Municipal bond issuers and underwriters should review all documents related to their pension disclosures, even those that were not prepared with disclosure in mind, an attorney told muni market participants Friday.
Once the Securities and Exchange Commission starts investigating state pension disclosures, it will look at all the documents it can find, even those not prepared as “disclosure documents,” Elizabeth Columbo, a partner with Nixon Peabody LLP, told attendees at The Bond Buyer’s Third National Municipal Bond Summit in Miami.
Columbo suggested this is one of the many lessons learned from the enforcement action the SEC brought against New Jersey last year over alleged faulty pension disclosures.
In its first enforcement action against a state, the the agency on Aug. 18 charged the state was negligent and violated the securities fraud laws by failing to disclose to investors that it was underfunding its two largest pension funds.
The SEC claimed the state sold 79 bond issues totaling $26 billion between August 2001 and April 2007 containing misrepresentations and omissions that created the false impression that the Teachers’ Pension and Annuity Fund and Public Employees’ Retirement System were adequately funded.
The commission found that beginning in 2003, the pension plans experienced substantial declines in their funded ratios, but New Jersey’s budget pressures made it difficult to make the required amount of contributions to the plans.
As a result, the state decided to phase in increased contributions over a five-year period. However, it altered its plan by reducing the percentages of phased-in contributions and then eventually abandoned the plan altogether.
The SEC charged the state failed to disclose in bond documents the actual contributions to the pension plans it was making and its waning commitment to the five-year plan.
In a settlement of the charges, the agency ordered New Jersey to cease and desist from violating the securities fraud laws, but did not levy a fine.
The state neither admitted nor denied the findings.
In imposing the sanctions, the SEC took into account New Jersey’s cooperation and the proactive steps it took to improve its pension disclosure practices.
It hired an outside disclosure counsel — Arthur McMahon of Nixon Peabody — to help with the improvements after a New York Times story in April 2007 raised concerns about the pension plans. The article appears to have prompted the SEC probe.
In her example of the commission’s examining non-disclosure documents, Columbo noted that it looked at the 2001 Office of Legislative Services’ analysis of the bills that eventually became legislation.
The SEC had charged that the disclosure fraud began in November 2001 when state legislation was enacted that increased retirement benefits for employees and retirees in the two funds by 9.09%.
The agency said New Jersey resorted to accounting gimmicks to fund the enhanced benefits rather than raise taxes or take other action that would increase costs for the government or taxpayers.
In her slide presentation, Columbo told issuers and underwriters: “Be diligent — ask for and review documents — even documents not prepared with disclosure in mind.”
Issuers should develop procedures and training programs for employees involved in the disclosure process and should make sure experts are involved and that they have time to review disclosure materials, she said.
Individuals responsible for disclosure should be trained. Those in authority should review and agree with the information in disclosure documents. Governing boards should take proper steps in approving offering documents, Columbo said.
In the New Jersey case, the SEC found the state treasurer did not read the bond offering documents, but rather relied on staff to ensure the accuracy of the information.
It also found that state pension officials often updated pension information by merely requiring the substitution of new numbers in existing documents. The state’s Office of Public Finance inserted the new information in the documents without verifying it.
Issuers should determine whether they have explained the potential impact and significance of pension changes or other matters on their overall financial condition, according to Columbo.
They also should be receptive and prepared to provide accurate answers to underwriters’ questions because dealers must have a reasonable basis for believing the information in bond offering documents is true and complete, she said.
Underwriters should have practices, procedures and training in place to ensure they are meeting their disclosure obligations, Columbo said.
