Why Governments Shouldn’t Fear a New Era of Financial Accountability
By Mark Funkhouser
Even before Congress provided unprecedented financial aid to help offset the impact of the COVID-19 pandemic, it was doling out more than $1 trillion each year to states and localities to support their role in our federal system. Over the last three years, the federal government has added to that pot to the tune of about $1 trillion more in direct aid, grants and tax credits.
Maybe it’s just coincidence that a long-stagnated proposal to require uniform data reporting from state and local governments suddenly gained momentum and passed Congress late last year, or perhaps it’s that increase in federal investment that finally made it happen. Either way, the feds are calling in their chips and requiring a new brand of financial accountability from states and localities.
I’m referring to the Financial Data Transparency Act, which requires those governments to report financial data in a standardized, machine-readable format, rather than publishing it in PDF documents as many now do. It won’t go fully into effect until 2027, and the implementation rules haven’t yet been written by the Securities and Exchange Commission, but governments should not sit back and wait for the powers that be to determine their fate.
For one thing, doing so increases the risk that state and local finance officials will be overrun with more work down the road and that the cost of conforming to the new rules will increase. More importantly, the financial information uncertainty that comes with difficult-to-navigate reports also has a price: higher borrowing costs for state and local governments that ultimately fall on the shoulders of taxpayers.
Given these considerations, government leaders should start preparing now — before the final expectations and timelines are determined — by keeping a few guiding principles in mind:
Stop worrying and start fixing. A common argument for less data standardization or disclosure is that it might cause government financial information to be taken out of context or otherwise be made to look bad. But transparency’s not to blame for that.
Over two decades ago, when the Governmental Accounting Standards Board implemented a rule requiring governments to show the cost of their depreciating infrastructure assets, many of these same arguments were made. In fact, the Government Finance Officers Association’s executive director at the time contended that the requirements “fail to provide information of any practical value to governments, citizens or investors.”
Instead, the requirement revealed just how little governments had been investing in their infrastructure maintenance and helped spur a national conversation around our infrastructure deficit. There will always be people who will be politically motivated to use numbers out of context if it serves their purpose. But for the public, gaining more clarity and uniformity around government financial data can only help.
Take the long view with everything. This recommendation is inspired in part from a new, must-read Volcker Alliance report on the increasing role the federal government should play in overseeing state and local borrowing. Matt Fabian and Lisa Washburn of Municipal Market Analytics argue that government budgets should provide context on future revenues and spending, and describe the fiscal impact of budget decisions on the medium-to-longer-term health of governmental balance sheets.
“State and local governments’ financial disclosures are mostly a look in a rearview mirror,” they write. “The implications of current-year budget choices are often at best misunderstood and at worst ignored for short-term benefit. Informed decision-making is compromised to the detriment of all stakeholders.”
One place that has a long-term lens built into its law is Washington, D.C. When Congress temporarily took over the city’s finances in the 1990s, it also established the position of chief financial officer and gave the office extraordinary powers. Most notably, the CFO had the ability to nix legislation that did not include funding if additional money outside the regular budget was needed. It earned the CFO at the time, Natwar Gandhi, the nickname “Dr. No” — and it’s also one of the key reasons D.C.’s finances continued to be strong after it regained local control.
Start the switch now. The GFOA and municipal issuers say that the Financial Data Transparency Act will cost governments $1.5 billion in software, consultant services and staff time to comply with it. But that’s likely a worse-case scenario. Start investigating now what will be required to transition your financial reporting to a machine-readable format, and you’ll likely save time and money down the road.
For example, the Center for Local, State, and Urban Policy has partnered with XBRL US to explore how governments can create their own machine-readable financial statements and how doing so can reduce costs and increase access to time-sensitive information for policymaking. It is piloting this project in Michigan with the city of Flint, Ogemaw County and Pine River Township, with the ultimate goal of implementing the open-data standard for all local governments across the state.
“This project ultimately is about improving a community’s quality of life,” Tom Ivacko, the center’s executive director, said at the project launch, “because as local fiscal information becomes more available, a greater number of stakeholders will have eyes on the data and be able to act on potential problems long before they turn into crises.”
This is tough medicine. But it is medicine. Previous disclosure mandates have been as unpopular as the Financial Data Transparency Act’s, but in the end they benefited state and local fiscal health. Asset depreciation disclosure is one example. A more recent one is pension liability disclosures. In 2014, the Governmental Accounting Standards Board started requiring that governments begin putting their unfunded pension liabilities on their government-wide financial statements. Previously, these liabilities were disclosed toward the back of annual reports in a separate section.
This change came about during a time when pension plans were already undergoing major scrutiny after the 2008 financial crisis. Providing this additional clarity and uniformity on government pension debt made it harder for lawmakers to ignore.
You didn’t beat them. So join them. Governmental associations fought the transparency act, but now that it’s law, they’d best serve their constituents by steering this lumbering ship. Leadership within the GFOA and the National Association of State Auditors, Comptrollers and Treasurers is already starting to do this by educating members and by advising the SEC on how to make this process easier for governments. The GFOA is also investigating artificial-intelligence-powered machine-reading methodologies to better understand what conversion technology would be best and focusing on methods with little to no cost to governments.
Girard Miller, an investment expert and former chief investment officer of Orange County, California’s pension fund, recently called on GFOA and NASACT to work as a united front. He outlined an approach that includes creating an open national competition to design and provide purpose-built software, tools and systems that governments can use to comply with FDTA. “Their staffs can provide online training sessions on how to use such tools and export their internal data files, so that the cost burden on taxpayers is close to nil,” Miller wrote. “That’s virtuous competition.”
However government officials choose to prepare, the point is to start now. State and local officials must be proactive in this new era of accountability to the federal government because it’s unlikely the FDTA will be the last we see on this issue. Notably, the SEC has been encroaching on municipal market disclosures for the last decade. It sued Illinois in 2013 for misleading pension disclosures, and in 2016 its Municipalities Continuing Disclosure Cooperation Initiative cracked down on the lack of timely financial disclosures by many issuers. More recently, its climate-disclosures rule (which has been delayed) applies to the firms that handle municipal bonds and so would indirectly affect governments.
While accountability to the feds is what has prompted this mandate, state and local governments should see it for the opportunity it presents: improving fiscal stewardship for the benefit of local communities.