Cities and States Bristle Over Proposal to Change How They Report on Finances

State and local governments are raising alarm over a proposal in Congress that would impose significant new requirements on how they share information about their finances with the public.

Those pushing for the changes say they are needed to make it easier for investors and residents to search and analyze governments’ fiscal data. But state and local governments are rejecting the proposal as an “unfunded mandate” and claim it would cost them over $1.5 billion to buy the software and hire the consultants needed to comply.

Though it has nothing to do with the military, the plan to impose the new reporting requirements on governments and nonprofits was included in the House’s version of the National Defense Authorization Act, an annual defense spending bill, which could be taken up as soon as next month. Senate lawmakers have put forward a similar plan.

The issue, according to Marc Joffe, a former senior director at Moody's Analytics, is that governments publish their annual financial reports in PDF documents, making it difficult to use software or spreadsheets to analyze the data.

“People who buy municipal bonds or people who are active citizens and want to compare financial information between different governments have a hard time,” said Joffe, now a senior policy analyst at the libertarian Reason Foundation. Joffe has long called for modernizing how state and local governments make their data available.

Sens. Mark Warner, a Virginia Democrat, and Mike Crapo, an Idaho Republican, have jointly proposed including a set of financial reporting requirements in the Senate’s version of the defense bill that are similar to what’s pending in the House.

Warner and Crapo, both members of the Senate banking committee, are calling for the Municipal Securities Rulemaking Board, which regulates the municipal bond market, to be required to set the new data standards for states and localities.

In addition to standardizing what data is reported and how it is identified, information would have to be machine-readable and searchable. The MSRB would have two years to develop the rules.

The requirement, Warner said in a press release, would be “another important step toward more consistency and transparency in government data collection and use.” It would also provide “greater transparency and usability for investors and consumers,” he added.

“Making financial data used by federal regulators more accessible and understandable to the American public is an important step in improving government transparency and accountability,” Crapo said in the release.

However, state and local governments say they are already transparent about their finances, and that the new rules would be difficult and expensive to implement, especially for smaller governments.

“I’ve talked to small cities that have one town clerk. They are concerned about having to dedicate their time to retooling their financial statements,” Michael Gleeson, the National League of Cities’ legislative director for finance, administration and intergovernmental relations, said in an interview. Gleeson said the governments also worried that they would have to hire expensive consultants to change their reporting systems.

Joffe, though, argues that there are ways that regulators can create the new rules so that the transition would not be as difficult for governments as they fear.

For example, governments could be allowed to classify some types of financial information as “other,” rather than creating a host of narrower separate categories. “It’s not going to cost nothing, but it’s not going to cost $1.5 billion,” he said.

Joffe also pointed out that corporations were required by the Securities and Exchange Commission to make similar changes in 2009. “I don’t know how long governments should feel they should be exempted from modernizing their financial disclosure,” he said.

The bill does give the Municipal securities board the discretion to “scale data reporting requirements in order to reduce any unjustified burden on smaller regulated entities.”

Nick Hart, president of the Data Foundation and a National Academy of Public Administration fellow, is also supporting the proposal. 

“The bill encourages what many states and localities are already doing: using data to make better decisions and arming local officials with higher-quality information,” he said. At the same time, it would ensure “data reported to the federal government is consistent and available as a resource for investors, government officials, and taxpayers alike.”

A group of government organizations, including the National League of Cities, the U.S. Conference of Mayors, the National Association of Counties and the Government Finance Officers Association, sent a letter to Senate leaders last month calling the proposal “an unfunded mandate” and saying it would result in “significant costs.”

The groups cited a Government Finance Officers Association estimate that about 15% of governments and nonprofits would have to buy and implement new software at a minimum cost of around $100,000 for each of them.

At least 10% of governments, the letter said, would have to hire consultants to reconfigure existing systems, resulting in $100,000 to $200,000 in expenses. Meanwhile, about 25% would “struggle” through the process of handling updates on their own with in-house staff.

“The costs for all affected public and charitable entities to comply with the mandate would exceed well over $1.5 billion within just two years and a disproportionate burden would likely be placed on smaller entities with the fewest resources,” said the letter, which was also signed by entities including the American Public Power Association, the National Association of Regional Councils and the National Council of State Housing Agencies.

The groups also said that, under current law, the municipal securities board “is not authorized to regulate municipal entities.” Giving the agency that power over cities would be “an unprecedented and substantial overreach by the federal government,” the letter said.