States and local governments, like corporations, issue bonds to the public. Yet, unlike corporations, states and municipalities are not held to the same requirements for disclosing financial information, including pension and OPEB (other post-employment benefits) liabilities, when issuing bonds.
As a result, the public, when making a determination on whether to invest in municipal bonds, does not necessarily have adequate information to make an informed decision.
Currently, there are three noteworthy items that suggest that there will be better financial disclosure by states and local governments in the future.
First, Moody’s is recalculating the states’ debt burdens to include public pension liabilities. Second, the SEC has set up a group to investigate public pension funds, as well as statements made by state officials regarding the health of such funds in connection with the issuance of municipal bonds. Third, Congressman Devin Nunes of California has proposed a bill to make the health of public pension plans transparent to the public.
Transparency and appropriate disclosure will allow municipal bond investors to make informed choices with respect to the yield they need to provide a state or municipality with funds. And, the public will be able to understand the gravity of the states’ and local governments’ fiscal situation.
Moody’s Change of Practice
This week, Moody’s Investor Services reported, for the first time, both bond debt and unfunded pension liabilities in calculating the states’ total debt burden. Moody’s stated that it always considers unfunded pension liabilities when it rates states but wanted to disclose the information publicly to help investors understand the impact of unfunded pension liabilities on the states’ debt levels. By including pension liabilities in the debt of the states, Moody’s is looking at the states’ finances similar to a corporation’s finances.
Notably, however, Moody’s is using the value of pension plans provided by the states, while acknowledging that the unfunded portions of pension plans may be higher than states disclose. Thus, while getting closer to disclosing the actual amount of debt and other liabilities burdening states, the public investor still needs to do some guess work to understand the total unfunded status of public pension funds and OPEB liabilities. Nonetheless, as discussed below, new legislation may help public investors obtain the true amount of unfunded pension liabilities in the future.
As Moody’s is reporting pension liabilities in its ratings, the SEC has been investigating the public disclosure by states and municipalities of their financial information in connection with municipal bond issuances. These investigations should incentivize public officials to disclose more information, rather than less, and provide a more comprehensive picture of their states’ fiscal health.
In April of 2008, the SEC charged five former San Diego city officials with securities fraud. The SEC charged these officials for failing to disclose to the investing public that there were funding problems with San Diego’s pension and retiree health care obligations and that those liabilities placed San Diego in serious financial jeopardy.
In a public disclosure, the SEC stated that “[m]unicipal officers responsible for municipal bond disclosure play a key gatekeeper role in protecting investors. It is therefore imperative that they honor the public’s trust by ensuring investors are provided with accurate, material information about the issuer’s fiscal health.”