For the second time in history, federal regulators have accused an American state of securities fraud, finding that Illinois misled investors about the condition of its public pension system from 2005 to 2009.

In announcing a settlement with the state on Monday, the Securities & Exchange Commission accused Illinois of claiming that it had been properly funding public workers' retirement plans when it had not. In particular, it cited the period from 2005 to 2009, when Illinois also issued $2.2 billion in bonds.

The growing hole in the state pension system put increasing pressure on Illinois' own finances during that time, raising the risk that at some point the state would not be able to pay for everything, and retirees and bond buyers would be competing for the same limited money. The risk grew greater every year, the SEC said, but investors could not see it by looking at Illinois' disclosures.

In effect, that meant investors overpaid for bonds of a lower value than they were made out to have, although the SEC did not measure any loss in dollars, and it did not impose fines or penalties in Monday's settlement. Illinois agreed to a cease-and-desist order without admitting or denying the accusations.

The charges put the state's pension system, generally thought to be the weakest of any state, back in the national spotlight. In his budget address last week, Gov. Pat Quinn, a Democrat, issued a clear warning that the system had to be fixed.

"Without pension reform, within two years, Illinois will be spending more on public pensions than on education," said Mr. Quinn. "As I said to you a year ago, our state cannot continue on this path."

Many states, counties and cities are struggling with shortfalls in their pension systems, and because large numbers of people now qualify to draw benefits, the expense is wreaking havoc with budgets. Still, securities lawyers are not predicting a wave of SEC pension enforcement actions. The states are legal sovereigns, and federal securities regulators have much more power to police corporate wrongdoing than potential violations by the states and municipalities.

The SEC does have the power to step in when it believes that there has been a fraud, but that means meeting a tough standard of proof. Many of today's troubled public pension funds got that way through missteps that, while harmful, do not necessarily constitute fraud: overly rosy investment assumptions, failure to take into account that Americans are living longer, and bad calls about how much benefits actually cost.

The agency did send a signal that Monday's enforcement action would probably not be the last, however.

READ FULL SOURCE ARTICLE: 03/11/2013

Editor's Note: It needs to be noted -- and understood as a irrefutable fact -- that when Republicans controlled Illinois State government the State Pension System was healthy and funded. In fact, in just about every State, county or municipal location where pension funds are in trouble, we find Democrat leadership foisting a Progressive agenda. Now, stop for a second and ask yourself why. Why is it that wherever Democrats control government and install their ideologically-based programs, fiscal devastation exists...An honest person knows the answer...