On July 20, Michigan Gov. Gretchen Whitmer signed a general government budget bill that included funding to implement a technology strategy for “machine-readable financial disclosures for local units of government.”
The state budget also authorizes “a pilot program for associations representing local units of government and government finance officers to do both of the following:
(i) Review the feasibility of local units of government using XBRL software to file required financial reporting with the Department of Treasury.
(ii) Assist the department in developing the information technology strategy.
Finally, the legislation states that “the department shall determine the feasibility and cost of implementing the ability to accept XBRL (extensible business reporting language) files on the department’s website as a substitute for annual financial reports, form F-65, and form 5572.”
Form F-65 is a state-specific financial report and Form 5572 contains information on pensions and other post-employment liabilities. Because these two forms contain redundant data with the annual comprehensive financial report that local governments currently report, they are being included in the Treasury program.
Michigan is now the second state to adopt machine-readable local government financial reporting legislation after Florida did so in 2018. Shortly before the COVID-19 pandemic struck, the California legislature also passed an XBRL bill, but it was vetoed by Gov. Gavin Newsom on the grounds that it created unbudgeted expenditures.
Michigan’s new law comes just weeks after the University of Michigan released a taxonomy for machine-readable local government financial statements. While Florida has been focusing on a state-mandated financial reporting form, the University of Michigan project targeted the annual comprehensive financial report (ACFR), whose format is primarily determined by the Government Accounting Standards Board (GASB), a national accounting standards body. This means the Michigan taxonomy could be easily adapted to most other states.
By building upon a project that targets GASB disclosure, Michigan may also be well positioned to impact national machine-readable disclosures. On July 14, U.S. Representatives Carolyn Maloney (D-NY) and Patrick McHenry (R-NC) announced that financial transparency legislation had been attached to the must-pass National Defense Authorization Act (NDAA), the bill that sets the Pentagon’s budget.
One provision of the Maloney-McHenry legislation would require the Municipal Securities Rulemaking Board (MSRB) to adopt data standards for submitted information that:
(ii) enable high-quality data through schemas…;
…(iv) be nonproprietary or made available under an open license;
(v) incorporate standards developed and maintained by voluntary consensus standards bodies; and
(vi) use, be consistent with, and implement applicable accounting and reporting principles.
The XBRL standard and the XBRL taxonomy released by the University of Michigan conform to the definition in the Maloney-McHenry proposal. As the self-regulatory body overseeing the municipal bond market, MSRB collects and publishes financial statements produced by all state and local governments that issue debt securities nationally.
If MSRB adopts the University of Michigan taxonomy or a modified version of it, it will enable tens of thousands of governments across the country to file machine-readable XBRL financial statements.
Although we do not know whether machine-readability language attached to the NDAA will ultimately survive a House or Senate, it appears that MSRB is already preparing to implement this technological advance. The board’s agenda for its July 27-28 meeting included a discussion of “potential new opportunities to collaborate with market participants in EMMA Labs, the MSRB’s innovation sandbox, to advance transparency and the quality and comparability of data in the municipal securities market.”
The Michigan Department of Treasury should work to implement its XBRL budget for the benefit of Michiganders and potentially for taxpayers and municipal bondholders nationwide.