In an Oct. 27 comment letter to the Securities and Exchange Commission (SEC), the National Federation of Municipal Analysts (NFMA) outlined its thoughts for implementing the Financial Data Transparency Act (FDTA). The letter, coming from a group that had previously expressed skepticism about the FDTA’s imposition of data standards for municipal reporting, was a breath of fresh air.
In October 2022, NFMA signed onto an industry letter opposing the inclusion of the municipal bond market in financial standards legislation, which stated that the then-proposed law did not “adequately address the numerous inherent financial complexities between the various types of governmental entities in the public sector.”
This position was driven by the false impression that it would be especially difficult to develop a taxonomy or set of taxonomies that would address the varied reporting requirements of special purpose governments. I addressed these concerns in a Jan. 4, 2023 Bond Buyer commentary.
Members of NFMA’s FDTA committee may have reached similar conclusions to mine because their SEC comment letter says the organization now “believes, regardless of issuer size or frequency of issuance, data standards should be equally and simultaneously applied to all issuers with outstanding debt in the municipal market.”
This position appears to run contrary to previous assertions by some in the municipal market that using data standards would impose crushing costs on small issuers, many of whom would flee to the bank loan market to avoid the new reporting regime. In fact, 18 states already impose standardized financial data reporting requirements on some or all local governments, and the bulk of them have been able to comply.
For those of us who study government finance, either for investment purposes or for public policy purposes, complete data sets are far more useful than partial ones that will necessitate ongoing use of legacy PDFs of those issuers that are exempt.
As a long-time advocate of municipal data standards who also believes that the costs of government should be minimized, I have one quibble with NFMA’s position. Specifically, NFMA states:
“The taxonomy should fully incorporate management’s discussion and analysis, basic financial statements, and notes, required supplementary information, and supplementary information. No less than what is currently provided as PDF documents should be provided in machine readable format.”
The more data items entities are expected to tag, the more costly it will be to comply. This is one reason why proposed taxonomies produced by the working group I formerly led at XBRL US were limited to seven face financial statements and four key footnotes: pensions, OPEB, long-term obligations, and capital assets. I see scope for expanding beyond that, but the marginal benefits to financial statement users decline as less commonly consulted items are added to taxonomies and machine-readable reports. I am specifically concerned about including MD&As which are heterogeneous and often take the form of boilerplate recapitulations of data already reported in the face financial statements. One way forward might be to publish a complete ACFR taxonomy while advising issuers that only specified sections of it are mandatory.
Finally, I think NFMA was wise to suggest the formation of an industry-wide FDTA Working Group. Almost a year after the passage of FDTA, it is time to move beyond debating whether it was a mistake and moving onto the question of how to implement the law in a way that balances the needs of data producers and consumers.
With respect to who should be on the working group, NFMA provides a pretty comprehensive list, but it should also include the Municipal Securities Rulemaking Board, representatives of standards bodies, and non-commercial users of municipal disclosures such as academics and think tank researchers. Also, those who opposed FDTA should not be overrepresented in such a working group; otherwise, it will simply serve as a barrier to progress.
Finally, it is great that NFMA suggested including the Census Bureau and the National Association of State Auditors Controllers and Treasurers (NASACT) in the working group. Since local governments are also reporting their financial statistics to Census, and, in many cases, to state overseers, the working group could provide an opportunity to standardize reporting requirements across all recipients and thereby reduce conflicting and redundant reporting requirements for issuers. To that end, it would also make sense to include a representative from the Federal Single Audit community, since these users consume local government and nonprofit financial data as well.
Although I do not agree with every bullet point in NFMA’s letter, it is full of great suggestions and constitutes a significant step forward in the effort to modernize the municipal bond market.