SEC Charges Kansas With Failing to Disclose Pension Risks

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 statement from Washington.

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.

Growing Gap

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 the 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.

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.

New Procedures

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.

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

“We remain committed to complying with all disclosure requirements,” Clark said in a statement.

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, Governor Sam Brownback said in the same statement.

“We have improved transparency in the reporting system and taken decisive actions to meet our existing obligations and maintain the trust of our state workers and retirees,” Brownback said.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Pete Young, Mark Tannenbaum

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