Disclosure Takes Its Sweet Time

WASHINGTON — Municipal borrowers are much slower than corporations to complete annual audited financial reports, confirming many analysts’ claims that muni issuers’ annual financial disclosures are often stale, a new report shows.

The report, released last week by Richard Ciccarone, president and chief executive officer of Merritt Research Services LLC, shows that on average, it takes municipal issuers 146.6 days — or just under five months — to complete their fiscal yearend audits, much longer than the 60- to 90-day limit for corporate issuers.

Ciccarone noted that the average 146.6 days does not include the time spent for a public body to review the competed audit and, if necessary, approve it and disseminate it publicly. That process could take an additional 30 days or more, according to the report.

While it may take an average of six months before a muni borrower’s audit becomes public, that time frame can vary dramatically by sector and governmental bodies or agencies.

For example, Ciccarone noted, the fastest city — Perinton, N.Y. — had its audit completed and signed in 64 days while the slowest — Freeport Village, N.Y. — took 367 days, even though both are located in the same state.

Governmental borrowers in general are the slowest to file, with states and territories taking an average of 177.7 days, counties taking an average of 172.3 days, and cities an average of 167.7 days. Meanwhile, wholesale electric utilities and nonprofit hospitals generally are the fastest, taking an average of 92.0 days and 106.0 days, respectively.

In all, Ciccarone examined over 14,000 audits from more than 4,600 different municipal bond entities spread across 16 sectors, for fiscal 2007, 2008, and 2009. To mitigate the impact of “overweighting” outliers, he calculated a median turnaround time for audits in each sector and used those figures to determine a three-year average ­completion rate.

The findings, Ciccarone said, show that muni investors are left vulnerable to important disclosure information that is included in the audit, particularly in its footnotes, and that investors in the secondary market may make purchasing decisions before key disclosures are made on events that have already occurred.

But issuers and their representatives dispute his contentions, arguing the ­report ignores the preponderance of financial data available from governmental issuers outside of their audited financials.

Jeff Esser, executive director of the Government Finance Officers Association, said the quantity and quality of information available to the public far exceeds that in the private sector, “largely because of the openness we run governments,” with public meetings, open records laws, and the release of unaudited financials and budget documents on issuers’ websites.

Though Esser said finance officers work hard to file their annual financial reports within six months — the deadline for the GFOA’s certificate program — meeting that goal is tough because many governments must wait for subcomponent units to provide financials before they can be rolled up into their general financial reports.

Ciccarone noted that the delays caused by waiting for subcomponent units do not apply to all governments and that many large governments, even states, have been able to meet the six month deadline.

Though states and territories took the most time to finish their audits of any sector, New York was consistently the fastest to complete its audits, finishing in 115, 116, and 114 days after the end of each fiscal year during the review period. It was followed by the District of Columbia, Utah, Michigan, and South Carolina, which all averaged under 150 days.

And even the slowest state filer in 2009, Tennessee at 402 days, completed previous audits much quicker in prior years — 165 days in 2008 and 160 days in 2007, though Illinois consistently took more than 360 days. Ohio, another late filer, took as long as 459 days to complete its audit for fiscal 2008.

Ciccarone’s report comes as the Securities and Exchange Commission is conducting a series of muni market field hearings designed to come up with recommendations for improving the timeliness and quality of disclosure.

The SEC Rule 15c2-12 on disclosure prohibits dealers from underwriting muni bonds unless the issuer has contractually agreed with bondholders to make annual disclosures of financial and operating information.

It also comes as the Municipal Securities Rulemaking Board plans, at the request of the SEC, in May to launch an experimental system that will reward issuers with special designations on its EMMA website if they commit to any of four voluntary undertakings, including filing their annual financial information within 120 days of the end of their fiscal years.

Ciccarone said issuer size was not a factor in the timeliness of the audits, though there was some evidence that credit quality mattered: weaker or more distressed credits were often more likely to be found on the list of late audits, his report found.

Some counties were remarkably quick in filing their audits for fiscal 2009, with Santa Barbara County, Calif., filing in 59 days, Manatee County, Fla., in 65 days, and Sarasota County, Fla., in 79. The three slowest counties — San Joaquin County, Calif., Humboldt County, Calif., and Clackamas County, Ore., all filled their audits in 274 days.

In an examination of various sectors of the market, single-purpose wholesale electric agencies were the speediest filers. They completed their audits in a median time of just slightly over three months from the end of their fiscal years. The Bonneville Power Administration in Oregon filed in just 30 days. The slowest of these issuers, the West Texas Municipal Power Agency, took 170 days.

Among private collections, Syracuse University in New York was the fastest in 2009, filing in just 30 days.

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