Buy-siders see merit, but also risks in issuer financial disclosure bill

Municipal bond investors and analysts have long pushed for improved disclosure from state and local governments, and a bill pending in the Senate would seem to grant them their wish.

But the Financial Disclosure Transparency Bill would bring big changes to the muni market, and some buy-siders, while saying it ultimately would boost market liquidity, worry it may mandate too much, too fast.

“If this is done well and done right, we would clearly be supportive of financial transparency and a robust reporting model,” said Anne Ross, immediate past chair of the National Federation of Municipal Analysts, a member of its Industry Practices Group, and a principal consultant at Muni Credit & Compliance Advisors, LLC. “But as written, we do have some concerns.”

The muni market is closely watching the FDTA, which is expected to be picked up by the Senate in November as part of the 2023 National Defense Reauthorization Act, legislation that must be passed by the end of the year. The House passed its version of the NDAA, with the FDTA attached, in July.

The FDTA, S. 4295, would require the Municipal Securities Rulemaking Board and other regulators to develop data standards and an implementation plan 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.

Issuers are lobbying hard against the measure, saying implementation could cost up to $1.5 billion and that a specific technology standard ignores inherent differences among roughly 50,000 unique municipal issuers.

Municipal Market Analytics Inc. warned the mandate may prompt hundreds of issuers, especially smaller ones, to head to the private market for bank loans to avoid the expense and complication of compliance.

While acknowledging potential complications, some investors are more supportive of the bill.

Vikram Rai, head of Citi’s Municipal Strategy Group, said there’s “no doubt” the legislation would impose a new cost burden on issuers, particularly small ones. But Rai noted the FDTA features a provision that would allow the MSRB to scale down the data-reporting mandate for smaller issuers.

Rai also he would be surprised if issuers fled into the arms of banks.

“The loan market is too small and constrained by the banks’ balance sheets,” he said, noting that banks currently hold about $610 billion of muni bonds, of which about $200 billion are loans and the rest are bonds. “It becomes a function of the constraints of bank balance sheets.”

And — current market volatility aside — it’s typically cheaper for an issuer to come to the bond market than borrow from a bank, Rai said.

“Most of the time the yields in the municipal market are very attractive for issuers,” Rai said. “It will probably cost them more to rely solely on bank loans rather than tapping the muni market.

“The smaller issuers in the beginning might think it’s more onerous, but in the long run they’ll benefit because illiquidity and a lack-of-transparency discount will go down,” he added.

The debate over improved issuer disclosure has “gone on for so long,” said Dan Solender, partner anddirector of Tax-Free Fixed Income at Lord Abbett.

“After what we’ve been going through this year, the market would function better if there was more timely disclosure in a format that’s readable for other investors than traditional muni investors,” Solender said.

The FDTA “might not be the right way to accomplish the objective,” he added, “but there is a need to modernize disclosure.”

The NFMA, which has long advocated for improved issuer disclosure, expressed its reservations about the FDTA in an Oct. 18 letter sent to Senate leaders that was also signed by the Government Finance Officers Association, the National Association of Bond Lawyers, the Bond Dealers of America and other market groups.

The letter zeroes in on Section 203 of the act, which highlights the MSRB’s role in setting standards and provides a four-year timeline to final adoption.

“The efforts to standardize financial data in the public sector not only would ironically create a lack of transparency, but also would likely create volatility and disruption in the municipal marketplace, which would burden and add greater costs to governments and governmental entities,” the letter said.

Ross said the four-year timeline poses a particular problem.

“We think there is merit in the development and acceptance of machine-readable documents in our sector, but there’s a uniqueness in our sector, and given the 40,000 issuers that would be impacted, we think we need more time and greater care to the details surrounding how to implement this.”