Thursday, March 31st, 2011
muni blues

My first desk job was as a municipal finance director.  I wasn’t really qualified for the position, so I dug into what was known in public finance as “the Blue Book.”  Officially, it was Governmental Accounting, Auditing, and Financial Reporting, but everyone called it by its nickname.

Upon examination, it was clear to me that the small town for which I worked needed to tidy up the books a bit, although it wasn’t an easy sell, since I was self-taught and the auditor and city administrator had degrees and experience.  Small town, piece of cake, right?  Well, no.

Structurally what was needed was the implementation of a complete fund accounting system.  There might have been only five thousand people in town, but that little burgh had more than twenty different kinds of operations, among them an electric utility, a water and sewer operation, street assessment projects, tax increment financing districts, debt service funds, and a liquor store (I had worked there too).  Each required segregation for financial reporting and the accounting treatments needed to be different from one to another.

I thought of all of that when I recently passed through a town in Illinois on a road trip to Florida.  I happened to pick up the local paper and read a story about the school district’s finances.  The superintendent was quoted:  “One of our board goals is to look at our finances and determine if we have cash we can invest and earn interest on.”  It seems that a previous state-sanctioned program had shown that there were “no funds suitable for immediate investment,” but that “the district should check again in a few years.”  So, the plan was to participate in another review.

The story then had some items noting the “other business” dealt with by the board at the meeting.  The first bullet:  “Recognized the district's financial profile designation, which at 3.8 on the 4-point scale earned the district a mark of Financial Recognition from the state.”

I would have thought that a 3.8 would include effective cash reporting and management thereof.

Amid a heated debate about municipal finances — and bold predictions by big names of how many bonds will or won’t go into default — it seems that the general issue of accounting and reporting hasn’t been examined very closely.  It undoubtedly has improved in general since I labored over the Blue Book, but what’s the current state of the art?

The website of the Government Finance Officers Association has a simple statement of “best practice.”GFOA of the US & Canada | In addition, you can visit the “about us” link on the home page to see a detailed list of the organization’s objectives. I asked the organization about the extent to which its recommendations had been adopted and how many states require GAAP and the timely submission of financial reports.  It did not have specific answers.

There are a lot of broad assumptions being thrown around about the nature of the muni market, but the revealing secrets are to be found in the careful analysis of the financial details, issuer by issuer — work not unlike that performed by those few that looked at mortgage securities tranche by tranche when the first signs of strain became evident there.  Or by those that bucked orthodoxy and called out bank risk for what it was.

Some politicians have been playing “kick the can” to placate stakeholders (and feather their political nests), just as many corporate managers play games of their own to placate shareholders (and feather their financial nests).  Throwing light on the shortsightedness of each is one of the good things that can come from difficult times.

Unlike the esoteric mortgage securities mentioned above, which were the province of supposedly sophisticated institutional investors, individual investors are key players in the world of municipals.  How they react to any further declines in prices will be a key determinant of whether this becomes a big deal or not.  Do you think that they know whether rigorous standards of accounting and financial reporting are being applied?

Instead of singing the muni blues, it’s time to hit the books and see what we find.