The document, recently approved by GFOA’s executive committee, says that for more extensive pension disclosures issuers should refer to guidance published in May by the National Association of Bond Lawyers. NABL worked on that guidance for more 15 months with a dozen muni market groups, including GFOA.
Traditionally, most state and local governments have taken the pension-related information in their comprehensive annual financial reports, or CAFRs, and replicated that in their official statements, said John Tuohy, deputy treasurer of Arlington County, Va. who worked on the GFOA best practice document.
GFOA is now saying that if issuers’ pension obligations could be material to their debt service payments or could otherwise effect their creditworthiness, they may need to go further with their disclosures, he said.
“We’re trying to give people some guidance on, (A), what’s in the NABL [paper] but also, (B), at what point do you do the deep dive into the [paper],” Tuohy said, adding, “The trigger for NABL is materiality.”
John McNally, a partner at Hawkins, Delafield & Wood LLP, who spearheaded the NABL pension project, said the GFOA best practice document “serves as a useful introduction to the fundamental questions to be asked in considering what pension disclosure may be appropriate.”
The GFOA best practice document quotes the NABL paper in saying that pension disclosures in an OS “should reflect the degree to which such obligations could affect the issuer’s ability to make bond payments to investors, or place pressures on the basic functions of government that would affect the creditworthiness of the bonds.”
The GFOA document recommends issuers develop procedures for determining the level of pension information that needs to be disclosed in their official statements. It says issuers should ask themselves a series of questions, including if the debt service on the proposed bond issue would be dependent on the same revenue source or sources as the pension obligations.
Issuers should also ask themselves if pension funding obligations would be material to their current or projected budgets or if those funding obligations could “crowd out” other expenditures.
Other key questions are whether there are pension-related legal restrictions or requirements that would place pension funding senior to debt service payments and whether there are pension-related trends that would be material to investors.
The GFOA document says that if the answers to these questions show pension obligations could adversely affect the ability to pay debt service, then issuers should refer to the NABL paper, particularly its Appendix D, and should consider other sources for additional disclosures. These may include the pension plan’s actuarial reports, legal and legislative actions affecting pension plans or obligations, and pension information included in the government’s adopted budget.
The best practice document was created by GFOA committees on governmental debt management and on retirement and benefits administration. It was approved by the group’s executive board last month.