In Florida, and nationally, Reason Foundation is working to improve the accounting transparency of state and local governments by seeking the mandatory disclosure of government financial documents in a machine-readable format, which would help eliminate barriers to data analysis and facilitate more robust independent policy analysis.
Having helped craft enabling legislation in Florida this spring, Reason is now working with academics, government officials and technology companies on the tall task of migrating Florida’s Comprehensive Annual Financial Reports (CAFRs) to a machine-readable, and thus more accessible, format while also engaging other states on the issue.
This update aims to explain why this issue is important to citizens and governments, how it can promote fiscally-sustainable government, and describes a recent technology showcase we arranged to show how machine-readable CAFRs might be prepared and submitted. It then describes the formation of a new standards body that will facilitate reporting modernization, as well as new model legislation that could serve as a template for adoption in other states.
The Problem: State and Local Fiscal Problems Hiding in Plain Sight
Although tens of thousands of governments publish audited financial statements each year, the reports — often known as CAFRs — almost invariably arrive in PDF form, frustrating efforts to analyze them in bulk. As a result, taxpayers often get financial transparency in name only, especially at the local level. While scraping data from CAFRs across all 50 states may be feasible for well-funded research teams, harvesting data from about 30,000 annual local government financial audits is beyond almost everyone’s capacity.
This situation leaves important policy and financial questions unanswered. For example, no one really knows the extent of Other Post-Employment Benefit (OPEB) liabilities nationally. Footnotes buried in CAFRs inform us that some local governments have enormous unfunded OPEB obligations — including $88 billion for New York City, $24 billion for Los Angeles County and $15 billion for the Los Angeles Unified School District — but the national total remains a mystery.
The solution to this transparency problem is obvious, yet much easier said than done: replace PDF-based financial disclosures with machine-readable files that can be readily processed by computer software. The most appropriate format for government financial disclosures is Inline eXtensible Business Reporting Language (iXBRL) which was recently mandated by the Securities and Exchange Commission (SEC) for corporate 10-K and 10-Q reports.
The new SEC iXBRL mandate replaces a 2008 rule that required companies to use XBRL, a closely related standard (both XBRL and iXBRL employ the same tagging system for financial documents, but iXBRL files have the advantage of being human-readable on Google Chrome, Firefox, Internet Explorer and other web browsers).
At the time the SEC mandated XBRL use for public company reporting (in 2008), government accountants and regulators began planning for a parallel transition from PDF to XBRL in the public sector. The Association of Government Accountants piloted XBRL with the state of Oregon’s CAFR. The Municipal Securities Rulemaking Board included XBRL in the long-range plans for its municipal bond information platform, EMMA. But progress toward adoption stalled during the Great Recession and the idea was largely forgotten. With no single entity responsible for government financial disclosures, bureaucratic caution and inertia set in, preventing any progress.
But this year, Reason Foundation allied with other reformers to resuscitate the CAFR XBRL concept. As we reported previously, Reason was instrumental in formulating Florida House Bill 1073, which will migrate local government annual financial reports to XBRL in 2022. The implementation starts in the current fiscal year as the Florida CFO’s office uses an appropriation to build an XBRL taxonomy (an XBRL taxonomy lists the names and properties of standardized elements that may appear in financial statements, thereby encouraging comparability across governments).
While XBRL and especially iXBRL promise to bring enormous transparency benefits to government financial reporting, implementation of this concept is complex. Further, the SEC’s corporate XBRL implementation attracted widespread criticism. And, more generally, major technology projects often prove to be difficult, especially in the public sector, with the failed Obamacare rollout offering a painful example.
XBRL Demo Day Recap: Facilitating the Transition to Machine-Readable CAFRs
To increase the odds of successfully implementing these systems, Reason has been working with experts and industry partners to offer Florida’s Chief Financial Officer (CFO) information on best practices. In May 2018, we connected the department’s employees with XBRL experts in Spain familiar with that country’s successful XBRL municipal reporting rollout. On August 7, we held an “XBRL Data Demo Day” in St. Petersburg, Florida, which featured seven companies explaining their ideas for adopting XBRL.
