March 18, 2013 01:01 PM UTC
SEC Issues Cease and Desist Order Addressing Illinois Public Pension Underfunding. Why Doesn't Illinois Avoid this Criticism by Simply Breaking Pension Contracts Like Colorado?
- by: PolDancer
Last week the SEC issued a cease and desist order condemning inadequate disclosure of chronic state public pension underfunding in Illinois:
“The Securities and Exchange Commission deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 against the State of Illinois.”
“On the basis of this Order and the State’s Offer, the Commission finds that:
“1. In connection with multiple bond offerings raising over $2.2 billion from approximately 2005 through early 2009, the State of Illinois misled bond investors about the adequacy of its statutory plan to fund its pension obligations [pension actuarially required contributions, ARC] and the risks created by the State’s underfunding of its pension systems.”
“2. The State omitted to disclose in preliminary and final official statements material information regarding the structural underfunding of its pension systems and the resulting risks to the State’s financial condition.”
“This methodology structurally underfunded the State’s pension obligations and backloaded the majority of pension contributions far into the future. The resulting systematic underfunding imposed significant stress on the pension systems and on the State’s ability to meet its competing obligations.”
“3. During this same time period, the State also misled investors about the effect of changes to the Statutory Funding Plan, including substantially reduced pension contributions in 2006 and 2007 (‘Pension Holidays’).”
Colorado’s public pension administration arm, Colorado PERA, hires actuaries who prepare an annual financial report for the pension system (CAFR.) These actuaries are required to inform the State of Colorado and other PERA-affiliated employers of the annual underfunding of the state’s (PERA) pension system. They provide this information in the annual Colorado PERA CAFR. Over the last decade, the members of the Colorado General Assembly have preferred to make discretionary state expenditures in lieu of meeting the contractual pension obligations of the State of Colorado.
Provided below are statistics relating to the failure of the Colorado General Assembly to pay its public pension “actuarially required contributions” (ARCs), from the Center for Retirement Research at Boston College Public Plans Database:
2001 Colorado School – 100% ARC Paid
2002 Colorado School – 100% ARC Paid
2003 Colorado School – 69% ARC Paid
2004 Colorado School – 51% ARC Paid
2005 Colorado School – 48% ARC Paid
2006 Colorado School – 62% ARC Paid
2007 Colorado School – 60% ARC Paid
2008 Colorado School – 68% ARC Paid
2009 Colorado School – 65% ARC Paid
2010 Colorado School – 70% ARC Paid
2011 Colorado School – 89% ARC Paid
2001 Colorado State – 100% ARC Paid
2002 Colorado State – 100% ARC Paid
2003 Colorado State – 69% ARC Paid
2004 Colorado State – 51% ARC Paid
2005 Colorado State – 48% ARC Paid
2006 Colorado State – 58% ARC Paid
2007 Colorado State – 56% ARC Paid
2008 Colorado State – 63% ARC Paid
2009 Colorado State – 61% ARC Paid
2010 Colorado State – 62% ARC Paid
2011 Colorado State – 85% ARC Paid
2001 Colorado Municipal – 100% ARC Paid
2002 Colorado Municipal – 100% ARC Paid
2003 Colorado Municipal – 69% ARC Paid
2004 Colorado Municipal – 62% ARC Paid
2005 Colorado Municipal – 64% ARC Paid
2006 Colorado Municipal – 85% ARC Paid
2007 Colorado Municipal – 84% ARC Paid
2008 Colorado Municipal – 98% ARC Paid
2009 Colorado Municipal – 96% ARC Paid
2010 Colorado Municipal – 101% ARC Paid
2011 Colorado Municipal – 139% ARC Paid
(According to the 2011 PERA CAFR, the dramatic increase in the percentage contributed for the Colorado PERA Local Government Division is a “result of the changes contained in SB10-001,” [2011 PERA CAFR Financial Section, page 82.] Apparently, when the State of Colorado breaks its public pension contracts it really facilitates the payment of the full ARC in some PERA divisions.)
Many state legislatures have kept up with their contractual public pension obligations, and accordingly, their public pension systems have been much less impacted by the 2008-09 market volatility:
“An April 2010 issue brief authored by the Center for Retirement Research at Boston College found that for the public pension community as a group, receiving the full ARC would require additional pension contributions of two percent of payroll, an amount that varies by plan.”
Link:
https://www.publicfundsurvey.org/www/publicfundsurvey/SummaryofFindingsFY10public.pdf
But, Colorado legislators are indifferent to Colorado’s contractual pension obligations:
“July 14, 2009 – However, Rep. Frank McNulty (R-Highlands Ranch) said he did not want to ask for higher contributions from governments, which are supported by taxpayers.
