What I’m reading: The New Yorker (even the fiction)
What I’m watching: The Crown, Season 3
What I’m listening to: A Whole New You Podcast
There’s no greater picture of a government’s work than what is represented in the Comprehensive Annual Financial Report (CAFR). Short of driving on paved roads, enjoying clean water, or sending kids off to school in buildings with sound infrastructure, the CAFR presents the most accurate and meaningful representation of a local government’s service priorities and financial performance for the public.
We know that, but does anyone else? This wealth of revealing information is out there, but how accessible is it to the average reader? Can non-financial staff and residents decipher it? How about elected decision makers?
From Paper to People
Across the country, local government financial statements are most commonly produced as PDF documents. “As a result,” explain Marc Joffe and Jacqueline Reck in a Mercatus Center working paper around the topic, “the financial data included in these documents cannot be readily harvested and consolidated via an automated process.”
Cumbersome, manual extraction of CAFR information can lead to dated and inconsistent information in state and regulatory compilations, which presents a barrier to truly useful analysis or comparisons. In addition, information locked in static paper or PDF documents simply isn’t accessible to the average citizen, or even to decision makers.
In keeping with our digital world, taking steps to make CAFR data machine readable will move information from paper to people. Machine readable data holds tremendous power to transform numbers on paper into accessible, consumable, and actionable information. This, in turn, increases meaningful insight, drives public engagement, and facilitates smarter decisions around financial policy.
To automate extraction of a CAFR’s data, experts such as Joffe and Reck are touting a move to structured text files such as those in eXtensible Business Reporting Language (XBRL). XBRL is not a software – it’s a standard in its own right that ensures data in a report can be easily imported into spreadsheets or databases and usefully analyzed. Cities can use open source or commercial software applications to extract and analyze XBRL-formatted data.
According to a session on the topic at GFOA’s 2019 annual conference, thousands of companies in the U.S. use XBRL to report to the Securities and Exchange Commission. In Australia, all government and businesses use XBRL for a $1.1 billion annual savings through efficiency and insight.
Some states are already exploring standardization using XBRL. Legislation in Florida enables the CFO to build XBRL taxonomies for state and local government filings. Pending legislation in California forms a commission to explore transitioning municipal financial reporting to XBRL standard.
Information in Use
Once the digitization of the CAFR is realized, the next progression would be digitalization. Don’t get confused: these words seem similar but their meanings are different. While digitization is the conversion of information to a format that can be understood by machines, digitalization is the use of digital technologies and digitized data to change social, business, and economic behavior. In digitalization, we solve problems and improve communities.
Machine learning, robotic process automation, advanced analytics, cognitive computing, and blockchain technologies will be catalysts for digitalization. Predictive models can help identify fiscal stress and provide suggested action. Financial information can be communicated in a way that is easily understood by people even without financial backgrounds. The information can be shared in real-time to auditors and regulatory agencies, and it can be obtained by having conversation with machines.
From this digitalization, stakeholders from elected leaders to community members and regulatory agencies can better understand a government’s information, and faster. Analysis itself is less expensive, and leaders can more easily compare their jurisdiction’s performance against that of other locales.
Local government innovators should think about how they can create more useful and usable CAFRs, with an eye toward digitization and this important evolution.
 Marc Joffe and Jacqueline Reck. “Applying XBRL to US State and Local Government Audited Financial Reports.” Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, January 2019.