3 issues to watch in a landmark year for government financial data

The SEC will soon propose rules for the Financial Data Transparency Act. Here’s what government stakeholders should keep in mind.

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Happy weekend, readers! It’s been more than a year since Congress passed the Financial Data Transparency Act (FDTA), the legislation requiring that state and local government financial disclosures be machine readable and provide a uniform set of data points. But the breadth and scope of the law was largely left up to regulators. Early this summer, the SEC is expected to issue draft rules which will give government stakeholders a better understanding of how disruptive the new requirements may be.

A new playbook on the FDTA outlines the issues at stake while offering advice and case studies that hopefully inspire local officials as they prepare. It’s produced by Funkhouser & Associates in partnership with DebtBook and I’m proud to have played a role in putting it together during my final months at F&A.

I (naturally) recommend reading the whole thing, but I’m using this week’s newsletter to highlight some critical takeaways from the playbook that are just as important as working through the mechanics of the FDTA:

1. The ultimate objective of financial transparency is to improve community outcomes through good government.

2. The FDTA can play a critical role for states monitoring local fiscal distress.

3. But transparency will still be hindered by governments’ problems with issuing their financial reports on time.

From machine readable to good government

To review, the FDTA was passed rather quickly and surprisingly at the end of 2022. It requires that “to the extent practicable” ongoing financial disclosures for outstanding debt be machine-readable and the information must be searchable via a structured data format using tagged identifier codes. It is in response to municipal finance data’s rather frustrating reputation for being time-consuming to access and compare on a regional or national level. Often this means that analyses looking at financial trends or even comparing certain indicators across municipal peer groups is a laborious, expensive and (often) an imperfect process.

From the LSS archives

• What's wrong with government financial reporting

• An AI takeover of the muni market?

From the playbook

The big legacy costs weighing on governments — namely, pensions and infrastructure — are in part the result of failures in government financial reporting. It wasn’t until new governmental accounting standards were introduced requiring that government-wide financial statements include asset depreciation and, more recently, unfunded retirement costs that these long-term burdens began getting the attention from policymakers that they deserved.

In many ways, the FDTA is the next step in the push toward data science and evidence-based policy that began in earnest over a decade ago. We don’t want to spend our taxpayer dollars on public programs that don’t work but—as Peter Drucker is often credited for saying—if you can't measure it you can't manage it. That’s difficult enough for one municipality. But what about policy issues like housing, mental health or homelessness that don’t have borders? 

When a city invests in building transitional housing, we might ask if that investment ultimately reduced spending elsewhere (such as on ambulance runs or unreimbursed emergency rooms costs). But we don’t typically ask about whether the city’s investment has any knock-on effect for the suburbs. Are their emergency response costs also going down? Is spending elsewhere rising? 

Answering questions like these takes a lot of data gathering and today could be done on a regional and case-by-case basis by researchers who have the funding and the time. But in the future, a more accessible and uniform government data landscape means that more stakeholders can answer these complicated policy questions for themselves.

From the playbook

“This project ultimately is about improving community’s quality of life because as local fiscal information becomes more available, a greater number of stakeholders will have eyes on the data and be able to act on potential problems long before they turn into crises.”

Tom Ivacko, CLOSEUP Executive Director, at XBRL project launch

A tool for states monitoring fiscal distress

States can—and should—play a role in helping municipalities comply with the new reporting standards. While it’s the right thing to do for under-resourced localities, it also helps state auditors do their jobs better.