The Securities and Exchange Commission v. The State of Illinois
“I believe that we (all of us) have allowed a double standard to develop in America, where citizens in the private sector are held to a higher standard of conduct and accountability than citizens in the public sector. And I believe it is getting worse over time (as the government expands) and it is eroding our individual rights and liberties and hurting the private sector’s ability and desire to take risks and innovate (succeeding sometimes, but more often failing and then trying again); the keys to a dynamic and vibrant economy. It is my view that Americans operating in the government sector (especially those in power, but even those who are not), must be held to a higher standard of duty and care than American’s operating in the private sector. Yet clearly today it is the opposite. Nearly all of our civil laws and regulations and the entire civil enforcement apparatus of the government is aligned against the private sector and private individuals. Nothing, other than our mostly disinterested and uninformed electorate, holds the government and its key officials to account for their conduct and mistakes. Why is it that because you seek to make your career in the “for- profit” sector (and help create jobs and taxpayers), some people think it is not possible to “do good” at the same time? And if something does go wrong (in an unprecedented financial crisis, say), it’s even worse. Your conduct and motives are immediately called into question and your reputation is unfairly besmirched. And years of your professional life are taken away being investigated by the government and sued (there are even calls in the press and among certain politicians for criminal prosecutions, without any knowledge of specific wrongdoing). However, if you are a government official and you are mistaken or fail, nothing happens.” Michael Perry, Excerpt from Statement #38, January 29, 2013
“Kudos to the SEC for shining a light on accounting practices that would get private market participants thrown in jail. But frauds are not committed by buildings or desks or chairs. They are committed by the people who occupy them and the commission should hold them accountable.” March 13, 2013, WSJ OpEd, “SEC v. Illinois”
SEC v. Illinois
The Securities and Exchange Commission announced civil fraud charges Monday against the state of Illinois, which means it’s now official: The Land of Lincoln has the nation’s most reckless and dishonest state government when it comes to pension liabilities.
This week’s order from the SEC reports that in multiple bond offerings from 2005 to 2009 “the State of Illinois misled bond investors about the adequacy of its statutory plan to fund its pension obligations and the risks created by the State’s underfunding of its pension systems.”
Unlike Illinois officials, the numbers don’t lie. The state’s five main pension funds are 40% funded, with a shortfall of close to $100 billion—and much more by some private estimates. It’s hard to express how irresponsible politicians have to be to dig a hole this big. By comparison, the average state plan is funded at 75%, which is itself dangerously low.
Even Illinois politicians admit that their pensions ought to be 90% funded, and in 1994 they pretended they were enacting reform with the ironically titled “Pension Funding Act.” But the law’s methodology “structurally underfunded” the state’s obligations and “backloaded the majority of pension contributions far into the future,” says the SEC.
By 2009, one of the pension system’s actuaries warned of “significant funding peril” while the Governor’s budget office raised “serious concerns about the financial strain,” says the SEC. But “this information was not disclosed to bond investors.”
The only other state ever to be sued for fraud by the SEC was New Jersey in 2010. That case also involved pension shenanigans, but the state has since begun to reform.
In Illinois, there’s little sign of reform, which suggests the SEC has more work to do. According to its sorry custom, the SEC announced a settlement with the state at the same time it announced the charges. As usual, there were no individuals charged, only an institution, and the institution neither admitted nor denied anything but merely promised to behave in the future.
Kudos to the SEC for shining a light on accounting practices that would get private market participants thrown in jail. But frauds are not committed by buildings or desks or chairs. They are committed by the people who occupy them, and the commission should hold them accountable. This OpEd piece appeared March 13, 2013, on page A14 in the U.S. edition of The Wall Street Journal