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Government Finance Officers Association | JUNE <strong>2023</strong><br />
Navigating the<br />
Talent Shortage<br />
Funding New<br />
Approaches to<br />
Public Safety<br />
Government Finance Review<br />
Five Secrets of<br />
Visionary Thinkers<br />
Is Web3 worth<br />
the hype?<br />
Is there real revenue potential for local<br />
governments, or too much risk?
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contents JUNE<br />
<strong>2023</strong> | VOLUME 39, NUMBER 3<br />
14<br />
SPECIAL SECTION<br />
Web3 and Blockchain<br />
Examining the revenue potential<br />
and potential risks of blockchain and<br />
cryptocurrencies for local governments<br />
By Theo Cox and Shayne Kavanagh<br />
30<br />
Navigating the Talent Shortage<br />
In a changing landscape, the role of<br />
just-in-time-talent and virtual CFOs<br />
By Charlie Francis, Mike McCann,<br />
and Adam Stone<br />
©<strong>2023</strong> HARRY CAMPBELL; MICHAEL AUSTIN C/O THEISPOT.COM<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 1
contents<br />
36<br />
Funding New Approaches<br />
to Public Safety<br />
Alternatives to conventional<br />
law enforcement in responding<br />
to mental health crises<br />
By Shayne Kavanagh and Galen McDonald<br />
42<br />
The Secrets of<br />
Visionary Thinkers<br />
5 steps to living in possibility<br />
By Susan Robertson<br />
46<br />
Better Decisions<br />
in Three Steps<br />
Using a triage process for<br />
more efficient problem-solving<br />
By Shiela Mie Legaspi<br />
6 Contributors<br />
8 From the CEO<br />
10 Rewind: A Look Back at<br />
<strong>GFR</strong> in 1963<br />
11 GFOA Student Chapters: The<br />
Key to Experiential Learning<br />
in Government Finance<br />
By Brianna Merling<br />
51 Metro, Oregon: Creating<br />
a Collaborative Culture<br />
By Katie Ludwig<br />
56 Subscription Supposition:<br />
Practical SBITA Examples<br />
By Michele Mark Levine<br />
62 Are Tax Incentives Good<br />
for Cities and States?<br />
By Katherine Barrett and<br />
Richard Greene<br />
64 A New Premium on Discount Rates<br />
By Justin Marlowe<br />
66 Embracing Complexity<br />
and Continuous Improvement:<br />
An Interview with Tara Baker<br />
By Jara Kern<br />
68 Q&A with Samantha Babich<br />
By Mike Mucha<br />
72 10 Steps to Better<br />
Collaboration Between Finance<br />
Officers and Fire Chiefs<br />
68<br />
©<strong>2023</strong> JAMES YANG; DAN PAGE C/O THEISPOT.COM<br />
2
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Publisher<br />
Chris Morrill<br />
Editor in Chief<br />
Michael J. Mucha<br />
Managing Editor<br />
Marcy Boggs<br />
GOVERNMENT FINANCE REVIEW<br />
www.gfoa.org/gfr<br />
EDITORIAL<br />
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gfoa.org/gfr<br />
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GFOA encourages finance officers, scholars,<br />
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individuals to submit manuscripts to <strong>GFR</strong>.<br />
All manuscripts should conform to the Editorial<br />
Policy and Guidelines for Authors, which are<br />
available online at gfoa.org. Manuscripts should<br />
be submitted electronically to gfr@gfoa.org.<br />
CONTACT<br />
Government Finance Review<br />
c/o Government Finance Officers Association<br />
203 N. LaSalle Street, Suite 2700<br />
Chicago, Illinois 60601-1210<br />
Phone: 312-977-9700<br />
Fax: 312-977-4806<br />
GFOA EXECUTIVE BOARD<br />
Laura Allen<br />
President<br />
Maryland Department of<br />
Budget and Management, MD<br />
Terri Velasquez<br />
Past President<br />
City of Aurora, CO<br />
Tanya Garost<br />
President-Elect<br />
District of Lake Country, BC<br />
Sonya Andrews<br />
City of Scottsdale, AZ<br />
Lunda Asmani<br />
Norwalk Public Schools, CT<br />
Jennifer Brown<br />
City of Sugar Land, TX<br />
Timothy Ewell<br />
County of Contra Costa, CA<br />
Edwin Gin<br />
Illinois Housing<br />
Development Authority, IL<br />
Bruce H. Fisher<br />
Nova Scotia Utility and<br />
Review Board, NS<br />
Jason Greene<br />
City of Miami Beach, FL<br />
Anne P. Harty<br />
City of Rock Hill, SC<br />
Sue Iverson<br />
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Grace Martinez<br />
Metropolitan Transportation<br />
Commission, CA<br />
Debra Roberts<br />
Maryland Teachers & State<br />
Employees Supplemental<br />
Retirement Plans, MD<br />
