Untimely data will cost muniland potential investors

October 8, 2011

If municipal bonds lose their tax-exempt status, as some in the corridors of power in Washington are suggesting, municipalities will increasingly be competing with corporations for investors. As this competition intensifies, municipalities with poor accounting and disclosure practices could find it difficult attracting capital.

Let’s say you’re an investor looking to buy the bonds of either Goldman Sachs or New York City and to help guide your decision, you seek out their most recent financial statements. As a public company, Goldman Sachs is subject to the SEC’s disclosure regulations which mandate the filing of audited annual financial statements 60 days after the end of the year. If Goldman does not file within the 60 day window then the SEC has the authority to restrict certain simplified securities offerings and the New York Stock Exchange, which lists their securities, can take action too.

Contrast that with the Municipal Securities Rulemaking Board, New York’s regulator, which encourages municipalities to make public their audited statements, which are called CAFRs or Comprehensive Annual Financial Report within 120 days of the end of their fiscal year. Unlike the SEC, the MSRB has no authority to discipline issuers who file late, other than suggesting the municipality issue a notification of late filing.

Having to wait additional 60 days to ascertain the fiscal health of municipalities makes them less attractive investments.  And if state and local government entities can file after the deadline with impunity, investors will worry — rightly — if they can ever get timely data consistently.

So how big of a delay is there when governmental entities publish their financial statements? MuniNetGuide recently published the results of a study by Merritt Research that measured how fast government entities were publishing their audited financials. Interestingly, the determining factor was not creditworthiness or size; some low-rated issuers got their financials out quickly and other AAA issuers were slow to publish. Merritt’s research suggests that the type of government institution that is reporting affects the speed with which it publishes its audited financial statements. MuniNetGuide has an excellent table which shows the median number of days from the end of the fiscal year until financials are released for various municipal sectors:

Wholesale electric utilities 90
Hospital and healthcare 110
Private higher education 112
Tollways 119
Retail electric utilities 133
Other revenues 138
Public higher education 138
School districts 142
Airports 145
Special districts 148
Water and sewer systems 153
Land districts 155
Dedicated tax 161
Cities 167
Counties 172
States and territories 178

The municipal bond market may have most of the data that investors need to evaluate bonds and that citizens need in order to understand the fiscal health of their communities. Government entities would do themselves a favor by beginning to file their financial statements in a more timely manner. Investors have many choices where to invest and muniland needs to pick up it’s game.


Reuters: Late financial reports dog U.S. localities – report

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