Kansas Gov. Sam Brownback says 2012 legislation putting new hires in a cash balance plan will stabilize Kansas pension funding.

DALLAS — The Kansas Public Employees Retirement System is under investigation by the Securities and Exchange Commission for its pension disclosure practices, a probe that began in 2010, according to a KPERS spokeswoman and bond documents.

"We continue to provide information at their request," said Kristen Basso, spokeswoman for KPERS.

The "confidential, non-public inquiry" began in the third quarter of 2010 when the SEC contacted state officials about how the state was disclosing its pension funding ratios, according to official statements in subsequent bond deals.

The Kansas Development Finance Authority, which issues debt for the state was also contacted.

"At this time, the outcome of the inquiry cannot be predicted," according a 2013 official statement for the KDFA.

The underfunding of the pensions became a concern after the steep downturns of 2008 and 2009. Kansas was not alone in the downturn, Basso said.

"They asked how KPERS has disclosed the underfunding," Basso said. "As result we sent hundreds of documents showing where and how we have been disclosing the underfunding ourselves."

There is no explicit requirement under federal securities laws for issuers to disclose when they are under SEC investigation, but they are supposed to disclose matters material to investors. That disclosure appeared in several KDFA official statements between November 2011 and September of last year, but none since. Jim MacMurray, finance vice president at the KDFA, said the matter does not impact most of the authority's higher education credits, which are repaid from revenue from those institutions, and is therefore not included in those official statements. The statements that did feature the disclosure were all for bonds payable from state appropriations, MacMurray said.

Ernesto Lanza, a lawyer at Greenberg Traurig LLP in Washington, said the decision to include that investigation disclosure in an official statement is a judgment call on the part of an issuer. They would disclose it if they felt it would be important to a reasonable investor, but not if they decided it was not material to investors.

KPERS' market value hit bottom in 2008 with a 30% decline but then rose more than 20% in 2010, according to a July 18 report to the KPERS Board by Patrice Beckham, an actuary with the consulting firm of Cavanaugh Macdonald.

The fall in actuarial value was 10% in 2008, with a nearly 15% increase in 2010, according to the report.

As of Dec. 31, 2013, KPERS had total funds of $15.7 billion on a market value basis, according to the actuarial report dated July 8. That represented an increase of $1.9 billion from the previous year's $13.8 billion.

The state's pension system improved in part because of a 17% investment return last year, well above KPERS' long-term assumption of 8%, the report said.

That brought Kansas' funded ratio to 60%, lifting the state out of the lowest quadrant of Standard & Poor's rankings.

Under the S&P medians for state pension funds, those below 60% are in the lowest fourth, below those in the 60% to 80% rankings.

Kansas issued $500 million of pension bonds in 2004.

With the climb past the 60% threshold, Kansas joins its neighboring states in the third-highest category.

Even though S&P's summary came out last month, the period it covers does not include any of 2013.

The Cavanaugh Macdonald report for KPERS includes all of 2013.

KPERS' funded ratio at the end of 2012 was just 56%, according to the report. S&P's median for all the states in 2012 was 65.8%.

S&P rates Kansas AA-plus with a stable outlook. Moody's Investors Service downgraded the state to Aa2 from Aa1 on April 30.

Noting that investment markets are unpredictable, Beckham said the system's long-term prospects look better now than they have in decades, thanks in part to legislative changes that have state employees paying contributions at or near the rate recommended by actuaries.

In 2012, Kansas passed legislation creating a cash-balance plan that will take effect for new employees in January. The change will reduce the state's exposure to investment underperformance, according to analysts.

"We are now beginning to see the results of our hard work directly benefiting teachers through a pension system they can rely on," Gov. Sam Brownback said in a prepared statement July 18.

To derive the value of their obligations, states use actuarial projections, which incorporate assumptions about employee retirement ages, longevity, investment performance, and other factors. The unfunded actuarial accrued liabilities are highly sensitive to changes in the underlying assumptions.

States use different combinations of assumptions and actuarial cost methods, making comparisons among states imperfect, according to Moody's.

Governmental Accounting Standards Board rules 25 and 27 on pension reporting allow states flexibility not permitted under the Financial Accounting Standards Board's rule 87 for corporate financial reporting.

The difference in rules is due to the fact that governments exist in perpetuity, while corporations can cease to exist.

States and other public-sector plan sponsors typically discount their liabilities using the approximately 8% return anticipated on stocks and other assets, which substantially reduces the liabilities' reported size, according to Moody's.

For a state with a pension funded ratio of 70%, lowering the discount rate to 7% from 8% would lower the funded ratio to approximately 63%.

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