Michigan is embarking on a pilot program that could lead to a seismic shift in local government financial reporting documents that proponents say would enhance transparency and help catch fiscal red flags earlier.
The fiscal 2023 budget signed by Gov. Gretchen Whitmer authorizes the state Department of Treasury to explore the feasibility of moving toward the use of machine-readable financial documents by local governments based on XBRL — extensible business Reporting Language —instead of their current PDF format.
Under the budget authorization for the fiscal year beginning Oct. 1, Treasury is setting up a XBRL Pilot Program Committee to review the feasibility of local governments using XBRL on their required financial reports and making recommendations on the development of an information technology strategy.
Based on the recommendations, Treasury will determine the feasibility and cost of implementing the ability to accept XBRL files on its website as a substitute for annual financial reports, Form F-65 and Form 5572, and will decide on any enhancements required for the current IT systems to implement the proposed change.
"We are in the initial stages of mapping out the pilot program and engaging stakeholders. We're in full learning mode," Treasury spokesman Ron Leix said in an email.
If a statewide change in eventually adopted that includes annual comprehensive financial reports — or ACFRs — it would mark a first of its kind.
Florida passed financial reporting legislation in 2018 and launched its reporting standards taxonomy last week for filings after September 1 but it's limited to Florida-specific required reports, said Marc Joffe, senior policy analyst with the Reason Foundation and chair of the XBRL US Standard Government Working Group.
Joffe's group and other backers promote use of XBRL as the best tool to modernize financial reporting in a way that expands the ability to search and compare data in documents for stakeholders from bondholders to taxpayers but it's been slow going in picking up any traction.
XBRL has been used for years in public company filings to the Securities and Exchange Commission's EDGAR disclosure system.
The Government Finance Officers Association in a
"GFOA opposes efforts to mandate the use of specific technologies by state and local governments for financial reporting and disclosure," its statement says.
Joffe counters that voluntary compliance should be the first step.
Though not identified in the budget language, the state will work with the University of Michigan, piggybacking on a grant-funded pilot study launched earlier this year by the Center for Local, State, and Urban Policy at the school's Ford School of Public Policy, in partnership with XBRL US and the city of Flint.
The UM pilot project sought input from stakeholders on digital financial standards, which is known as a taxonomy. The pilot applied the standard to cover seven financial statements and four associate footnotes as well as two Michigan-specific reports.
The pilot program also involved supplying Flint with the tools and support to publish its ACFR in a fully searchable and machine-readable form.
The university's goals are twofold: to help local governments streamline reporting processes and better enable the early discovery of fiscal trigger points and more broadly to put the state at the forefront of promoting transparency and intervening before local finances reach crisis points.
"Transparency into local government fiscal health is needed to handle challenges communities in Michigan and around the country encounter today, from pandemic- and infrastructure-related costs, to economic issues like inflation," said Stephanie Leiser, who leads university's Michigan Local Government Fiscal Health Project.
"Open data standards generate financial data that will help local entities respond faster, and have the information to make better policy decisions," Leiser said.
Being able to identify early warning signs could help the state react more proactively, Leiser said.
The state's past use of emergency managers to provide fiscal oversight of local governments in fiscal distress was considered proactive but was put on the backburner after Flint's 2008 water contamination crisis.
The city's decision to participate in funding construction of a new water pipeline and to use Flint River water that was not adequately treated — leading to a lead contamination debacle — was overseen while under state emergency management.
"Having better data won't solve" fiscal distress "but if we don't have the data in the first place we are flying blind," Leiser said.
During a 60-day public review period that closed last week, participants could access the consortium's taxonomy in an online viewer and in downloadable form, sample machine-readable financial reports and instructions on how to review and participate.
The ACFR taxonomy covers government-wide governmental funds and proprietary fund statements, as well as footnotes for pension, OPEB, capital assets and long-term debt. The taxonomy covers all concepts needed for the Michigan Chart of Accounts, in addition to separate entry points for the Michigan Form F-65, Local Unit Fiscal Report and Michigan Form 5572, Retirement System Annual Report.
The ACFR Taxonomy was developed with the non-profit XBRL US Standard Government Reporting Working Group which was launched in 2018 and includes municipal securities analysts, academics in government accounting, research analysts and software tool providers that support government financial reporting.
Applications for taxonomy development and review were contributed by CoreFiling Ltd. XBRL creation tools were contributed by IRIS Business Services LLC and Workiva Inc. The pilot project with the Flint was made possible through a grant to U-M from the Charles Stewart Mott Foundation.
The Michigan partnership "has allowed us to greatly expand on that work to build a commercial-grade taxonomy," Joffe said. "The work in Michigan can easily be transferred to other states with a similar focus."
There's some cost, but it's limited — in range of tens to hundreds of thousands of dollars — and in a statewide case, aid could be provided to cover the shift, Joffe said.
The university study is aimed at setting up a taxonomy model with wide appeal. "We are trying to create a standard that any state can build on," Leiser said.
Joffe also noted that the University of Michigan standard and taxonomy standards would meet the requirements of legislation tucked into the National Defense Authorization Act by U.S. Representatives Carolyn Maloney, D-New York, and Patrick McHenry, R-North Carolina.
One provision would require the Municipal Securities Rulemaking Board to adopt data standards that render data fully searchable and machine-readable; enable high quality data through schemas, be nonproprietary or made available under an open license; incorporate standards developed and maintained by voluntary consensus standards bodies; and use, be consistent with, and implement applicable accounting and reporting principles.
The SEC began requiring private companies to use XBRL with the EDGAR system in 2009, at the same time the Municipal Securities Rulemaking Board launched its EMMA disclosure website. On the corporate side, the SEC has the authority to establish a set of standards, which does not extend to the municipal market.
