The push for greater transparency is everywhere these days. The thought being that access to financial records, research data, even the personal calendars of elected officials will remove barriers and eliminate distrust between parties. The very tenets underlying a democratic society include open access to the business of government. Laws requiring notification of public meetings and the retention and release of public documents have been on the books for years. But here’s the paradox, for all that transparency does to promote collaboration and understanding, it can also engender misunderstandings that may leave public agencies feeling exposed and at risk. As the demand for governmental data grows public agencies should act proactively to take control of their information. Managing what is available and how it is presented may limit or negate the misuse, misinterpretation, and mischaracterization of the core facts associated with governmental operations.
Data on the use of debt by public agencies in California is available from a variety of public sources, including the California Debt and Investment Advisory Commission (CDIAC), the State Controller’s Office, the Municipal Securities Rulemaking Board (MSRB), and a number of commercial sources, including Thompson Reuters. Each provides a piece of the whole picture. But because of the differences in the form and structure of the data published by these organizations it is nearly impossible for taxpayers, policy makers, and market analysts to fully understand the costs and benefits of the debt issued. To provide the greatest value to users of this data public agencies should take ownership of their data to tell their own “story.” This will require them to adopt new tools to track and manage the data generated by their debt programs.
Where Does Your Debt Data Now Reside?The California Legislature created CDIAC in 1983 to act as the state’s clearinghouse of bond issuance. The data submitted by issuer reveals the WHO and HOW public agencies in the State use debt to finance facilities and operations. CDIAC has published the data in both electronic and print form since 1986.
In 2016, The State Treasurer’s Office launched DebtWatch, an interactive website providing a user-friendly portal to CDIAC’s debt issuance data. The public can use the charts and tables available in DebtWatch to determine the amount and purpose for which their city or school district has issued debt. That same year, the Governor signed Senate Bill 1029 (Chapter 307, Statutes of 2016), creating the Annual Debt Transparency Report and requiring issuers to provide CDIAC (for each bond issue sold after January 2017) an accounting of the principle and authority outstanding and how they have spent the proceeds of that debt. CDIAC will begin publishing this information on DebtWatch sometime in 2018.
SB 1029 offered a fix to a problem that infrequently afflicts public agencies that issue bonds, namely, the misuse or theft of bond funds. In 2015, a special task force convened by State Treasurer John Chiang in response to the fraudulent use of proceeds by an issuer in the Bay Area recommended that issuers create and maintain a website to report on the use of bond funds for the benefit of their constituents. The report did not provide specific guidance on the form or structure of the data publish but encouraged each issuers to make those decisions based on community interests.
Public agencies are generally required to produce an annual financial report that accounts for the assets and liabilities of the agency, submit such data to the State Controller, and present it in financial statements or a CAFR. In the content of these reports, readers will find information on the debts of the agency, including long-term and short-term obligations. Agencies that have issued public debt are required by the Securities and Exchange Commission to post their financial statements on the MSRB’s Electronic Municipal Marketplace Access website.
Limits to the Existing Reporting RegimeThe data available through CDIAC, the State Controller, or the issuer’s audited, annual financial report or CAFR meet the issuer’s legal obligations under state and federal law. But they do not provide a complete or timely picture of the agency’s debt programs and, as a result, deprive data users of a complete understanding of the costs and benefits of debt financing. This system of reporting suffers from several flaws.
Meaning and Interpretation — Differences in data structure, including definitions and reporting periods, create differences in how issuers reports debt. For example, CDIAC defines short-term debt as anything less than 18 months while accounting practice defines it as less than 13 months. Until recently, the State Controller’s transactions report was due before many agencies had completed their audits, leading to potential disparities between reports for the same expenditures.
Data Structure — Most financial reports address the instruments of debt independently even though many projects are financed with multiple instruments. If the data structure uses the debt issue as its base, as CDIAC does, it will be possible to understand what was issued but it will be difficult to determine how one issue relates to another and then to a project.
Differences in Scope — Some data providers offer only a slice of the pie. EMMA, for example, contains only publicly traded debt and not privately placed debt. The State Controller’s transactions reports do not cover school spending.
