DENVER — Municipal borrowers continue to lag behind corporations in completing their annual audited financial reports, and state and local governments are only incrementally faster than a year ago, a new report concludes.
The report, released Wednesday by Richard Ciccarone, president and chief executive officer of Merritt Research Services LLC, shows that on average, muni issuers took 141.3 days — almost five months — to finish their 2010 fiscal year audits, compared to 141.6 days in fiscal 2009. Corporate issuers, by contrast, are generally required to complete their annual audits in 60 to 90 days after the end of their fiscal years.
Ciccarone’s report comes as muni market participants, regulators and legislators are scrutinizing the timing and quality of secondary market disclosure. Analysts have clamored for more timely financial reports, including monthly and quarterly financial statements, but issuers have resisted, often saying they lack the resources and staff to produce more frequent financial statements.
Issuers have also cited concerns they might become subject to an enforcement action by the Securities and Exchange Commission if they release interim financial information that later proves inaccurate.
The SEC is in the process of drafting a staff report on the muni market that’s expected to include recommendations for legislative changes to improve disclosure.
The commission is also in the process of updating its 1994 interpretive guidance on secondary market disclosure. A draft bill being circulated among regulators and market participants by Reps. Mike Quigley, D-Ill., and Patrick McHenry, R-N.C., would for the first time give the SEC authority to dictate the timing and content of issuers’ disclosure, including interim financial reports.
Still, while municipal borrowers on average take close to five months to file their reports, Ciccarone found considerable variation by sector and even among certain types of issuers.
For example, the report found that states and territories rank among the slowest reporting credit sectors in the market, while public power wholesale electric borrowers are among the fastest.
Nor does an issuer’s size accurately predict whether it will file timely reports, according to the report.
In 2010, Ciccarone found, the four fastest entities to complete their audits were all relatively small issuers, including Pulaksi Electric Division, Tenn., which filed its annual report 16 days after the close of its fiscal year.
Three others filed within less than a month after their fiscal years ended: Titus County Fresh Water Supply District #1 in Mount Pleasant, Texas, at 22 days; Newaygo Public Schools in Michigan at 23 days; and Maple Shade School District, N.J., also at 23 days.
Many large muni borrowers also completed their audits within 60 days after their fiscal years ended, including the Port Authority of New York and New Jersey at 56 days and Santa Barbara County, Calif., at 55 days.
In addition, Ciccarone noted, New York State and New York City, two complex credits, each filed annual reports within 120 days of the close of their fiscal years — the fourth year in a row that the state met the benchmark. New York City has filed within 120 days for three of the last four years, the report said.
But most states, cities and counties lag far behind corporate borrowers and even the speediest of municipal issuers, with states ranking as the slowest sector for the fourth year in a row.
The median audit-completion time for states was 178 days after the end of their 2010 fiscal years, an improvement of four days over 2009. Illinois ranked as the slowest, with a 365 delay between the close of its fiscal year and the completion of its audited financial report. New York, at 114 days, was the fastest.
Cities and counties ranked as the second and third slowest credit sectors, with median audit-completion times of 172 days for cities and 167 days for counties, Ciccarone said.
Only 2.5% of cities and counties completed their audits within 90 days of the end of their fiscal years.
The fastest city, Perinton Town, N.Y., filed within 53 days of its year-end, while San Diego, the slowest, filed 427 days after its fiscal year closed.