The central idea behind the FDTA is that public-sector organizations’ financial data should be readily available for online search and standardized downloading, using common file formats. Think of it as “an http protocol for financial data” that enables an investor, analyst, taxpayer watchdog, constituent or journalist to quickly retrieve key financial information and compare it with other numbers using common data fields. Presently, online users of state and local government financial data must rely primarily on text documents, often in PDF format, that don’t lend themselves to convenient data analysis and comparisons. Financial statements are typically published long after the fiscal year’s end, and the widespread online availability of current and timely data is still a faraway concept.
The primary rationale for this initiative has been transparency of data in the municipal bond marketplace, but a broader vision lies beyond the letter of this law. The last thing that the public finance world needs is yet another walled garden in which data structures are built to benefit a narrow group of industry analysts, muni bond fund managers and regulators. The ultimate benefits of data transparency should be far broader, at little or no cost to taxpayers, students and public agencies. Therein lies an opportunity for the nonprofit associations focused on public finance to take the lead rather than letting software vendors call the shots.
The new law gives regulatory powers to the Securities and Exchange Commission, with a particular focus on the data to be provided to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website (EMMA). Ultimately the regulators will require muni bond issuer data to be structured using a format such as extensible business reporting language (XBRL) or something similar. In this way, each piece of data can be “tagged” to facilitate compilations, comparisons and charting of various sets of data. Similar rules already apply to public corporations and regulated nuclear facilities, which are required to provide data in XBRL or equivalent.
XBRL is a freely available and global framework for exchanging business information, although this law does not give that network a monopoly. The idea here is that no single company or consortium can make a proprietary claim on the info tech for data formats.
So far, so good. But the devil is in the details. The first question is just what kind of information will be required in this new system, and when. Most would agree that a complete download of every byte of data now formatted in voluminous governmental financial reports and their notes is overwhelming, unnecessary and burdensome. Thus, a far more incremental and focused approach is a wiser path. For starters, it may be helpful to keep the initial data requirements skeletal and focus initially on a dozen or more vital fiscal data points that are most important to financial statement users. Then, after that foundation is laid, the public finance industry can build out. Of course, this will require that regulators buy into a sensible implementation plan.
The debate over information content requirements should focus first on “decision-useful information.” Having served briefly two decades ago as a voting member of the Governmental Accounting Standards Board (GASB), contributing my professional background as a chartered financial analyst, I can attest that almost every one of their meetings included a board member reminding others that required financial statement information should be decision-useful. A key question, of course, is “useful to whom?”
If the initial requirements are as simple as I’ve suggested above, only 15 to 20 key data points in the first year of implementation, then a simple manual data upload could easily fulfill the spirit of this new law initially, with robust automated data transfers phasing in thereafter. This alone will cut the cost to taxpayers dramatically. The more comprehensive implementation period would best be stretched out to something more like five years. That would be more consistent with the historical timelines when GASB undertakes a major project that breaks new ground in widescale reporting practices.
Coming Next: Interim Data?
But all this EMMA uploading is just the beginning, if we’re going to be really serious about data transparency. After the initial FDTA implementation phase, other new digital networks should eventually house interim financial data, such as quarterly reports. Users of governmental financial data can benefit immensely from updates on items such as year-to-date actuals-vs.-budget on key items, the latest quarterly revenues and payrolls, year-over-year data comparisons, and relevant midyear financial indicators such as treasury management and pension fund market values or trends.
As daunting as building these systems may seem, it’s not like it hasn't been done before. If 4,000 U.S. corporations can routinely produce quarterly financial reports for the SEC, why can’t the 50 states and our 1,000 largest cities and counties do much the same for their primary operating funds and financial reserves? For local governments, that would draw the line at around 100,000 population, big enough to support a credentialed financial staff. Just as one example, think how informative it would have been to economists — and especially to congressional and Federal Reserve policymakers — to have easily accessible quarterly updates on the flow of federal intergovernmental pandemic aid to and through these larger jurisdictions, accompanied by relevant updated entitywide financial metrics.
The idea of posting unaudited interim financial data online will make many governmental accountants cringe. Sardonic staffers will object that all this just invites gadflies, not serious policymaking. As a former hot-seat corporate Sarbanes-Oxley certifier myself, I appreciate their apprehension. There’s too much room for unintentional errors, some will say, and the cost of getting quarterly or even semi-annual audits to validate the data would be burdensome. Being sensitive to issuer liability, I would discourage putting unaudited interim reports on the MSRB-EMMA system and leave that database for somebody else to operate independently — where caveat lector disclaimers can be clearly posted and viewer-downloaders must accept arbitration and hold harmless clauses under the terms of use.
Early Targets for Marketers
Nature hates a void, as does capitalism. Most vendors of accounting software will eventually include XBRL functionality as standard features in their new releases, but legacy systems will require interfaces. New rules like these are always great door-openers for sales representatives, consultants and software marketers. This paradigm shift invites a land rush, and potentially a land grab, by opportunists.
Soon the national professional and policy organizations’ leaders will be courted by vendors seeking those associations’ implied endorsements to promote proprietary “XBRL-conversion” products and services to public-sector members — in exchange for a lucrative royalty or affiliation fee, of course. The nonprofits with ties to financial services corporations and those that offer product branding or sponsorship opportunities will be early targets for marketers seeking to position themselves on the inside lane. Their executive staffs should stifle such mercenary instincts this time and defer to the pros.
Instead, the two most prominent and qualified associations in this field should take the lead. The Government Finance Officers Association (GFOA) and the National Association of State Auditors, Comptrollers and Treasurers (NASACT) have historically and laudably resisted money grubbing and the siren call of marketers to sell their souls for endorsements. Such discipline qualifies them uniquely for the task of establishing a public utility available to all state and local governments at no charge.
GFOA and NASACT could be joined by their tagalong peer associations to set up an open national competition to design and provide the software interfaces, data conversion tools and free-standing systems that all their members can use to comply with FDTA with little or no additional direct expense. If the competition is intense, driving the user’s price to zero or thereabout, there could be more than one winner. Their staffs can provide online training sessions on how to use such tools and export their internal data files, so that the cost burden on taxpayers is close to nil. That’s virtuous competition.
Shaping the Market
This competition could also award rights to architect and support a national repository of governmental financial data beyond the confined bond market scope of EMMA. Imagine housing the 4,000 annual financial reports filed annually for GFOA’s venerable Certificate of Achievement program in a single data library with unprecedented capacity for statistical analysis by researchers, legislatures and stakeholders. Then add two separate databases for budgetary and interim financial information with appropriate liability disclaimers and protective terms of use for unaudited numbers. This way, the associations can provide a vital liability shield to their members. Such facilities would be marketable intergovernmental utilities of value to commercial and academic users. Most importantly, the good guys can control the process — and the pricing and terms for commercial access — as the owners and not the grunts.
So instead of complaining about federally mandated costs, the key public-sector associations should instead be strategizing now about how to shape the market. Paradoxically, Congress has unintentionally set the stage to “rethink” governmental financial reporting and analysis in multiple dimensions well beyond the EMMA website. To its credit, the GFOA is launching a research project roughly along this line of thought. Hopefully it will widen the lens to include this broader vision.
By providing leadership in the implementation process, GFOA and NASACT leaders can speak with authority on what’s realistically feasible on the ground, as they meet with federal regulators, lobbyists and members of Congress to promote pragmatic rules, timetables and functional revisions to the FDTA. This is a ripe time for professional leaders to be proactive and strategic.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
