State Pension (Non)disclosures Draw Another SEC Suit, Settlement

The Securities and Exchange Commission (SEC) on Aug. 11 announced securities fraud charges against the state of Kansas, claiming that the state failed to disclose that the state’s pension system was significantly underfunded, and that the unfunded pension liability created a repayment risk for investors in those bonds.

An SEC press release notes that the action stems from a nationwide review of bond offering documents to determine whether municipalities were properly disclosing material pension liabilities and other risks to investors. 

Shortly after the SEC began its nationwide review of municipal bond disclosures, for the first time it brought an 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. The SEC notes that around the same time, the agency began questioning the disclosures surrounding eight bond offerings through which Kansas raised $273 million in 2009 and 2010. 

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. The SEC notes that one study at the time cited the Kansas Public Employees Retirement System (KPERS) as the second-most underfunded statewide public pension system in the United States. 

The SEC said its investigation found that Kansas’ failure to disclose this material information was due to 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.

As the SEC began its inquiry, Kansas began adopting new policies and procedures to improve disclosures about its pension liabilities. It has fully implemented those remedial actions, and has agreed to settle the SEC’s charges for its prior incomplete disclosures. The SEC notes that Kansas has taken the following steps:  

• designated responsible parties in state agencies critical to the disclosure process;
• mandated closer communication and cooperation among those agencies;
• established a disclosure committee; and
• requires annual training of key personnel. 

Without admitting to or denying the SEC’s 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 also charged Illinois last year for its misleading pension disclosures, and the state similarly implemented a number of remedial actions.