The User's Perspective
Performance Reporting and the Municipal Bond Industry
In 2005, the GASB conducted an extensive "user needs study" intended to explore, in a very a fundamental way, what the users of governmental financial information do, how they do it, and what financial and nonfinancial information they use. The study entailed 114 in-depth interviews, each lasting two to three hours or more, with almost 250 people from around the country. A total of 64 of those interviews were conducted with nearly 150 participants in the municipal bond industry—analysts at rating agencies, bond insurers, underwriters, and mutual funds, and bond attorneys.
Among many questions, the interviewees were asked if they used service efforts and accomplishments (SEA) information—measures of inputs, outputs, outcomes, efficiency, and so on. Many of the interviewees from the municipal bond industry quickly replied no. However, published documents and the interviewees' responses to follow-up questions demonstrate an active use of such information. Furthermore, interviewees that do not currently use SEA information indicated an interest in receiving it.
In other words, the conventional wisdom of some—that financial statements are for municipal analysts and SEA information is for other types of users, such as legislators and citizen groups—may be ill-informed.
Overview of SEA Information
Outside of accounting circles, SEA information is better known as performance measures. Accountants tend to shy away from the latter term to avoid confusion with its use to describe certain financial metrics in the financial statements, such as net assets or change in fund balance.
In the late 1960s and early 1970s the accounting industry began to acknowledge that, to fully comprehend the status of not-for-profit organizations, governments, and other non-business entities, financial measures were not sufficient. Bottom-line profit measures did not completely capture such entities' reason for being. Assets, liabilities, revenues, and expenses needed to be complemented by nonfinancial measures that indicated what non-business entities accomplished and the efficiency with which they did so. The GASB's immediate predecessor, the National Council on Governmental Accounting, stated that governments should provide information that can be used to evaluate "the efficiency and economy of operations" and "the results of programs, activities, and functions and their effectiveness in achieving their goals and objectives."
Thus, the reporting of SEA performance information became a part of the agenda that the GASB established at its creation. For more than two decades, the GASB has been studying SEA and monitoring the use and reporting of SEA performance information by state and local governments. Earlier this year, the GASB reviewed the results of its research and monitoring activities and decided to add a project to its agenda with two purposes. The first purpose was to update GASB Concepts Statement No. 2, Service Efforts and Accomplishments Reporting, to reflect what the GASB has learned. For example, Concepts Statement 2 anticipated that GASB might establish standards that required governments to report a set of very specific measures; however, the GASB has come to see that the selection of measures is more appropriately located with the policy makers of a government based on the goals and objectives they have set.
Do Municipal Analysts Use SEA Information?
Although many are quick to answer no, the evidence points to yes. SEA performance information is an official part of municipal credit analysis for many revenue-backed credits. For example, published ratings criteria for higher education credits cite the following as necessary information: full-time equivalent enrollment; freshman acceptance and matriculation rates; average SAT scores; percentage undergraduate; freshman retention rate; four- and five-year graduation rates; full-time equivalent faculty; percentage of faculty tenured; full- versus part-time faculty; and so on.
The National Federation of Municipal Analysts' recommended disclosures for water and sewer transactions include: trends in staffing; capacity, peak and average flows, and amounts treated for drinking water and wastewater facilities; and miles of water mains and storm and sanitary sewers. Recommended disclosures for airport debt include: numbers of employees; breakdown of level of passenger and cargo service by type, including domestic and international; number of gates available and in use by type; total enplanements; average daily departures; cargo activity in tons; and many others. Similar lists could be presented for toll roads and bridges, health care facilities, and public power.
So why do many municipal analysts insist they do not use SEA performance information? One might guess they are unfamiliar with the term "SEA." Therefore, the wording of the question in the interviews was crafted to clearly explain what SEA performance information is. Many interviewees persisted in saying no. Follow-up questions, however, asked them whether they used the types of information described above, and not surprisingly they acknowledged that they did. When it was explained to them that those statistics are kinds of SEA performance information, one could practically see comprehension dawning on their faces.
Would SEA Information Be Valuable to Other Analysts?
Although municipal analysts looking at revenue-backed debt are evidently users of SEA performance information, analysts of general obligation and tax-backed issues generally are not. The "no" responses of these analysts were legitimate. One exception may be school districts. Analysts of these credits are eager to see enrollment, capacity, graduation rates, standardized test scores, student-teacher ratios, and numbers of full- and part-time staff by type (for instance, instructional versus administrative).
But analysts of states, counties, cities, and other general purpose governments almost never use SEA information. Why not? Is it because SEA performance information would not be useful to their analyses? Or, could it be that it would be useful, but is generally not available?
The responses to these questions were necessarily speculative, but many of the interviewees agreed that information about the performance of services could be useful in assessing credit worthiness. Some suggested that when looking at two governments with financial performance and other important characteristics that are similar, the government with more efficient and effective services and more satisfied service recipients could be looked upon more favorably. Unfortunately, such information is sparsely available. The responses to these questions were by no means universally affirmative—they ran the gamut from enthusiastic desire to receive SEA performance information to steadfast insistence that all of the SEA information in the world would be of no use whatsoever.
What Is the Moral of the Story?
The current and potential value of service efforts and accomplishments information to participants in the municipal bond markets is not cut and dried. Usage is far more extensive than most people realize, and the potential for greater usage in a wider variety of types of municipal credits could be significant if more information were readily available.
The GASB's belief in the value of SEA performance information to decision making and accountability has been the driving force behind its extensive study. The state of the art is far more advanced now than when the GASB was created, and the GASB's work has been a significant contributor to that advancement. Furthermore, the number of governments measuring their performance for the purposes of budgeting, management, and external reporting has increased significantly. The GASB's future activities in the area of SEA performance information reporting will seek to continue the expansion and advancement of the practice among state and local governments in order to help the users of governmental financial information to obtain the nonfinancial information that they need.