Back in 2009, Kansas was preparing to issue $127 million worth of bonds to investors who probably knew that the state’s pension system wasn’t the healthiest in the country.
What investors didn’t know, however, was just how bad the system really was—it was the 2nd most underfunded in the nation at the time.
But don’t blame the investors for their ignorance. They didn’t know because Kansas didn’t tell them.
That lack of disclosure is the reason the SEC today announced they are charging Kansas with fraud for misleading investors about the health of the state’s finance and, by extension, the risk associated with buying its bonds.
The U.S. Securities and Exchange Commission charged Kansas with failing to disclose a “multibillion-dollar” pension liability to bond investors.
“Kansas failed to adequately disclose its multibillion-dollar pension liability in bond offering documents, leaving investors with an incomplete picture of the state’s finances and its ability to repay the bonds amid competing strains on the state budget,” LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Securities and Public Pension Unit, said in a statement from Washington.
A draft actuarial report provided to Kansas’s public pension found that the gap between its liabilities and assets had grown to $8.3 billion in 2008, from $5.6 billion the previous year, lowering the pension’s funding level to 59 percent, the SEC said.
The gap was the result of years of insufficient contributions by the state and school districts to cover the cost of benefits earned by public employees and their accumulated liabilities, the SEC said.
Only Illinois had a lower pension funding status than Kansas, according to a 2010 report by the Pew Center on the States.
Neither the finance authority nor the Kansas Department of Administration, which advised the authority of material changes to state finances, determined that additional disclosure regarding the pension fund in the bond offering statement was necessary, the SEC said.
The SEC has been investigating this charge for four years.
The SEC also announced today that Kansas has agreed to settle the case without admitting or denying the allegations.
No financial sanctions were imposed on Kansas as a result of the charges.
It’s likely the SEC was content with the settlement due to recent efforts by Kansas to increase the state’s compliance with federal regulations.
In addition, the state has attempted to increase the sustainability of its retirement system—the state boosted contribution rates for workers and employers in 2012, and new hires are now entered into a “cash balance” plan.
Photo by CatDancing via Flickr CC License