NEW YORK U.S. regulators said on Wednesday they charged New Jersey with securities fraud for not disclosing to municipal bond investors that it was underfunding its pensions.
New Jersey, the first state ever hit with securities fraud charges by the Securities and Exchange Commission, agreed to settle the case without admitting or denying the findings, the SEC said. The state was not required to pay any civil fines or penalties, but ordered to cease and desist from future violations.
New Jersey offered and sold more than $26 billion of municipal bonds in 79 deals between August, 2001 and April, 2007, according to the SEC.
The offering documents "created the false impression that the Teachers' Pension and Annuity Fund (TPAF) and the Public Employees' Retirement System (PERS) were being adequately funded, masking the fact that New Jersey was unable to make contributions to TPAF and PERS without raising taxes, cutting other services or otherwise affecting its budget," the SEC said.
"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 SEC's Division of Enforcement, said in a statement.
In a joint statement with the New Jersey attorney general's office, Andrew Pratt, a spokesman for the state treasury which oversees the $68 billion state pension fund, said the state has never missed a bond payment.
"The state aims to have the best financial disclosure in the nation and we will continue to strive to achieve that goal," Pratt said.
Some of the debt was sold while former Governor Jon Corzine ran the state. Corzine, a Democrat, one-time chief executive officer at Goldman Sachs Group and current MF Global Holdings Ltd CEO, ran the state from 2006 until losing a reelection bid to Republican Chris Christie last year.
Corzine spokesman Josh Zeitz said Corzine had worked to shore up the system that had been badly neglected for years.
"He put more state money into the public pension fund during his one term than all of his predecessors over 15 years did combined," said Zeitz.
Meanwhile, Christie skipped a scheduled $3.1 billion payment into the state's pension fund for the current fiscal year that began July 1.
Christie, seeking to close a $10.7 billion budget shortfall, said the state should not make further payments into a system that paid retirees too generously. He has promised to propose pension reforms in the fall.
New Jersey is the third most indebted state, after California and New York, according to Moody's Investors Service's 2010 State Debt Medians Report, which is based on 2009 data. It is one of many states grappling with big pension funding problems.
The charges against New Jersey came as municipal regulators stepped up efforts to ensure issuers in the $2.8 trillion municipal market were meeting disclosure requirements.
U.S. states face a total shortfall of at least $1 trillion in their funds for employees' pensions and retirement benefits, according to a report released by the Pew Center on the States in February. The report found that states did not save for the future or manage costs well, but they also typically expect an 8 percent return on investments.
Given the state of the stock market, many pension funds and governments found their investment returns have grown slimmer in recent years and they have had to put in more money to cover costs.
The state's bonds were issued before 2007, when regulators began requiring that the opaque municipal bond market provide investors with more information about the debt being sold. SEC chairwoman Mary Schapiro has said she wants muni buyers to have the same protections as corporate investors.
The Municipal Securities Rulemaking Board has created the central repository known as EMMA, where investors can access information about the bonds for free instead of following the previous path of having private repositories mail them copies of documents for fees.
It has also shortened the amount of time disclosures can be made and begun requiring more detailed information.
(Reporting by Karen Pierog in Chicago and Edith Honan in New York, additional reporting by Lisa Lambert in Washington and Jon Hurdle in Philadelphia; Editing by Chizu Nomiyama)