We're still in a jobs depression in many parts of Illinois. New business activity has slowed considerably thanks to sky-high taxes and a state government so incompetently run, they still owe bills from 3 years ago.
But the talk today is about a pension bomb that threatens disaster and the settlement the state made with the SEC for misleading investors about the billions in shortfalls the pension system was operating under.
The state settled yesterday with the U.S. Securities and Exchange Commission over charges it misled investors from 2005 to 2009 about shortfalls in retirement funds. Yet buyers in the $3.7 trillion municipal bond market are still penalizing Illinois.
Investors demand 1.3 percentage points of extra yield to own 10-year debt of the state and its localities, almost seven times the average in 2005, when the SEC said the inadequate disclosure began. Illinois had its credit rating cut by Standard & Poor's in January, leaving it the lowest of any state, after lawmakers failed to bolster its pension or whittle down a backlog of $9 billion of unpaid bills.
"Where other states are making progress, they're not," said Daniel Solender, who helps manage $19.5 billion of munis at Lord Abbett & Co. in Jersey City, New Jersey. "It definitely makes you more hesitant to increase positions on the bonds."
Illinois joins local governments nationwide facing growing retiree burdens after the 18-month recession that ended in 2009, including Chicago, its largest city. States and localities are grappling with more than $2 trillion in unfunded public-employee retirement costs, Moody's Investors Service said in July.
Illinois failed to disclose how much it was underfunding its plans as it sold $2.2 billion in bonds, the SEC said. The fifth-most-populous state became the second to settle over such charges. New Jersey resolved a similar case in 2010, as did San Diego in 2006.
Illinois neither admitted nor denied the SEC's findings in the settlement, which didn't include fines, according to a statement from Governor Pat Quinn's Office of Management and Budget. Abdon Pallasch, an assistant budget director, said the administration would have no further comment beyond the release.
"It goes back to an era, which wasn't that long ago, where there just wasn't as much attention placed on pension obligations," said Howard Cure, director of muni research in New York at Evercore Wealth Management LLC, which oversees $4.5 billion. "You're not talking about small, infrequent issuers."
The SEC said in the settlement, "The state knew that the plan was unmanageable, but failed to disclose the significant risks to those who bought its bonds." Illinois is paying for their dishonesty, as investors have penalized the state's bonds by ratcheting up yields. Illinois already boasts the absolute worst credit rating among any state and the sale of muni bonds isn't doing anything to fix that.