SEC Charges Kansas, New Jersey and Illinois for Understating Municipal Bond Exposure to Unfunded Pension Liability

Comprehensive research into the funded status of state level defined benefit public pension plans reveals that public employee retirement promises are underfunded by $4.1 trillion. Combined, state public pension plans are just 39 percent funded. Figures were drawn from state Fiscal Year 2012 Comprehensive Annual Financial Reports, as well as the Comprehensive Annual Financial Reports and actuarial valuations published by individual plans. In each case, figures were from the most up-to-date valuation available at the time of research. Plans were compiled based on the United States Census Bureau's Annual Survey of Public Pensions and state-level financial reports. Therefore this includes municipal pension funds that are administered by the state. States facing a particularly large unfunded liability at a per capita level and as a percentage of their annual gross state product include Illinois, Ohio, New Jersey, Oregon, Connecticut, Nevada, New Mexico, Hawaii, and Alaska. As this report demonstrates, unfunded public pension liabilities present a unique threat to state government finances. While many have tried to turn a blind eye to the pension crisis, the problem is simply too big to ignore. [Source]

August 11, 2014

SEC Press Release - The Securities and Exchange Commission today announced securities fraud charges against the state of Kansas stemming from a nationwide review of bond offering documents to determine whether municipalities were properly disclosing material pension liabilities and other risks to investors.  According to the SEC’s cease-and-desist order instituted against Kansas, the state’s offering documents failed to disclose that the state’s pension system was significantly underfunded, and the unfunded pension liability created a repayment risk for investors in those bonds.

Shortly after its nationwide review of municipal bond disclosures began, the SEC brought its first-ever enforcement action against a state when it sanctioned New Jersey for failing to disclose to investors that it was underfunding the state’s two largest pension plans.  Around the same time, the SEC began questioning the disclosures surrounding eight bond offerings through which Kansas raised $273 million in 2009 and 2010.  As the SEC began its inquiry, Kansas began adopting new policies and procedures to improve disclosures about its pension liabilities.  Kansas has now fully implemented those remedial actions, and has agreed to settle the SEC’s charges for its prior incomplete disclosures.

The SEC also charged Illinois last year for its misleading pension disclosures, and the state similarly implemented a number of remedial actions.

“We’re pleased that our actions have resulted in improved disclosure of pension liabilities in states that were not making investors aware of a significant repayment risk,” said Andrew Ceresney, director of the SEC Enforcement Division.  “Investors must be given adequate information to evaluate the impact of pension fund liability on a state’s overall financial condition.”

According to the SEC’s order against Kansas, the series of bond offerings were issued through the Kansas Development Finance Authority (KDFA) on behalf of the state and its agencies.  According to one study at the time, the Kansas Public Employees Retirement System (KPERS) was the second-most underfunded statewide public pension system in the nation.  In the offering documents for the bonds, however, Kansas did not disclose the existence of the significant unfunded liability in KPERS.  Nor did the documents describe the effect of such an unfunded liability on the risk of non-appropriation of debt service payments by the Kansas state legislature.  The SEC’s investigation found that the failure to disclose this material information resulted from insufficient procedures and poor communications between the KDFA and the Kansas Department of Administration, which provided the KDFA with the information to include in the offering materials.

“Kansas failed to adequately disclose its multi-billion-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,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “In determining the settlement, the Commission considered Kansas’s significant remedial actions to mitigate these issues as well as the cooperation of state officials with SEC staff during the investigation.”

According to the SEC’s order, Kansas has since adopted new policies and procedures to help ensure that appropriate disclosures about pension liabilities are being made in its offering documents.  Kansas designated responsible parties in state agencies critical to the disclosure process, mandated closer communication and cooperation among those agencies, established a disclosure committee, and now requires annual training of key personnel.  Without admitting or denying the findings, Kansas consented to the SEC’s order to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

The SEC’s investigation was conducted by Robert Hannan and Eric Werner in the Fort Worth Regional Office with assistance from members of the Municipal Securities and Public Pensions Unit including Joseph Chimienti, Creighton Papier, Jonathan Wilcox, and Mark Zehner (deputy chief).

Kansas governor seeks tax increases to address budget woes

January 17, 2015

AP - Kansas would nearly triple its cigarette tax, raise taxes on alcohol and slow down promised income tax cuts to balance its budget under proposals Republican Gov. Sam Brownback outlined Friday.

Brownback presented detailed recommendations to the GOP-dominated Legislature for eliminating projected shortfalls totaling more than $710 million in the current budget and for the fiscal year beginning July 1. He also presented a spending blueprint for the fiscal year beginning in July 2016 designed to leave the state with some cash reserves.

The state's budget problems arose after lawmakers aggressively cut personal income taxes in 2012 and 2013 at Brownback's urging to stimulate the economy. Brownback's budget-balancing plans would make those reductions more gradual, without abandoning his long-term goal of eliminating income taxes.

He proposed increasing the cigarette tax to $2.29 a pack from 79 cents and raising the tax on other tobacco products to 25 percent from 10 percent. The tax paid by consumers on beer, wine and liquor at liquor stores would jump to 12 percent from 8 percent. The increases would raise $394 million over two years, starting in July.

Thomas Koehn, a 49-year-old unemployed Topeka resident, estimated that the cigarette tax increase would cost him $50 a month. Ruby Tate, a 47-year-old cashier at Discount Smokes and Convenience Store in central Topeka, said the proposals would hurt people on fixed incomes.

"Do you cut back the smoking or do you cut back the medicine?" she said. "A lot of people are going to make the choice of the medicine."

The governor's proposals also would divert funds for highway projects to general government programs and delay the elimination of a long-term funding gap in the pension system for teachers and government workers. Overall state aid for public schools would remain flat through June 2017 — with higher spending on teacher pensions.

Brownback is proposing more than $15 billion in total spending for the current fiscal year and each of the next two fiscal years. The state would end June 2017 with $253 million in cash reserves.

The Legislature's top Democrats said only that they're concerned about some of his proposals — without being specific — and would have more to say next week.

Brownback promised during his State of the State address Thursday night that Kansas would keep moving to eliminate its income taxes, despite its budget problems.

He and top aides defended his proposals to raise cigarette and alcohol taxes, saying it's better to tax consumption rather than "productivity."

"You can't get out of a tax on productivity, but you can on consumption," Revenue Secretary Nick Jordan said in an interview. "You can decide how you're going to spend your money and what you're going to spend it on."

The state has cut its top personal income tax rate 29 percent and exempted the owners of 191,000 businesses altogether. Those changes would remain in place.

However, future cuts would be slower. For example, the state's lowest income tax rate, now 2.7 percent, was set to drop to 2.4 percent for 2016 and would dip to 2.66 percent instead.

Also, deductions that were phased out as rates dropped would be eliminated more quickly, including a popular one for interest paid on home mortgages.

Jeff Glendening, state director of the anti-tax group Americans for Prosperity, said that under the governor's plans, movement toward eliminating income taxes "has slowed to a crawl."