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GFOA Shifts on Muni Disclosure

Correction: The headline and top of this story on the Government Finance Officers Association's debt committee meeting incorrectly suggested that the group had altered its position on disclosure. While some prominent members of the panel said issuers should discuss whether to disclose additional voluntary information, primarily tied to derivatives, they were not speaking on behalf of the entire GFOA.

SEATTLE - In a conciliatory shift, government finance officials meeting here Saturday conceded that some improvements to municipal disclosures sought by an analysts' group may be warranted, though the finance officers insisted that the changes should be made only on a voluntary basis and not mandated by federal regulators.

The move nonetheless appears to be a significant shift for members of the Government Finance Officers Association's debt committee, who in the past had blasted the National Federation of Municipal Analysts, and its calls for general improvement to muni disclosure standards.

But Frank Hoadley, the chairman of the debt committee and Wisconsin's capital finance director, said at Saturday's all-day committee meeting that the NFMA raised "some legitimate issues" in a June 4 letter that partly focused on the hoops analysts must go through to find information about an issuer's exposure to counterparty risk in derivatives transactions.

At one point, Hoadley characterized the NFMA letter, which was sent to the ranking members of the House Financial Services and Senate Banking committees as well as Securities and Exchange Commission chairman Mary Schapiro, as "pretty good."

"It does seem to me that we may be able to ... address some of these issues that NFMA is raising as matters of voluntary disclosures on our part without necessarily having to involve ourselves in a change in accounting standards," Hoadley said.

Specifically, the NFMA letter noted that since the financial crisis began about two years ago, its members and other market participants have "struggled to unravel the details" of a number of different transactions.

"For interest rate swaps and similar instruments, simply being able to track exposure to troubled counterparties is a time-consuming, frustrating and often fruitless effort," the letter stated. "The structure of a swap, the counterparties involved, and in particular a transaction's terms and triggers are often not disclosed to investors. For example, it was not readily clear which borrowers had interest rate caps on auction-rate bonds."

Hoadley's support for portions of the NFMA letter comes about five years after the committee gave the then-NFMA chairman, who spoke before the panel at its 2004 annual conference, a rhetorical beating for not obtaining their input on a series of recommended disclosure practices that the NFMA had developed for specific sectors of the municipal bond market. The committee members were concerned that the NFMA's best practices had the effect of setting industry-wide standards.

"You cannot represent that the issuers have signed off on these because we haven't," said Monique A. Moyer, then-chairwoman of the debt committee, who is executive director of the Port of San Francisco. "You cannot be blind-sided by the fact that this could become the standard by which we are regulated."

Asked about Saturday's remarks, Mark Stockwell, vice chairman of the NFMA and director of municipal research at PNC Capital Advisors in Philadelphia, said yesterday: "It's encouraging to hear a positive response to our letter but there's still a lot of work to be done and we would want to see what their statements mean in terms of implementation. And if there are specific regulatory initiatives in this arena, we would want to see how they react."

The committee did not decide how it would incorporate the NFMA requests into its policy statements, though one member suggested that the requests be addressed in a disclosure best practices document the panel is drafting.

Despite embracing certain portions of the NFMA letter, Hoadley rejected calls from "investors, the SEC and other politically motivated parties to somehow reform" the municipal market and make its financial reporting more timely. He said the calls are based on "specious information" that suggests that muni market is much less safe than commonly thought.

"I think that we have some problems of perspective and deliberate misguidance from some in the industry," Hoadley said. "The reality is that virtually everyone who issues bonds is using higher accounting and reporting standards than corporate America."

The reference to "specious information" refers to a speech Schapiro gave two weeks ago, in which she said that despite their reputation for safety, municipal securities can and do default, adding that in 2008, 140 municipal issuers defaulted on $7.6 billion of bonds.

Hoadley disputed those figures, which he said likely reflected defaults by conduit borrowers rather than pure governmental issuers. Issuers, he added, are "desperate" for more details on that data, which was compiled by a Florida newsletter that tracks corporate and municipal defaults.

Stephen Gauthier, GFOA's director of technical services, said he does not share the frustration of analysts calling for more timely release of state and local governments' annual financial information - which, for large issuers, are typically released about six months after the end of their fiscal years. Speeding up that release would be "very difficult" without imposing "significant costs" on issuers, he said.

"It's the private sector that has lost significant amounts of money" during the financial crisis, Gauthier said. "I'm still wondering where that's happened in our market. Maybe the best way is to look at the demand. I'm proud of the information that we have available, but I don't think any of us have to hire extra security when we're about to release a [comprehensive annual financial report], you know, for crowd control."

He added that the level of detail of issuers' annual financial statements is "stunning, because of fund accounting and the like, we can really find out a lot of information that is just completely invisible in the corporate sector."

Still, Hoadley said issuers should consider accommodating some investor demands, arguing that the debt committee would need to be "very, very careful" going forward because "the SEC and other parties are sort of barking about doing away with" the Tower Amendment. The amendment, which was added in 1975 to the Securities and Exchange Act of 1934, prevents the SEC and the Municipal Securities Rulemaking Board from collecting documents from muni issuers before they issue bonds.

Ben Watkins, director of Florida's Division of Bond Finance, said in an interview that NFMA is advocating for information that was not pressing prior to the financial crisis and that issuers did not know investors wanted.

"That's very constructive dialogue," he said, adding that he would remain opposed to federal efforts to dictate the timeliness and content of municipal disclosures.

"The SEC needs to be spending their time, effort and energy on things that matter, where people lost billions of dollars, and not on the municipal market," Watkins said.

Turning to the topic of boosting voluntary disclosures, one debt committee member noted that the MSRB's new central repository known as EMMA - which replaces the four existing nationally recognized municipal securities information repositories on Wednesday -will be "very helpful" in disseminating both mandatory disclosures and additional voluntary filings that issuers choose to submit.

The panel member dismissed a study performed last year by one of the existing NRMSIRs, DPC Data Inc., that said as many as half of issuers aren't in compliance with their continuing disclosure agreements. The reality is that most issuers are in compliance, but their submissions were misfiled and lost by the NRMSIRs, the committee member argued.

Watkins agreed, and characterized the DPC study as "a total pile of garbage." He said issuers should be challenging such studies and also proactively lobby against legislative and regulatory changes to municipal disclosure standards, which committee members said would be unduly burdensome and expensive.

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