PHOENIX — The Municipal Securities Rulemaking Board is projecting $39.8 million of revenues and has budgeted for $40.5 million of expenses for fiscal year 2018, according to its first-ever executive budget summary.

The summary, which the board released Tuesday, provides projections and breakdowns of the board’s expenses and sources of revenue for the newly begun fiscal year as well as explanations of the MSRB’s financial strategy. The MSRB has faced criticism from the dealers and municipal advisors it regulates for keeping large cash reserves or not reducing fees when it could seemingly afford to do so. The new budget summary is intended as a “window into the future” to show market participants the relationship between the MSRB’s goals and its budgeted expenses.

Lynnette Kelly
MSRB executive director Lynnette Kelly said the new executive budget summary provides a look ahead at the MSRB's financial strategy.

“We’re always sensitive to concerns from regulated entities that the fees are too high or the reserves are too high,” said MSRB executive director Lynnette Kelly. “We hear about it all the time.”

Nanette Lawson, the MSRB’s chief financial officer, said that the audited financial statements the MSRB files each year are “historical documents” that the board is required produce, but that the new executive summary is intended to be a “visionary” document.

“We’re really trying to be much more insightful with how we spend our money,” Lawson said.

The vast majority of the MSRB’s projected 2018 revenue — about 80%, is directly tied to muni bond volume through transaction and underwriting fees. After the more than $24 million accounted for by those fees, the board’s next largest revenue source is the technology fee at $7.5 million. This is followed by several other sources that together account for $8 million of the projected revenue, including annual fees, muni advisor fees, rule violation fine revenue, and investment income.

The MSRB has taken steps to diversify its revenue in recent year, relying less on the transaction, underwriting, and technology fees. The board now charges municipal advisor and 529 underwriting fees that it has not historically charged, making it at least somewhat less exposed to market volume volatility than in recent years.

On the expense side, the MSRB’s largest budget item is market transparency and IT operations at $14.2 million, followed by market structure and support at $7.7 million and market regulation and professional qualifications at $6.6 million. The transparency and IT operations include the board’s EMMA disclosure site and the Real-Time Transaction Reporting System.

“We’re trying to explain to people how much transparency costs,” Kelly said. “What it costs to run the EMMA system.”

The summary projects that the MSRB will have an organizational reserve of nearly $60 million in fiscal 2018, above its target of just under $50 million. But current multi-year projections show the reserve dipping to $50 million in fiscal 2020, which will then be below the reserve target which rises each year. Dealers and other market participants have sometimes complained that these large reserves seem unnecessary and that the MSRB could reduce fees. The MSRB has said it has returned money to regulated entities when appropriate — some $9.1 million since 2014.

“This year, the MSRB will operate under a deficit budget that reflects a modest expense increase over the prior year,” the MSRB said in the budget statement. “However, the MSRB is not taking further action at this time to reduce our organizational reserves given the dependency of revenues on market activity, the fact that the MSRB is taking a less conservative approach to budgeting revenue (applying lessons learned from past years’ budget versus actual revenues), and outyear projections that align with reserve targets in the next two years. The MSRB is applying a more prudent ‘wait-and-see’ strategy to address surplus reserves and minimize the risk of needing to raise fees quickly based on unexpected changes in market activity.”

“Know that we are dedicated to managing assessments responsibly and are mindful of not prematurely distributing excess reserves and then needing to increase fees soon thereafter to maintain the financial strength of the organization,” the summary reads.

Kelly said that the MSRB probably will continue to produce an executive budget summary on an annual basis if the market finds it useful.

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