David P. Schmiedicke<br />
City of Madison, WI<br />
Kendel Taylor<br />
City of Alexandria, VA<br />
Diane Waldron<br />
City of Bristol, CT<br />
Chris Morrill<br />
GFOA<br />
<strong>GFR</strong> (Government Finance Review) (ISSN 0883-7856) is published bimonthly in February, April, <strong>June</strong>, August, October, and December.<br />
Subscription price is $35 annually. Opinions expressed herein are the viewpoints of the authors. They may differ from the policies and<br />
recommendations of the Government Finance Officers Association, its committees, and staff. Letters to the editor are welcomed.<br />
Copyright <strong>2023</strong> by the GFOA. Published by the Government Finance Officers Association, 203 N. LaSalle Street, Suite 2700, Chicago,<br />
IL 60601-1210. Periodicals postage paid at Chicago, Illinois, and additional mailing office. Postmaster: Please send address changes<br />
to Government Finance Review, 203 N. LaSalle Street, Suite 2700, Chicago, IL 60601-1210.<br />
4
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CONTRIBUTORS<br />
Theo Cox is head of Life Itself Labs, a multidisciplinary research institute and consultancy that works<br />
across the fields of economics, governance, strategy, and technology, innovating systemic solutions to<br />
complex problems in support of a global transition. He is fascinated by what new forms of human society<br />
and cooperation can look like, and how we can find new ways of meeting humanity’s greatest challenges.<br />
Particular areas of interest include collective intelligence and distributed governance mechanisms,<br />
alternative economic systems, and human engagement with transformative technologies. Theo teaches<br />
Politics, Philosophy, and Economics at the University of Oxford and holds an MSc in Development Studies<br />
from the London School of Economics.<br />
Charlie Francis is a local government finance expert with more than 45 years of local government<br />
financial management experience in both the public and private sectors, including 20 years of experience<br />
as a CFO. Most recently, he served as the director of administrative services and treasurer for the City of<br />
Sausalito, California. Francis began his career as an auditor for the State of Illinois Department of Revenue<br />
and later served as an accountant for the Denver Renewal Authority and a consultant for the Wyoming<br />
Association of Municipalities. Francis has also consulted with national and international governments.<br />
Shayne Kavanagh is the senior manager of research for GFOA. He started GFOA’s long-term financial<br />
planning and policy consulting offering in 2002 and has been working with governments on financial<br />
planning and policies ever since. Most recently, Shayne has pioneered the use of computer simulation<br />
to “stress test” the long-term financial position of local governments. He is also the author of a number of<br />
influential publications on financial planning and budgeting. His work has earned him a fellowship with<br />
the National Academy of Public Administration, a position on the board of advisors for the University of<br />
Chicago’s Center for Municipal Finance, and recognition as one of the 100 most influential people in local<br />
government by Engaging Local Government Leaders.<br />
Shiela Mie Legaspi is the president of Cyberbacker, a provider of virtual assistant services and<br />
administrative support worldwide, and a leadership coach. Her mission is to enable ambitious<br />
business owners to achieve their greatest potential by offering them access to exceptional economic<br />
leverage. Legaspi is an accomplished career coach dedicated to helping others lead with integrity,<br />
purpose, and passion.<br />
6
Mike McCann is a consultant with McCann Consulting, which he developed to help smaller<br />
agencies achieve their goals. Mike joined OpenGov.com as a founding employee in 2012, after 30<br />
years in corporate, not-for-profit, and government accounting office leadership roles. He retired<br />
from OpenGov in 2022 as vice president of government finance and had a leadership role designing<br />
and developing OpenGov reporting and budgeting software products and services. His teams<br />
implemented OpenGov software for hundreds of customers and helped them find added value in<br />
their reporting and budgeting operations with OpenGov.<br />
