The $4 trillion municipal securities market has approximately one million outstanding securities issued by an estimated 50,000 different state and local governments and other authorities. Issuers of municipal debt can range from the largest cities to tiny mosquito abatement special districts.
But all of these entities submit financial statements and other disclosures into the Municipal Securities Rulemaking Board online portal called the Electronic Municipal Markets Access system.
Most information submitted to EMMA is prepared in paper-based PDF format. Municipal bond investors and government regulators could benefit from easier access to consistent, machine-readable financial data from government bond issuers.
Members of Congress seem to agree. They recently passed the Financial Data Transparency Act, legislation that requires disclosures from municipal bond issuers to be prepared in machine-readable, structured format. This approach will make financial data less costly to process, and more accessible, consistent, and comparable.
Data extracted from EMMA or pulled from local government websites requires manual review and the rekeying of data into analytical applications, a labor-intensive, expensive process that can be prone to error. The FDTA promises to change all that, which will certainly benefit municipal bond investors.
But investors are not the only ones looking for greater transparency into local government financial statements. Eighteen states today require local governments to submit the Annual Comprehensive Financial Report in PDF format, in addition to a subset of ACFR data into state-managed reporting systems. This gives state regulators the ability to compare entities faster and more consistently.
Some in the municipal market have raised concerns that, while general purpose governments like cities and towns report common line items in their financial statements, special districts are far too unique to be represented in “standardized” financial reporting. They are concerned that the FDTA “one size fits all” approach suggests that government entities as diverse as school, cemetery and sewer districts should report the same information as general purpose governments. The legislation, however, specifically calls for no change in what entities report in their financials, so how can a standardized approach encompass so many diverse reporting needs?
To address this challenge, we conducted a pilot program to explore how much variation there is in special district reporting, to learn if their financial statement data can be transformed into machine-readable, standardized data. With support from a grant provided by the Mercatus Center, we investigated four types of special districts in Colorado: school, metropolitan, hospital/health and fire protection. (Colorado metro districts are a type of special district that provides at least two types of services: fire, mosquito, parks and recreation, safety protection, sanitation, solid waste disposal, street improvement, television relay, transportation or water.)
The data standards referenced in the FDTA are required to be built in machine-readable “taxonomy models.” A taxonomy is a way of classifying objects like organisms or species. For FDTA purposes, the taxonomy classifies information reported in a disclosure from a municipal bond issuer. For example, it would contain financial statement line items like assets and revenues, as well as commonly used column headers like General Fund or Component Unit.
Given the requirements in the legislation, the work conducted started with a taxonomy that had already been created to represent general purpose government ACFR reporting. The ACFR Taxonomy was built using the eXtensible Business Reporting Language data standard and represents seven financial statements covering government-wide, governmental funds and proprietary fund statements. XBRL is a global, open-source, nonproprietary financial data standard that supports existing accounting standards like U.S. GAAP and IFRS, to render data fully machine-readable. U.S. entities have been reporting in XBRL format for years: banks report to the Federal Deposit Insurance Corporation, public companies to the Securities and Exchange Commission, and public utilities to the Federal Energy Regulatory Commission.
We reviewed multiple statements from each type of special district. Colorado school districts even have their own chart of accounts. Not surprisingly, we found that each type of special district has a number of unique line items that are unlikely to be found in general purpose government or other special district financials. For example, expenses for vehicle and fire apparatus, or patient accounts receivable, net or charter school allocations are commonly found in certain special district financial statements but not in others.
But we also found many line items in common regardless of entity type. As noted in the assets portion of the Denver Health and Hospital Authority Statement of Net Position below, most financial statement captions can also be found in statements prepared by other government entity types.
When a financial statement like this is prepared in structured, machine-readable format, each reported fact highlighted by red bars contains digitally embedded information that explains what it represents. The gray popup box shows the information digitally associated with the fact of $101,122,178 for Patient Accounts Receivable. The “tagging” process is analogous to UPC codes on cans of soup, which contain digital information about the product being sold, its price and potentially other features, like whether the flavor is chicken noodle or beef barley.
As part of the pilot, we prepared machine-readable financials like the one shown here for the Denver Health and Hospital Authority for each type of special district: School, Metropolitan, Hospital/Health and Fire Protection.
Work conducted in the pilot answers the question about whether the FDTA can be implemented as written — enabling comparison of structured, machine-readable data from all types of municipal bond issuers, even special districts. The ACFR Taxonomy could be easily extended to accommodate not just general purpose governments, but special districts as well.
The availability of digitized state and local government data opens up a world of possibilities for municipal bond investors, government policy setters, watchdog groups and taxpayers. This is an opportunity to modernize government reporting for better, more timely, more granular, and more actionable information that governments need.
The data is already there. But unfortunately, most of it is buried in paper-based PDF documents that make it prohibitively expensive to answer basic questions like:
- How did one hospital district fare during the pandemic compared to another in the same state? Or even compared to a similarly sized hospital in a different state?
- What is the per student cost of transportation fees or food service, and how does it compare across school districts? How much are we spending on charter schools compared to traditional public schools?
- How do pensions compare across fire protection districts?
- Are my taxpayer dollars being spent wisely?
Answering questions like these should be easy and cost-effective. Governments owe it to themselves to make sure they have the information they need to make better decisions and optimize government programs. Residents need access to better information to understand how their tax dollars are spent and to compare their own local government programs to neighboring municipalities. The increased trust and accountability envisioned in the FDTA will go a long way toward improving government efficiency and increasing residents’ confidence in local government spending and programs.
For more information, read the Mercatus Center paper Annual Comprehensive Financial Report (ACFR) Special District Taxonomies.
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