GAO Report to Warn About Funding Shortfall for GASB

WASHINGTON — Voluntary contributions from states and localities, one of two key revenue streams for the Governmental Accounting Standards Board, have dropped precipitously in recent years as localities cut back on funds.

The Government Accountability Office, a congressional watchdog, will make the finding in a report slated to be released Tuesday that was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In another expected development related to Dodd-Frank, the Securities and Exchange Commission is scheduled to vote on final rules for asset-backed securities on Thursday.

However, most market participants expect the SEC will delay applying the ABS rules to munis until the GAO completes a study on municipal disclosure by July 2012. A commission spokesman declined to comment on the rules.

The GASB report stems from a provision in Dodd-Frank that requires the GAO to evaluate the role and importance of the accounting standard-setter and the manner and level at which it has been funded.

Congressional sources briefed on the report last week said it makes no recommendations for funding for GASB, sticking mostly to reporting historical funding levels and synthesizing the views of market participants. The report generally confirms what is already widely known — GASB has an unreliable and inconsistent funding stream, the sources said.

In 2006, states and localities voluntarily contributed $2.1 million to the board, but contributions declined to $1.2 million in 2009, according to the report.

The figures suggest that contributions from localities have all but dried up, according to sources.

GASB is currently funded through voluntary contributions from state and local governments as well as the sale of its publications. The National Association of State Auditors, Comptrollers and Treasurers collects about $1 million annually from states, while the Government Finance Officers Association raises $300,000 to $400,000, partly from member dues and partly from GASB publication subscription services, according to GFOA executive director Jeff Esser.

For years, however, GASB has faced enormous annual funding shortfalls of around $4 million that have been filled by its parent organization, the Financial Accounting Foundation.

The GASB report, which was sought by Sen. Bob Corker, R-Tenn, may illustrate the importance of a related provision that authorizes the SEC to direct the Financial Industry Regulatory Authority to collect GASB assessments from securities dealers. The provision was designed partly to eliminate conflicts of interest stemming from GASB having to rely for funding on the states and localities for which it sets standards.

The provision states that the “reasonable annual accounting support fee” must “adequately fund the annual budget” of GASB and must be determined after consultation with state and local groups.

Sources said Friday that the SEC will likely issue an order later this year requiring that FINRA begin to assess the board’s fees on its member firms. FINRA would have to propose the fees and collect public comments on the proposal before it is implemented.

But the sources said that FINRA has yet to determine how it will collect the GASB assessments, which would need to generate about $7 million, according to congressional sources.

Spokesmen for the GAO, GASB, SEC and FINRA declined comment on Friday.

Meanwhile, the SEC’s vote on asset-backed securities rules, which are required to be finalized six months after the enactment of Dodd-Frank, come as muni market groups have urged the commission not to apply the provisions to munis.

The rules are designed to provide more transparency in the ABS market and to avoid problems that led to the financial crisis in 2008, when originators of subprime loans had no incentives to make sure the loans performed well and walked away from them when they did not.

The two sets of rules, proposed Oct. 4 and Oct. 13, would define ABS broadly so that it would cover a wide range of munis, including housing bonds, student loan bonds, pooled financings, and even leases and installment sales, according to muni market participants.

One set of rules would require municipal bond issuers to disclose, in forms submitted to the SEC, the extent to which there are nonconforming loans in their loan portfolios backing bonds and the extent to which they have been removed, several lawyers said.

Another set would require issuers, or third parties they hire, to review the assets or loans underlying the securities. The issuers would have to disclose the findings in forms filed with the SEC.

But several market groups, including the National Association of Bond Lawyers, warned that applying the rules to municipal bonds is unnecessary and would violate the Tower Amendment, which was added in 1975 to the Securities Exchange Act of 1934 and prohibits the SEC from requiring muni issuers to file documents with it before selling bonds.

Even the Investment Company Institute, which has long sought improvements for municipal disclosure, told the SEC that while it generally supports the proposals, munis should be exempted from them to eliminate investor and issuer confusion.

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