Issuer coalition pushes senators to oppose financial disclosure bill

BY SourceMedia | MUNICIPAL | 09/30/22 12:59 PM EDT By Caitlin Devitt

A coalition of major issuer groups Thursday delivered a letter to Senate leaders urging them to oppose a bill that would require governments and other bond-issuing agencies to standardize financial disclosure.

The Financial Disclosure Transparency Act, which is opposed by many muni market participants, is currently attached to the National Defense Authorization Act, a bill that the Senate must pass by the end of the year and is currently expected to take up in November. Sen. Majority Leader Chuck Schumer has also said the Senate may consider it in October, before midterms.

The House in July passed the NDAA, with the FDTA attached. Sen. Jack Reed, chair of the Armed Service Committee, is still taking amendments to the NDAA on the Senate side.

The FDTA would require the Municipal Securities Rulemaking Board and other regulators to develop data standards and an implementation plan standard over the next four years that moves municipal issuers and other financial entities toward a financial reporting standard like eXtensible Business Reporting Language, or XBRL. The bill does not name a specific standard.

"The plan to attach it to the NDAA makes it so much harder to have a conversation about it because it's moving so quickly, so we would love more time," said a representative from the Government Finance Officers Association who is talking with senators about the bill and asked not to be named.

The GFOA is asking senators to consider several options, including ? its "main ask" ? that the provision be dropped the NDAA entirely, or instead first doing a study on the proposal or extending the four-year implementation timeline to up to 10 years.

The Public Finance Network is a broad range of organizations representing states, cities, airports, hospitals and utilities. A total of 18 groups signed Thursday's letter, including the GFOA, the American Hospital Association, the American Public Power Association and the State Debt Management Network.

The four-page letter was sent to Schumer and Reed as well as Sen. Mitch McConnell and Sen. Jim Inhofe, ranking member of the Senate Armed Services Committee.

The PFN called the bill an unfunded mandate that could cost issuers up to $1.5 billion for the first two years of implementation.

Of the roughly 40,000 muni issuers, the letter estimates that 15% would have to buy new software at the cost of $100,000 per government; another 10% would need to reconfigure existing systems at a cost of $50,000; 25% would "struggle through updating their systems on their own by utilizing staff capacity at a minimum cost of $50,000;" and the remaining 50% would develop 'shadow systems' and use redundant processes to deal with the additional reporting needs with costs ranging from $5,000 to $100,000.

"This means that the costs for all affected public and charitable entities to comply with the mandate would exceed well over $1.5 billion within just two years and a disproportionate burden would likely be placed on smaller entities with the fewest resources," the letter said.

The legislation would also be a federal overreach, the PFN warned, as neither the Securities and Exchange Commission nor the MSRB have direct oversight on the presentation and delivery of issuers' financial disclosure.

The FDTA "would not conform to existing law," the letter said. "Section 203 could irreparably breach these important guardrails that uphold congressional intent for nearly 50 years, and the tenets of federalism that are deeply rooted in our nation since its founding."

The coalition assured lawmakers that it supports and encourages transparency and accountability in governmental financial reporting.

"However legislative initiatives like the FDTA's Section 203 would only hinder efforts already in place, therefore we must oppose the inclusion of this provision in any matters moving forward in Congress."

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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