By Jonathan Miltimore

 

New Jersey became the first state in history Wednesday to be charged with securities fraud for concealing from investors financial information about the funding status of two public pensions, according to the U.S. Securities and Exchange Commission.

 

From August 2001 to April 2007 New Jersey offered and sold $26 billion worth of municipal bonds using securities documents that masked the financial condition of the Teachers' Pension and Annuity Fund (TPAF) and the Public Employees' Retirement System (PERS), according to SEC officials.

 

 The SEC said New Jersey misled investors and created the false impression that the state could fund PERS and TPAF without raising taxes or otherwise cutting services.

 

"All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The State of New Jersey didn't give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation."

 

A copy of the order reveals New Jersey omitted legislation passed in 2001 that increased benefits for employees, creating benefit enhancement funds (BEFs) to finance the benefits. In order to fund the BEFs without raising taxes, New Jersey used TPAF and PERS assets valued at June 1999 levels, the peak of a bull market.

 

New Jersey was ordered to cease-and-desist from committing or causing future violations.

 

The state consented to the issuance of the order without admitting or denying the findings, but no further penalty was administered. 

 

Richard J. "Dick" LaRossa, a former New Jersey state senator and executive director for Solutions New Jersey, said studies as early 1996 revealed the state was experiencing severe demographic challenges in pension funding. Instead of curbing pension costs or raising additional revenue, in 2001 Governor James McGreevy signed legislation permitting workers to retire early with enhanced benefits, LaRossa said. 

 

“(The state) gave away a total of 13 years (of pension costs) without funding a single dime,” LaRossa said. “The general public had no knowledge.”

 

Jonathan Miltimore is a national reporter for The Franklin Center for Government and Public Integrity. jonathan.miltimore@franklincenterhq.org