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

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.