Municipal bond investors, state fiscal oversight bodies and the United States Census Bureau would all benefit from standardized, machine-readable government financial data. That was the message attendees heard at the first-ever Municipal Finance Data Forum convened by the standards body XBRL US in Washington, DC, on April 24.
Stephen Owens, a public sector specialist at the US Census Bureau, discussed challenges his division encounters when running the quinquennial Census of Governments and annual surveys of State and Local Government Finance. Only about 5 percent of local governments complete the financial survey forms the Bureau sends out, he said. For non-respondents, the bureau is obliged to infer their results from publicly available disclosures or make educated guesses. As a consequence, census results are released on a long delay and have a variety of data quality challenges.
Dr. Kimberly Cornaggia, a finance researcher at the University of Pennsylvania, told attendees that municipal bond investors are heavily dependent on ratings, despite concerns over the credibility of credit rating agencies. The importance of credit ratings increased after the collapse of the municipal bond insurance industry in 2008. Before that, most local government bond issuers obtained insurance policies from Ambac, MBIA or other insurers, conferring AAA ratings on their debt offerings. After these bond insurers went bankrupt or experienced severe downgrades, both the incidence and value of bond insurance declined. Investors have been able to “get away” without conducting their own analysis due to historically low default rates. But, Dr. Cornaggia argued, this benign credit environment could change due to public pension funding shortfalls. Investors thus need to conduct more independent analysis and would benefit from the availability of machine-readable financial statements.
Marcus Stanley, policy director of Americans for Financial Reform, elaborated on Dr. Cornaggia’ s concerns about rating agencies. He noted that the Dodd-Frank Act required rating agencies to employ universal rating symbols, which have the same meaning in terms of default probability across asset classes. But credit rating agencies have continued to assign harsher ratings to state and local governments after the enactment of Dodd-Frank.
Adrienne Lu from Pew Charitable Trusts discussed her organization’s research into state oversight of local governments. In a 2016 study, Pew found that many states were conducting and analyzing local government financial disclosures to identify distressed entities that may require proactive intervention. Since Pew published its research, Ohio and Massachusetts have expanded their monitoring efforts, while Virginia has joined the list of states that conduct this type of oversight. One limitation of these oversight initiatives is the long lag time between the end of a fiscal period and the publication of fiscal assessments. This delay compromises the value of fiscal “early warning” systems. Timing lags could be reduced by using interim financial data, reducing the number of variables analyzed and improving data flows between local governments and state oversight bodies.
Two other speakers offered lessons that municipal finance researchers could learn from other financial reporting areas. Matt Reed, chief counsel at the US Treasury’s Office of Financial Research, discussed the successful effort to adopt non-proprietary Legal Entity Identifiers (LEIs) on a global basis. The LEI initiative has advanced due to support from the G-20 and a high level of coordination across jurisdictions. He also noted that more nimble private entities were better suited to implementing national LEI registries than governments.
Nathan Dietz of the Urban Institute discussed the progress that the research community has made toward improving the availability of non-profit machine-readable disclosures. As with the LEI initiative, coordination among diverse stakeholders has been key. Most of this coordination is handled by the Aspen Institute, which runs periodic community phone calls. Dietz said they have had some success in encouraging Congress to require a greater proportion of non-profits to electronically file their IRS Form 990s and getting the IRS to publish these returns as structured text. Because the non-profit research community relies on centrally collected 990 disclosures, its challenge is somewhat less daunting than that faced by the government research community, which lacks a single authoritative data source at the national level. Both the Municipal Securities Rulemaking Board and Census Bureau— in its role administering the federal Single Audit program —have a large proportion of local government audited financial statements, but not the full set.
Also during the program, I showed attendees State and Local Disclosure Modernization Working Group’s progress in creating and analyzing sample machine-readable government financial disclosures. You can see that demo along with the speaker presentations summarized here by viewing this video.