Small Cities, Big Challenges: Why We Need a System to Warn of Fiscal Crises

Small Cities, Big Challenges: Why We Need a System to Warn of Fiscal Crises

Timenewman1/Wikimedia Commons

If you want to check out the financial health of companies like Amazon, Amgen or Apple, it is easy to do so. Just go to Yahoo Finance, MSN Money, CNBC or any of a host of other web sites, type in the company name or ticker symbol, and you can see full financial profiles of each company. Some sites also make it easy to compare the earnings performance of multiple companies.

But what if you want to see the financial status of cities like Amarillo, Akron or Alexandria? It’s not so simple. Because these cities had fewer than 200,000 people in 2015, they were not included in our City Financial Strength Index published earlier this month. Other groups that collect and publish local government financial data, like Truth in Accounting, also focus on just the biggest cities. Creating a comprehensive resource for government finance would be a complex and costly undertaking.

Related: How Strong Are Your City's Finances? 116 US Cities Ranked

Yet the need for such a resource is real. An online database of local government financial statistics would provide early warning of potential fiscal crises. Since fiscal crises trigger public employee layoffs, deep service cuts and sharp tax increases, they affect a large cross section of the community. By identifying which governments are most vulnerable, policymakers and citizens can take early action to avoid or minimize such emergencies. A fiscal data repository would help researchers answer such questions as whether bankruptcy filings by Stockton, San Bernardino and Detroit were straws in the wind presaging a more generalized problem, or were they exceptional events not likely to be widely repeated? And, which financial data points are the best indicators of future trouble (while I believe the indicators and weightings I used for the Financial Strength Index were appropriate, others differ)?

Historically, we have relied on rating agencies to assess government financial health, but Department of Justice settlements with S&P and Moody’s over their actions that precipitated the financial crisis, suggest that we need alternative measurements. Also, many cities do not carry credit ratings. An online database would also help us assess relative government performance, showing us which units are spending their tax dollars more or less efficiently. And, it would let us see how spending priorities differ across governments, letting us determine whether they are properly emphasizing public safety or social services.

The Current Mess
Most major cities publish their budgets on their websites, but budgets contain forecast revenues and expenditures, which are not completely accurate. Budgets are also not well standardized, making peer comparisons difficult. Even though they’re less timely, actual financial statements certified by an independent auditor are the better choice for analyzing financial performance across governments.

Related: Chicago, New York in Worst Financial Shape Among Large US Cities 

Most major cities (as well as counties, states and special districts) also publish audited financial statements in a document known as a Comprehensive Annual Financial Report (or CAFR).  The Government Finance Officers Association sets standards for these reports and awards a “Certificate of Achievement for Excellence in Financial Reporting” to filers meeting these standards. The core of the CAFR, the government’s basic financial statements, must adhere to principles set forth by the Government Accounting Standards Board (notably, New Jersey cities do not use this standard.)

While these annual financial reports possess a wealth of useful information about government financial condition, they are not widely used. Historically, the documents have been hard to find, and, because their data is locked in PDFs, they are difficult to analyze.

Finding the reports has become much easier in recent years. While in the 1990s, obtaining a CAFR might have required a trip to the library or municipal building, now these documents are generally online. State and local governments that issue municipal bonds usually post their CAFRs on the Municipal Securities Rulemaking Board’s EMMA system. Unfortunately, finding CAFRs through the system is not straightforward: EMMA was designed to provide information about individual municipal bonds, not as a database of government financial statistics.

Related: 15 States Americans Are Ditching: What’s the Matter With Wyoming? 

Recently, the federal government has launched a new resource that eases the process of finding and downloading local government financial statements. Governments and non-profits receiving federal funds above a certain threshold (currently $750,000 annually) are required to submit audited financial statements to the federal government. Last year, the Census Bureau, which collects these statements, started to place new local government audits online with a somewhat more user-friendly interface than EMMA. Finally, many states have CAFR repositories. Good examples are those provided by Illinois, Michigan and Washington State.

Still, extracting and standardizing the data from these reports remains challenging. Three years ago, the Sunlight Foundation held a hackathon to tackle the issue of “scraping” data from PDFs and none of the developers attending could come up with a good solution for CAFR data extraction. Since then, software tools facilitating PDF data extraction have only improved marginally.

A Better Way
A more useful approach is to move away from PDF filings and instead encourage or require governments to submit their financial statements in a “machine readable format” like XBRL (eXtensible Business Reporting Language). It would then be possible to create an online, searchable repository of government financial statistics. (The Census Bureau does currently provide annual state and local financial data, but, because the Census information is derived from a survey rather than the audited reports, it is inconsistent with CAFR data, unaudited and limited in scope.)

Related: The Financial Health of All 50 States, Ranked

The implementation of a machine-readable filing standard is one reason why standardized corporate financial data is so much more readily available than government data. Since the 1990s, the SEC has made corporate financial statement filings (Forms 10-K and 10-Q) available in a text format known as SGML, which is much easier to process than PDFs. In 2009, the SEC began requiring companies to file their financial statements in XBRL, which better enforces standardization across filings and internal consistency of data within a single filing.

With the 2014 enactment of the Digital Accountability and Transparency Act, the federal government embraced the use of machine readable fiscal data. The act requires the executive branch to “establish Government-wide data standards for financial data and provide consistent, reliable, and searchable Government-wide spending data that is displayed accurately for taxpayers and policy makers.” DATA Act implementation, which is being led by OMB and the Treasury Department, includes an XBRL schema that facilitates standard reporting of federal expenditures.

Corporate and federal XBRL filing standards offer useful precedents for a state and local government standard, which has been slow to emerge. While some existing projects are in preliminary stages, larger organizations that could all promote a single standard have yet to do so. Congressional action may be required: A bill that would have mandated a machine-readable municipal financial filing standard proposed in the last Congress died despite attracting 35 cosponsors. Perhaps this idea could be resurrected as part of Dodd-Frank changes expected in the current Congress. Citizens interested in understanding the financial health of their cities would benefit.