Bondholders Left in the Dark

Investors and regulators are growing increasingly concerned about the quality and timeliness of information that state and local governments are disclosing about their finances.

The Securities and Exchange Commission is inquiring about public statements Illinois made about its pension funds amid the agency's increased scrutiny of the municipal-bond market, a representative for the governor said.

Amid governments' financial woes, meanwhile, angry investors are finding themselves blindsided by bad news. Those concerns are reflected in a forthcoming study that shows that public issuers routinely file information about their financial health well beyond the date they promise to bondholders, if at all.

This weak disclosure is raising anxiety in the $2.9 trillion market, where investors withdrew more than $20 billion from municipal bond funds in recent weeks.

Federal regulators' power in this realm is limited because municipal borrowers are unregulated. But they are trying to crack down on the disclosure issue.

"If a municipality is in dire financial straits, we want to know if that information was disclosed to bond holders in a timely fashion," says Elaine Greenberg, who runs the municipal-bond unit set up by the SEC last year. "It's not good enough to put the information out there late. Investors need information that is current, not stale, to make informed investment decisions."

At the request of The Wall Street Journal, DPC DATA Inc., a specialist in municipal disclosure, did an extensive analysis of disclosure and found the problem growing since a 2008 study. Of 17,000 bond issues it studied, more than 56% filed no financial statements in any given year between 2005 and 2009. More than one-third of borrowers entirely skipped three or more years, and the number grew to 40% in 2009, as credit woes mounted. Another 30% filed extraordinarily late in 2009.

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