‘I don't think at this point we can expect employer contributions to be part of the solution . . .’"
https://www.9news.com/rss/story.aspx?storyid=119465
(In 2009, Rep. McNulty stated that those who legally owe the Colorado PERA pension debt, Colorado PERA-affiliated employers, should not “be part of the solution.” Indeed, the bill adopted by the Legislature to break Colorado PERA retiree contracts, SB10-001, asked that those who legally owe the debt contribute a mere “ten percent” of the “fix” proposed in the bill.)
Back to the SEC Cease and Desist Order:
“This underfunding also compromised the creditworthiness of the State and increased the State’s financing costs.”
“Concern about the State’s pension financing was a significant factor prompting downgrades of the State’s credit rating from 2010 to 2012.”
(My comment: Recently, the credit rating firm Standard and Poors (S&P) downgraded the State of Illinois due to pension underfunding:
“Standard & Poor's rating service said Friday that the rating on the state's general obligation bonds was downgraded to A- from A.” “The agency says the outlook is negative, an indication it could take the unusual step of further downgrading the state if conditions don't improve.”
Link to Breitbart.com:
https://www.breitbart.com/Big-Government/2013/01/26/S-P-lowers-Illinois-credit-rating–blames-pensions
S&P warned the Illinois Legislature about the adoption of unconstitutional pension reform:
"Today, Standard & Poor's warned lawmakers that unconstitutional pension cuts would invite ‘legal challenges’ and cause ‘several years’ of budget uncertainty.
Link:
https://www.weareoneillinois.org/news/coalition-comments-on-sp-downgrade-points-to-summit-as-critical-step-forward
Colorado has adopted the type of unconstitutional public pension reform (SB10-001) that S&P warns against – breaching public pension contracts – yet S&P has actually upgraded Colorado’s credit rating from AA- to AA. That is, while the State of Colorado suffers through its recently claimed “actuarial emergency,” it has somehow managed to achieve an improved credit rating. Let’s add this situation to our list of life’s great mysteries.
Colorado’s S&P rating in 2012: AA
Colorado’s S&P rating in 2009 and 2010 at time of contract breach: AA
Colorado’s S&P rating during 2002 to 2006: AA-
Link:
https://www.pewstates.org/projects/stateline/headlines/infographic-sp-state-credit-ratings-20012012-85899404785)
Back to the SEC Cease and Desist Order:
“The State’s current funding deficit was created in significant part by the State’s historical failure to fund its pension systems in a manner to avoid the growth of the unfunded liability.”
“Rather than controlling the State’s growing pension burden, the Statutory Funding Plan’s contribution schedule increased the unfunded liability, underfunded the State’s pension obligations, and deferred pension funding. This resulting underfunding of the pension systems [“Structural Underfunding”] enabled the State to shift the burden associated with its pension costs to the future and, as a result, created significant financial stress and risks for the State.”
“For the majority of the years under the Statutory Funding Plan, the State’s annual required contributions were insufficient to prevent the growth of its unfunded liability.”
“The State’s pension contributions were calculated in accordance with State law, not in accordance with the ARC, and therefore the Statutory Funding Plan deferred funding of the State’s pension obligations and compounded its pension burden.”
“By failing to amortize the UAAL completely, the State was able to lower its contributions. However, by assuring that some portion of the UAAL would remain outstanding, it also increased the economic cost of the pensions and delayed the cash outlays necessary to fulfill its pension obligations.”
“The State’s insufficient contributions under the Statutory Funding Plan were the primary driver of this increase, outweighing other causal factors, such as market performance and changes in benefits.”
From the Silver and Gold Record:
“PERA Executive Director Meredith Williams told the committee that PERA is ‘rock solid, even in the face of volatility and financial insecurity.’ At least one committee member saw no reason to adopt the more drastic changes. Sen. Norma Anderson (R-Lakewood), who said she has been following PERA for many years, told S&GR after the hearing, ‘The plan is solid, one of the best in the nation. Why change it?’"
(My comment: Note that former Senator Norma Anderson testified in favor of SB 10-001, the bill that breached Colorado PERA retiree pension contracts.)
https://www.cu.edu/sg/messages/551.html
Back to the SEC Cease and Desist Order:
“The State did not disclose in its official statements its failure to contribute to the full amount of the ARC and the consequences of not funding the full amount of the ARC.”
“ . . . the CAFR disclosures did not describe the risks and implications of the Statutory Funding Plan and deviations from that plan.”
