Bill to set up XBRL study clears California Legislature
The California Legislature has approved a bill that would set up a commission to study if the state should require its governments and agencies to provide financial documents to the State Controller’s Office in a more readily searchable format than the PDF.
State Sen. John Moorlach, R-Costa Mesa, sponsored Senate Bill 598, the Open Financial Statement Act, with the aim of making state and local government financial data more accessible.
The bill would authorize a study whether the state, counties, cities, school districts, special districts and pension funds should submit financial statements in Extensible Business Reporting Language. The machine-readable computer language, known as XBRL, would standardize issuers’ financial documents making it easier to compare data, because computers could read and search the financial documents, which would also add transparency, said Marc Joffe, a proponent of XBRL and a senior policy analyst at the Reason Foundation.
The bill did not receive a single nay vote in either house and no one filed a statement of opposition, Joffe said. It cleared its final vote Wednesday.
“I am pleased that California legislators are supporting the modernization of municipal market continuing disclosure,” Joffe said.
The concept, contemplated on the federal level, has received mixed reviews from municipal market participants, some of whom say the changeover would be onerous and costly.
XBRL is an open international standard for digital business reporting managed by XBRL International, a global nonprofit consortium of 450 major companies, organizations and government agencies, according to the Financial Accounting Standards Board website. It is an open standard, provided free of license fees, and is already being used in some countries.
XBRL technology has been around for about 15 years and the SEC has been requiring private companies to use it for about 10 years with the EDGAR system. The SEC has the authority to establish a set of standards on the corporate side, but not in the municipal market.
Matt Fabian, partner at Municipal Markets Analytics, has argued that the cost and difficulty of implementing a new standard could result in worse disclosure among small governments and small issuers.
“The CA bill shouldn’t be a problem for the market, which is unlikely to use any CA-specific data in a meaningful, yield-reducing way,” Fabian said. “To the extent a state wants to require all local governments to raise their financial reporting costs, that’s their business. The problem comes with proposals that lay XBRL mandates only on bond issuers and so reduce the efficiency of the municipal market, send borrowers away from the market, and add little to the credit analysis of investors buying more than one state or sector.”
Fabian called the bill a limitation of the idea, because in putting only the finances of California issuers into XBRL, it will be California-only buyers who could make meaningful use of the information.
“So it’s very hard to expect that California issuers will see enough of a related reduction in their cost of capital to offset their cost of XBRL,” he said. “But if California wants to force them anyway, maybe the state or its agencies can use the data for monitoring or regulatory programs away from the municipal bond market, that’s up to California.”
Joffe thinks it will lower costs for issuers in the long run.
“Over the long term technical standards like XBRL will save state and local governments time and money because they will be able to satisfy multiple disclosure obligations simultaneously,” he said. “Over 1,500 California government entities are required to produce both CAFRs and state financial reports with overlapping information: these should be handled through a single software tool."
Just as individuals can use TurboTax to file both their federal and California tax returns, local governments should expect a similar level of convenience, Joffe said.