Galen McDonald is a policy associate in GFOA’s Federal Liaison Center. Galen supports the FLC<br />
team in sharing federal funding opportunities, advocating for GFOA membership, and tracking<br />
legislation and federal policy changes. Galen also serves as staff on GFOA’s Committee on<br />
Economic Development and Capital Planning. Galen has a BA in Sociology and Human Services &<br />
Social Justice from George Washington University, and a Master of Public Policy from American<br />
University. Her MPP concentration is advanced quantitative analysis with a focus on social and<br />
environmental policy.<br />
Susan Robertson empowers individuals, teams, and organizations to adapt more nimbly to<br />
change by transforming thinking from “why we can’t” to “how might we”? She is a creative<br />
thinking expert with more than 20 years of experience speaking and coaching in Fortune 500<br />
companies. As an instructor on applied creativity at Harvard, Susan brings a scientific foundation<br />
to enhancing human creativity. To learn more, please go to SusanRobertsonSpeaker.com.<br />
Adam Stone, CPA, is an independently registered municipal advisor and principal with Stone<br />
Municipal Group. He specializes in tax increment finance, capital improvement planning,<br />
and long-term financial planning for cities and towns. Adam has more than a decade of local<br />
government financial leadership experience in both the public and private sectors, including as<br />
CFO, interim controller, and contract budget officer. He currently serves high-growth, small- and<br />
medium-sized communities that are looking for ways to invest in quality-of-life improvements.<br />
Recently, he participated in the planning, financing, education, and feasibility analysis of over<br />
$500 million of public-private partnership and related economic development projects.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 7
FROM THE CEO<br />
Christopher P. Morrill<br />
Executive Director/CEO<br />
GFOA’s DEI Journey<br />
Using Values and Ethics as a Guide<br />
Approximately one<br />
year ago, I stood on<br />
stage at GFOA’s annual<br />
conference and signed<br />
the CEO’s Pledge,<br />
joining more than 2,000 other chief<br />
executive officers who committed their<br />
organizations to supporting complex and<br />
sometimes challenging conversations<br />
about diversity, equity, and inclusion<br />
(DEI); implementing and expanding<br />
unconscious bias training; sharing DEI<br />
programs; and engaging the board in<br />
the development of DEI strategies. I’m<br />
proud of the work we’ve accomplished<br />
over the last year, but GFOA’s DEI journey<br />
didn’t start in Austin, Texas. GFOA has<br />
recognized the importance of diversity,<br />
equity, and inclusion for years, and we<br />
believe that the work we do to advance<br />
excellence in government finance is<br />
interconnected with our commitment<br />
to those values. Our members shape<br />
the policies, programs, and resource<br />
allocations in their communities, and<br />
their differences make us all stronger.<br />
GFOA’s DEI Initiative outlines the<br />
actions being taken to uphold the<br />
principles of DEI, as stated in GFOA’s<br />
Code of Ethics. The code defines how<br />
finance officers can value diversity and<br />
foster inclusion.<br />
• “Provide people with opportunities to<br />
be part of decisions that impact them.<br />
Public finance decisions often have<br />
big implications for people outside the<br />
finance office. If these people are part<br />
of the decision-making process, they<br />
are more likely to feel fairly treated and<br />
thereby regard the people who work in<br />
the finance office as trustworthy.”<br />
• “Support equity in service provision.<br />
Local government services are critical to<br />
the lives of our citizens. Finance officers,<br />
because of their resource allocation role,<br />
can impact the quality of services and<br />
how and where services are provided.<br />
I commit to valuing diversity within my<br />
organization and within my community,<br />
recognizing my own biases, and calling<br />
out unfair discrimination of any kind.”<br />
Last year, GFOA members voted to amend<br />
the bylaws of the association to promote<br />
diversity, equity, and inclusion in the<br />
government finance profession and within<br />
