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A Case for Municipal Securities Disclosure Standards

Data Quality
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8 min read
Barnet Sherman
Founder and Senior Managing Partner
Published: May 5, 2020
Last Updated: April 25, 2023

As if we needed another reminder, the COVID-19 pandemic has shown how vital government services are—and how necessary it is that governments be able to raise and use capital as cost-effectively as possible. With this work so essential to our future, it is necessary to bring municipal bond disclosure practices on par with those practiced in global public securities markets. 

Municipalities across the United States, from big cities such as New York and Los Angeles, to small towns like Beaver Dam, Wisconsin, and Wilbarger Creek, Texas, all share a commonality—they provide essential public services to their residents. Be it schools, roads, water, health care, or mass transit, there are tens of thousands of municipalities that must develop both the public policy defining these services and the projects to offer their services. 

The $3.8 trillion municipal bond market is the capital source for over 50,000 municipalities and public authorities, covering some 40 different sectors and sub-sectors. With long-lived public assets across 40 or so essential public purpose sectors and generally steady revenue streams from taxes and fees, these cities, counties, and towns turn to debt to fund public projects and programs. The municipal bond market offers these public entities an array of debt choices, from bonds with 30-year maturities to variable rate paper maturing in less than a year. 

At least 25 public securities exchanges around the world have timely, standardized digital reporting—but not the $3.8 trillion U.S. municipal bond market. 

With that much money and so many borrowers, the municipal bond market seems big and complex. And it is, but against other public markets, it pales in comparison. In the U.S., from the New York Stock Exchange to Nasdaq, there are roughly 4,300 exchange-listed public companies—each tagged with one or more of the 1,057 North American Industry Classifications—with a total market capitalization of around $30 trillion.

In addition to capital size and securities traded, these domestic public stock market exchanges also require standardized digital disclosure and reporting. Sharing a well-defined taxonomy, these diverse companies report on a basis defined by regulators.

It’s not just U.S. domestic markets that have standardized digital reporting. Around the world, no fewer than 25 public securities exchanges totaling more than $50 trillion in capitalization require standardized digital reporting, whether it's the Tokyo Stock Exchange, Frankfurt Stock Exchange—the list goes on. And, the number of exchanges is anticipated to double by 2021, when 28 EU markets come online through a mandate by the European Securities Markets Authority (ESMA). 

All these markets have timely, standardized digital reporting—except the $3.8 trillion U.S. municipal bond market. 

The background

The reason goes back to legislation limiting the Securities and Exchange Commission (SEC) from mandating it. Additionally, unlike equity markets, the municipal bond market is over the counter. There is no “municipal bond exchange” to regulate—only the broker-dealers that underwrite and trade the bonds. The broker-dealers are regulated by the Municipal Securities Rulemaking Board (MSRB).  

Correspondingly, state and local government-audited financial disclosure is left to these entities to determine. Almost without exception, audited reporting comes only once a year in the Annual Comprehensive Financial Report (ACFR). While some may post interim budget updates on websites, most often the ACFR is released 120-180 days after the close of the fiscal year. The information is stale by the time it gets released. And that’s for ACFRs released in a timely manner. Compounding the problem is a chronic lateness in posting, well past 180 days. The usual excuse? The length of time it takes to collect, process, audit, and finalize the data.

While the information within the ACFR is generally thorough—detailing funds, revenues, and expenses—it isn’t standardized. Because governmental accounting standards are flexible as to labeling what gets reported and how it gets reported, different names may be used to reflect the same or similar items. What one municipality might label simply as revenue, another may break out into its components, such as taxes and fees, and not assign any of those as “revenue.” 

While the information in a ACFR is generally thorough, it isn’t standardized. What one municipality labels as revenue, another may break out into taxes and fees.

Even more vexing, municipalities may aggregate or disaggregate certain government services. A small town may group “public safety” in one fund, including fire, police, and other services under that umbrella. A larger city may have separate funds for each department.

Moreover, the data comes as unstructured information. ACFRs are usually released as PDF documents, most over 200 pages, with some as long as 400 pages. A PDF file is a digital analogy of a paper document, but it isn’t the machine-readable data that investors have come to expect based on their experiences with the public securities market.

The costs to municipalities and taxpayers of no standardization

The result? Overall, financial reporting is, to be blunt, an unnecessary mess. Not only do municipalities spend countless weeks, nay, months preparing a ACFR that is stale and difficult for stakeholders—internal or external—to consume, but it isn’t readily applicable to other reporting purposes either. The same data might have to be used for federal and state reporting requirements among different departments, which results in even more time being spent in duplicative efforts.

