On Monday of this week, the Securities and Exchange Commission (SEC) announced it was suing the state of Illinois over a lawsuit that alleged that state officials had mislead investors over the health of their pension funds between 2005 and 2009.  The state sold more than $2.2 billion in munibonds during that time.  The SEC's Acting Director of the SEC’s Division of Enforcement George S. Canellos said “Municipal investors are no less entitled to truthful risk disclosures than other investors.  Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system.” Ouch.  Another legacy from the Blago, who is cooling his heels in the Federal Correctional Institution-Englewood near Denver, Colorado.  Who knew that he would look so good in orange and shorn of his infamous helmet-like coiffure. This is only the second time in its history that the SEC has sued a state. From the SEC:

An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.

And here is another tidbit which readers may not have heard about the Illinois pension system and it bears directly on every taxpayer in the country; the state's teachers and cops (among others) have never contributed to the Social Security program, which means that if the state's pension fund fails, there are no Social Security checks waiting to fill that gap. Republican members of Congress are so concerned about the possibility of Illinois coming hat in hand to the federal government for a pension bailout that they have issued a shot across the bow, warning all states (but particularly Illinois) that if the state's lawmakers fail to vigorously and materially address its impending pension crisis, Republican members (at least) will block any attempt to get taxpayers from others states to bail out the decades-long profligacy and mismanagement of Illinois. These members of Congress have every cause for alarm.  For one thing, Governor Quinn has already telegraphed his wish to seek a federal bailout from taxpayers.  In his FY 2012 budget (published in 2011), Quinn alluded to the pension crisis and included the following language in the budget:

While the pension reform of 2010 improved the situation by decreasing future liabilities … significant long term improvements will come only from additional pension reforms, refinancing the liability and seeking a federal guarantee of the debt, or increasing the annual required state contributions [emphasis added].

When the wily pension bailout watchdogs at the Illinois Policy Institute uncovered that language and Quinn was called on it in the WSJ, he scrambled to explain that the inclusion of bailout language was a “precaution.”  And, with a Chicago pol in the White House, it is not a stretch to imagine that Illinois lawmakers might be hoping for a leg up from a favorite son. Gov. Quinn is  paying lip service to pension reform.  During his budget address earlier in March, he reiterated the need to act quickly and decisively, saying “Without pension reform, within two years, Illinois will be spending more on public pensions than on education.  As I said to you a year ago, our state cannot continue on this path.” Even though Illinois and California are leading the pack when it comes to pension dysfunction, they are hardly alone.  Virtually every state in the country has an underfunded pension liability bearing down on them. There are multiple drivers of the pension crises.  But one is the overly generous salaries and benefits afforded public-sector employees.  In September, 2012 CAGW's report, entitled Public Servants or Privileged Class: How State Government Employees are Paid, analyzed state government employee wages and benefits in all 50 states and, for the first time, provided a thorough comparison of compensation for public and private sector workers in the same job categories, from architecture and engineering to transportation.  The report found that state governments pay on average 6.2 percent more per hour in wages and benefits, including pension benefits, than the private sector for the 22 major occupational categories that exist in both sectors.  Additionally, the report found that no state government pays its employees on par or below what the private sector pays; that the largest percentage difference in pay between the public and private sector is 40 percent; and that the highest difference in pay is $61 an hour. And cities are also struggling.  The Pew Charitable Trust issued a report highlighting the fact that 61 key cities emerged from the recent recession (emerged?  not so sure about that) with a budget gap of more than $217 billion between "what they had promised their workers in pensions and retiree health care and what they had saved to pay that bill."  Cities like Detroit, Michigan, Stockton  California, and Scranton, Pennsylvania are among a growing number of municipalities that are either bankrupt or near bankrupt.  In each and every case, exorbitant and unfunded pension liabilities figured centrally in those failures. All of which begs the question:  if the states are in trouble and the cities are drowning, what is happening with federal employees' pension liabilities?  (Wink, wink, nudge nudge, say no more)...few care to discuss the issue but the liabilities are staggering. In a November 26, 2012 Wall Street Journal op ed, Chris Cox (former SEC Commissioner and chairman of the House Republican Policy Committee) and Bill Archer (former  chairman of the House Ways & Means Committee) shared some stunning numbers in order to call for more honest and transparent accounting of the taxpayers' true liabilitie:

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. Why haven't Americans heard about the titanic $86.8 trillion liability from these programs? One reason: The actual figures do not appear in black and white on any balance sheet. But it is possible to discover them. Included in the annual Medicare Trustees' report are separate actuarial estimates of the unfunded liability for Medicare Part A (the hospital portion), Part B (medical insurance) and Part D (prescription drug coverage). As of the most recent Trustees' report in April, the net present value of the unfunded liability of Medicare was $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion.

The bankrupt cities are looking to the cash-strapped states, many of the most profligate and (now nearly) bankrupt states are stealing a pitiful glance at the federal government hoping for a bailout, and the federal government is leering at our debtors, borrowing more than 40 cents on every dollar just to fund the basics and keep the teetering fiscal tower from tumbling. Unfortunately, though, it's turtles all the way down.