The State of Illinois reached a settlement today with US securities regulators on charges that it committed securities fraud when it issued $2.2 billion worth of municipal bonds from 2005 to early 2009.

Illinois failed to disclose that it significantly underfunded the state's pension obligations and increased the risk to its overall financial condition, the SEC said in a statement. Illinois began revising its disclosures in 2009 to show the full risk. The state will pay no fine under today's settlement.

"Municipal investors are no less entitled to truthful risk disclosures than other investors," said George S. Canellos, acting director of the SEC's Division of Enforcement. "Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system."

Elaine Greenberg, chief of the SEC's Municipal Securities and Public Pensions Unit, said, "Regardless of the funding methodology they choose, municipal issuers must provide accurate and complete pension disclosures including the effects of material changes to their pension plans. Public pension disclosure by municipal issuers continues to be a top priority of the unit."

The state in 1994 set up a 50-year pension contribution schedule that failed to cover pension costs, and even underfunded that plan later on, the agency reported. As a result, bond investors got less interest than they should have had they known the full extent of the pension underfunding. The state has underfunded its pension system by $98 billion and this year expects to spend 19 percent of its budget on pension funding without reducing that liability.

It was only the second time that the SEC has accused a state of securities fraud. The SEC charged New Jersey in 2010 with misleading municipal bond investors about its underfunding of the state's two largest pension plans.