State Budgets

Sunshine Week Spotlight: Transparency at the Expense of Greater Federal Control?

In December 2022, the President signed the National Defense Authorization Act for Fiscal Year 2023 (NDAA) into law. Buried deep within the nearly 4000-page bill is a mandate that state and local governments prepare their annual financial statements in a standardized format that’s electronically searchable known as eXtensible Business Reporting Language (XBRL). These requirements are like the reforms discussed in the ALEC model policy The Open Financial Statement Act.

For the first time ever, the general public will be able to view and analyze government data at a keystroke instead of digging through hundreds of pages of duplicative financial reports. Of course, there’s no such thing as a free lunch. Greater transparency will come at the of price of giving D.C. greater control over state and local government accounting and state and local taxpayers are expected to foot the bill.

When considering policy changes, it’s important to first ask, “At what cost?” For example, the NDAA transfers authority over setting government accounting standards from the non-profit Government Accounting Standards Board (GASB) to the Securities and Exchange Commission (SEC). This raises some serious concerns regarding federalism, specifically the ability for the states to retain ultimate authority over the form and content of financial statements.

In addition, these transparency updates are unfunded mandates on state and local governments. The Government Financial Officers Association estimates that the cost of buying and implementing the new software could cost at least $100,000 for each local government. Regardless of whether these reforms are paid for by federal, state or local programs, however, taxpayers will foot the bill for the updates.

After considering costs of a policy change, ask “What’s the alternative?” A clear alternative is to maintain the status quo. States could continue to use PDF-format for financial statements and retain authority over their own financial reports. Under the status quo, though, comparing financial information between governments means digging through thousands of pages of government financial reports to find the necessary information.

Alternatively, states could consider learning from the ALEC model The Open Financial Statement Act. This act replaces PDF-formatted audited financial statements of state, county, municipal, and special district filings with filings utilizing Interactive eXtensible Business Reporting Format (iXBRL). It also establishes these iXBRL audited financial statements as the only annual financial filing required from public agencies by the state, reducing duplicative reporting efforts. If states legislatures implemented policy similar to the Open Financial Statement Act, they would also be able to retain authority over state financial reports.

The increase in transparency under the NDAA changes, however, comes with many benefits. As Marc Joffe noted, these changes allow the general public to search and download government financial data in just a few keystrokes. This increase in transparency could also lower borrowing costs for governments because the greater transparency would reduce uncertainty about a government’s financial health. Lower borrowing costs translates to lower costs on taxpayers in the future.

As these changes are implemented over the next two years, accessing government financial information will become easier than ever before. As stated by ALEC VP of Policy Lee Schalk, transparency is key to good public policy. Unfortunately, any future changes to state and local financial reporting will have to come from D.C. instead of the fifty laboratories of democracy.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

+ State Budgets In Depth