NABL Eyes Pension Disclosure

WASHINGTON — The National Association of Bond Lawyers released a 28-page document Thursday containing guidance and suggestions to help issuers provide appropriate disclosures about their public pension systems in bond documents.

The document, which was approved by a dozen muni market and other groups, has been in the works for more than 15 months and has been through five drafts.

John McNally, an attorney with Hawkins Delafield & Wood LLP who helped draft the paper, said a task force of representatives from the groups reached agreement on the guidance.

They included Bond Dealers of America, the Government Finance Officers Association, the Investment Company Institute, the National Federation of Municipal Analysts, the Securities Industry and Financial Markets Association and the National Association of State Treasurers, and the National Association of State Retirement Administrators.

“I think every major participant in the market that was interested in this area” contributed to the document, McNally said. It’s called “Considerations in Preparing Disclosure in Official Statements Regarding an Issuer’s Pension Funding Obligations.”

The groups reached consensus, but not all parts of the guidance “necessarily reflect” the views of all the groups or individuals, according to the document.

McNally said the task force wrote a document that accounts for differences among issuers. He said it avoids mandates that might not apply to all issuers. “There is great diversity of where issuers are with respect to their pensions,” he said.

The document’s recommendations are based on a review of pension accounting and financial reporting standards written by the Governmental Accounting Standards Board, and high-profile enforcement cases brought by the Securities and Exchange Commission against New Jersey and San Diego.

McNally said the paper follows a logical format, helping issuers decide which material to disclose, and helping them prepare the disclosures.

One section called “Telling the Credit Story” reminds issuers that federal laws require them “to act with reasonable care and prudence, to simply and plainly tell the whole credit story related to their bonds.” It says issuers must examine how pension funding could affect their finances, and that they must not omit material information.

The document leaves it to issuers to decide whether to disclose pension funding projections. “Reasonable care and prudence would entail” having an actuary conduct an examination of future funding, including a preparation of projections, if the issuer knows its pension contributions will “materially” increase, it says.

Earlier drafts had recommended issuers provide 10 years of prospective funding, if available. Issuers opposed the provision, but analysts favored it, saying the projections would highlight potential credit risks.

The guidance adds that determining which factors should be disclosed “will depend upon the facts and circumstances.”

Another section, “Understanding Public Pension Plans,” describes plans and lists documents that can help issuers gather information, including financial statements, budgets, actuarial reports, valuations and asset-liability modeling studies.

The “Drafting Disclosure Language” section includes what McNally calls “key questions” that help issuers determine what is material to investors. Questions address budgeting, forecasting, pension contribution and general pension provisions, among other topics. The section notes that in some cases, such as when pension contributions are “relatively manageable” to an issuer, pension fund obligations may not be material to investors.

Once issuers answer the questions, McNally said they can turn to Appendix D, which suggests formats for disclosure. The appendix recommends a “plain language” plan summary and overviews of contribution funding policies and practices, relevant litigation, labor relations, transfers of investment earnings, pension reserves and pension obligation bonds.

It also suggests a format for disclosing future projections, should the issuer deem projections necessary.

David L. Cohen, SIFMA’s managing director and associate general counsel for the municipal division, said the guidance will improve transparency for investors. He praised it for accounting for differences among issuers and for not taking “a one-size-fits-all approach.”

Greg Clark, NFMA past chairman and senior muni credit analyst at Concordia Advisors, said NABL “shepherded” a varied group of parties to complete the project. “Hats off to them,” he said of NABL. “We had a lot of different types of groups around the table; we were able to come to a consensus.”

Clark added that discussions often focused on the need for future funding projections, and that he is pleased with the language in the final document.

“If you have a healthy, well-funded plan, projections are not as important as they are with a less-healthy plan,” he said.

The Government Finance Officers Association said in a statement that it appreciates NABL’s leadership.

GFOA representative John Tuohy, deputy treasurer of Arlington County, Va., said the document “provides a platform for counsel, issuers, and the marketplace to discuss this important topic.”

Tuohy said GFOA will develop best practices for its members based on NABL’s document.

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