careful when INVESTING ! ********* Municipal bond risks must be disclosed Most municipal bond investors are individuals, who tend to hold bonds until maturity. These are “retail” investors who directly or indirectly hold more than 75 percent of the $3.7 trillion municipal bond market, comprising more than 1 million different municipal bonds. Assessing the risk of a bond is an important part of the selection process. Having adequate disclosure is key, and if that disclosure is insufficient to allow for a reasonable assessment, a lot can be at stake. To that end, the Securities and Exchange Commission has been on a nationwide hunt for disclosures about pension liabilities and other risks investors need to know about. As a result of that review, a few months ago the SEC announced securitiesfraud charges against the state of Kansas, essentially for failing to tell investors enough about risks. The state subsequently improved disclosure and settled with the SEC. This is not the first time the SEC pursued a state. If you are a municipal bond investor, you may remember the SEC’s “first-ever” enforcement action against a state — New Jersey. In 2010, the SEC alleged that investors were not provided “adequate information to evaluate the state’s ability to fund the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System or assess their impact on the state’s financial condition.” The SEC charged that New Jersey made “material misrepresentations” and omissions in preliminary official statements, official statements and continuing disclosures — all mandated disclosure documents. New Jersey settled with the SEC without admitting or denying any of the findings and beefed up its disclosure. The second action against a state occurred in 2013, when the SEC charged Illinois with securities fraud for failing to inform investors “about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009.” According to the SEC, the state did not disclose that its plan “significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition.” Illinois settled with the SEC without admitting or denying any of the findings. The state took corrective action, enhancing its pension disclosure. In the third action against a state, disclosure of pension underfunding was once again a central point. According to the SEC, Kansas’ offering documents “failed to disclose that the state’s pension system was significantly underfunded, and the unfunded pension liability created a repayment risk for investors in those bonds.” Quoting from the SEC’s order against Kansas, the series of bond offerings were issued through the Kansas Development Finance Authority on behalf of the state and its agencies. The Kansas Public Employees Retirement System was the second- most underfunded statewide public pension system in the nation, according to “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform,” published by the Pew Center on the States in 2010. Kansas did not disclose the unfunded liability of KPERS in the offering documents for the bonds. In addition, there was a risk that the Legislature might not act to appropriate money to service the debt. That risk was not disclosed, according to the SEC order. Kansas consented to the SEC’s order without admitting or denying any of the findings and enhanced its disclosures. As Andrew Ceresney, director of the SEC Enforcement Division, said in the Kansas release, “Investors must be given adequate information to evaluate the impact of pension fund liability on a state’s overall financial condition.” If you are a municipal bond investor, you’ll want to study the SEC’s 150page “Report on the Municipal Securities Market,” which was released July 31, 2012. You can find it at sec.gov. The direct link is tinyurl. com/bs4aevf. You’ll also want to read Pew’s “State Public Pension Investment Shift Over Past 30 Years,” which you can find online at pewtrusts.org. To look up the health of your state’s pension plan, you’ll want to read “The Fiscal Health of State Pension Plans: Funding Gap Continues to Grow” at preview.tinyurl. com/mcda9cc. To read the SEC’s orders I referred to in this column, go to tinyurl. com/mkv2vmq for New Jersey. For Kansas, go to tinyurl/ qj2qb7f. For Illinois, go to tinyurl/ a238oae. In a future column, we’ll talk about municipalities, such as Detroit. Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Connecticut) and award-winning author, welcomes your questions/comments at readers@juliejason)
Posted on: Sat, 04 Oct 2014 18:19:38 +0000
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