The state of Kansas reached a settlement with the Securities and Exchange Commission Monday over charges that significant pension underfunding was not disclosed to municipal bond investors in 2009 and 2010.
The state neither admitted nor denied the findings in the order, which carried no penalties or fines.
The consent order noted that at the time of the offerings, the $16 billion Kansas Public Employees Retirement System, Topeka, was the second-most underfunded state pension fund in the nation at 59% funded and an estimated $8.3 billion unfunded liability. The order said the funded status was not disclosed in the bond offering documents issued through the Kansas Development Finance Authority. That left 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 Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, said in a statement.
The case against Kansas stemmed from the SEC’s nationwide review of municipal bond offerings to determine whether pension liabilities and other risks were being disclosed to investors. The SEC took action earlier against New Jersey and Illinois, settling for procedural reforms in both cases.
The consent order noted that from 2004 to 2009, Kansas’ annual financial report did not discuss KPERS’ funded ratio, while the bond offering documents failed to note that the pension fund’s financial difficulties “were the result of years of … contribution rates insufficient to cover both KPERS’s normal costs” and its unfunded liability.
The state now includes pension funding information in its annual financial reports and provides a separate pension funding progress report in bond offerings.
Kansas Gov. Sam Brownback said in a statement: “We have taken what was once the second-worst funded pension system in the nation and made significant strides, including reducing its projected debt by almost $500 million.”
