Illinois: from deadbeat to fraud (Chicago Tribune editorial)

"Monday's humiliating accusation that state officials intentionally misled investors about a ruinous pension debacle easily justified the Tribune's front-page headline: 'Illinois is guilty of fraud, SEC says.' But that narrow accusation by the federal Securities and Exchange Commission underplays the far more damning tale that unfolds on page after page of the agency's cease-and-desist order.

"The order documents show Illinois politicians systematically have cheated public workers who trust in their pension system, investors buying bonds under false pretenses — and taxpayers left holding the bag for untold billions of dollars in unfunded pension obligations.

"The SEC order details how, beginning 19 years ago, Illinois pols laid the foundation for today's pension mess — evidently so they could keep spending what should have been pension fund contributions on other things. But the agency doesn't have jurisdiction over most of that chicanery; as an agency official put it, 'the SEC is not involved with whether the state is doing a good job or bad job in terms of managing its pensions.'

"We wish it did. Instead, the feds essentially are limited to describing securities fraud that suffused the information given, or intentionally not given, to potential buyers of Illinois bonds from 2005-09. It's as if generations of Illinois pols have been caught committing armed robbery ... by a meter maid who can only ticket them for over parking.

"The SEC's probe focused on misconduct that preceded the governorship of Pat Quinn. His administration has instituted new safeguards — and has consented to the SEC's order without admitting or denying the findings. Given the SEC's ample evidence, Illinois didn't have to admit anything. And denial would have been preposterous.

"Illinois' artful bungling traces to a notorious 1994 episode: Then-Gov. Jim Edgar signed into law a pension funding plan, supported by Statehouse Democrats and Republicans, that was all but doomed to fail: It gave lawmakers a lavish 50 years, rather than the customary 30, to backfill their underfunded system. It asked them only to achieve 90 percent of full funding, not the necessary 100 percent. And lest the plan cramp lawmakers' yearning to spend state money on more popular pursuits, it began with a 15-year 'ramp' of inadequate contributions.

"The law Edgar signed also enshrined some slippery actuarial practices that no well-run government would perpetrate. Example: Future annual contributions should have been pegged to honest actuarial math — not to whatever a bunch of pols would decide they could spare each year to meet this basic cost of doing business. That foolishness persists to this day.

"The results were as foreseeable as they've proven to be: 'Rather than controlling the state's growing pension burden,' the SEC writes, '(the plan) increased the unfunded liability, underfunded the state's pension obligations and deferred pension funding.'

"Springfield's abdication of duty didn't just shift huge pension costs to today's taxpayers and those for decades. Combined with 'pension holidays' when lawmakers didn't fully fund even their own wimpy ramp payments, political collusion to spend money on anything but shoring up the pension system created today's crisis: Pension costs consume so much of the state general funds budget — 21.5 percent next year — that other needs go unmet.

"The SEC doesn't mention that Illinois' then-governor, Rod Blagojevich, cut damaging pension 'holiday' deals with House Speaker Michael Madigan and then-Senate President Emil Jones, co-chairs of Blagojevich's 2006 re-election campaign.

"All of this irresponsible lawmaking was bad enough; hiding the implications from potential bond buyers led to the fraud charge. The SEC says Illinois didn't admit in its official statements that the state wasn't contributing enough to its pension funds — and camouflaged the serious risks to Illinois' total financial picture:

"'The state failed to disclose the effects of its unfunded pension systems on the state's ability to manage other obligations. ... Although the state understood that the (50-year plan) could risk the eventual exhaustion of the pension system's funds ... it did not disclose that the state's inability to make its contributions increased the investment risk to bondholders.' Another state secret: Even if lawmakers had stuck to their plan, its payment schedule 'failed to control the growth of the unfunded liability until the latter years of the plan.'

"How could officials under Blagojevich, and the politically connected financial and law firms that feed on state government, fail to disclose such dangers to potential investors? Here's an astonishing finding by the SEC: 'Within the Governor's Office of Management and Budget, the team responsible for managing the disclosure process purported to rely on its consultants, underwriters, underwriters' counsel, and bond counsel to identify and evaluate the need for additional disclosures. Those parties, however, relied on the state to do the same. The result was a process in which no one person fully accepted responsibility for identifying and analyzing potential pension disclosures' (Emphasis ours).

"The SEC says Quinn's administration has markedly improved the fraudulent disclosure process it inherited. But 19 years after lawmakers passed their slipshod pension funding scheme, Illinois has the nation's worst-funded state pension system (about 40 percent, barely half the national average). That pension-cost pressure is a big reason why Illinois has billions in unpaid bills and the worst credit rating of any state.

"What can Illinois do now? Three things:

•At a minimum, we hope Quinn's office will declare that no financial or law firm complicit in Illinois' pension debacle — no matter how 'experienced' at handling Illinois securities — will get one more dime of state business. Those financial professionals and lawyers failed workers, investors and taxpayers. Not one dime.

•We hope voters — especially union members whose pensions are at grave risk because of these bad acts — will stop re-electing the politicians who have cheated them for 19 years. More on that later.

•Many of those politicians, having sabotaged state government and its pension system, still hold office. In the best of worlds, those who voted for the pension plan Edgar signed, or for subsequent pension holidays, would resign.

"That may be a far-fetched hope. Not one of the pols who helped devastate Illinois' finances is named in the SEC's order, available at chicagotribune.com/sec. As a group, they've never been quick to accept consequences for the damages they cause. But it's not as if ex-lawmakers would be penniless. Most of them would be at the trough to draw generous state pensions — unless, that is, their pension fund soon goes insolvent."

from the Chicago Tribune