The city of Gardner will make it clear to bond investors that it is not in compliance with state law, Laura Gourley, city finance director, told city council members during a meeting Feb. 3.
Last fall, the city’s attorney said the ordinance that created the electric utility board (EUB) did not meet some statutory requirements. For example, the ordinance allows members of the EUB to set utility rates, however state law requires that the governing body is responsible for rate setting and other budgetary obligations.
Council members discussed making changes to the ordinance, but never reached a consensus on how to change the make-up of the EUB in a way that satisfied both the council and state law.
During the Feb. 3 meeting, Dotty Riley, the city’s attorney for bond projects sales, gave council members an hour long presentation on municipal bond disclosure liability.
In short, she said the city must disclose anything to potential future and current bond holders that may be of material interest to investors.
“You don’t have to tell the marketplace every single detail, but you have an obligation to sort out what really is important in investment decisions,” she told council.
Without proper disclosure, not only can the city be found liable, but also city staff members and city council members.
“Ultimately, it’s the responsibility of your elected officials to make sure disclosures meet federal security regulations,” Riley said.
Possible penalties include up to $150,000 per individual, including elected officials, involved.
The city’s investment disclosures to date have not included a statement saying that the city is not in compliance with state law, but future information will include that disclosure.
“The crime is in non-disclosure or omission, not in the ‘whoops,’” Gourley told council.
Riley and another attorney from the firm, Kutak Rock, listed 10 recent cases in which cities and officials have been penalized by the Securities Exchange Commission for not supplying proper disclosure information. The penalties can be levied without court hearings.
Riley said there are a series of steps the city can take to limit its disclosure liability in the future. First, she said the city should create strong internal controls related to bond disclosure. Officials and staff should also determine who is responsible for what, and the system should include appropriate checks and balances. One person shouldn’t be responsible for everything.
Second, she said proper training, like that officials received during the council meeting, is vital. She also suggested that everyone should do their own individual due diligence and bad news should be disclosed.
“Where there’s a piece of information out there that could be detrimental to investors, disclose it,” Riley said.
Finally, she said it’s imperative that the city hire experienced professionals to assist in disclosures.
Mayor Chris Morrow said going forward, the city will be disclosing to investors that “we are willfully ignoring Kansas statutes.”
Riley could not say whether the new disclosure would affect the marketability of the city’s bonds or its bond rating.
“That’s up to investors,” she said.