(Adds reaction from Kansas governor, background)
By Lisa Lambert
WASHINGTON Aug 11 The U.S. Securities and
Exchange Commission said on Monday it has charged Kansas with
fraud for not properly disclosing funding problems with its
public pension when it held bond offerings in 2009 and 2010.
It marks the third time the federal regulator has taken
action against a state for violating municipal bond disclosure
Kansas, which was under investigation for four years, has
already implemented reforms in how it discloses its pension
liabilities and has agreed to settle the charges for its prior
incomplete disclosures, without admitting or denying the
charges, the SEC said.
According to the SEC, the Kansas pension system was so
poorly funded that it created a repayment risk for investors
holding the state's bonds, but in bond offering documents the
state did not explain the existence of "the significant unfunded
Kansas also should have described how the state legislature
could have to appropriate funds to cover the pension liability,
thereby making less money available for spending in other areas,
including debt service payments, the SEC said.
"Kansas failed to adequately disclose its
multi-billion-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," said LeeAnn Ghazil
Gaunt, chief of the enforcement unit on municipal securities and
The SEC charged New Jersey in 2010 and Illinois last year
for not informing bond buyers of pension problems. Because
federal regulators have limited power over states, the SEC in
recent years has asserted a stronger influence on public
retirement finances by citing states and cities for violating
municipal bond disclosure rules.
Since the 2007-09 recession laid bare some pensions' shaky
finances, political pressure has mounted for greater federal
Around the time of the New Jersey charges, the commission
said it began looking into the bond offerings that Kansas made
in 2009 and 2010, totaling $273 million, adding that at one
point the state's pension was considered the second-worst funded
in the nation.
The SEC did not detail the size of the state's pension
shortfall at that time.
Governor Sam Brownback, who took office in 2010, pointed to
reforms passed in 2012 to boost contributions from both
employers and employees, and enroll new workers in a plan
resembling 401(k) accounts in the private sector.
"Under my administration, we have improved transparency in
the reporting system and taken decisive actions to meet our
existing obligations and maintain the trust of our state workers
and retirees," he said.
Brownback is struggling to keep his post in upcoming
elections, where the state's budget woes have taken center
As of Dec. 31, 2012, the Kansas Public Employees Retirement
System, or KPERS, had a shortfall of $10.3 billion, according to
its annual report. The unfunded liability shrank to $9.77
billion in 2013, mostly on investment gains, it said last
The funded ratio was 56 percent in 2012, meaning KPERS had
enough money to cover roughly half the amount promised to
workers, according to the presentation. In 2013 the ratio
improved to 59.9 percent.
(Reporting by Lisa Lambert; Editing by Chizu Nomiyama, Andrew
Hay and Leslie Adler)