By Lisa Lambert
WASHINGTON (Reuters) - States, cities, counties and others who sell debt in the $3.7 trillion U.S. municipal bond market continue to struggle with providing prompt financial information to the public.
A report by Merritt Research Services released on Thursday found it took an average of 141.3 days for municipal bond issuers to complete audited financial reports for fiscal 2010, which ended for most in June 2010. That was only a slight dip from the average of 141.6 days in fiscal 2009.
Municipal bond investors, whose ranks have historically been dominated by individuals, do not have to rely solely on disclosures to learn if borrowers are in bad shape, as three rating agencies monitor states' credit and the news media regularly report on their financial conditions.
Still, with anxiety rising in the last year from news reports of struggling cities and states, and the financial crisis sparking skepticism about credit ratings, many rely on the audited reports when they buy debt.
States were the slowest to report in the muni market and, among them, Illinois was the most laggard, taking 365 days to complete its audited report, Merritt found.
Counties and cities followed, needing more than 160 days to finish their reports. The slowest city and county were in California, with the city of San Diego taking 427 days, and Santa Cruz county taking 401 days.
Merritt did not analyze the reasons for such a slow pace, but noted that "being a small municipal borrower does not seem to inherently handicap an issuer's ability to gets audits signed in a timely manner."
Regulators and investor advocates have posited that one reason annual reports, along with other municipal bond disclosures, are late is because there are few penalties for late filing.
Strict federal oversight state and local finance could invite accusations of interference, and so the U.S. government has tread carefully in regulating the market.
Corporations that issue bonds must usually file their audited reports 60 days to 90 days after the end of their fiscal years. The Municipal Securities Rulemaking Board requires muni issuers post their annual financial reports on its site, known as EMMA, within 120 days of the close of the fiscal year.
Few muni issuers, though, could meet that requirement. Merritt found that only tollways and wholesale electric utilities completed their financial audits under 120 days on average from fiscal 2007 through fiscal 2010.
DISCLOSURE BECOMING BIGGER ISSUE
The federal government has recently turned its attention to making more thorough and accurate information about the municipal market available to investors in a timely manner.
At one point, issuers sent disclosures to a handful of repositories that mailed investors hard copies for a fee. Now, they post annual statements, bond offering documents and some continuing disclosures to EMMA, or Electronic Municipal Marketplace Access, which also tracks trades.
But the tools for pushing issuers to post information are often difficult to wield.
The rulemaking board has called on the federal government to penalize issuers who do not provide information about their debt investors deem crucial. It noted in a recent letter to the Securities and Exchange Commission, which enforces the rules it writes, that there "seem to be no significant regulatory repercussions for non-compliance."
Last week, Commissioner Elisse Walter said the SEC would soon release its plan to beef up the timeliness and quality of financial disclosures in the market. But Walter said that if disclosure standards are set, the SEC would need some kind of authority to enforce them.
The Financial Industry Regulatory Authority, an independent regulator, can execute some MSRB regulations because it has oversight of securities firms. But cases can take a while to work through FINRA's systems.
A Reuters survey of FINRA's settlements related to MSRB rules over the last six months found seven firms faced sanctions for not delivering official statements to customers by the settlement dates of new bond issues. All bonds involved were issued well before 2010, with one firm paying a $25,000 fine this August for infractions in April and May of 2008. Altogether, the seven firms paid $270,000.
Out of the approximate 42 firms fined for breaking an MSRB rule in the last six months, three settled cases related to the auction-rate securities meltdown that dominated 2007.
(Additional reporting by Karen Pierog in Chicago; Editing by Theodore d'Afflisio)