

Detroit is being taken over by the state of Michigan, as a final alternative to declaring bankruptcy. The latter is considered so radical and disruptive that everyone's trying to avoid it, even though, in fact, the city is bankrupt.

In the US legal system, states can't go bankrupt in a formal sense. But they can go bankrupt de facto; a number were such in the 1930s. Soon Illinois and California will join them. It will be funny to watch, because of the strenuous denials. But it's nice to see the SEC waking up to what's been going on and even considering charging someone with criminal fraud. For states in the worst shape and unable to change course, some prosecutions are the alternative to an unavailable judicial bankruptcy.