GFOA. We created a DEI committee of<br />
the executive board and have also been<br />
integrating the values identified in the code<br />
of ethics into resources for our members.<br />
Our Rethinking Revenue and Rethinking<br />
Budgeting projects, in partnership with<br />
several other organizations, have provided<br />
leadership on reforming unfair financial<br />
policies related to imposed fees, fines,<br />
and asset forfeitures, and we reviewed<br />
the potential for segmented pricing for<br />
fees and fines.<br />
GFOA Research has been providing<br />
practical recommendations on how<br />
to budget through an equity lens. We<br />
produced a six-part research series on<br />
fairness in public finance that looked<br />
at ways of using behavioral science to<br />
make better decisions. Issues of fairness<br />
and justice are central to the work of<br />
all government officials, as their roles<br />
and power are granted by the will of<br />
their constituents, and their work can<br />
empower or limit the livelihood of those<br />
same people. As part of this series,<br />
we looked at opinions about fairness<br />
as it relates to political polarization,<br />
equity and equality, group dynamics,<br />
and distrust.<br />
We’ve also partnered with<br />
Constructive Dialogue Institute to bring<br />
you Perspectives, an online program<br />
that helps teams create ideas that reach<br />
across divides to develop public finance<br />
solutions that are greater than the sum<br />
of their parts. Political polarization is<br />
the leading social rift of our time, and it<br />
won’t be an easy problem to solve—but<br />
Perspectives provides a science-backed<br />
method that can help.<br />
8
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
GFOA has recognized the<br />
importance of diversity,<br />
equity, and inclusion for<br />
years, and we believe<br />
that the work we do to<br />
excellence in government<br />
finance is interconnected<br />
with our commitment to<br />
those values.<br />
To organize these resources, GFOA<br />
launched a web page focusing on DEI<br />
initiatives (gfoa.org/dei). You’ll find<br />
links to GFOA research, information<br />
about GFOA’s DEI journey, organizational<br />
priorities, and next steps.<br />
We are excited about the future<br />
and look forward to introducing GFOA<br />
members to a few of our new initiatives<br />
in <strong>2023</strong>, including:<br />
• An update of the gender diversity<br />
dashboard that will include a full<br />
look at the public finance profession<br />
at all levels. We also will add a<br />
diversity dashboard to evaluate<br />
ethnicity among GFOA members.<br />
• Enhanced partnership agreements<br />
with the Local Government<br />
Hispanic Network (LGHN) and the<br />
National Forum for Black Public<br />
Administrators (NFBPA). These<br />
partnerships will provide expanded<br />
education offerings, mentorship<br />
programs, and networking as we align<br />
the mission of all three organizations<br />
to support public administrators,<br />
their governments, and ultimately<br />
the communities they serve.<br />
• An LGBTQIA+ Caucus—launched at<br />
our annual conference in Portland—<br />
to promote awareness, advise GFOA,<br />
and support our members and others<br />
in the profession.<br />
• Expanded leadership training,<br />
specifically regarding unconscious<br />
bias, organizational belonging, and<br />
building DEI principles into work<br />
culture.<br />
• A public finance DEI assessment<br />
tool to help guide improvement<br />
efforts in state and provincial and<br />
local government throughout the<br />
United States and Canada.<br />
DEI is not a fad, but a value that guides<br />
our strategies and actions. There are<br />
no quick solutions to the challenges<br />
governments face in recruiting<br />
and retaining top talent, but all<br />
organizations can help by focusing<br />
on building a more inclusive and<br />
welcoming culture. Communities<br />
are confronting issues related to<br />
political extremes and tackling tough<br />
issues where policy disagreements<br />
sometimes leave little room for<br />
compromise. Finance officers are<br />
positioned to provide leadership,<br />
promote fairness, live the values<br />
outlined in the GFOA code of ethics,<br />
and advocate for diversity, equity, and<br />
inclusion. We anticipate this journey<br />
