WASHINGTON — A machine-readable technology's move into the municipal market could bring more transparency, though it could also cause headaches and uneasiness for issuers.
As XBRL enthusiasts, short for Extensible Business Reporting Language, try to bring the computer language into the muni world to standardize issuers' financial documents and improve transparency, issuers are concerned about its implications and the amount of resources and money needed to go into it.
XBRL helps make financial documents machine readable, meaning that a computer can process the information in them. XBRL could benefit investors by making it easier to compare data and making definitions the same across all municipalities. It creates a single language and puts it into a computer readable form.
XBRL technology has been around for about 15 years, but has yet to gain much traction in the muni market. About ten years ago, the SEC started requiring private companies to use XBRL with the EDGAR system at the same time the Municipal Securities Rulemaking Board launched EMMA. On the corporate side, the SEC has the authority to establish a set of standards, which is not true in the municipal market.
Currently, issuers put out their financial documents each year in a PDF format, which Marc Joffe, senior policy analyst at the Reason Foundation, said can be hundreds of pages long and make it hard for municipal bond investors to find information about governments’ performance. With XBRL, he said, the format is going to be easier for investors to pull the data they want.
XBRL U.S., a nonprofit group that works to promote the technology,recently released a taxonomy — a definition of terms that could be implemented into a financial document — to help standardize terms in issuers’ comprehensive annual financial report documents.
Joffe sees XBRL as one of a number of steps to be taken to make the municipal market more liquid and better for both issuers and investors.
Some issuers, however, are concerned about any mandating of a specific piece of technology, such as XBRL, said Kenton Tsoodle, assistant finance director for Oklahoma City.
There is a wide variety and difference between issuers in the types of financial information they report, Tsoodle said. Municipalities have a variety of financial systems or resource planning systems they run data through, making it difficult for it to be completely standardized.
Tsoodle said he was concerned if the systems used by smaller issuers would work with XBRL and if they would then have to implement other systems to feed the data into XBRL.
“I’m very aggravated that this is even a conversation as an issuer because it borders on irresponsible to try to mandate a specific piece of technology,” Tsoodle said.
Technology could change as well, he added.
Implementing a mandate for XBRL has been kicked around for about 10 years, though to do so would likely require legislative action. The idea of it makes sense, said Ernesto Lanza, senior counsel at the law firm Clark Hill , but the issue is how people go about doing it and balancing costs and benefits.
The MSRB has not taken a position on XBRL.
“Obviously we run the EMMA system so we’re very interested in promoting technologies and better data, data quality,” said Lynnette Kelly, MSRB president and CEO. “Ultimately, it’s got to be an industrywide effort to move this industry to XBRL or another data format.”
Financing a new system and differences throughout municipalities would make mandating XBRL difficult. Each state has different requirements involving GASB standards and have modifications, making it complex.
“What might look like a somewhat similar financial statement may not be identical in terms of what the underlying tables and numbers mean for various reasons,” Lanza said. “That’s one of the primary difficulties that’s kind of slowed things down in the municipal market.”
He doesn’t see XBRL close to being mandated, but said it’s a positive and it gives issuers control on how data is seen.
The Government Finance Officers Association opposes the mandate of the use of specific technology for financial reporting purposes.
The GFOA has discussed using specific technology, but GFOA federal liaison center Director Emily Brock said the rub is the mandate of purchasing a specific technology for financial reporting purposes.
Lanza said it’s about if and how investments analysts would use the data.
“At the end of the day, will it be worth all this effort?” he said.
In Brazil and Spain, local governments
Though there is no specific mandate in the U.S., Florida appropriated $500,000 to build the taxonomy to implement XBRL. In March 2018 the state enacted a law to explore the feasibility of creating a system that would use XBRL for local governments.
“It basically said, if you can create something that is feasible and works, people are required to use it,” said Ben Watkins, director of the Florida Division of Bond Finance.
Since it is not a mandate yet, it hasn’t really been an issue, Watkins said, and if it is mandated, it will impose significant costs on state and local governments with questionable benefits.
Investors already have information in the CAFR they could dig out and put in an Excel spreadsheet, Watkins said.
“I have seen these large technology projects that are an apple in someone’s eye crash and burn because they’re extraordinarily difficult to design and implement,” Watkins said. “It’s a great theoretical concept, but then when you get into the hardcore details of how it’s going to work, it’s much more challenging.”
Costs weigh heavily on issuers, especially in smaller municipalities, Watkins said.
Eventually, XBRL U.S. would like to have a more robust taxonomy that could cover more portions of the CAFR.
“That’s going to take money,” Joffe said. “It’s not going to take hundreds of millions of dollars or tens of millions of dollars. It’s going to take a few hundred thousand, maybe a couple of million. We certainly are hoping that people see this and become motivated to fund further development of this.”
States, nonprofit institutions, the MSRB or the federal government could fund it, Joffe said. The federal government could implement a standard and provide funds for the development of a taxonomy, he said.
“We at XBRL in the U.S. and the members aren’t trying to charge anyone a fee for this,” Joffe said.
The possibility of improvement in data accuracy allows investors to do a much broader comparative analysis and gives them the ability to make better decisions, said Michelle Savage, vice president at XBRL U.S. Inc. For municipalities, it could improve the ability to get funds for local programs. More accessible financials could help investors spend less time collecting and pulling data and more time on the analysis.
They can build "that rec center they’ve been wanting to build because they’ll be able to access funds because their data is much more accessible by one of their key stakeholders,” Savage said.
Some critics say issuers would not want to participate because they already struggle to put out their CAFRs on time. Most times it’s due to the cost of auditing so making the auditing process more expensive is not going to help, said Matt Fabian, partner at Municipal Markets Analytics.
“We may wind up having even worse disclosure among small governments and small issuers than if we just left them well enough alone,” Fabian said.
For those hesitant about the new technology in the muni market, Joffe said education is key.
“I wish people would take the time to learn a little bit more about this than simply repeat preconceived notions that may not stand up when they’re presented with the facts,” Joffe said.
