And both of these would be right.
That’s the problem, some say, with transparency in local and state government finance: a lack of standardization or more up-to-date releases make it difficult for bond investors to know precisely what they’re buying. But just what to do about it – and how far to go – is a subject of debate among regulators and even the finance officers themselves. Last year the Securities and Exchange Commission issued a report on the municipal securities market that included a recommendation to legislate disclosure requirements by governments. The report stated that governments should follow mandated deadlines to submit audited financial statements. It’s a current SEC requirement for the corporate market, but would be a tall order for the nation’s spectacularly diverse group of state and local governments, some officials argue.
Rather than having the SEC mandate reporting requirements, (i.e., quarterly fiscal data), the National Association of State Auditors, Comptrollers and Treasurers is hoping to preempt the SEC by getting states to volunteer the information in a more formalized way. Last month, NASACT released a memo, “Voluntary Interim Financial Reporting: Best Practices for State Governments,” which recommended 10 areas where state governments should provide financial information as it becomes available (even if it is not audited like a Comprehensive Annual Financial Report). The ten items are:
1. Tax revenues
2. Budget updates
3. Cash flow
5. Economic forecasts
6. Pensions and other-postemployment benefits (OPEB)
7. Interest rate swaps and bank liquidity
8. Investment
9. Debt management policies
10. Filings with the Electronic Municipal Market Access (EMMA) system
The first four items should be updated regularly (at a minimum, on a quarterly basis), and the remainder should be updated as new information flows in, NASACT says. The updates should be recurring and should be released within 40 days of the end of each quarter. Rather than having potential investors go hunting across state agency websites for certain financial information, the items should all be made available via a dedicated investor website, webpage or link on a state’s homepage, NASACT recommends. The association also says states should consult with bond counsel to determine which disclosures to make and also to draft appropriate disclaimer language.
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“The investing community is asking for something and we as states needed to step up and take a leadership role and do something without having someone say, ‘You have to do it,’” says Kim Wallin, Nevada’s state controller and co-chair of NASACT’s Continuing Disclosures Task Force, which issued the recommendations.
NASACT is now forming a task force to help with their best practices implementation across the states. States are not expected to immediately be able to provide all 10 recommended items now. But NASACT’s wants to give governments a goal to shoot for.
The carrot, Wallin says, is that better transparency will save money.
“If states had more frequent disclosures, I think we could drop our interest by 15 basis points – and when you’re talking about millions of dollars, that’s huge,” she says.
As part of its implementation, NASACT plans to present its recommendations to the SEC. NASACT President James Lewis (New Mexico’s state treasurer) says the report was “overwhelmingly supported” among its members and notes “a good percentage of people indicated they are already doing six to eight of the [recommended] items.”
But the tougher audience may be some of NASACT’s compatriots. The Government Finance Officers Association, for one, sees no need to change things up. In fact, says Jeff Esser, the association’s executive director and CEO, the notion that interim financial information will help investors make more informed decisions is misguided.
“What happens in a calendar quarter has no bearing on a government’s fiscal capacity to support their debt,” he says. Unlike a publicly traded company, Esser added, the finances of a government do not change very drastically throughout the course of a year. He argues that it's more helpful for for potential investors is to look at 10-year trend data in the statistical section of state CAFRs.
And although NASACT’s best practices so far just apply to state-level governments, Esser is wary about application at smaller levels of government. “A distinction needs to be made between large governmental entities and the bulk of governments in this country,” he says. “These are governments that rarely or infrequently issue debt and they ought to be treated differently.”
Wallin acknowledged that the diversity among the lower levels of government make this kind of standardization difficult. “Our thought is, let’s start with states and then we can work with the local municipalities,” she says. “But there’s over 89,000 units of government – we have to take at least a bite of the apple.”