to be a long one, but we’re proud of<br />
what we have been able to accomplish<br />
and look forward to working with our<br />
network of dedicated finance officers<br />
to meet the challenges of the future.<br />
Sincerely,<br />
Learn more<br />
Read more about GFOA’s DEI<br />
goals, progress and next steps.<br />
gfoa.org/dei<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 9
ewind<br />
Preserving the Tax-Exempt<br />
Status of Municipal Bonds<br />
A look back at <strong>GFR</strong> in February 1963<br />
This issue of Municipal<br />
Finance (renamed<br />
Government Finance Review<br />
somewhat later) addressed<br />
intergovernmental tax<br />
immunity, the legal principle acting as<br />
a constitutional check on the powers of<br />
federal and state governments to levy<br />
taxes on each other. It’s a topic GFOA is<br />
still working on, although now we tend to<br />
refer to it as state and local government<br />
taxing authority, and the preemption<br />
thereof. (See gfoa.org/pps-tax-exemptfinancing<br />
for information about GFOA’s<br />
ongoing defense of the exemption of<br />
municipal bond interest from federal<br />
and applicable state income taxation.)<br />
This historic exemption from<br />
taxation of interest on state and local<br />
government bonds reinforces our<br />
nation’s federal system and provides<br />
major advantages to communities across<br />
America, including lower costs to fund<br />
government infrastructure and services;<br />
freedom from the uncertainties of the<br />
annual Congressional appropriations<br />
process in funding capital needs or<br />
any portion of their interest costs; and<br />
efficient access to capital markets<br />
without delay or interference from<br />
the federal government. Although the<br />
primary beneficiaries of a particular<br />
bond issuance are the citizens of the<br />
issuing community, the nation has a<br />
vital interest in maintaining adequate<br />
and safe public facilities to support<br />
a dynamic economy. The national<br />
interest is well-served by keeping state<br />
and local government borrowing costs<br />
low, thereby providing an incentive for<br />
public investment in infrastructure.<br />
GFOA has opposed efforts that curtail<br />
the use and attractiveness of taxexempt<br />
bonds. Congress has enacted<br />
measures, most notably in the late<br />
1960s and in 1986, that placed severe<br />
restrictions on the use of tax-exempt<br />
bonds, and these laws continue to apply<br />
today. Additionally, the IRS has adopted<br />
many regulations that cause enormous,<br />
costly administrative burdens to<br />
entities issuing tax-exempt debt.<br />
But back to 1963 and our Municipal<br />
Finance article, which estimated<br />
the additional interest states and<br />
local governments would have to<br />
pay if their securities were subject to<br />
federal taxation. “If there had been<br />
no intergovernmental tax immunity<br />
of securities, states and local<br />
governments would have had to pay an<br />
additional $827 million in interest on<br />
their obligations in 1959.” (That would<br />
be $24.545 billion in today’s money.)<br />
GFOA encourages Congress and the<br />
Department of the Treasury to remove<br />
or modify restrictions affecting the<br />
issuance of municipal bonds that are<br />
overly burdensome and costly such<br />
as the arbitrage rebate requirement,<br />
The national interest<br />
is well-served by<br />
keeping state and local<br />
government borrowing<br />
costs low, thereby<br />
providing an incentive<br />
for public investment in<br />
infrastructure.<br />
and that do not make changes to the<br />
Treasury’s State and Local Government<br />
Securities (SLGS) program that would<br />
hinder its use and efficiency; recognize<br />
a new type of public-purpose, taxexempt<br />
bond or eliminate current law<br />
restrictions on tax-exempt financing<br />
to permit and encourage public-private<br />
partnerships; create incentives for<br />
individuals and institutional investors<br />
to purchase municipal bonds; modify<br />
federal tax policies that impede the<br />
development and functioning of state<br />
bond banks and bond pools and other<br />
state credit assistance programs; ensure<br />
that federal government enforcement<br />
actions with respect to tax-exempt bonds<br />
