The Securities and Exchange Commission (SEC) 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.
The SEC began questioning the disclosures surrounding eight bond offerings through which Kansas raised US$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.
One study at the time found that the Kansas Public Employees Retirement System (KPERS) was the second-most underfunded statewide public pension system in the nation. However, Kansas did not disclose the existence of the significant unfunded liability in KPERS in the offering documents for the bonds. 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,” says LeeAnn Ghazil Gaunt, chief of the SEC enforcement division’s municipal securities and public pensions unit.
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.
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