Issuer disclosure times slow despite regulatory pressure

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The median time it takes for municipal bond borrowers to complete their annual financial audits grew to 156 days for fiscal 2018, two days longer than the previous year and equal to the slowest time in the past 11 years.

Those are the findings of the latest Merritt Research Services survey, released late last week. The study covered about 10,700 issuers and this year’s results were “particularly disappointing,” Merritt said.

“Slower audit turnaround times increase the likelihood that analysts will miss signals that may adversely affect municipal bond pricing and catch investors or other stakeholders off guard,” according to the study. “In short, the useful value of the audits will become either stale or diminished, or potentially not useful at all.”


It has been more than a year since Securities and Exchange Commission Chairman Jay Clayton first publicly expressed concern about municipal market investors relying on stale information, and he has urged the industry and its regulators to work toward a solution.

The Municipal Securities Rulemaking Board responded by proposing to include a “submission calendar” on EMMA that would show the number of days between the posting of an annual financial disclosure and the end date of the financial period, allowing investors to know at glance how “stale” the information might be.

Muni analysts, however, were not satisfied, telling the SEC that the calculator’s trigger and reliance on the imperfect nature of EMMA submissions leaves much to be desired.

This past year, the three fastest sector median times belonged to “perennial sector leaders of the pack,” Merritt found. Wholesale electric, hospitals and private higher education were the speediest-filing sectors. All three have finished in that order for speediest reporting in each of the last 10 years that Merritt has been tracking audit times.

Each of these sectors was a bit slower than the previous year, however. Wholesale electric slid to 101 days from 99 in fiscal 2017, hospitals slowed to 114 days from 111 the prior year, and private higher education clocked in at 116 days after sitting at 115 a year prior.

For the third year in a row, counties were the slowest filers with a median sector time of 178 days, two days better than the previous year. States/territories and cities tied for the next worst position at 174 days. States/territories finished a median day faster than in 2017, while the city sector was a day slower.

The results show that attempts to induce issuers to be faster have not worked, said Richard Ciccarone, Merritt’s president.

“I think that there is not enough movement applying the voluntary approach so far, especially for the governmental sector,” he said. “If Columbus, Ohio, and New York City can do it every year, any borrower can do it if they make it a priority.”

Ciccarone said a “secondary takeaway” is that weaker credits are slower and that’s worrisome because the markets need them to be more timely. There are not significant differences among the auditors (large or small) tied to the borrowers except in the case in which a state auditor is involved. At that point, the audits are usually much slower, he added.

“Governments or agencies audited by state auditor rather than private CPAs often have slower times in their sectors,” the study found. “For example, in the county sector, Alabama, Indiana, Washington, Minnesota, Oklahoma and Iowa had median audit times of over 200 days, which compares unfavorably to the national county median of 181 days.”

Ciccarone also noted that there are small and large borrowers on both sides of the best and worst lists.

At the top of Merritt’s “honor roll” was the Port Authority of New York and New Jersey, which filed its audited report just 65 days after fiscal year-end. Columbus, Ohio, was also singled out for its speedy reporting, filing in 87 days. That’s the sixth time in the last 10 years Columbus achieved that mark in 90 days or less.

Columbus City Auditor Megan Kilgore said her city became a recognized leader in timely disclosure under her predecessor Hugh Dorrian, and that it remains a point of pride and an important aspect of Columbus’ “brand” with investors.

“Columbus is consistently one of the fastest large public sector issuers in the country because we believe strongly in putting this information in the hands of investors while it’s most valuable,” she said.

Columbus works with a private audit firm and under the supervision of the Ohio Auditor of State, and the private firm is contractually obligated to complete the audit within 90 days, Kilgore said.

But she also stressed the importance of in-house preparation and a team of experienced and dedicated staff at the city.

Kilgore said recent pressure from the SEC and MSRB have spurred best practice discussions among city officials all over the country.

The question going forward may be whether issuers will eventually be penalized, either by increased regulation or by investors if things do not improve, the study concluded.

“The Merritt Research study provides ample of evidence that a 120-day standard is a reasonable target that can be achieved by all borrowers in the near term if issuers put forth the effort,” Merritt said. “If municipal bond issuers procrastinate to meet that target, it is more likely that the government will mandate it. In order to avoid regulation of audit times, bond issuers should act now to make it a higher priority to accelerate the completion of audits and release them to the market promptly.”

“Rating agencies and investors have the tools to penalize non-compliance, but they must choose to use them,” Merritt continued. “Chronically late audit times should be reflected in lower bond ratings and higher issuer borrowing rates.”

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