August 11, 2014

SEC charges Kansas with not disclosing pension risk to investors

The U.S. Securities and Exchange Commission charged Kansas with failing to disclose a “multibillion-dollar” pension liability to bond investors.

The U.S. Securities and Exchange Commission charged Kansas with failing to disclose a “multibillion-dollar” pension liability to bond investors.

Documents for eight bond offerings in 2009 and 2010 by the state’s Development Finance Authority didn’t tell investors that a study had pegged Kansas’s public-employee pension as the second-most underfunded in the nation. Kansas, which didn’t admit or deny the findings, put in place new disclosure policies and agreed to settle the case.

“Kansas failed to adequately disclose its multibillion- dollar pension liability in bond offering documents, leaving investors with an incomplete picture of the state’s finances and its ability to repay the bonds amid competing strains on the state budget,” LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Securities and Public Pension Unit, said in a news release from Washington.

The SEC didn’t seek financial penalties or make claims of intentional misconduct, according to Jim Clark, the state’s secretary of administration.

The SEC has been cracking down on faulty disclosure by states and localities that borrow in the $3.7 trillion municipal-bond market.

It settled a similar case with New Jersey in 2010, the first time the regulator targeted a state. Last year, Illinois became the second state to settle with the SEC over charges it misled investors about a growing shortfall in its employee pension funds as it sold $2.2 billion in bonds.

Around the same time as New Jersey’s settlement, the SEC began questioning the disclosures in eight Kansas bond issues that raised $273 million, the SEC said.

As the Sunflower State prepared to issue $127 million of bonds in 2009, a draft actuarial report provided to Kansas’s public pension found that the gap between its liabilities and assets had grown to $8.3 billion in 2008, from $5.6 billion the previous year, lowering the pension’s funding level to 59 percent, the SEC said. The gap was a result of years of insufficient contributions by the state and school districts to cover the cost of benefits earned by public employees and their accumulated liabilities, the SEC said.

Only Illinois had a lower pension funding status than Kansas, according to a 2010 report by the Pew Center on the States.

But neither the finance authority nor the Kansas Department of Administration, which advised the authority of material changes to state finances, determined that additional disclosure regarding the pension fund in the bond offering statement was necessary, the SEC said.

Kansas has adopted new policies and procedures to ensure it’s making the appropriate disclosures about its pension liabilities, the SEC said. The state mandated closer communication and cooperation among agencies responsible for preparing bond disclosures and established a disclosure committee, the agency said.

Kansas boosted employee contributions to the pension fund and created a new plan for employees hired after 2015, reducing projected pension debt by $500 million, Gov. Sam Brownback said in a statement.

Kansas’ finances have had other bad news in recent weeks because substantial revenue shortfalls are expected as a result of tax cuts. As a result, Moody’s Investors Service downgraded the state’s credit rating in April, and Standard & Poor’s followed suit last week.

S&P cut Kansas to AA, third-highest, from AA+, and the state’s appropriation-secured debt was dropped to AA- from AA. The outlook on both ratings is negative, which “reflects our belief that there will be additional budget pressure as income tax cuts scheduled in future years go into effect, or if midyear revenue shortfalls resume,” S&P credit analyst David Hitchcock said.

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