U.S. Congress moves forward on new financial reporting rules for locals

By CAROLE GRAVES

TML Communications Director

Despite opposition from tens of thousands of state and local governments entities, Congress moved ahead on new state and local government financial reporting rules.

The U.S. House approved language included in the National Defense Authorization Act (NDAA) that requires new standards for how states and local governments report financial information using uniform reporting categories, or “data standards.”    

The Tennessee Municipal League is part of multi state and local government coalition opposing this change stating that it would impose a costly, unfunded mandate on local governments when it is uncertain whether Tennesseans or the market will realize any significant value from requiring all 345 municipalities to comply with the new requirement.

In a letter sent to Tennessee’s Congressional Delegation on Nov. 9, TML President and Henderson Mayor Bobby King stated, “I understand the proponents of this legislation contend the adoption of the new standard would enhance transparency and make it easier for the public and those who engage in the municipal market to analyze governments. However, transitioning to a new uniform reporting system requires significant resources — consultants, software, and reconfiguring municipal financial systems to account for the new reporting standards. This costly, unfunded mandate will fall on the backs of local governments, with no financial support from the federal government.” 

In addition to standardizing what data is reported and how it is identified, information would have to be machine-readable and searchable. 

The Government Finance Officers Association estimates that about 15% of governments and nonprofits will have to buy and implement new software at a minimum cost of around $100,000 for each of them. At least 10% of governments will have to hire consultants to reconfigure existing systems, resulting in $100,000 to $200,000 in expenses. Meanwhile, about 25% would “struggle” through the process of handling updates on their own with in-house staff.

Organizations making up the local government coalition estimate the new requirements will cost governments and charities well over $1.5 billion within just two years and a disproportionate burden would likely be placed on smaller entities.

The Security Exchange Council is being charged with developing the new rules – which will provide TML and other entities an opportunity to submit public comments.

Among several of TML’s concerns included in the letter to Tennessee’s Congressional Delegation is that any new reporting standards developed as a result of the implementation of Section 203 could conflict with existing federal and state governmental reporting standards and result in more confusion. All local governmental entities in Tennessee already adhere to the standards established by the Governmental Accounting Standards Board (GASB) as well as those standards that are either included in state law or implemented under the authority of the Tennessee Comptroller. 

The concerns regarding the potential for conflict are particularly noteworthy as the Comptroller has announced his intention to implement a new uniform chart of accounts as it applies to annual municipal audits.  TML is already in conversation with the Comptroller as to how this new federal requirement will affect his statewide initiative.

The push for state and local governments to use a uniform chart of accounts was first introduced in May 2022 by Sens. Mark Warner (D-Va.) and Mike Crapo (R-Idaho), who sponsored the Financial Data Transparency Act of 2022 (S. 4295) that requires government and non-profit financial information to be reported in a standardized format to ensure there is uniform financial reporting across all types of municipal bond issuing entities.

Companion legislation (H.R. 2989) was introduced by Reps. Carolyn Maloney (D-N.Y.) and Patrick McHenry (R-N.C.). 

To gain passage, the language was attached to the House version of the FY 2023 National Defense Authorization Act, a must pass annual piece of legislation. At press time, the Senate had not taken up the annual defense authorization bill, but will likely approve it this week.