From NY Times:
Federal regulators are examining disclosures by Illinois about its unorthodox pension funding method, trying to determine whether the state misled bond investors about the risks.
The Securities and Exchange Commission has said it has a special team devoted to investigating public pensions, and last year it brought its first case ever against a state, accusing New Jersey of securities fraud for claiming to have pension assets that did not really exist.
If the commission decides at some point to bring a case against Illinois, it would send another warning.
Some other states, including Arkansas, Ohio, Rhode Island and Texas, have used variations of Illinois’s method, which reduces their annual contributions to their pension funds. The effect is to save money at a time of tight budgets, but it can also weaken the pension funds.
The S.E.C.’s inquiry was disclosed in a prospectus for a $3.7 billion bond offering planned by Illinois for February. The state wants to use the proceeds from the sale to make its annual contribution to its pension funds, which are among the most poorly funded in the country. Illinois must sell bonds to come up with the cash because the state is low on money.
Okay, that bond issue is gonna be tough now, isn't it? If you thought they were going to have to pay up before, just wait now (if the issue can even be placed). This is gonna spread like European sovereign risk.
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