really interesting - could this crack the pension/unfunded obligations/state bonds system? the article hints that lawsuits may follow.

U.S. Alleges Fraud in New Jersey Pension Funding


The Securities and Exchange Commission said the action was its first ever against a state, and only its second against any government over the handling of a public pension fund. The city of San Diego was the first.

The S.E.C. settled its civil complaint with New Jersey by issuing a cease-and-desist order, which the state accepted without admitting or denying the findings.

The agency did not impose a financial penalty. The S.E.C.’s powers of enforcement against the states are tightly limited by states’-rights concerns and constitutional law, and it has standing to get involved only when there is a clear-cut case of fraud.

Nor did the S.E.C.’s order name the bond underwriters whose job it was to vouch for the state’s financial statements. That raised the possibility that investors might decide to file suit.

The action could also put pressure on other states and cities that have used various accounting maneuvers to portray their pension funds as healthier than they currently are. Actuaries have been raising questions, for example, about the plans Illinois has laid out for strengthening its pension funds.

The S.E.C. said in its cease-and-desist order that investors bought more than $26 billion worth of New Jersey’s bonds, without understanding the severity of the state’s financial troubles.

“The State of New Jersey didn’t give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation,” Robert Khuzami, director of the S.E.C.’s division of enforcement, said in a statement.

The S.E.C. said the fraud began in 2001, when New Jersey increased retirement benefits for its teachers and general state employees. As reported by The New York Times, the state did not put real dollars behind this 2001 promise, because it did not have the money. Instead, it used an accounting illusion to make the new benefits look as if they were paid for, claiming to have money available in a special “benefit enhancement fund.”

New Jersey also claimed that it had a “five-year plan” to use money in the benefit enhancement fund to make contributions to the pension funds for the teachers and state workers. In fact, no such money was available.

“The state was aware of the underfunding” of the workers’ plans, the S.E.C. said in a statement, “and the potential effects of the underfunding.” It said the fraud involved 79 bond offerings, from 2001 until April 2007.

New Jersey’s pension fund is one of the largest state funds in the country, and the state is now in a position where it must come up with tens of billions of dollars to make good on all of its promises — something it cannot do without raising taxes, cutting public services or otherwise retooling its budget. Its bond buyers have thus become creditors of a state whose finances are much shakier than they were previously told.