The University of Michigan moves to modernize government financial reporting
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The University of Michigan moves to modernize government financial reporting

XBRL can make data from state and local governments more digestible and publicly available.

In 2002, three academic researchers proposed applying eXtensible Business Reporting Language (XBRL) to state and local government financial reporting to make municipal data more digestible and publicly available. Now 20 years later, the University of Michigan’s Center for Local, State and Urban Policy (CLOSUP), in conjunction with industry standards group XBRL US, is releasing the first commercial-grade XBRL taxonomy for US governments. The taxonomy is a catalog of over 2,800 standardized terms for concepts that appear in government financial reports.

In Mohammad Abdolmohammadi, Jonathan Harris, and Kenneth Smith’s The Journal of Government Financial Management article, entitled “Government financial reporting on the Internet: The potential revolutionary effects of XBRL,” the authors observed:

The difficulty in obtaining financial, budgetary and economic data about municipal governments has created possible inefficiencies in the municipal bond market… Despite the enormous size of [municipal] debt, pertinent information on particular bond issues is difficult and costly to obtain.

That difficulty has remained for two decades. After an exhaustive data collection process, the Reason Foundation has determined that over 30,000 U.S. state and local governments filing audited financial statements reported a total of $4 trillion of revenue and $7 trillion of liabilities in the fiscal year 2020. If governments utilized XBRL, financial statistics like these could be instantly available to anyone performing a simple Google search.

While governments have made little progress toward XBRL adoption since the turn of the century, the technology has been fully rolled out at the country’s publicly-listed companies and among U.S. banks. It is also widely used abroad, both in the private and public sectors.

In the United States, the failure to adopt modern financial reporting might be attributed to inertia as well as the lack of unified oversight at the national level. Further, interest rates were very low for the last 14 years. With most state and local governments paying low financing costs relative to pre-2008 levels, the need to find efficiencies in municipal finance seemed less pressing.

But now that interest rates are rising sharply in 2022, the time for market efficiencies like those offered by XBRL financial reporting may be at hand. If so, the new effort from the University of Michigan will prove timely.

The CLOSUP/XBRL US taxonomy for state and local governments is built upon standards published by the Government Accounting Standards Board (GASB). These standards are used by all state governments as well as local governments in most states. The taxonomy covers seven face financial statements and four footnotes, including those for pension and other post-employment benefit liabilities.

Later in the summer, the research team, working in conjunction with Workiva Corporation and city financial staff at Flint, Michigan, will release an XBRL financial report for that city. This pilot is being supported by a grant from the Charles Stewart Mott Foundation.

CLOSUP’s executive director, Tom Ivacko stated:

“This project ultimately is about improving a community’s quality of life, because as local fiscal information becomes more available, a greater number of stakeholders will have eyes on the data and be able to act on potential problems long before they turn into crises.”

The state of Michigan will have the opportunity to make XBRL the permanent mode of operation moving forward. The state Senate’s draft budget for the 2022-23 fiscal year includes funding for the Michigan Department of Treasury to continue the project in conjunction with a public university. But it remains to be seen whether the Senate’s XBRL provision will make it into Michigan’s adopted budget for the fiscal year that starts October 1, 2022.

The release of Michigan’s project comes four years after Florida passed legislation mandating XBRL reporting, which is expected to be implemented next year. But the Florida bill only pertains to a state-specific annual financial report and is not directly applicable in other states.

Hopefully, progress on municipal financial transparency and reporting at the state level will overcome inertia at the national level. Although the Grant Reporting Efficiency and Agreements Transparency (GREAT) Act of 2019 (P.L. 116-103) required the adoption of machine-readable data standards for financial statements submitted by local government grantees to the federal government, executive branch officials have yet to implement this legislation.

Similarly, the Municipal Securities Rulemaking Board (MSRB), which oversees the municipal bond market, persists in requiring disclosures filed in PDF rather than XBRL format. This self-regulatory body may face pressure to begin an XBRL migration if states begin using XBRL and the Financial Data Transparency Act (S.4295) passes in the U.S. Senate. The House of Representatives passed a similar bill (HR 2989) last year. These federal bills would require MSRB to adopt standardized, machine-readable disclosure.

Should the Municipal Securities Rulemaking Board or the federal grants community decide to implement XBRL, the newly released University of Michigan taxonomy will give them a very strong starting point.