In recent years the Securities and Exchange Commission has sanctioned municipal bond issuers such as New Jersey and San Diego for not fully disclosing pension information or for understating pension liabilities in bond documents because officials feared political fallout. Now the opposite may be occurring.
Some state and local officials, eager to garner public support for cuts in pension benefits, increases in contributions or other reforms, have been exaggerating their pension problems, according to several lawyers. And those estimates often are higher than the ones in their bond documents.
Christopher Platten, an attorney representing three labor unions in San Jose, Calif., filed a complaint with the SEC last month charging that the mayor made public estimates of pension costs that were significantly higher than the projections in bond documents.
The complaint contends the different estimates violate anti-fraud securities laws. City officials claim the charges are without merit.
But Robert Klausner, a principal at the Plantation, Fla.-based law firm of Klausner, Kaufman, Jensen & Levinson, said public officials frequently overstate pension and budget problems for political gain. He said officials’ public statements often contradict annual reports, bond statements and reports to rating agencies.
Klausner, who works on municipal retirement issues, is representing unions in lawsuits against Miami and Baltimore seeking to reverse changes in pension plans. The cities cut benefits in recent years, citing financial troubles. But despite such woes, the two cities have recently secured A-level credit ratings, he noted.
“We are seeing announcements of doom and gloom as a justification for cutting employee benefits,” he said. “And at the same time, the people who say, 'It’s disastrous,’ go to bond raters and say, 'Everything is great. We are paying our debts.’ ”
The trend has become more widespread as officials from Maine to California, facing tighter budgets and under-funded pension plans, have pushed for pension reforms. “This dichotomy of statements, I’ve seen it all over the country — New Orleans and Houston and [Los Angeles] and Anchorage,” Klausner said.
Platten, an attorney with Wylie, McBride, Platten & Renner, filed his complaint Feb. 27 on behalf of San Jose unions representing police officers, firefighters, and professional and technical staffers.
The complaint charges that in recent months Mayor Chuck Reed told numerous media outlets that the city’s pension costs could reach $650 million by 2016. That figure also appeared in press releases and budget messages as part of Reed’s push for a pension overhaul plan, according to the complaint.
But Reed’s public statements appear to contradict bond documents for $315 million of airport revenue bonds and hotel tax revenue bonds, issued by the city in 2011. The documents project that the city’s pension contributions will rise to $431.5 million by 2015-2016.
“Mayor Reed and the city of San Jose have failed to disclose to investors the material fact of a substantial likelihood that the city’s pension and contribution costs could increase to $650 million. ... This information, if disclosed, would be considered significant by a reasonable investor as defined under section 17(a) of the Securities Act,” the unions said in the complaint.
Platten said Reed should be held accountable for his statements. The mayor’s “projections are simply scare tactics, but now he has violated federal law. He insists on the $650 million, but hasn’t told that to the bond community,” Platten said.
The San Jose City Council in early March approved Reed’s plan to cut pension benefits. Voters will now decide whether to approve the plan in July.
The SEC told Platten that it forwarded the complaint to its office of investor education and advocacy, which it said may be shared with other SEC units.
SEC spokesman John Nester declined to comment on Platten’s complaint, but noted that anti-fraud provisions in securities laws pertain both to actions and statements.
An attorney for law firm Orrick, Herrington & Sutcliffe, bond counsel and disclosure counsel for the transaction, declined to comment about the case, referring questions to the city attorney.
Ed Moran, San Jose’s assistant attorney, said the city’s bond documents are accurate and are based on all information available at the time they were written. He said the $650 million estimate came from the city’s retirement director, who used it in response to a hypothetical question about San Jose’s pension costs.
“The mayor can make a statement based on what he thinks [is] important. As far as disclosures — we will only put out factual information based on actuarial reports and information we can substantiate,” Moran said. “The disclosure number is the only number anyone can rely on.”
Michelle McGurk, Reed’s spokeswoman, called Platten’s SEC complaint a “political trick to distract voters.” She said San Jose’s retirement costs have tripled in 10 years, forcing the city to slash salaries and cut hundreds of jobs.
The city’s general fund has had 10 years of budget deficits, ranging from $46 million to $118.5 million yearly, according to the city’s website. San Jose projects a $10 million surplus in fiscal 2012-2013, but a $22.5 million deficit the following year.
The $650 million was a “worst-case” estimate and San Jose has “some of the most extensive pension disclosures of any city in the country,” McGurk said.
Securities lawyers declined to comment on the case. But Andrew Kintzinger, a bond attorney with Hunton & Williams, said the SEC’s 1994 interpretive guidance on its secondary market disclosure rules provides a “baseline test” to determine if public speech could be subject to anti-fraud laws.
The guidance says issuers that release public information that is “reasonably expected to reach investors and the trading markets” could be subject to anti-fraud liability, even if the statements are not meant for investors.
Elizabeth Kellar, president of the Center for State and Local Government Excellence, a nonprofit group that researches public employee pensions and other issues, said the San Jose dispute appears different from the circumstances in San Diego and New Jersey.
“Here, we have a situation where elected officials are trying to get ahead of the curve on a funding matter,” she said.
Robert Lenna, executive director of the Maine Municipal Bond Bank, called the San Jose complaint indicative of an era of increased regulatory oversight.
“In the regulatory environment we are in now, where everybody is really hepped up on disclosure,” elected officials must choose their words carefully — even when making broad statements used to make political points, Lenna said.
Gone are the days when public officials “just signed their names” on bond documents, relying on lawyers and advisors to ensure the documents were accurate, he said.
The environment began to change in the mid-1990s, when the SEC took enforcement action against Orange County, Calif., and its officials for failing to disclose information about the county’s financial condition.
Lenna said the San Jose complaint raises concerns about the reach of federal regulations in the realm of free speech, noting that pension estimates can vary widely depending on assumed rates of return and a host of other legitimate factors.
Small changes to assumptions, he said, can change estimates by “a hell of a lot of money.”
“Where does a regulatory body step over the line in terms of regulating free speech? That’s an unanswered conundrum of the increased regulatory demand,” Lenna said. “It worries me.”