“In its official statements, the State cited a number of factors that, in the past, contributed to the increase in unfunded pension liability, such as statutory benefit enhancements and market performance, but did not disclose that the State’s insufficient contributions were the primary driver of the increase.”
(My comment: Have Colorado’s bond official statements and Colorado PERA financial documents adequately disclosed Colorado’s underfunding of the PERA pension? Colorado PERA’s CAFRs do set forth the failure of the Colorado Legislature to pay annual ARCs during the last decade.)
SEC Cease and Desist Order:
“On June 1, 2005, the State legislatively enacted Pension Holidays, lowering the contribution in 2006 and 2007 by 56 and 45 percent, respectively.”
“Reasonable investors would have viewed such information as significantly altering the total mix of information available regarding the State’s financial condition and the State’s future financial prospects. Such information allows investors to weigh and price the risk associated with the State’s debt obligations.”
“GOMB’s procedures were inadequate for ensuring that material information concerning State Pension Funds or the State’s financing of State Pension Funds was disclosed and accurate in bond offering documents.”
“The result was a process in which no one person fully accepted responsibility for identifying and analyzing potential pension disclosures.”
“In late 2009, the State made a series of personnel changes in the GOMB, including in its most senior positions. These new officers worked to formalize the disclosure and underwriting process.”
(My comment: I want to pause here and caution Colorado PERA active and retired members against prematurely laying blame for the SB10-001 taking of fully-vested PERA COLA benefits at the doorstep of Colorado PERA Executive Director Greg Smith. It would be wrong to blame him for SB10-001 and find out later that he may very well have attempted to dissuade the Colorado PERA Board of Trustees from promoting the breach of PERA retiree contracts.
Here’s why I think we should be cautious in this respect: Greg Smith has provided written testimony to the Colorado Legislature’s Joint Budget Committee that the PERA COLA is a contractual obligation. He has described his own legal research in the press finding that “actuarial emergencies” occur only when a public pension system is broke, and cannot pay current benefits. He has also pointed out that the Legislature has failed to meet the required ARC payments. We don’t know what Greg Smith’s initial reaction was to the proposal to seize PERA retiree COLA benefits, so, at this point, I don’t think we can fairly criticize him.
But, some have criticized Greg Smith. A member of the Colorado General Assembly asked why Colorado PERA’s Greg Smith and Meredith Williams remain employees of the PERA pension system:
“Rep. Cheri Gerou, R-Evergreen, questioned why Williams and Smith still have their jobs, suggesting that if they worked in the private sector they might have been fired. ‘A lot of people would like to see you lose your jobs over this,’ she told them.”
https://coloradostatesman.com/content/991604-pera-reform-bill-gets-bipartisan-blessing
Colorado Senate President John Morse (a co-sponsor of the COLA-taking bill, SB10-001) is not among those who criticize Colorado PERA Executive Director Greg Smith:
From the January 16, 2013 Colorado Senate Journal, the Colorado Senate honors Greg Smith for his appointment to the position of Colorado PERA Executive Director:
“TRIBUTES: Honoring: Greg Smith, for his recent appointment with PERA — By President John P. Morse.”
Link:
https://www.leg.state.co.us/CLICS/CLICS2013A/csljournals.nsf/(jousen)/6F8152ABB6CFAA3D87257AF50052F652/$FILE/jour_008.pdf)
A few more excerpts from the SEC Cease and Desist Order:
“Issuers of municipal securities are responsible for the accuracy of their disclosure documents.”
“The Commission has repeatedly emphasized that disclosure in municipal debt offerings may be rendered materially misleading due to the omission of other material facts.”
“The antifraud provisions of Section 17(a) of the Securities Act prohibit fraudulent or deceptive practices in the offer or sale of securities by the issuers of municipal securities.”
“A fact is material if there is a substantial likelihood that a reasonable investor would have viewed the information as ‘having significantly altered the ‘total mix’ of information available.’”
“As a result of the negligent conduct described above, the State violated Sections 17(a)(2) and 17(a)(3) of the Securities Act.”
“ . . . the State misled bond investors by omitting to disclose information about the adequacy of its statutory plan to fund its pension obligations . . .”
“Accordingly, it is hereby ORDERED that, pursuant to Section 8A of the Securities Act, the State of Illinois shall cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.”
“By the Commission. Elizabeth M. Murphy Secretary”
Link to the complete SEC Cease and Desist Order:
https://www.sec.gov/litigation/admin/2013/33-9389.pdf
Colorado PERA active and retired members, support the rule of law in Colorado. Contribute at saveperacola.com, and “Friend” Save Pera Cola on Facebook!
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