SEC Accuses New Jersey of Financial Fraud

Published October 18, 2010

Sheila Weinberg was not surprised to learn the Securities and Exchange Commission had accused the State of New Jersey of securities fraud.

“We found New Jersey to be the worst by far” of the 50 states when it comes to accounting transparency for liabilities for pension and health insurance benefits for government workers and retirees, said Weinberg, CEO and founder of the Institute for Truth in Accounting, an independent nonprofit organization in Northbrook, Illinois.

The institute last year released a study of all 50 states’ financial reporting practices and is currently updating the work. Weinberg said the action against New Jersey could pressure other states and local governments that have been using similar tactics to disguise their finances to be more truthful.

‘Flat-Out Lying’

Weinberg said New Jersey was simply the worst of a bad bunch.

“What they have been doing in government budgets is flat-out lying,” Weinberg said. “Financial statements are so opaque. It’s scary now.

“Because governments have not been reporting things properly, spending has gotten out of hand,” she added. “Government unions are always pushing for more. But the cost of government is massively higher than what they’ve been telling us.”

Shady Pension Reporting

The SEC charges, announced in August, stemmed from New Jersey’s pension obligation reporting.

The SEC stated investors bought more than $26 billion worth of New Jersey bonds in 79 offerings between 2001 and 2007 without understanding the severity of the state’s financial condition. The agency issued a cease-and-desist order, and the state accepted the order without admitting any wrongdoing.

The SEC said the fraud began in 2001 when New Jersey raised retirement benefits for teachers and general state employees.

The state claimed to have money to pay for the higher benefits in a special “enhanced benefit plan” and a five-year plan to contribute to the pension funds. In fact, the SEC wrote in its order, “Disclosures in bond offering documents regarding the State’s five-year phase-in plan and use of the BEFs likely falsely led investors to believe that: (1) the State would be contributing to TPAF [Teachers’ Pension and Annuity Fund] and PERS [Public Employee’s Retirement System] in fiscal years 2004, 2005, and 2006; (2) the State had a plan for making its full statutory contributions; and (3) the State would begin making full statutory contributions in fiscal year 2008.”

Retroactive Revaluations

The state also misled investors in other ways, according to the SEC, including by retroactively revaluing pension fund investments to June 1999, near the height of the stock market. The revaluation covered up a $2.4 billion loss of asset value that had occurred between June 30, 1999 and April 30, 2001 and was not revealed until March 2003. No explanation for the revaluation was given.

“Because the State’s contributions to TPAF and PERS are based on the actuarial value of assets, the revaluation created the false appearance that the plans were ‘fully funded’ and allowed the State to justify not making contributions to the pension plans despite the fact that the market values of the plans’ assets were rapidly declining,” according to the SEC’s order.

The agency did not impose a financial penalty. Nor did it name the bond underwriters who vouched for the state’s financial statements.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Finance, Insurance & Real Estate News, a publication of The Heartland Institute, where this article first appeared. Used with permission.