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New Jersey POS for $2.25B Note Sale Includes Pension Plan Disclosures

WASHINGTON — A day after New Jersey settled securities fraud charges with the Securities and Exchange Commission for failing to disclose to bond investors that it was underfunding its two largest pension plans, offering documents for the state's record $2.25 billion short-term tax and revenue anticipation note deal included several pages of disclosures about the woefully underfunded retirement plans.

The preliminary official statement distributed ahead of the note sale indicated that the state only made $106.3 million in contributions to its seven pension plans for the fiscal year ending June 30, 2009, much less than the $1.047 billion that was included in the fiscal 2009 appropriations act and just 4.8% of the total actuarially recommended contribution of $2.231 billion.

The state was late in making the $106.3 million payment. It was due June 30, 2009 but not paid until Sept. 14, according to the POS. The document also said that New Jersey failed to make any contribution for fiscal 2010, and that it had no plans to make one for the current fiscal year, for which the actuarially recommended contribution has ballooned to $3.060 billion.

As a result, the state's unfunded pension ratios are expected to "increase significantly, which would lower the overall funded ratio of the pension plans and increase the need for future state pension contributions to ensure the fiscal integrity of the pension plans," the POS said. "No assurances can be given as to the level of the state's pension contributions in future fiscal years."

The lengthy pension-related disclosures, which the state began using in 2007 after the media and federal regulators first raised questions about them, are practically encyclopedic compared to what the state used to provide investors.

For instance, offering documents for New Jersey's 2003 $1.9 billion note sale include a brief discussion of the pension-funding issues. In it, the state asserted — based on accounting gimmicks — that the actuarial value of all assets in the funds was $83.4 billion which, when compared to the $76.4 billion actuarial accrued liability, represented a funding level of 109.2%.

In its settlement Wednesday, the SEC said that between August 2001 and April 2007, New Jersey created the false impression that its two largest pensions — the Teachers' Pension and Annuity Fund and the Public Employees' Retirement System — were adequately funded.

SEC commissioner Elisse Walter said in a statement Thursday that the case points to the need for the SEC's efforts to boost municipal disclosure and accounting standards.

"The New Jersey case highlights the need for states and municipalities to address investor disclosure, and the consequences for not doing so."

She also said that disclosure issues will be among the "many important issues" explored during the commission's upcoming muni field hearings, though she declined to provide a schedule for the hearings.

In an interview with The Bond Buyer last month, she said the commission is tentatively planning five field hearings throughout the country between September and January.

New Jersey agreed to settle the case without admitting or denying the SEC's findings and said it will cease and desist from committing any further violations. There was no fine.

Specifically, the SEC said the disclosure fraud began in November 2001 when the Legislature enacted a law that increased retirement benefits for employees and retirees enrolled in the Teachers' Pension and Annuity Fund and the Public Employees' Retirement System by 9.09%.

However, the state resorted to gimmicks to "fund" the enhanced benefits, rather than increase cost of the benefits to the state or employees. Specifically, it revalued TPAF and PERS' assets to reflect their full market value as of June 30, 1999, at the height of the bull market. As a result, the documents essentially masked a $2.4 billion decline in the market value of the pension assets between 1999 and 2001, the SEC said.

The commission also found that the state failed to disclose and misrepresented information about special Benefit Enhancement Funds, created by the 2001 law, that initially were intended to fund the costs associated with the increased benefits, among other issues.

New Jersey's bond disclosure also omitted or misrepresented information about the state's use of the BEFs as part of a five-year phase in plan to begin making contributions to TPAF and PERS as well as the state's alteration and eventual abandonment of the plan, the SEC said.

Despite the settlement, market participants said that the state had no difficulty Thursday selling its notes that mature in June 2011, with JPMorgan taking the largest amount of the deal and the greatest number of its pieces. The largest piece, worth $750 million, was won with an effective rate of 0.33%, eight basis points higher than Thursday's one-year MMD triple-A scale.

The credit carries top short-term ratings of MIG-1 by Moody's Investors Service, SP-1-plus by Standard & Poor's, and F1-plus by Fitch Ratings.

Despite the case, Many market participants Thursday said the settlement is consistent with remarks by SEC officials, who have repeatedly warned issuers to ensure the accuracy of the information in their disclosure documents.

But Ben Watkins, Florida's director of bond finance, said that the SEC was "clearly" using New Jersey "as an example to justify repealing the Tower Amendment," which prevents the SEC or the Municipal Securities Rulemaking Board from collecting bond documents prior to bond sales.

Issuers have long opposed repealing Tower, though at least two SEC officials have called for its removal, as well as authority to directly regulate the muni market. Currently, the agency's enforcement authority is limited to the antifraud provisions of the securities laws and it is unable to regulate issuers directly.

Watkins said he is not convinced having the SEC tell issuers what they ought to disclose is appropriate or justified, arguing that the development of best practices documents by market professionals is more effective.

"The disclosure is already very good and I'm just a big believer in having the professionals do it through best practices and conversations directly" with other market participants, he said.

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