WASHINGTON — Public sector pensions should consider disclosing their projected future contributions in order to fare better in the marketplace, a bond lawyers’ group said in guidance circulated earlier this month.
In the third and most recent draft of its pension-disclosure guidance, the National Association of Bond Lawyers has restored previous language that would prod issuers to provide information about future projections “if available.”
But for the first time, NABL framed its guidance in terms of market access, saying issuers should consider whether future projections, even if not required by federal securities laws, should be prepared “to obtain better receptivity in the marketplace.”
The issue of future projections had fractured the coalition of around a dozen industry members who are participating in the voluntary pension project, spearheaded by NABL and its former president, John McNally, a partner at Hawkins Delafield & Wood LLP in Washington.
Issuers balked at providing future projections of a plan’s funding status, while analysts favored disclosure, saying it would boost transparency about possible credit risks. NABL’s new draft strikes a middle ground, balancing interests of both groups.
Specifically, NABL said analysts and institutional investors participating in the pension task force — which includes representatives from the National Federation of Municipal Analysts and the Investment Company Institute — have indicated that “projections (preferably, 10 years) of pension contributions and a sponsor’s pension funding policy are two of the key components of any analysis.”
But in apparent deference to issuers, who have balked at the potential cost of additional disclosure, NABL’s Oct. 2 draft does not require “preparation of information that is not otherwise available.”
In particular, NABL said, projections of annual contributions, “if not otherwise prepared,” do not need to be generated to satisfy the federal securities laws, because such projections are not facts an investor would consider material. If future projections have been prepared, an issuer should determine if they contain information an investor would deem material.
Separately, in sections entitled “General Overview of Pension Plan or System” and “Summary of Fiscal Policy of the Issuer,” NABL added several paragraphs of new guidance about future projections.
In a paragraph billed as what “may be the most critical section,” NABL said issuers should include a brief, plain-language analysis to “quickly apprise the reader” about any potential difficulty funding future pension contributions unless the issuer obtains “new revenues, reduced pension benefits, or reduced [issuer] services.”
As authority, NABL cited the Securities and Exchange Commission’s 2006 case against San Diego. The SEC brought securities fraud charges against the city for failing to disclose that it was intentionally underfunding its pension obligations in official statements, rating agency presentations and continuing disclosures related to more than $260 million of municipal debt issued between 2002 and 2003.
City officials knew, but did not disclose, that they would be unable to fund future pension and health-care obligations without new revenues, benefit cuts or reductions in city services.
In particular, NABL said, a plan’s plain-language overview should include a description of the issuer’s current funding policy and its “discipline” in meeting the policy. An issuer may need to provide more detailed information if its financing team — including its underwriter, financial advisor, underwriter’s counsel and disclosure counsel — finds one or more “key factors,” which NABL also called “indicia” of “financial distress.”
Such indicia include: an amortization period of more than 30 years, which could indicate “potential long term funding problems;” an employer who is not making payments required to meet the plan’s amortization period, which could suggest “long term funding problems;” an actuarial asset value under a smoothing method that “deviates significantly” from the market value, which could imply “potential significant increases in future contribution levels;” and a funded ratio — the measure of assets to liabilities — of less than 80%, which may indicate “financial stress.”
As for the fiscal policy summary, NABL said issuers typically prepare forecasts of future obligations and liabilities as part of their budgetary process and likely includes projected pension contributions.
“When disclosing this information,” the group said, issuers should include a description of the “assumptions used, the process undertaken and the persons involved” in its preparation.
NABL said task force members admitted projections are “inherently unreliable,” but “the fact that an issuer has undertaken to study or evaluate this future obligation would provide a level of assurance that some attempt was being made to comprehend, monitor and manage the scope of this obligation on future budgets.”
In addition, NABL noted, if an issuer had one or more of the indicia of financial distress, an actuary — either from the pension system or a third party — should prepare future projections covering a 10-year period.
Issuers should also consider providing a description of steps or plans they have, if any, to address future funding obligations, the guidance said.
NABL’s previous draft guidance, circulated in August, deleted a four-page section on funding status from the original 13-page draft proposal, including a 10-year prospective funding table. The August version also suggested that issuers provide a “plain language summary” of a plan’s “current and projected funding status,” without specifying a time period.
The October draft reinstates the section on funding status, including a suggestion that issuers provide prospective funding in a 10-year table, “if available.”
NABL has added new language clarifying that if actuarial projections are not available, and the issuer does not want to incur the cost of preparing such projections, the issuer could prepare a table using its five-year budgetary planning numbers.But any use of budgetary numbers in an official statement would need “appropriate cautionary language,” NABL said.
The pension disclosure task force will meet next on Oct. 25 in Washington.
Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center, said GFOA’s pension disclosure task force is reviewing the updated draft of NABL’s pension disclosure paper, and will submit comments to the group later this month.
McNally said the guidance will likely go through several more drafts. The current version is not a template for all issuers, he said, because NABL realized such an approach would not be acceptable. “And more important, not needed,” he added.
NFMA and ICI officials declined to comment.