The availability of both the underlying fundamentals and derived analytics would further increase municipal bond market transparency, enhance investor confidence and ultimately reduce borrowing costs for states, cities and counties.
Since 1940, bond defaults by US cities and counties have been relatively rare. However, municipal credit issues were quite common during the Great Depression, and concerns about local government credit quality have increased in the wake of Chapter IX filings by Detroit, San Bernardino, Stockton and Harrisburg.
Regardless of whether municipal credit quality is actually deteriorating, fears of a municipal credit crisis cause cities and other public sector issuers to pay higher debt service costs. These extra costs will necessarily trigger some combination of service reductions, higher taxes and/or actual defaults.
Investor concerns can be alleviated through greater access to information about the creditworthiness of municipal bond issuers. Just as greater disclosure by over-the-counter equity issuers in the 1960s resulted in a significant one time increase in their stock prices, improved disclosure by cities can produce a significant one time reduction in their spreads relative to Treasuries as fear and speculation give way to facts and figures.
Government bond issuers already produce copious amounts of disclosures, including detailed budgets and audited financial statements, but these reports are typically available only as PDFs. For municipal market disclosure to have its full impact on bond market liquidity, standardized fielded data must be readily available. Just as stock market investors can visit a variety of websites to quickly obtain the latest corporate revenue and earnings information at no cost, current data on municipal revenues, expenditures, debts and retiree commitments should also be easily and freely accessible – not just to municipal bond investors, but to political leaders, government employees, city residents and other stakeholders.
Regulators and Self-Regulators Aware of the Issue
Since becoming operational in 2009, the Municipal Securities Rulemaking Board’s EMMA system has greatly facilitated the availability of municipal disclosure. But, as a recent Government Accountability Office report noted, there is a sharp contrast between corporate disclosure, which is now required to be in eXtensible Business Reporting Language (XBRL) format, and municipal issuer disclosure, which is solely in the form of PDF documents.
Analysts wishing to compare municipalities must undertake the laborious task of manually extracting data from PDFs or obtain fielded data from costly subscription services. Although MSRB officials addressed the possibility of implementing an XBRL standard in the future at a July 2012 conference in San Francisco, the Board’s Long-Range Plan for Market Transparency Products does not specifically mention XBRL. The plan does include “primary or continuing disclosure documents posted in interactive data formats” as part of its EMMA 2.0 product roadmap, but does not provide details or implementation dates.
In a July 2012 report to Congress on the municipal bond industry, the Securities and Exchange Commission noted that “some retail investors may have difficulty understanding lengthy disclosure documents or the terms of complex municipal securities, and finding information about outstanding municipal securities.” Unfortunately, the commission’s recommendations failed to include a call for standardized continuing disclosure using XBRL.