As the incidence of municipal fiscal stress continues to spread around the country, rating agencies, bond investors, public finance professionals, and market regulators are paying closer attention to public pension disclosure in municipal security offerings.
The Governmental Accounting Standards Board (GASB), the National Association of Bond Lawyers (NABL), the Municipal Securities Rulemaking Board (MSRB), and the Securities and Exchange Commission (SEC) have all weighed in recently on improving and enhancing disclosure practices by local governments. GASB issued statements amending its official standards in 2011 and June 2012. The MSRB also issued recommendations in 2011. In May, NABL released its comprehensive guidance on pension disclosure considerations. Now, the Government Finance Officers Association (GFAO) has released its “Best Practice” document further emphasizing the critical importance of adequate pension disclosure in public offerings.
The GFAO document properly identifies materiality to an investor as the key consideration underlying good disclosure practice. While facts and circumstances may differ for each debt offering, including the type of securities offered, the financial health of the municipality, its form of pension plans, and funding ratios and contribution requirements, enhanced disclosure should address a municipality’s pension obligations within the broader context of its financial resources and competing obligations.
The GFAO’s report affirms that pension disclosure should be extensive enough to reflect how pension obligations and funding status affect the issuer’s ability to meet its debt service requirements and other financial obligations. Disclosure should address how pension obligations might affect the creditworthiness of the bonds due to the competing pressure such obligations, together with labor costs, put on the limited discretionary resources available to local governmental leaders. Additionally, disclosure must take into account identifiable trends and problems, the size of unfunded pension obligations in comparison to the issuer’s overall budget, and whether required pension contributions are paid from the same source of revenue as debt service payments.
The GFAO recommends that municipal issuers implement appropriate procedures to determine the extent and content of pension disclosure in their offering documents. This heightened focus on pension disclosure necessitates that local governments, together with their financial advisers, underwriters, and legal teams, be prepared to scrutinize more closely how pension obligations may affect their ability to repay bondholders.