SEC charges Kansas with fraud for Parkinson-era omissions

OVERLOOKED: The Securities Exchange Commission has slapped Kansas with fraud charges for failing to disclose the shoddy shape of the state’s pension program during 2009 and 2010.

By Travis Perry │ Kansas Watchdog

OSAWATOMIE, Kan. — The Securities Exchange Commission has levied fraud charges against Kansas for actions taken under the administration of Democratic Gov. Mark Parkinson.

At issue is the state’s failure to disclose the poor state of the Kansas Public Employee Retirement System while simultaneously raising $273 million through a series of eight bonds in 2009 and 2010. Failure to disclose the massive unfunded pension liability “created a repayment risk for investors in those bonds,” investigators reported.

The SEC states:

According to the SEC’s order against Kansas, the series of bond offerings were issued through the Kansas Development Finance Authority (KDFA) on behalf of the state and its agencies. According to one study at the time, the Kansas Public Employees Retirement System (KPERS) was the second-most underfunded statewide public pension system in the nation. In the offering documents for the bonds, however, Kansas did not disclose the existence of the significant unfunded liability in KPERS. Nor did the documents describe the effect of such an unfunded liability on the risk of non-appropriation of debt service payments by the Kansas state legislature.

Federal investigators blame “insufficient procedures and poor communications between the KDFA and the Kansas Department of Administration” for the lie of omission. View the full SEC order here.

“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,” LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit, said in the news release. “In determining the settlement, the Commission considered Kansas’s significant remedial actions to mitigate these issues as well as the cooperation of state officials with SEC staff during the investigation.”

Duane Goossen, former Kansas Director of Budget.

While the troubles brewed under Democratic Gov. Kathleen Sebelius and bounced to Parkinson, Kansas began reforming matters in 2011 following the election of Republican Gov. Sam Brownback. According to the SEC’s cease-and-desist order, changes included new procedures designating responsible individuals within critical state agencies, mandated closer communication and cooperation between state agencies, established a state disclosure committee and required annual training for key personnel.

Duane Goossen, who served as budget director for Sebelius and Parkinson, didn’t return calls for comment from Kansas Watchdog.

“Since taking office, I have made restoring the health of our KPERS system a priority. Reforms passed by the Legislature in 2012 resulted in an improved KPERS system, benefiting our teachers and other public employees,” Brownback said in a prepared statement Monday. “Through reforms that included boosting employer and employee contributions and creating a new cash balance plan for individuals hired after 2015, we have taken what was once the second-worst funded pension system in the nation and made significant strides, including reducing its projected debt by almost $500 million.”

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Rob Port is the editor of SayAnythingBlog.com, a columnist for the Forum News Service, and host of the Plain Talk Podcast which you can subscribe to by clicking here.

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