“Pensions are complicated, and when they are not causing huge problems, they are boring.”

I’ve mentioned that Josh Barro line before, and I probably will again, because it’s pure truth. These days, pensions are certainly not boring, as the situation in Illinois illustrates spectacularly.

Yesterday, the Securities and Exchange Commission charged the state with securities fraud “for misleading municipal bond investors about the state’s approach to funding its pension obligations.”

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.

The funded status of the public pension system in Illinois is among the worst (if not the worst) in the country. For example, the State Employees’ Retirement System was only 35.6 percent funded in 2011.

As the New York Times notes,

Many states, counties and cities are struggling with shortfalls in their pension systems, and because large numbers of people now qualify to draw benefits, the expense is wreaking havoc with budgets. Still, securities lawyers are not predicting a wave of S.E.C. pension enforcement actions. The states are legal sovereigns, and federal securities regulators have much more power to police corporate wrongdoing than potential violations by the states and municipalities.

The S.E.C. does have the power to step in when it believes that there has been a fraud, but that means meeting a tough standard of proof. Many of today’s troubled public pension funds got that way through missteps that, while harmful, do not necessarily constitute fraud: overly rosy investment assumptions, failure to take into account that Americans are living longer, and bad calls about how much benefits actually cost.

But Illinois went above and beyond:

By 2003, the state was so far behind that it issued $10 billion of bonds and put the proceeds into its pension funds to make them look flush. The main underwriter of those bonds, Bear Stearns, was later found to have made an improper payment to win the business, figuring in the corruption trial of a former governor, Rod R. Blagojevich.

Not boring at all.