Guest author: Marc Joffe, Reason Foundation
Spiraling pension costs and several municipal bankruptcies have heightened interest in local government financial conditions. Unfortunately, municipalities and special districts are too often obliged to use outdated technologies for reporting their fiscal status. As a result, local finance officers are overburdened by redundant work, while taxpayers, bond investors and other stakeholders often receive reports that are difficult to use and understand. Last month, Florida enacted a new law that promises to usher in 21st Century local government financial reporting, offering more accessible data at lower cost.
About 30,000 local governments prepare audited financial statements each year in accordance with their obligations under the federal Single Audit Act, state reporting mandates or their obligations to the municipal bond market. These financial audits – often called Comprehensive Annual Financial Reports (CAFRs) – are usually published in PDF format. Adobe Corporation created the PDF format in the early 1990s to facilitate sharing of “full text and graphics documents” so that individuals using different types of computers could view and print them. However, the format was not designed to efficiently share financial data.
When a local government prepares its CAFR, it normally starts with financial data stored in spreadsheets or a database (which may be on premises or in the cloud). Government finance staff then “print” this information to PDF. Financial statement users receiving the PDFs must copy the data by hand or use PDF extraction tools before analyzing it. This awkward process effectively reduces government transparency. Because CAFRs often contain hundreds of pages of data in a variety of formats, its technical inaccessibility effectively prevents citizens from comparing their governments to peer agencies across a full range of metrics.
A more efficient, 21st Century approach is to retain all the data in “machine-readable form” rather than converting it into and the back out of a print format. The primary technology that enables the transfer of financial data from statement filers to users is eXtensible Business Reporting Language (XBRL). XBRL is an open standard for sharing financial data. After a 2008 Securities and Exchange Commission mandate, corporations that issue public securities began migrating their financial statements to XBRL, but no similar transition has occurred in the public sector.
State governments are well placed to begin this transition and can take the opportunity to eliminate redundant reporting burdens while doing so. Many states require their local governments to file state-specific annual financial reports. These state-mandated reports use a variety of formats and their content usually overlaps with the data reported in CAFRs. Local governments are also required to file a third financial report to the Census Bureau in conjunction with the Survey of Local Government Finances.
Local governments could save time and reduce errors by producing a single XBRL filing that includes all CAFR data while also meeting state and Census reporting needs. Florida took a major step in this direction last month when Governor Rick Scott signed HB 1073. This law empowers the Sunshine State’s Chief Financial Officer to create an XBRL taxonomy (a dictionary of accounting concepts) for Florida local government financial reporting, to instruct municipalities and special districts to switch from PDF reports to XBRL filings, and to update its statewide local financial data collection and reporting system – known as LOGER – to accept the new XBRL data.
Ten years after the SEC began moving corporate reporting into the 21st Century, Florida has kicked off a similar transition for local government financial reports. If other states follow and the federal government takes notice, we could finally have a comprehensive database of government financial statistics. Such a database could give us early warnings of fiscal insolvency while improving information flow and lowering costs in the municipal bond market. Time and money now spent compiling and locating government financial data can instead be spent analyzing and acting on this important information.
Marc Joffe is a Senior Policy Analyst at Reason Foundation where he studies public employee pensions and other fiscal issues. His research has been published by the Mercatus Center at George Mason University, the California Policy Center, the California State Treasurer’s Office and the Texas Public Policy Foundation among others. Before becoming involved in public policy, Marc held a number of financial technology roles at money center banks and was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.