Gina Raimondo

The Securities and Exchange Commission has opened an investigation into Rhode Island’s bond offerings, WPRI.com has just confirmed with General Treasurer Gina Raimondo’s office.

The SEC informed Raimondo of the investigation on Monday afternoon but offered no further details, according to Raimondo spokeswoman Joy Fox. The SEC has not requested any information yet, Fox said.

The New York Times has reported on an ongoing SEC probe into Illinois’ bond disclosures that relates to a method of pension accounting also used in Rhode Island.

John Dugan, associate regional director of the SEC’s Boston office, did not immediately return a phone call requesting comment. The agency has created a special investigative team that focuses on public pension systems and last year it brought a landmark case that accused New Jersey of fraudulent accounting.

Frank Caprio, Raimondo’s predecessor as treasurer, did not immediately return a phone message asking about the SEC investigation.

Raimondo – who launched a “top-to-bottom review” of Treasury just hours before she apparently received the call from the federal investigators – issued the following statement about the SEC probe:

“It is regrettable to have inherited this situation so early in my administration before having an opportunity to fully address these issues,” said Raimondo. “Regardless if the SEC decides to proceed with a full investigation, work has begun to improve the state’s disclosures in bond issuances. The state needs to be able to access the bond market in the years to come on the most favorable terms possible. It is critical to present a complete picture of our finances to potential bond investors.”

“I was not entirely surprised to receive the SEC’s call,” she continued. “For months Rhode Island has been listed among several states with precarious finances. This challenging position is in part due to our significant and growing unfunded pension liability. It is unacceptable to be on these lists. The first step to addressing these challenges is to be accurate about the numbers we are using and to not underestimate the magnitude of our problems.”

Much more to come. Keep checking back here.

Update: With no comment from the SEC and no details available from the treasurer’s office, it’s too early to say exactly what federal investigators are probing about the state’s bond offerings. But here’s how The Times explained the accounting method also used by Rhode Island that drew its attention to Illinois:

The method, enacted last year, is based on sharp cuts in benefits for state workers who have not yet been hired. Although the cuts will not produce an appreciable savings until far in the future, Illinois has begun funding its plans as if its current workers were already earning the smaller benefits of the future. …

The gap between how much is needed and how much is actually in the [pension] funds has grown so big that [Illinois] is overwhelmed by the required contributions. The benefit cuts were presented by state officials last year as a reform that would get the situation under control. …

[Some actuaries argue] it deprives the pension fund of the substantial yearly contributions it needs now, to pay for the benefits already earned by today’s workers.

Update #2: Here are a few key pension numbers the state used in a recent bond disclosure.

The unfunded liability for the entire Employees’ Retirement System of Rhode Island was $4.35 billion as of June 30, 2008.

The state’s total annual contributions to the pension fund in recent years were $195 million in 2006-07; $219.9 million in 2007-08; and $205 million in 2008-09. The estimated subsequent contributions were $216.6 million for 2009-10 and $225.9 million in 2010-11.

“The state has made 100% of its actuarially determined contributions to the pension system for each of the past 15 years,” the disclosure declares.

Update #3: Gov. Lincoln Chafee was told about the SEC investigation within the last two days, his spokesman Mike Trainor tells me.

“His sense is twofold,” Trainor said of Chafee. “Obviously, the state is going to cooperate with the SEC in any way, shape or form, and he has confidence that Treasurer Raimondo will provide that level of cooperation. And he will closely monitor the situation.”

Update #4: “Officials in Rhode Island did not respond to phone calls seeking information about how the state achieved its pension savings,” The Times reported in September as part of the original article that kicked off the SEC’s Illinois investigation.

Update #5: The General Assembly enacted changes to the structure of the state’s pension benefits during four of its last six sessions: 2005, 2008, 2009 and 2010.

I should repeat that we don’t know if the SEC is investigating Rhode Island’s bond disclosures related to pension accounting – Treasurer Raimondo says the agency did not tell her what it was examining. It’s possible there’s something else going on. But the pension accounting issue is the only one that springs to mind based on my reading and reporting.

Update #6: Rhode Island’s $4.4 billion pension gap was the nation’s fourth-largest as of June 2008, the Pew Center on the States reported last year.

The so-called “funded ratio” – the percentage of assets Rhode Island has set aside to cover liabilities – was 61%. The only three states with pension systems more poorly funded than Rhode Island’s were Illinois, Kansas and Oklahoma.

Update #7: Just spoke briefly with David Bergers, who leads the SEC’s regional office in Boston. “I cannot comment,” he said. “Essentially, our standard policy is to neither confirm nor deny the existence of an investigation.” Still, nice of him at least to return my call.

Update #8: First, let’s not get ahead of ourselves: It’s not even clear yet that the SEC will open (or has opened) a full investigation into Rhode Island’s bond disclosures, let alone whether such a probe would lead to the agency accusing the government of securities fraud. Much is unknown.

That said, to my knowledge there’s only one precedent for the SEC bringing a fraud case against a state: New Jersey. The two sides settled last August, and it sounds like it was more embarrassing than damaging for New Jersey, judging by this Wall Street Journal story:

In its settlement, New Jersey neither admitted nor denied wrongdoing but said it wouldn’t do it again. The SEC didn’t fine the state, citing its cooperation and remedial steps it has taken. No individuals were charged.

No investors appeared to have been harmed. …

The New Jersey Treasury and the state attorney general’s office said in a joint statement that the state’s credit rating hasn’t been lowered since the SEC’s inquiry began three years ago. The value of bonds held up through the recession and the investigation didn’t push down prices, several large bond investors said.

Of course, that doesn’t mean a similar outcome would result here in Rhode Island – if, again, a case is ever even brought.