The fact is that New Jersey lied and got caught, but taxpayers everywhere may benefit.

Yesterday, the State of New Jersey settled with the SEC on charges that the state committed securities fraud by failing to disclose the true state of its state employees pension funds. This admission is an important step toward ending accounting policies that allow states to claim that the state teachers and employees’ pension funds are fully funded, when they really have billions of dollars of deficits.

By using accounting tricks, New Jersey claimed to have made millions of dollars of contributions into its pension funds, when it really made no cash contributions at all. The false statements in the documents backing 79 issues of municipal bonds totaling $26 billion between 2001 and 2007 gave the impression that the state was in much better financial shape that it actually was (and is), thus misleading purchasers of the bonds into thinking that the risk of default was lower.

Unfortunately, New Jersey is only one of many states and cities with underfunded public employees pension plans. As was formerly the case with many private traditional pension plans, perfectly legal accounting policies mask the true condition of these plans, a situation that was largely changed by pension reform legislation in 2006. Unfortunately, some states and local governments have carried this even further by using tricks for which companies in the private sector would have been indicted, while others have no idea what they owe in the long run.

That is where yesterday’s SEC action comes into play. While it is right to be suspicious of regulators’ actions, the SEC this time is on the side of taxpayers. By attacking fraudulent pension funding numbers in securities filings, the agency is moving to one set of uniform accounting standards that taxpayers can use to see what promises their local and state governments have made. This is especially important since it is taxpayers who will be on the hook to actually pay for those promises.

This common accounting standard, assuming that it is rigorously enforced, will enable taxpayers to get accurate answers to the questions, “What pension promises have my state or local governments made?” “What do those promises cost?” “How responsibly have those funding requirements been handled?” That, in turn, will enable taxpayers to figure out how to reduce the cost of those promises

Because the state constitution prevents cutting pensions, it is too late for the taxpayers of New Jersey to change the pension promises they will have to pay. However, residents in other states and cities may still have the opportunity to act before it is too late. The SEC now needs to require other states and local governments to tell the truth about their pension plans.