Best Practices

Disclosures of Pension Funding Obligations in Official Statements

Issuers should implement appropriate procedures when determining the level of information that needs to be disclosed about their pension funding obligations relative to their financial position.

Issuers of municipal securities, with the advice of legal counsel, financial advisors and other professionals, make numerous judgments as to what information should be included in an Official Statement (OS) for a public offering of state and local government debt. Materiality  is the guiding principle as to the content and extent of the disclosure that is provided in the OS.  Disclosure related to an issuer’s pension funding obligations is just one type of information that should be included in an issuer’s OS, and the pension obligation should be considered in the broader context of the issuer’s resources. While disclosures about pension funding obligations will vary among issuers and types of bonds being issued, all issuers should be aware of the type of information that should be included in the OS, most of which already may be presented within other financial documents (e.g., the annual comprehensive financial report). Additionally, the type of pension plan that is used by a government will dictate the amount of disclosure.  For instance, those governments that participate in defined benefit (DB) pension plans likely will have more extensive disclosures than those participating in other pension plans, such as defined contribution (DC) plans.   

To assist with the development of appropriate disclosures related to pension funding obligations for DB pension plans, the National Association of Bond Lawyers (NABL) issued guidance in May 2012 regarding the application of the federal securities laws to the disclosure of pension funding obligations for DB pension plans. NABL published this guidance following a process that included input from numerous experts in the fields of pensions and debt, including representatives of the Government Finance Officers Association (GFOA). While the guidance is aimed at assisting government issuers that sponsor or participate in DB plans, governments that sponsor hybrid and DC plans may also wish to review and consult the NABL guidance regarding disclosures that might be applicable and appropriate for their jurisdictions.

Of particular significance, the guidance offers the following recommendation regarding the preparation of pension disclosure for an OS:

“Official Statement disclosure is about the credit quality of the bonds being offered.  Disclosure about an issuer’s pension obligations that is included in the OS should reflect the degree to which such obligations could affect the issuer’s ability to make bond payments to investors, or place pressures on the basic functions of government that would affect the creditworthiness of the bonds.  This may depend, to varying degrees, on matters such as size of those obligations relative to the issuer’s overall budget, the funding status of the pension plan, and identifiable trends and problems that are material to an investor.  It will also depend on the degree to which the pension obligation payments and debt service payments are payable from the same source of revenue.  The goal of this disclosure, as with all disclosure in an OS, is the appropriate level of information for the issuer’s specific situation.  Neither too much information nor too little information is helpful to the investor.”  

In many cases, the government’s preparation of its pension disclosure for an OS will be straightforward and the information will already be present in the government’s financial documents.  However, there may be situations in which a government’s pension funding obligations are significant and additional disclosures may become material.

GFOA recommends that issuers implement appropriate procedures when determining the level of information that needs to be disclosed about their pension funding obligations relative to their financial position. To help determine the appropriate level of disclosure about the government’s pension funding obligations in the OS – including the possibility that more extensive disclosures may be material and may need to be included in the OS–issuers should address, along with the assistance of legal counsel and others on their financing team, the following questions:

  1. Is the debt service on the proposed bond issue and the funding of the issuer’s pension plan dependent on the same specifically identified revenue source or sources?  
  2. Is the current and future funding of the pension plan material in relation to the issuer’s current and projected budgets?
  3. Is the funding of pension obligations currently stressing the issuer’s budget or “crowding out” other expenditures, or have the potential of doing so in the future?
  4. Are there legal restrictions or requirements related to pension funding that reasonably might be considered placing pension funding senior to debt service payments?
  5. Are there known and determinable trends or issues related to pension funding that may be considered material to investors?

If the answers to these questions indicate that pension funding could adversely affect the jurisdiction’s ability to pay its debt service, more extensive disclosures may be required. In these instances, the GFOA recommends that issuers consult the NABL guidance, especially Appendix D, to determine what disclosures should be included in an OS.  If necessary, sources for additional disclosures may include:

  1. Statements and schedules in the issuers’ annual comprehensive financial reports or audited financial reports such as financial statements, Required Supplementary Information (RSI), footnote disclosures, statistical tables or Management Discussion and Analysis (MD&A).
  2. Pension information included in the issuer’s adopted budget.
  3. Other publicly available reports, including actuarial reports of the pension plan.
  4. Relevant laws, statutes, regulations or other completed legislative actions that affect pension funding and obligations, or the pension plan itself.
  5. Information from the pension plan related to specific plan investments and other policies and procedures that could be material to bondholders.


  • Board approval date: Wednesday, October 31, 2012