Into the maelstrom of municipal bond disclosure investigations comes a request by the Municipal Securities Rulemaking Board (“MSRB”) for comments about public pension plan IOUs. Specifically, they seek information about the funding status of defined benefit plan arrangements. According to “MSRB Looking at Pension Disclosure” by Andrew Ackerman (Bond Buyer, January 31, 2011), there is no legal basis for this rule-making body to force municipal issuers to disclose details about pension funding. Importantly, even with authority, the real question is what measure(s) of funding status would be helpful to buyers of municipal bonds?
As stated in “The Plan That Didn’t Bark” by Susan Mangiero (CFA Magazine, March/April 2008), “Financial analysts really have no choice but to become forensic detectives. They cannot rely solely on published numbers but instead must ask lots of pointed questions about how plan sponsors identify, measure, and manage myriad types of risk. Knowledge of accounting rules is only a beginning, and a humble one at that. Economic, fiduciary, and regulatory factors counts too.”
Warren Buffet chimed in a few years ago when he discussed the investment-return assumption a company uses in calculating pension expense in order to enhance reported earnings. He added that “Whatever pension-cost surprises are in store for shareholders down the road, these jolts will be surpassed many times over by those experienced by taxpayers. Public pension promises are huge and, in many cases, funding is woefully inadequate.” See his “2007 Letter to Shareholders,” pages 18 to 20.
In “Pension Investment Risk Disclosure – What Don’t You Know?” by Susan Mangiero (September 6, 2007), the point is made that there are numerous ways to make the numbers appear on paper. Economic reporting is seldom the same as what an investor sees when he or she reads published financial statements.
As someone who has provided expert testimony on the topic of risk metrics and performance reporting, I’ve given examples aplenty about looking for hidden treasure in published data and how and why due diligence has to go beyond the numbers.
The point is that heightened disclosure rules can only go so far. If what is being reported is an incomplete representation of the cash requirements and inflows for a particular security issuer, imposing new mandates will require a lot of work with little benefit. The key is to agree on uniform reporting metrics that reflect economic reality. The situation relating to accounting fraud is another topic altogether.
Decision-making requires access to meaningful inputs. The long journey begins!