An AI takeover of the muni market?

Otherwise known as the Financial Data Transparency Act

Photo by h heyerlein on Unsplash

Happy Finance Friday! A new federal law recently took effect that will dictate new data standards for the $4 trillion municipal market. The standardization of municipal market data is something that a lot of people have argued about for years and I’ve followed the debate with interest. I still can’t decide where I land on the issue but this week I’ll lay out the pros and cons of the newly minted Financial Data Transparency Act (FDTA).

Can we just get the data already?!

As a reporter, it was always frustrating to take on a project that required comparing municipalities to one another because that meant digging up a lot of PDFs and hoping they were readable (there were always at least a few that weren’t) so I could “Control-F” my way to the information I needed. Needless to say, I now know my way around an ACFR (Annual Comprehensive Financial Report) pretty darn well.

Finding the most recent ACFR isn’t simple either, by the way. While governments with outstanding bonds are supposed to file their annual reports promptly with the Municipal Securities Rulemaking Board (MSRB), they don’t always do that. So it’s a better bet to go straight to the government’s website to find it. Some are really easy to find, others are not.

Now what about analyzing the data? At Governing magazine, our data editor would use software to turn information from PDF tables into usable spreadsheets. But even then, we’d have to pick through the tables to make sure there weren’t any weird glitches before running pivot tables and other functions. Add in the fact that governments have different fiscal years and timelines for producing their ACFRs, and it means that any substantial municipal finance data project contains caveats like “according to the most recent data available” and asterisks explaining different fiscal years or accounting assumptions.

A lot of people find this frustrating, especially those who are trying to make money from municipal market investments. It’s incredibly labor-intensive to get the type of information that is usually just a few clicks away in the corporate market. The FDTA seeks to remedy that by:

• Directing the SEC to adopt new uniform data reporting standards for financial disclosures filed with the MSRB.

• Requiring that information to be presented in a fully machine-readable and searchable structured format, tagged with identifier codes allowing for greater data analysis and comparability.

In short, it would bring public finance reporting more in line with what’s required of corporate securities. 

This is great! So what’s the big deal? The “for” and “against” sides each have their own motivation and (of course) it’s mostly about money. I’ll get into that below.

But broadly, there are two big challenges for the SEC here as it begins the rulemaking process: 1) It will be very hard for small governments to comply, and 2) Will machine reading really “get” the eccentricities of local government finance? 

Let’s look more closely at those challenges.

A $1.5 billion price tag for transparency