Last month’s Bond Buyer National Municipal Summit featured a lot of discussion on data and technology, and speakers noted their concerns and hopes about developments in the municipal space. The issuer community is worried about new mandates, while data vendors are concerned that EMMA enhancements might encroach on their ability to generate the revenue needed to fund their data collection.
These concerns must be squared against the imperative of government data transparency. Municipal bondholders are one of several stakeholder groups that have a legitimate interest in state and local government financial information. Taxpayers, public employees and federal oversight agencies are among the constituencies that want to monitor a municipal bond issuer’s financial performance and have a reasonable expectation of convenient, inexpensive access to relevant data.
A major barrier to low-cost data access is the format of municipal disclosure. While the Municipal Securities Rulemaking Board (MSRB) has done a great job of collecting large numbers of disclosures on EMMA, they are only available in PDFs, which are hard to process. EMMA disclosure diverges sharply from that which is available to corporate securities investors on the Securities and Exchange Commission’s (SEC’s) EDGAR system—the Electronic Data Gathering, Analysis, and Retrieval system. All disclosures in EDGAR are text documents that can be readily loaded into spreadsheets, and an increasing number are XML, XBRL and Inline XBRL files whose key data points are enclosed within tags, making those data elements easy to extract.
Regardless of whether MSRB should — or even can — mandate more user-friendly formats for municipal disclosures, nothing should prevent the board from developing formats that issuers can use on a voluntary basis. Creating specifications for new filing formats and allowing filers to use them would allow market participants to see the benefits of reporting standards and encourage software vendors to upgrade their tools to provide compatibility.
Standards setting can proceed in parallel with MSRB’s efforts to mine data from existing PDF disclosures. Although machine learning techniques have improved, intelligent searching of unstructured documents is unlikely to ever produce results on a par with querying standardized data.
Ideally, the MSRB would create standards for all types of primary and continuing disclosure, but financial reports would be a good place to start. At its December conference, SEC commissioners and staff focused on the timeliness and frequency of these disclosures. Although new standards can’t speed up the availability of disclosure files, they will accelerate the process of gleaning actionable data from annual or interim financial reports.
The standards-setting process requires selecting a reporting format and a list of standardized reporting elements, known as a taxonomy. Creating a taxonomy is the harder part, especially for complex documents. At its peak, the SEC taxonomy for corporate financial statements reached 19,000 elements. But municipal investors could get substantial benefits from a much smaller taxonomy, making up no more than a couple of thousand elements. Limiting the taxonomy in this way requires making decisions about the relative importance of various financial statement items. For example, MSRB might conclude that it is important to easily determine a city’s total revenues and expenditures, but less essential to know the name of the city’s controller.
Limited taxonomies can create a distinction between free and premium data. Vendors could continue to add value by extracting and presenting data points outside the taxonomy to subscribers, while the general public obtains access to a basic level of data. If MSRB were to adopt Inline XBRL – the standard that will apply to SEC 10-K and 10-Q filings from 2020 onward – extraction costs for premium data will also decline. This is because Inline XBRL documents are HTML files, and HTML files are easier to parse than PDFs.
Defining a reporting taxonomy would involve speaking to stakeholders and reviewing prior work. One input MSRB might use is the Government Finance Officers Association’s Financial Indicators Database, which includes selected financial statistics from municipality, county and school district Comprehensive Annual Financial Reports (CAFRs) that won a GFOA Certificate of Achievement. GFOA’s 2013 data set – published in August 2015 – included 81 data elements. The XBRL US State and Local Disclosure Modernization Working Group has also published— and will shortly update—a demonstration CAFR taxonomy.
As to compliance costs, the availability of a uniform reporting standard will drive down expenses as filers gain familiarity with the taxonomy and software vendors gain experience implementing the technology. Rather than focusing exclusively on the drawbacks of a mandate, it would be great for GFOA to actively engage in standards development, so that their members have better ways of communicating vital fiscal performance data to prospective investors.
It has been 11 years since the Association of Government Accountants first documented the benefits of digitized CAFR reporting. Little has been achieved since, leaving the municipal bond market well behind other securities markets. Rather than continuing to worry about the downsides of technical standards, the time has come for industry leaders at the MSRB, the GFOA and GASB to embrace them.
This column first appeared in The Bond Buyer.