DALLAS — The U.S. Securities and Exchange Commission's charging of Kansas for inadequate disclosure of long-term pension obligations is a positive credit factor the municipal market as a whole, according to Moody's Investors Service.
The SEC charged Kansas on Aug. 11 with securities fraud for failure to disclose the extent of its pension underfunding in 2009 and 2010 bond disclosure documents. Kansas is the third state, along with New Jersey and Illinois that the SEC has charged with inadequate pension disclosure.
"While Kansas will not have to pay any fines, subsequent disclosure has improved," Moody's noted in its Aug. 22 comment. "The charges also underscore the importance of understanding pension risk factors as part of a comprehensive evaluation of bondholder credit risk."
According to the SEC charges, the Kansas Development Finance Authority, one of the main issuers of state debt, issued $273 million in eight series of bonds from 2009 to 2010 without disclosing the state pension plan's serious underfunding in the bond disclosure documents.
In 2008, the Kansas Public Employees Retirement System reported an unfunded actuarial liability of $8.3 billion. The plan was only 59% funded, down significantly from 71% funded a year earlier due to a steep decline in the market value of the plan's assets.
"The SEC's increased scrutiny of pension disclosures is credit positive for the municipal market because it encourages issuers to improve their pension-related disclosure and transparency around pension obligations and funding practices," Moody's said.
Funding ratios for public pensions have remained at the forefront in the municipal market because of the credit pressure pension funding obligations place on many governments' financial flexibility. Despite the disclosure improvements, the unfunded pension liabilities of Illinois, New Jersey, and Kansas remain among their biggest credit challenges, Moody's said.
Standard & Poor's downgraded Kansas' issuer credit rating to AA from AA-plus Aug. 5, retaining a negative outlook and citing income tax cuts that have not been matched by reduced spending.
Moody's downgraded Kansas' issuer credit rating to Aa2 from Aa1 on May 1. The Moody's outlook is stable.
The SEC's Kansas action concluded a four-year investigation.
"While the SEC's investigations and investor pressure have improved the quality of much public pension disclosure, other efforts continue to shed light on this area," Moody's noted.
Beginning with financial reporting for fiscal years 2014 and 2015, the Governmental Accounting Standards Board will introduce new pension accounting standards for state and local governments. New disclosure requirements will include reporting shares of multi-employer cost-sharing plans, the fair value of pension plan assets and discount rate sensitivity of pension liabilities, with a goal of improving the transparency and comparability of pension information in the sector.
