You’re Late!

I’ve discussed before I don’t think that the municipal bond market is headed for a meltdown. But how do we know? The way to know that a business or government isn’t in trouble is to look at their financial statements. And when there is one big problem when it comes to municipalities: they don’t file their audits on time.

When a company borrows money or issues stock, the SEC requires they file their financials 60 to 90 days of year-end. That’s only reasonable. After all, people need to know how the business is doing. But cities, states, and towns aren’t required to get their financials in for 120 days. And most don’t do that. A recent study of 14,000 audits done over three years on 4,600 bond issuers found that the average delay was 147 days—well over the SEC’s limit.

The most complex financials—and worst offenders—are the states. The slowest state was Tennessee—which took 402 days to file 2009’s audit–while the fastest was Utah, which typically filed its audit in less than 150 days. Still, no states would meet the SEC’s requirement, although some entities, like hospitals or counties, did.

I don’t see this as life-threatening, in part because municipal finance is so stable. It takes a big change to have a major impact. But it is important. Because we don’t know what we don’t know, it’s important to look at those filings.

Motivation matters. Even when New Jersey fraudulently misstated their pension obligations, they only got a slap on the wrist. There’s no sanction for misfiling or delayed filing, unless investors (or voters) demand it.

Douglas R. Tengdin, CFA
Chief Investment Officer
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