are conducted fairly and are directed at<br />
the responsible party; and allow for an<br />
additional advance refunding of bonds.<br />
10
In Brief<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
GFOA STUDENT CHAPTERS<br />
The Key to<br />
Experiential<br />
Learning in<br />
Government<br />
Finance<br />
BY BRIANNA MERLING<br />
In September 2022, GFOA published<br />
a report titled “Meeting Demand<br />
for State and Local Public Finance<br />
Jobs” (available at gfoa.org/<br />
meeting-demand-public-finance),<br />
which recommended new ways of<br />
attracting and retaining talent. Wanting<br />
to support GFOA’s efforts to attract new<br />
talent to the public finance profession,<br />
a group of 16 graduate students from the<br />
George W. Romney Institute of Public<br />
Service and Ethics (Romney Institute)<br />
at Brigham Young University (BYU)<br />
in Provo, Utah, found a quiet room<br />
and officially began BYU’s first GFOA<br />
student chapter on October 21, 2022.<br />
The group includes an array of diverse<br />
undergraduate degrees in public policy,<br />
economics, communication, and more.<br />
A large majority of the current cohort<br />
of students are MPA graduate students<br />
sharpening their government finance<br />
skills in preparation for careers in public<br />
service.<br />
The BYU GFOA student chapter has<br />
already initiated projects within the<br />
community to serve and connect while<br />
gaining applicable experience. “There<br />
is no better preparation for a career<br />
in government finance service than<br />
getting involved in our community<br />
right here, right now. Our GFOA student<br />
chapter provides me with opportunities<br />
to do just that,” Abbie Sanders, a BYU<br />
GFOA student chapter member, shared.<br />
Sanders is currently working as a<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 11
IN BRIEF<br />
TOP: Fall 2022 BYU student chapter (Front<br />
row, left to right: Erick Bravo, Connor Golden,<br />
Nathaniel Loo, Abbie Sanders, Ayanda<br />
Sidzatane, Francisco Ordaz, Andres Galan<br />
Cajamarca and Vanessa Nakayiki. Back row,<br />
left to right: Brianna Merling, Cody Cheney,<br />
Junior Mavambu, Bradley Day, Brittni<br />
Anderson, Abi Maccabee, Kaylee Hepburn<br />
and Steve Mutombo.<br />
BOTTOM: Winter <strong>2023</strong> BYU student chapter<br />
(Front row, left to right: Ayanda Sidzatane, Abi<br />
Maccabee, Abbie Sanders, Taylor Nikolaus,<br />
Brianna Merling and Francisco Ordaz. Back<br />
row, left to right: David Matkin, Erick Bravo,<br />
Junior Mavambu, Cody Cheney, Yuber Miranda<br />
Macias, Connor Golden and Kaylee Hepburn.<br />
finance associate for Utah County and<br />
has found that her GFOA membership<br />
has enhanced her work experience.<br />
“I was reading a book published by<br />
the GFOA just this morning to help me<br />
conduct a cost analysis of a government<br />
department!”<br />
The student chapter is guided and<br />
mentored by two longtime GFOA<br />
members and BYU faculty, Francisco<br />
Ordaz and David Matkin. Ordaz is the<br />
director of MPA career development,<br />
and Matkin is a professor at the<br />
Romney Institute. Both contribute<br />
their expertise from careers rooted in<br />
finance to student chapter members<br />
seeking and fulfilling projects.<br />
With the GFOA student chapter well<br />
underway, GFOA student members<br />
are turning their attention to building<br />
a strong network with other GFOA<br />
members and fellow student chapters.<br />
They are planning to invite other<br />
BYU students to join the chapter and<br />
contribute their experiences to projects.<br />
Erick Bravo, a current BYU GFOA<br />
student member and graduate student,<br />
said: “I would encourage everyone<br />
interested in public and nonprofit<br />
organizations to join GFOA. Whether<br />
they are dealing with humanitarian<br />
issues, leading a department, or looking<br />
at policy initiatives, knowing which<br />
practices promote financial stability<br />
is tantamount to ensuring success.<br />
GFOA has something of value to learn<br />
for everyone who would like help<br />
developing their career.”<br />
Connor Golden, the current president<br />
of the GFOA student chapter, said: “I see<br />
the BYU GFOA student chapter having<br />
a very bright future. With more student<br />
involvement and resources being made<br />
