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05-25-2012 NABL Provides Guidance on Pension Obligation Disclosures for Bond Issues by Government Entities

On May 15, the National Association of Bond Lawyers (NABL) issued guidance applicable to state and local governments in a document entitled Considerations in Preparing Disclosure in Official Statements Regarding an Issuer's Pension Funding Obligations (Public Defined Benefit Pension Plans) (" Considerations"). In particular, Considerations addresses the appropriate disclosure of pension funding obligations in a bond issuance by a state or local government with a public defined benefit pension plan.

The disclosure requirements arise from the federal securities laws, which prohibit issuers from providing an "untrue statement of material fact" or omitting "to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." A fact is material when there is a substantial likelihood that a reasonable investor would consider it important to an investment decision. Due to the nature of this standard, the materiality determination must be made on a case-by-case basis.

When a government entity with a pension funding obligation issues bonds, investors generally are interested in whether the future pension obligations and the issuer's ability to pay such obligations will affect the entity's ability to repay the bonds. To determine which facts an entity must disclose pertaining to its pension funding obligation, the entity must consider the extent to which the historical and anticipated pension obligations impose a major fiscal stress on its budget and financial condition. For example, if an entity has a significantly underfunded pension obligation and the anticipated obligation constitutes a considerable portion of projected future expenses, the entity will need to make significant disclosures in the official statement of the bond issuance -- this information will be "material" to the issuer's ability to repay its bonds. Considerations is at least in part a response to past situations such as this, including litigation involving the City of San Diego (2006) and the State of New Jersey (2010). The SEC succeeded in actions against both of these government entities for their failure to disclose information pertaining to underfunded pension plans.

In Appendix D, Considerations provides categories of information (and provides guidance for disclosing that information) that an entity should consider disclosing about its pension obligation. Depending on the extent to which the pension obligation constitutes a fiscal stress to the entity, it may need to disclose very few or substantially all of the categories of information on the list, or possibly even information not contained in the list. The categories of information listed in Appendix D include:

  1. General overview of pension plan or system in which the issuer participates;
  2. Summary of pension contribution funding policy of the issuer;
  3. General funding practices of pension plan or system;
  4. Pension plan investment policy and practices;
  5. Litigation, investigations and labor relations;
  6. Transfers of investment earnings;
  7. Pension plan reserves;
  8. Pension obligation bonds; and
  9. Other relevant reports.

Considerations also provides an overview of two GASB proposals -- GASB No. 25 Exposure Draft and GASB No. 27 Exposure Draft. Among other things, these exposure drafts provide for quicker recognition of certain pension liabilities, a new method of calculating pension liabilities, and certain disclosures in financial reports.

The Pension Disclosure Task Force -- the group that produced Considerations -- is comprised of NABL members and a cross-section of other interested parties. As stated in the document, Considerations does not create legal standards or describe existing legal standards in any detail. Instead, it merely provides guidance to state and local governments in light of the federal securities laws, recent GASB statements, and recent case law.

Fraser Stryker has a long history of representing political subdivisions, municipalities, school districts, universities, pension board of directors and board of trustees, public utilities, and other public and governmental employers in all aspects of employee benefits law. Fraser Stryker understands the unique funding, legal, and tax environments in which government employee benefits plans operate. Fraser Stryker provides cutting-edge advice and strategies to governmental employers on pensions, retirement plans, retiree medical care, executive compensation, and self-funded health benefits.

Fraser Stryker is on the forefront in assisting public employers address a myriad of problems related to governmental pension plans. Across the country, governmental pension plans that provide retirement income to police and fire officers, teachers, judges, and other government employees face severe unfunded liabilities. Left unaddressed, these unfunded liabilities threaten the bond ratings, tax rates, and quality of life for citizens in nearly every city and state. Fraser Stryker understands the complexity of public pension systems and that competing interests must be analyzed and addressed when negotiating employment contracts, collective bargaining agreements, and amending pension laws. Fraser Stryker has worked with pension tasks forces, unions, municipalities, legislators, pension boards, and other key stakeholders in analyzing and developing innovative solutions to ensure the solvency of public pension systems. For more information, please contact Nicole R. Konen.