If that wasn’t enough, new applications or updating existing documents for funding, such as grants or intergovernmental programs, have to be generated from scratch. The lack of any sort of consistency creates inefficiencies throughout the system. The entire process is a costly endeavor in terms of time and taxpayer money.

Not only do municipalities spend countless months preparing a ACFR that is stale and difficult to consume, but it isn’t readily applicable to other reporting purposes either. 

There are other costs to municipalities. In the municipal bond market, investors lacking current, standardized financial and operating data find assessing credit risk challenging. Correspondingly, when underwriting or trading bonds, the credit component of the bond’s pricing becomes more “educated guess” than data-determined. No matter how well-justified, valuations lack quantifiable accuracy.
Who pays for this pricing inaccuracy? The municipalities and their taxpayers. Investors demand higher rates of return for the uncertainty of the data gap. For smaller borrowers who may not access the market regularly or those borrowers with weaker credit profiles, the costs increase disproportionately as investors perceive more risk than may objectively exist.

Compounding the issue, these data inefficiencies impact liquidity. Due to the structure of the municipal bond market, liquidity is always an issue. Transparency and timeliness improve market liquidity; opaqueness, delays, and inconsistency lessen liquidity. There is a charge for this—investors call it a “liquidity premium.” Translation into real money: higher interest rate charges. 

Again, who pays? The liquidity premium is borne by the municipal borrower and taxpayers. Moreover, these higher borrowing costs last as long as the debt remains outstanding, which for municipalities usually means 30 years. Thirty years of additional borrowing costs for schools, roads, water and sewer systems, public libraries, and other public works projects because of the lack of basic, modern data practices: reports are delivered unstructured, inconsistently, and without machine-readable comparability.

A call for consistency

This costly and frustrating situation has a simple solution: municipalities adopting a consistent, data-driven design and system for categorizing the contents of their financial reports. Municipalities all do basically the same thing: provide public services. They may organize and report how that’s done differently, but at the end of the day, a fire department is a fire department, a library is a library, a water and sewer system is a water and sewer system. 

Regardless of municipality, authority, or agency, wherever on the balance sheet or income statement, there are assets or liabilities, revenues or expenses. Each can be readily identified and labeled appropriately to establish consistent, uniform categories. In developing and applying these categories, generally referred to as a “taxonomy,” municipalities benefit greatly. Instead of hundreds of hours and months of work to generate a paper-based ACFR, now data is organized, aggregated, formatted, calculated, and reported digitally—all with a click.

Creating transparency solves all the financial reporting problems for the financial markets in one stroke. Information is uniform, comparable, and reported in a timely manner. Valuations and interest costs are based on defined metrics, not fuzzy or arbitrary determinants.

Why we need a clear framework we can agree on

For a municipality’s financial operations, the benefits for a simplified, consistent financial reporting model are equally time-saving. Replacing outmoded legacy systems with updated digital financial and accounting systems, fully integrated with the model’s taxonomy, allows automation for financial reporting internally and externally.

This extends to program auditing and reporting for federal and state funding. With digital consistency, this becomes a streamlined process handled in bytes for fast evaluation and approvals. Now, evaluating program costs, efficiencies, and effectiveness becomes data-driven, measured with accurately constructed benchmarks and comparable metrics. 

Moreover, as municipal leaders increasingly look to evidence-based solutions to public policy issues, they can now readily draw on the data and experience of other municipalities. The data exists in a readily usable and analyzable format.

Existing regulatory structures may be a hindrance to an implementation by fiat, but the public and business benefits of standardized reporting would suggest it will emerge regardless. Market transparency, with consistent and timely information, benefits all participants.

Everyone is in uniform agreement on that.

About the Author
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Barnet Sherman

Founder and Senior Managing Partner

Barnet is Founder and Senior Managing Partner of The Tenbar Group, a firm dedicated to transformational impact through pursuing environmental, social, governance, and impact investment mandates. In his career in the municipal bond market as an institutional investor, he managed money for and advised mutual funds, high net worth clients, hedge funds, consultants, and insurance companies on investment strategies in the municipal bond and fixed income markets. He has analyzed, negotiated, and closed billions of dollars of financings and is a recognized expert in public finance and municipal credit analysis. He is an Adjunct Professor at Boston University and a Senior Contributor to

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