New MSRB submission calculator is a welcomed advance

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Last month, the Securities and Exchange Commission and the Municipal Securities Rulemaking Board took a major step toward improving municipal financial reporting, but much more needs to be done. On Feb. 18, SEC authorized MSRB to begin displaying the length of time between the end of an issuer’s fiscal year and the date it received annual financial disclosures for that fiscal year.

The new information display may increase pressure on delinquent issuers, some of which don’t post audited financial statements for hundreds of days after the relevant reporting period. Truth in Accounting recently surveyed 2018 CAFRs from the 50 states and 75 largest cities, finding that the State of Illinois took 418 days to release its CAFR while Seattle took 301 days. Some smaller issuers take even longer than that: as of this writing, the City of Compton, California has yet to produce its 2015, 2016 and 2017 CAFRs — although it recently published audited financials for 2018. The city’s extreme reporting delinquency prompted the California State Auditor to rank Compton dead last in its recent fiscal ranking of California cities.

Investors unfamiliar with Truth in Accounting’s or the California State Auditor’s research will soon be able to look to the MSRB’s EMMA system to identify late filers. Potential bond buyers can make their own decisions about whether to consider or ignore this data point.

The SEC and MSRB took this action over the objections of multiple commenters representing key constituencies in the municipal bond market. While some of their concerns were well taken, regulators were correct to move forward. Allowing the perfect to become the enemy of the good is a recipe for inertia — and this inertia is preventing the municipal bond market from evolving into the kind of efficient market now available for corporate securities.

In NFMA’s comment letter, Scott Andreson noted that the Submission Calculator would not differentiate between audited financial statements, unaudited financials or failure to file notices. Anything tagged by the issuer as an annual financial disclosure would be treated the same way, potentially distorting day counts displayed by the calculator. All we would really know is when an issuer first filed any document for a given fiscal year.

This is a drawback, but it is one that can be addressed through further technological innovation. If the EMMA Dataport could read submitted documents, it could automatically determine whether they are indeed audited financial statements or something else. It would be easier to make this determination for documents that follow a standard text format — like XBRL documents submitted to the SEC’s EMMA system — than for the PDFs that EMMA exclusively accepts today.

MSRB’s rulemaking in connection with the new Submission Calculator suggests the Board’s interest in extracting data from the disclosures it receives. The revised rule states that the EMMA system may display and disseminate “calculations, data, and metrics derived from … municipal securities disclosure documents and related information.” This gives EMMA the authority to move beyond just providing disclosure files, to also displaying data elements derived from these documents. Hopefully, the MSRB will use this new authority to extract and display key financial metrics such as total long-term debt outstanding, net pension liability and unrestricted net position, thereby giving investors the data needed to evaluate municipal credit risk.

At a time of few defaults, record low base rates and compressed spreads, improved disclosure may seem irrelevant. But as the FIMSAC’s Municipal Securities Transparency Subcommittee recently observed: “market dynamics can change, and municipal issuers should be aware that the market could demand higher yields from municipal issuers with longer disclosure time and less robust disclosures in general.”

Now is the time to move the market forward; when the next recession hits and issuers are struggling with declining revenue, the bandwidth won’t be available to improve disclosure practices.

Marc Joffe is senior policy analyst at the Reason Foundation and Liz Sweeney is president of Nutshell Associates.

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