A new working paper by Marc Joffe (Public Sector Credit Solutions) and Jacqueline Reck (University of South Florida) has been released by the Mercatus Center on the feasibility of PDF to XBRL migration of CAFRS so that their content can be quickly and automatically imported into spreadsheets and databases:
Ten years after the Securities and Exchange Commission mandated the conversion of corporate financial statements to machine-readable formats, there is still no analogous mandate for state and local government Comprehensive Annual Financial Reports (CAFRs). We explore the challenges and benefits of migrating from PDF CAFRs to machine-readable filings using eXtensible Business Reporting Language (XBRL). After explaining the benefits of machine-readable audited municipal financial data, we consider the challenges of creating and implementing an XBRL taxonomy for this sector and the impact a filing mandate would have on state and local governments. To better assess the challenges, we update a CAFR taxonomy previously published by Neal M. Snow and Jacqueline L. Reck and apply it to a city in Florida. While corporate XBRL filers generally use third-party filing firms, they can also use open-source software, low-cost licensed software, or both to produce the filings. Providing a variety of low-cost alternatives to state and local governments helps mitigate the challenge of providing affordable filings.
I was curious about the benefits of this for governments that might persuade them to start voluntarily using XBRL. That is, the benefits to academics and monitoring agencies from being able to harvest mass data are clear, but I wasn’t sure what would be in it for governments doing the filing. Indeed, as their review shows, many of the beneficiaries of this are regulators (the SEC requires XBRL in the 10-K reports for public companies for this reason), so it looks to me like voluntary provision will likely remain the exception rather than the rule.
Confronted with the threat of another impending federal government shut-down over the budget, much has been made of recent trends in the dissolution of norms in both politics and civility.
For a longer run perspective on the role of norms, I thought it useful to visit an interesting paper (ungated) in the Journal of Institutional Economics by Peter Calcagno (College of Charleston) and Edward Lopez (Western Carolina University) on the role of informal norms in the federal budget process. The argument is in the title with “Informal Norms Trump Formal Constraints: The Evolution of Fiscal Policy Institutions in the United States.” Here is the abstract:
Two shifts of informal rules occurred in the decades around the turn of the 20th century that continue to shape U.S. fiscal policy outcomes. Spending norms in the electorate shifted to expand the scope of the government budget to promote economic security and macroeconomic stability. Simultaneously, norms for elected office shifted to careerism. Both norms were later codified into formal rules as legislation creating entitlement programs, macroeconomic responsibility, and organizational changes to the fiscal policy process. This institutional evolution increased demand for federal expenditures while creating budgetary commons, thus imparting strong motivations to spend through deficit finance in normal times. Despite the last four decades of legislative attempts to constrain spending relative to taxes, the informal norms have trumped the formal constraints. While the empirical literature on deficits has examined the constraining effects of informal rules, this paper offers a novel treatment of shifting norms as having expansionary effects on deficits.
Here is some more:
Our historical investigation traces today’s U.S. fiscal policy challenges to two shifts of fiscal norms from about 1880 to 1930. First, there emerged new demands on federal spending to support economic security at the household level and economic stability at the macro level. Second, the industrial organization of supplying federal spending became professionalized and competitive, as elected office transformed from a temporary public service to a pursuit of a career ambition. We describe the combination of these two shifts–the demand side spending norm and the supply-side professionalization norm–as the American polity’s shift away from a balanced-budget norm in favor of a deficit-as-policy norm.
See also a recent blog post here on a paper in Public Choice on the influence of formal rules in state constitutions. It is tempting to see those two as opposing views, but I would be inclined to read it as Calcagno and Lopez arguing that informal rules carry more explanatory power, not that formal rules are irrelevant at the margin.
Many budgeting scholars are currently interested in whether a rule-based system could be used for improving fiscal sustainability. In the US, congress’s own dismissive treatment of the rules governing the budget process are supportive anecdotes of the view that self-imposed rules do not bind. Furthermore, there is little doubt that adopting rules (e.g. like Balanced Budget Amendments) is at least partially just signalling what you intend to do regardless of the rules. Nevertheless you’d expect that it is possible to raise the political cost of certain actions.
In this spirit is an interesting article forthcoming in Public Choice by Csaba Toth (Central Bank of Hugary) on “Valuable Legacy? The Effect of Inherited Fiscal Rules.” Here is the abstract:
The working mechanism of national fiscal rules depends strongly on whether a government must comply with its own rules or inherited ones. In the former case, a government usually introduces fiscal rules to show its commitment to a disciplined fiscal policy (the signaling function). In the latter context, however, inherited rules constitute external obstacles to budgetary policymaking (the limiting function). This study mainly is concerned with the limiting function and therefore bases its empirical analysis on periods when the ruling government inherited fiscal rules introduced by a previous government. The results of a panel-data econometric study indicate that national fiscal rules do contribute to disciplined fiscal policy after a change in government in times of an economic upturn. That finding, however, does not mean that the signaling function is ineffective: quite the contrary. My results, in line with the literature, indicate that the double functions of rules may complement one another. A government that introduces such rules is often already committed to a disciplined policy and wishes to signal such commitment in the short term. With the appearance of new government, however, the function of rules changes, and they efficiently promote disciplined fiscal policy in the long term.
That abstract is a nice summary of the paper’s main points. The empirical work is based on 27 EU members states from 1995 to 2008. Section 3 (Databases and New Methods) is a section not to be skipped, and it is a credit to the author that such a detailed description of where the reader might want to be skeptical of the data’s coding and other limitations. For instance, this has the potential to be a big drawback.
Before delving into the details, however, I need to emphasize that my definition of budgetary rules is limited in several ways. On the one hand, this study concerns only the numerical values of the procedural rules in effect during the compilation and enforcement of the general public budget. In doing so, I concentrate exclusively on the rules contained in national legal systems and thus ignore supranational provisions. Third, budget rules are in place worldwide; this study focuses on European practice and more precisely on the EU member states.
It is an impressive paper, and if you teach a doctoral level course on budgeting it is worth consideration for syllabus space.