Muni bond issuers decreased audit times for fiscal 2024

Municipal bond issuers cut their median audit times from 2023 to 2024, with issuers in all governmental bond sectors and most revenue bond sectors shortening audit timelines despite a reported shortage in auditors.

That's according to research published this month by the University of Illinois at Chicago's Government Finance Research Center and Merritt Research Services, an Investortools company.

This year's report, which covers issuers across the country, is titled, "The Lone Star Shines Bright: How Texas Found the Carrot (or the Stick?) to Improve Cities' Audit Times," a nod to a recent Texas law that ties property tax hikes to city audit timeliness.

"What Texas has done is really unique," said Deborah Carroll, director of the UIC Government Finance Research Center and co-author of the report. "Across the United States, local governments are generally pretty dependent on property tax revenue to finance essential services. Texas local governments are even more dependent on property tax revenue, because they don't levy an individual or corporate income tax in Texas, and so that makes property tax revenue really important."

Texas has "done it in such a way that it acts as an incentive," Carroll said. "That's why we wanted to look at that issue this year, because we had heard that there was a positive impact of this policy being implemented, and that's exactly what we found in this year's report."

The report came out Monday. It was released against the backdrop of legislation in a growing number of states, including Illinois, that aims to loosen auditing requirements, rather than strengthening them, as Texas has.

"We're actually seeing improvements across the board in terms of audit timing, and we don't really feel like the data support those claims (of a need to loosen rules), so we would really strongly caution against removing the requirements to use GAAP accounting," Carroll said.

She noted that issuers that do not comply with generally accepted accounting principles are excluded from recognition for best audit times in the report.

"We understand that a lot of smaller issuers might use a cash-based form of accounting, but that's not really recommended," she said. "It's not necessarily comparable to those that use GAAP accounting, and there is actually some new research coming out that suggests there is a cost in terms of investors' willingness to invest."

Proponents of bills like the one in Illinois argue that onerous auditing requirements are driving certified public accountants away from government work, exacerbating a shortage of auditors.

"We've heard anecdotally that there's a lot of concern about auditor shortages, and that's why audit timing is becoming more and more delayed," Carroll said. "And we actually did some analysis this year... We looked at when creditors change their auditor, whether that has an impact on their audit timing, and we actually found for a number of sectors that a new auditor potentially reduces audit timing, which goes against these anecdotal arguments."

In fiscal year 2024, wholesale electric issuers were the fastest revenue bond sector, with 84% of those issuers finishing their audits within 180 days. Water and sewer issuers were the slowest performers; only 44% of them completed their audits in 180 days.

Carroll stressed that their research did not extend to why certain sectors were slower than others, but said, "I do a lot of work in water and sewer (financing), in terms of research, and I do know that fiscal capacity does tend to be kind of an issue and a challenge for these agencies? It potentially could just be that there's more volatility in these sectors."

Private higher education issuers represented another struggling sector, increasing their median audit times by 12.3% between 2013 and 2024.

"There's a correlation between credit quality and timing, and so it's not surprising that private higher ed would have a slower completion time, because their credit quality tends to be lower than other investment-grade sectors in the marketplace," said Richard Ciccarone, president emeritus of Merritt and co-author of the report.

"When you look at private higher ed, 2024 was a particularly off year," he added. "The ones that were the slowest, there was definitely a high percentage on the margin of investment grade or lower, or not rated, in that grouping." But "it's too early to call that a track record."

Among governmental bonds, K-12 school districts did best and dedicated tax issuers struggled the most. Sixty-four percent of school districts finished their audits within 180 days, while only 29% of dedicated tax issuers completed them in the same timeframe.

Fiscal 2024 was "a fairly decent year" for governments, Ciccarone said. "Many of the governmental sectors not only had an improvement, but it was the second year in a row (of) improvement in the median for the governmental sectors, such as cities, county school districts and states," he said.

"We have to put the onus of responsibility with management and the legislative bodies as to whether there's a will to get this information available to the users in time," Ciccarone added.

Counties were the slowest governmental bond issuers, the report found. Carroll suggested that timely audits may not be a high priority among some counties.

"We saw cities in Texas turn around really quickly once there was leverage being held over them in terms of accessing property tax revenue, and I think if there was similar leverage over counties, we would see an improvement in counties as well," she said.

Eleven of 56 state and territorial governments dragged their audits out beyond 360 days or have yet to finish their FY2024 audits, according to the report.

"We still are seeing states lagging pretty far in terms of audit timeliness," Carroll said. "We would really like to see the states serve as leaders for the governments that are within them, and so we would love to see greater performance among the states."

It's in everyone's best interest to complete muni bond audits in a timely manner, Ciccarone said. Not only "the usual users of the documents, stakeholders," like bond investors, but also "the citizens, the taxpayers or the ratepayers," he said.

Even as median audit times improved year-over-year, the median audit time across muni bond sectors rose 10.7% over the past decade, deteriorating by 16 days.

The median audit timeline went from 150 days in 2013 to 166 days in 2024. That's compared to a 10.6% increase over the same amount of time in last year's report, from 151 days in 2012 to 167 days in 2023.

"There's still more work to do" on audit timeliness, Carroll said. "We're not quite where we want to be, and in some sectors, we're still far from where we'd like to be. But we are seeing some really positive trends."