Six of the seven firms provide XBRL filing services, mostly for US and foreign corporations. A seventh company, Thales Consulting, currently offers a cloud-based solution for producing PDF-based CAFRs, but, according to founder Joe Stimac, the company’s tools can be readily adapted to produce iXBRL disclosures.
You can click on the links below to see slide presentations provided by six of the seven companies that presented at Reason’s event:
Another company, Workiva, gave a live demonstration included in our event video (which you can see in this post or by clicking here). The program also included comments from St. Petersburg CFO Anne Fritz, an early adopter of XBRL technology, and Rachel Carpenter, CEO of Intrinio, who played an active role in achieving passage of HB 1073. Intrinio, a St. Petersburg-based fintech startup, provides online financial data often using XBRL disclosures as a source. A successful XBRL public sector implementation will enable Intrinio and other data providers to serve the $3.8 trillion municipal bond market, which is currently starved of fundamental data on debt issuers.
New Industry Working Group to Develop Reporting Standards
On the afternoon of August 7, the XBRL US State and Local Government Disclosure Modernization Working Group held its first in-person meeting at the same St. Petersburg location. XBRL US is a non-profit that effectively owns the XBRL reporting standard in the United States. Besides working in parallel with the SEC and the Financial Accounting Standards Board to support the US corporate financial reporting taxonomy, XBRL US has taken the lead in developing taxonomies for solar finance and the surety bond industry.
After noting the passage of Florida House Bill (HB) 1073, XBRL US accepted an application from Reason Foundation, Workiva, Intrinio and others to form a working group for state and local disclosures. Most of the companies participating in Reason’s Demo Day joined the working group as have several other firms.
One high-profile corporate member is the Investments division of Neighborly, a venture-funded start-up that uses modern technologies to enhance the municipal bond market. Barnet Sherman, the firm’s Director of Municipal impact Credit Analysis, told me, “Neighborly is excited to be part of the critical application of technology to make the municipal bond market more transparent and more efficient —ensuring a better deal for communities who need to build vital public goods and full and fair returns for investors.”
Also participating in the working group are several academics including Shannon Sohl from Northern Illinois University (who, like me, has been a long-time advocate of public sector XBRL) and Dr. Jacqueline Reck from the University of South Florida (who, with Neal Snow, authored the first peer-reviewed journal article proposing an XBRL taxonomy and who advocated for adoption as a member of the Government Accounting Standards Advisory Committee).
The working group plans to deliver a prototype CAFR XBRL taxonomy later this year in hopes of providing further guidance to the Florida CFO’s office. In 2019, the group expects to create a more comprehensive taxonomy that will encompass not only CAFRs, but state-mandated financial reports and responses to the federal Census of State and Local Government Finance. By consolidating three types of annual municipal financial reporting into a single iXBRL document, the working group hopes to reduce the paperwork burden on local government financial reporting teams.
I am excited to be the chair of the new XBRL.US working group and look forward to collaborating with Shannon Sohl, who is serving as vice chair, as well as our institutional and individual working group members. I am also excited that our group is being observed by four different government and practitioner organizations, and I look forward to identifying these entities if and when they become comfortable having their names publicly announced.
Model Legislation for Statewide XBRL Reporting
Finally, on August 9, the American Legislative Exchange Council’s (ALEC) Tax and Fiscal Taskforce approved model legislation that other states can use as a template for implementing reforms similar to those in Florida. The model “Open Financial Statement Act” lays out a multi-stakeholder process through which a statewide XBRL reporting taxonomy could be developed and implemented. This process is intended to minimize compliance costs especially for smaller local governments and to produce fiscal data sets useful to an array of information consumers.
Ratification of this model bill is consistent with ALEC’s long-term efforts to advance government financial transparency, but at the same time, it is a truly cross-partisan idea for which we intend to engage other associations representing elected officials, including the National Conference of State Legislatures, the Council on State Governments, the International City/County Management Association and others through a wide-ranging outreach effort.
Regardless of one’s perspective on the size and scope of government, just about all well-intentioned policymakers and stakeholders seek modern, efficient and transparent government processes. Migrating to 21st-century financial reporting technology is an idea whose time has come for red states and blue states alike.
Please feel free to email me for more information about these efforts.