available, I believe our chapter will<br />
“We encourage universities across the United States<br />
to create GFOA student chapters to support the career<br />
development of future government finance officers.”<br />
CONNOR GOLDEN, CURRENT BYU STUDENT CHAPTER PRESIDENT<br />
continue to provide valuable education<br />
and networking opportunities for its<br />
members and community.” Golden<br />
foresees the chapter expanding its<br />
reach by engaging more with other<br />
universities and organizations to foster<br />
the collaboration of best government<br />
finance practices.<br />
“Next fall semester, we look forward<br />
to participating in GFOA’s fellowship<br />
program so our student chapter<br />
members can be matched with local<br />
governments to help them prepare a<br />
popular annual financial report for<br />
GFOA award consideration. We also<br />
look forward to being matched with<br />
local governments that are interested<br />
in aligning their financial policies with<br />
GFOA best practices. We are grateful<br />
to GFOA for supporting GFOA student<br />
chapters and their willingness to<br />
match our student chapter members with<br />
GFOA professionals who are interested<br />
in mentoring them. We encourage<br />
universities across the United States<br />
to create GFOA student chapters to<br />
support the career development of future<br />
government finance officers,” Ordaz said.<br />
The BYU GFOA student chapter<br />
welcomes opportunities to support GFOA<br />
members in researching issues that are<br />
important to them, and we look forward<br />
to contributing to GFOA’s mission of<br />
advancing excellence in public finance.<br />
Our GFOA student chapter can be reached<br />
at mpacareers@byu.edu.<br />
Brianna Merling is vice president of the<br />
GFOA Student Chapter and a first-year MPA<br />
student at the George W. Romney Institute<br />
of Public Service and Ethics at Brigham<br />
Young University.<br />
12
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JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 13
14
SPECIAL SECTION | WEB3 AND BLOCKCHAIN<br />
SPECIAL SECTION<br />
What’s the Real Deal<br />
on Web3?<br />
Examining the revenue potential and potential risks of blockchain and<br />
cryptocurrencies for local governments<br />
BY THEO COX AND SHAYNE KAVANAGH<br />
Cryptocurrency and blockchain are part of the latest iteration of Internet technologies, broadly referred<br />
to as “Web3.” Web3 includes cryptocurrency but also other technologies that are characterized by<br />
decentralized, blockchain-based architectures. Non-fungible tokens (NFTs) are another example of a<br />
Web3 technology that has gotten widespread attention. A brief Internet search on “Bored Ape Yacht<br />
Club” gives an idea of the fervor NFTs have created.<br />
Web3 and cryptocurrency have led to much excitement and investment beyond what we see in popular<br />
culture. Many sectors are experimenting with these technologies, including some local governments.<br />
Initiatives such as CityCoins have made headlines but are not without controversy. Questions persist<br />
about the potential of these technologies for public finance.<br />
This series aims to help local governments think about the revenue potential of Web3, as well as<br />
potential risks. Web3 technologies are complex, and their implications are not well understood.<br />
Though we would not expect local governments to invest directly in cryptocurrencies, and GFOA has<br />
an advisory that recommends governments abstain from using and investing in cryptocurrency, their<br />
wild swings in value illustrate the uncertainty surrounding Web3 technologies.<br />
©<strong>2023</strong> HARRY CAMPBELL C/O THEISPOT.COM<br />
In March 2022, GFOA approved an advisory that advises governments to abstain from accepting<br />
cryptocurrency for receivables, using cryptocurrency for payables, and investing in these products.<br />
More information is available at gfoa.org/materials/cryptocurrency-advisory.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 15
SPECIAL SECTION | WEB3 AND BLOCKCHAIN<br />
Understanding Web3 and<br />
Blockchain Technology<br />
T<br />
he term “Web3” lacks a precise<br />
definition. It is often used as<br />
an umbrella term for various<br />
blockchain-based technologies<br />
and activities. Most famously<br />
these include cryptocurrencies<br />
