Illinois' recent settlement with the Securities and Exchange Commission over charges of misleading pension disclosures will result in better disclosure overall and boost the credit of the entire municipal securities market, Moody's Investors Services said in a report released Friday.
"The move is a credit positive for the municipal securities market as a whole because increased SEC scrutiny will encourage municipal issuers to continue improving their pension-related disclosures," the rating agency said in the report.
On March 11, the SEC charged the state with securities fraud for violating federal securities laws in its public pension disclosures between 2005 and 2009 while it issued some $2.2 billion of general obligation bonds.
Illinois failed to disclose that its statutory funding plan significantly underfunded its pension obligations and increased risk to its overall financial condition, the SEC charged. The funding schedule did not cover costs of benefits accrued in a current year and payments to amortize the plans' unfunded actuarial liability, the commission said.
Illinois also misled investors about the effect of changes to its statutory plan, including pension holidays enacted in 2005, said the SEC.
Illinois, which the SEC said implemented remedial actions and issued corrective disclosures beginning in 2009, settled the charge by agreeing to a cease-and-desist order. It did not admit or deny the order's findings and does not face fines or penalties.
Moody's said the topic of public pension disclosure rose to prominence in the last four years as many plans' funding ratios plummeted. It said the SEC's scrutiny of plan disclosure was fueled by dismay from market participants over inconsistent disclosure practices and overly-optimistic accounting assumptions.
Those concerns also helped lead the Governmental Accounting Standards Board to evaluate and improve pension reporting standards.
"Continued efforts by both GASB and the SEC are a step in the right direction, but there are still substantial areas that could be improved regarding disclosure, accounting and the funding status of state and local government pension," Moody's said in its report.
New Jersey is the only other state to have faced similar sanctions from the SEC. The state settled those in 2010.
