Municipal Securities and the Exploding Demand for Transparency
Wary investors and analysts not only want more information than ever, they want better information and they want it all now. Giving it to them could be a good deal for governments.
To get an idea of just how unsustainable the U.S. Government Accountability Office thinks the state and local-government sector of the economy is, scroll down to the bottom of this column and take a look at a graph from the GAO's latest simulation, released in April. The message is clear: State and local governments overall remain at a substantial deficit as a percentage of GDP, and, absent some major structural changes, things are just going to continue getting worse at least through 2060.
The reasons are familiar ones: Declining tax bases, increased revenue volatility, reduced federal support and increasing economic stress for a large swath of the American population. As John Sugden, senior director at Standard & Poor's, put it at a recent conference of the National Association of State Auditors, Comptrollers and Treasurers (NASACT), "There's a lot of headwinds here." In the municipal-securities market, it's not hard to see why municipal-credit analysts are digging deeper, demanding that issuers of state and local debt increase the amount, quality and timeliness of their financial disclosures.
The harsh economic environment has caused many governments to rediscover the importance of fiscal discipline, and the analysts have been seeing stability and even some improvement in state and local governments' overall credit quality. But a few are in such seriously bad shape that there is probably no way out for them, and identifying those governments, accurately assessing their ability to pay their debts and putting an appropriate premium on their debt is now of major importance to investors.
One result of these increased demands from the investor community was a report issued by the U.S. Securities and Exchange Commission (SEC) a year ago containing legislative recommendations that would give the commission direct authority over municipal issuers and their disclosure. Those recommendations have roiled the government-finance community: NASACT vigorously opposes the idea of giving such authority to the SEC, arguing that doing so disregards the basic premise of federalism.
NASACT does, however, recognize that governments in real trouble have the potential to hurt efficient access to capital for everyone -- that to keep the hard cases from having a disproportionately negative impact, the larger community of issuers of state and local debt must improve the overall quality of disclosure to investors.
That's why two weeks ago a NASACT task force issued a report entitled "Voluntary Interim Financial Reporting Best Practices for State Governments." Those best practices include at-least-quarterly reporting of information on revenues, budget updates, cash flow, outstanding debt, economic forecasts and pensions. This is data that is important to investors but not found in governments' Comprehensive Annual Financial Reports. In addition, the NASACT task force recommended making the data easily accessible to investors by providing interim disclosure updates via a dedicated investor website or web page.
That's not necessarily a huge burden. Nevada Controller Kim Wallin and Assistant Massachusetts Treasurer Colin MacNaught, who co-chaired the NASACT task force, pointed out to me that states already have a great deal of auditable information on their websites -- reliable information that can be put out quickly and at little extra cost.
NASACT officials believe that collectively these steps can lower the cost of borrowing for states. They certainly do seem to have the potential to have a positive impact, and the benefit of improved transparency is worthwhile in and of itself. Like many governments, says MacNaught, Massachusetts has "chased the PIRG" - tried to improve its Public Interest Research Group transparency ratings. "We put together this stuff and moved from a D to an A," he said.