This article is the fifth of a six-part series on investor disclosure in the municipal bond market.
The previous article, Muni Bond Market Disclosure: Thoughts From Standard-Setters And Stakeholders, discussed how other stakeholders in the municipal bond market, such as the Governmental Accounting Standards Board and the National Federation of Municipal Analysts, have also contributed to creating a disclosure framework.
This article discusses how, just as the then-new technologies of a decade ago transformed disclosure in the municipal bond market, today’s current technologies and data sciences portend further transformations. And, just as before, there are those that embrace them—and those that oppose them. History has shown that one thing is certain: technology keeps moving forward. Like it or not. Those that embrace it tend to succeed. Those that don’t, fail.
Everything Is Coming Up Digital…
The municipal bond market is undergoing a technological transformation. There are online exchanges to trade bonds, such as ClarityBidRate and MarketAxess. Data on municipalities has never been more plentiful and accessible online, from financial data on the Merritt System to the ever increasingly important social, environmental and economic metrics on Openexa or ACRe Data.
A key market standard setter has taken notice as well. The new chair of the Governmental Accounting Standards Board (GASB), Joel Black, wrote that during his tenure, one theme will be change—specifically, technological change. Acknowledging that technology is transforming state and local governments, he looks ahead to what implications that might have for financial reporting. How will technology affect users of governmental financial reports, such as citizens, legislators, and investors? How will those users access and consume government financial reports? He is looking inward as well, exploring how emerging technologies will allow [GASB] to fulfill its mission in new ways. One can anticipate there will be some very positive technological innovations and applications coming from GASB to establish a consistent and standardized financial reporting framework.
TAG. The MSRB Is It.
The market regulators are moving forward, too. Just prior to the Covid crisis, the Municipal Securities Rulemaking Board (MSRB) announced the volunteer members of a newly created Transparency Advisory Group (the market’s wags quickly bestowed them with the title The TAG Team). MSRB Board Chair Ed Sisk stated the group’s work will “help us leverage our migration to the cloud by identifying and prioritizing initiatives that enable big data analytics and other tools [benefitting] the Electronic Municipal Market Access (EMMA) website and other market transparency tools.”
The MSRB is putting its money where its mouth is. At the end of July 2020, the MSRB’s Board of Directors approved $10 million of reserves for a multi-year strategic investment to modernize its market transparency systems to leverage the power of the cloud. Additionally, the MSRB is developing EMMA Labs as “an innovation hub where market stakeholders can collaborate on active prototypes” and share feedback on preliminary concepts that could eventually make their way to being implemented on EMMA.
The municipal bond market is about to get a system-wide upgrade.
Reboot to Install
The MSRB has the authority to install this market-wide upgrade, particularly as it pertains to improving disclosure. It’s not the first time the SEC has pushed through technological advancements and given the MSRB considerable power to implement them as the Board sees fit. Take the approval history of Electronic Municipal Market Access (EMMA) (see 73 FR Part 240 at 76113).
Motivated by the economic effects of the Great Recession in 2008, the SEC adopted the final rule creating EMMA and giving the MSRB the authority to run it. In the records documenting the approval process to accomplish this (Section 19(b) of the Exchange Act) the SEC noted “because the current environment differs markedly from the time when Rule 15c2–12 was adopted in 1989 and subsequently amended in 1994, we believe that it is appropriate to adopt an approach that utilizes the significant technological advances such as the development and use of various electronic formats, which have occurred in the intervening years. Thus, we are adopting the proposed amendments that specify that continuing disclosure documents must be provided to the MSRB in an electronic format as specified by the MSRB.” The bold emphasis is by this author.
One hopes that now, with this upgrade, a variation of Moore’s Law takes effect: a technology that doubles disclosure in half the time.
Electronic Format Upgrade
For disclosure to serve its function of transparency, consistency, and oversight in the digital financial world, it must come in the form of structured data. Globally, the $50 trillion corporate securities markets report financial data in digital-sized bytes using Extended Business Reporting Language (XBRL). With its standardized taxonomy with well-defined and consistent terms, XBRL frames corporate market disclosure, providing readily available structured data. With digital data, the world of analytics bursts wide open. Suddenly the $3.9 trillion muni market doesn’t seem so big.
