But one detail in the story of Dixon reveals a way that future losses to state and local governments might be prevented. Local governments should make their financial information more transparent by publishing it as open data. Sterling, Illinois, is a city near Dixon with a similar population and budget. In the spring of , the city manager of Sterling noticed stark differences between the financial situations of the two cities: Sterling was in a good financial position, while Dixon was in arrears and borrowing.
The city manager contacted a colleague in Dixon to ask questions. What if there had been a simple way for software to draw comparisons between the financial status of Dixon and similar cities? What if it were easy for the state of Illinois, which oversees the finances of its local governments, to electronically compare municipalities that are of similar size, offer similar services, and have similar economies and demographics? By giving the state and others more visibility into municipal finances, open financial data could help suppress embezzlement of precious public funds.
State and local governments should modernize their public disclosures. Specifically, they should begin by publishing their Comprehensive Annual Financial Report CAFR as open data to create a more transparent and publicly accountable financial system, to discourage embezzlement and financial errors, and to learn more about their own financial status.
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The CAFR is a set of statements that comprise the financial report of a state, municipal, or other governmental entity. About 30, state and local governments in the United States, including the City of Dixon, produce audited financial statements each year. Not all jurisdictions publish CAFRs, but it is widely regarded as a financial best practice. The existence of PAFRs as interpretive aids to CAFRs invites more questions about potential benefits of open data: can open data simplify the preparation of and improve the trust in derivative reports?
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The answer to both is yes. In fact, the publication of the CAFR as open data would not only allow municipalities to easily transform their CAFRs into PAFRs, but it would also allow a wide variety of downstream users to more easily convert CAFR data into the type of reports that suit the many use cases our country and society society have for information about government finances, thereby improving transparency and oversight.
No less importantly, municipal governments could use their own data to more easily fill out the myriad financial reports required by state and federal programs such as applications for federal grants, grant reports, and economic activity reports such as the F to the US Census. Among the most important uses of municipal financial data is its use by the municipal bond market to determine the price government entities pay to borrow funds for roads, schools, and other infrastructure construction and repair. If the municipal bond market had the information contained in CAFRs as open data, instead of just as old-fashioned documents, it would cost less for market participants to gauge the creditworthiness of towns and cities.
New ways of slicing and dicing data—including the potential use of machine learning—might help them to discover better ways to separate good credit risks from bad. The result would be better borrowing terms for many government entities and the carrot of better terms for those that improve their financial reporting. But what does publishing CAFR information as open data really mean? No—because information has meaning that is independent of the document in which it is published. Replacing document-based reporting with open data submissions would allow CAFR data to almost literally leap from the page.
Open data can be searched and sorted, remixed and reprocessed, and put to new and better uses, both those we can imagine and those we cannot. PDF documents are not good enough. The PDF electronic document standard merely tells computers how words and numbers should appear on a page. It does not describe what the words and numbers mean.
An open data CAFR would enable the automated ingestion and meaning-full analysis of the data by computers with minimal or no human intervention. The process of establishing the necessary infrastructure for an open data CAFR will require two basic steps:. First, participants in the municipal financial reporting ecosystem must get together and define an information model for the contents of CAFRs.
Second, they must settle on a data encoding language for implementing that information model. These two steps will allow the contents of CAFRs to be published as machine-readable data. Thanks to the work of organizations like GASB and the Government Finance Officers Association, there is already a well-developed structure for the concepts of financial reporting, so the project of modeling that information will not require new ground to be broken.
This process will change the manner in which state and local financial information is reported, but not its substance. An open data CAFR would not require state and local governments to report different information, but only to report the same information using different digital packaging. There are certainly substantial impediments to the project of establishing this infrastructure, not the least of which is inertia. Often, this resistance is based on a perception that the costs exceed the benefits.
Other times, this resistance is strategic because the change simply cannot be accomplished by individual entities acting on their own.
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The benefits accrue when a critical mass of entities embrace and use the same standards. This report explains why state and local financial reports should be submitted and published as open data, rather than just as documents Parts II and III ; summarizes the necessary steps to create an infrastructure for open data CAFRs Part IV ; anticipates objections and challenges Part V ; and outlines the impact of currently-pending federal reforms Part VI. To inform this report, we interviewed fourteen noteworthy leaders in state and local finance see Appendix.
We believe more careful study and coalition-building will be necessary to achieve a full transformation from documents to data. But we are confident that the essentials of the case for open data and the steps to bring it about are contained herein.
The introduction of digital documents, including the now-ubiquitous but still-proprietary PDF electronic document standard by Adobe Inc. Before PDF, the best and most common way for people to disseminated financial and statistical information was to print it on paper and send that physical paper around, with all the costs, delays, and interpretive uncertainty that process entailed.
But the PDF is now old news. The state of the art in publication is swiftly shifting toward publication of the data that underlies documents. What was formerly presented only in a single, static way can now be presented in both a highly readable format for humans and also as data to be processed by computers.
State and local governments reporting their financial information, and consumers of that information, do not have to choose between human-readability and computer-readability. New data encoding formats such as iXBRL; explained below expand the potential uses for these reports, limited only by the imaginations of downstream users. PDF and other static forms of publication are the way of the past. However, our society would enjoy many benefits if these intermediaries were able to ingest the data automatically, , thus, reducing the costs of their data-gathering services.
CAFR data could be available immediately at publication rather than weeks or months later, after data-processing. It is a simple law of innovation that high costs reduce experimentation. Experiments have no guarantee of a return, so the demand for experimental uses of data drops off steeply in relation to price. If it cost less in dollars and mental energy to acquire high-quality CAFR data, new uses of the data would spring forth.
We cannot know what those uses would be, but if barriers are lowered, new applications will emerge. The fundamental shift from PDF documents into open data has already begun in the corporate sector and in federal finance.
The federal government began requiring open data within corporate financial reporting a decade ago. These transformations offer a useful guide for the future of state and local finance. Over the last decade, U. When corporate and federal financial reports are expressed as open data, instead of as plain-text, or even PDF, documents, the information contained in them is more easily compiled and can be electronically analyzed without further translation. In order to move from document-based reporting to open data reporting, an information model that captures the content to be reported and how information elements relate to one another must first be created.
Second, a data encoding language , expressing the information in well-defined data fields, must be adopted. Open data for corporate financial reporting. In , the U. Securities and Exchange Commission began requiring issuers of corporate securities to report their financial statements as open data,  using an information model maintained by the Financial Accounting Standards Board FASB.
Nearly every major securities regulator in the world now requires the public companies in its jurisdiction to report financial information in XBRL. Open data for federal agency financial reporting. In May , every agency began reporting spending information to the Treasury Department as open data, submitting data files encoded using the DAIMS every quarter. Because state governments are sovereign, there can be no federal mandate for open data across all state and local financial reporting.
The User's Perspective
However, two existing federal reporting systems—grant reporting and municipal securities reporting—already involve nearly every state and local government, because almost every state and local government entity receives federal grants, issues federally-regulated bonds, or both, and regularly submits a CAFR to fulfill the related reporting requirements.
Congress is currently considering legislation that would create open data mandates in both of those existing federal reporting systems: the GREAT Act would apply to the grant reporting system, and the Financial Transparency Act would apply to the municipal securities reporting system.
Both are described in more detail in Part VI, below. Even without the enactment of these two federal laws, the work of creating an infrastructure for open data for state and local financial reports can move forward through proactive cooperation between state and local governments and the organizations that represent them.
The urgency for open data is strong, as PDF documents do not meet the needs of governments, markets, and constituents. There are already many benefits to the uses of the financial information contained within CAFRs.
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