The limitations in the data and in the structure of the state’s mandated reporting regime make it harder for users to understand the costs and benefits of debt financing. For example, most public agencies, particularly the State, organize their debt data by authority or program. A water project, in this example, may be financed with several different bond issues over several years. Because of the structure of existing reports, however, it will be difficult for a taxpayer to discern how much debt was used to finance which projects. Issuers may fully comply with their reporting obligations and still find that the limits to the quality, timeliness, and application of the data leave them at risk that users will misinterpret the public benefit of debt.
Voluntary Disclosure of Bonded Indebtedness
In 2006, Governor Arnold Schwarzenegger worked with bi-partisan support in the Legislature to launch the most aggressive infrastructure financing plan in California history. The Strategic Growth Plan, as it was called, sought to invest billions in restoring and expanding highways, roads, transit systems, schools, courthouses, levees, and water systems. In 2006 voters approved $42.7 billion in general obligation bonds as the first installment on the plan. Shortly thereafter, the Governor’s Office created the Strategic Growth Plan Bond Accountability website to “enhance transparency in state activities, and earn the trust of voters who approved a historic level of bond funding…” That website set a standard for providing detailed information on the projects financed by the bonds. And yet, this practice remains uncommon among local governments in the state. Why is that?
Data Access — Many issuers operate multiple financial systems for accounting, cash flow, payments, etc. It is very common for mid- and small-sized public agencies to use spreadsheets to manage their debt and a separate accounting platform to handle operations. Equally as common is the dependence upon 3rd party administrators to manage bond proceeds and debt payments and to report on these transactions. As a result, access to data for reporting purposes may be constrained or costly to obtain.
Lack of Resources — Developing and maintaining a website to display an agency’s debt program can be difficult and costly. It requires sufficient insights to produce a platform that easily and effectively communicates the program purposes, activities, and accomplishments. Lacking good data and a data management system further complicates efforts to generate reports, charts, and tables that are needed.
Fear of Exposure — Lacking good data and the capacity to build and maintain a website, many agencies fear the worst from posting anything at all. Public agencies are aware of the risk that “no good deed goes unpunished” in the public sector. Rather than lessening debate, publishing more information may feed misunderstandings and generate more mitigation work for agencies.
Regulatory Confusion — The increased scrutiny paid to the municipal market by regulators since 2009 has left many issuers uncertain about the risk of reporting more than what is required by federal or state laws. Even though the MSRB has invited issuers to voluntarily use EMMA to create an issuer webpage, few have done so. In part because there is no standardized “cook book” for producing such reports as there is for corporate entities.
Self-Determinism — A New Paradigm for Public Agencies
Public agencies are subject to two environmental forces that are reshaping the relationship between issuers of debt and taxpayers. The first is the work of regulators and lawmakers to make public financial information more transparent. SB 1029 suggests that the State will continue to demand more information from issuers of debt. At the same time it is CDIAC’s intention to expand the scope and functionality of DebtWatch over time to maximize the value to issuers and their constituents.
The second trend affecting public agencies in California is the demand for more accountability. Social and political activism is on the rise and with it an expectation among voters and taxpayers that their public servants be accountable to them. Public agencies can expect more community members to demand to know how funds were spent and what projects were built with debt proceeds. In the 2017 Legislative session, there were no less than three proposals seeking to expand the authority of school bond oversight committees.
The pressure to publish debt data will not likely abate even though public agencies are facing challenges that put them at risk of releasing bad or out-of-date data. To meet the needs of their constituents issuers should take control of their data. They should enhance recordkeeping and accounting systems to track outstanding debt and the uses of proceeds. They should harness the power of technology to use data to interpret and represent the full scope of their program activities and the role of debt in them. Using the format created by the Governor’s Bond Accountability website, they should report on project expenditures and statuses on a dedicated bond website. By proactively tracking and reporting on their debt programs issuers can limit miscommunication and misinterpretation. More importantly, they can foster trust between themselves and the community they serve, increasing the chances that they will receive continued support from taxpayers for future debt-financed projects.
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