But the municipal bond market stays close-doored. Here’s an example of the reason why. Arguably the most important document of all publicly released municipal financial information is the Comprehensive Annual Financial Report. Cities, states, and town spend months preparing these, the final documents often coming in at over 200 pages. The CAFR is filled to the brim with financial, operating, demographic, economic and other key statistical data. But unless you are willing to transcribe much of that manually to a spreadsheet or other structured data framework, the information stays trapped on those pages.
Why? Because the vast majority of CAFRs are produced and released as a PDF documents. The PDF (portable document format) is an electronic image, a picture with pixels saved in bits and bytes. It isn’t data. The decade-old PDF technology, even with ongoing improvements, remains unstructured, lacking the most basic interactivity found in nearly any digitally structured format. Yes, there are numerous technologies being developed to more efficiently ‘scrape’ or convert this pixel-dust to transform it into data. But why the bother of retrofitting a horse and buggy when you could be driving a Tesla?
It’s odd. Cloud-based, digital, standardized government accounting applications such as OpenGov and Cleargov help thousands of governments every day streamline their financial service functionality, including financial reporting. Moreover, dozens of cities and states post a considerable amount of data on a wide range of matters on their websites in structured form, available to all who wish to download it. Increasingly, financial reporting for Federal and state funding now have to file in digital format with standard taxonomies.
And all of this happens with bytes and clicks.
As the philosopher-king of digital innovation Steve Jobs astutely observed, “Design is not just what it looks like and feels like. Design is how it works.” Right now, the PDF design isn’t working for the municipal bond market. If a disclosure solution is going to be effective, it has to address the issue of a consistent, standardized, digital format.
A Standardized Taxonomy
The bottom line here is that the MSRB does have the power to specify a more current, efficient, and effective electronic format when it comes to disclosure. Moreover, any transparency initiative will include data and EMMA. That means a discussion about disclosure standards, metrics, and timeliness—all of which can be addressed with a technological solution.
While it has expressed the desire for market consensus, the MSRB’s last Rule update on technology was over a decade ago. Over that time, the “significant technological advancement” in disclosure in the financial markets is XBRL. In fact, back in 2008, it was noted as part of the final Rule that the MSRB “could encourage the establishment of the necessary taxonomies and permit states and local governments to make use of the XBRL in the future” (17 FR Part 240 at 46155 n.64).
Optimistically, this time, the market won’t have to wait another decade for a technological improvement for municipal bond disclosure.
We Agree to Disagree
No surprise, there are those who object to XBRL and vociferously bring out a host of reasons to impede its implementation. But if one winds back the clock a decade or so to all the objectors and objections when the MSRB instituted PDF as the reporting technology, you find a tiresome repetition of the same unfounded fears, such as crippling costs and massive disruption. Then, as now, most objectors are those merchants of complexity and bureaucratic advocates of inefficiency who benefit from the existing system and will tenaciously fight for it.
Yet, looking back since the PDF was implemented as the reporting technology of choice, none of those fears came to pass. The municipal bond market did not implode. No borrower filed for bankruptcy by implementing that then new electronic format. This time will be no different. In fact, perhaps the market will learn from that history and, dispensing with the unnecessary fretting and fulminations, move forward swiftly.
We Agree to Agree
Having followed the discussions on disclosure and disclosure formats over the years in his various roles in the market, including vice chairman and board member of the Municipal Securities Rulemaking Board, J. Ben Watkin, the Director of the State of Florida Division of Bond Financing, offered that borrowers, bond program administrators, and investors do find common ground on having uniform and consistent disclosure conventions. There is general agreement that disclosure standardization brings benefits, both in economics and data collection, he offered.
The impediment is the approach. Those trying to overhaul the entire market all at once aren’t going to be effective. Raising fears of unilaterally imposed disruption, it’s likely to raise stiff resistance, in his view. No one likes to be told what to do. He mused that perhaps a good starting point would be to set out a basic digital framework, something simple that everyone could get used to, implement, and use.
Read the other parts of the series:
Next in the 6-part series: Muni Bond Market Disclosure: It’s About Time, And Time Is Money. Inadequate and inconsistent disclosure standards in the municipal bond market lead to billions of dollars of additional capital costs. Born by taxpayers and service users, it is money that could be better directed to meeting capital and service needs. The relatively minor cost of disclosure gets magnified multifold in the capital cost expense burden it places on borrowers. Former Harvard University President Derek Bok observed “If you think education is expensive, try ignorance.” A variation of this for the muni market might be, if you think disclosure is expensive, try not disclosing.