and non-fungible tokens (NFTs),<br />
but there are many others. A more detailed<br />
outline of these is given in section 2. Web3<br />
also evokes a future version of the Internet<br />
based on these technologies. A good way to<br />
begin understanding Web3 is to compare<br />
it to its predecessors, Web2 and Web1.<br />
Venture capitalist Marc Andreesen<br />
formulated a simple typology:<br />
• Web1 = read. The earliest Internet<br />
applications published information<br />
online in formats like blogs for people<br />
to read.<br />
• Web2 = read and write. The next iteration<br />
of the Internet allowed users to publish<br />
their content much more easily, with<br />
social media being a prime example.<br />
• Web3 = read, write, and own. Web3<br />
allows users to exercise ownership<br />
rights over Internet content, using<br />
technology native to the Internet<br />
rather than relying on external forces<br />
to enforce ownership rights (such as<br />
copyright laws). One of the implications<br />
is that scarcity can be introduced<br />
to the Internet. A finite supply (of a<br />
certain cryptocurrency, for example)<br />
introduces a pricing dynamic that has<br />
not existed before on the Internet.<br />
Introducing ownership rights as native<br />
to the Internet isn’t the only exciting<br />
aspect of Web3. Proponents also cite<br />
decentralization and alternative<br />
economic models, with cryptocurrencies<br />
being the most famous but far from only<br />
example.<br />
This isn’t just a result of technological<br />
innovation—social narratives fuel<br />
excitement around Web3. For example,<br />
trust in institutions has been decreasing<br />
dramatically for years. By supporting<br />
decentralization, Web3 promises<br />
to reduce reliance on institutions.<br />
The creation of Bitcoin was partially<br />
inspired by distrust in established<br />
banking institutions, as the first Bitcoin<br />
references the 2008 financial crisis in its<br />
code. 1 Another obvious social narrative<br />
is that Web3 is a bold new frontier,<br />
capable of generating fantastic wealth.<br />
Because “blockchain” technologies<br />
are the basis for Web3 technologies<br />
(and the associated social narratives)<br />
let’s see what this technology is, and<br />
how it works.<br />
What is blockchain technology?<br />
Blockchain technology is an example of<br />
an “append-only distributed ledger.” The<br />
“append-only” ledger means that data<br />
can only be added to it, but not edited<br />
or removed. “Distributed” ledgers are<br />
databases where data is stored across<br />
many different actors in a network<br />
rather than in a single location. These<br />
actors are referred to as “nodes” in the<br />
network. In a blockchain, each node<br />
stores a full copy of the database. As<br />
all nodes have equal permissions<br />
within the network—they all have the<br />
power to do the same actions—these<br />
are known as “peer-to-peer” (P2P)<br />
networks, and it’s this feature that<br />
leads people to describe blockchains<br />
as decentralized technologies. The fact<br />
that all participants have full access<br />
to the entire database and are equally<br />
empowered 2 within the network is one<br />
of the key technical features that fuels<br />
the excitement around blockchain<br />
technologies, as this is said to build in<br />
transparency and more participatory<br />
dynamics.<br />
Blockchains can be categorized as<br />
either public or private. This distinction<br />
is similar to the differences between<br />
the Internet and intranets. Public<br />
blockchains are publicly visible<br />
and accessible to anyone. They are<br />
©<strong>2023</strong> HARRY CAMPBELL C/O THEISPOT.COM<br />
16
“permissionless,” meaning anyone<br />
can participate in transacting (adding<br />
data to the ledger) or validating<br />
transactions. Private blockchains<br />
are used internally by private actors<br />
such as businesses to manage their<br />
data. But almost all discussions<br />
around Web3 and blockchain in<br />
popular culture today refer to public,<br />
permissionless blockchains—although<br />
much of the excitement exhibited by<br />
private companies refers to private<br />
blockchain. Some of the potential<br />
applications for local government<br />
might also rely on private blockchains.<br />
How do blockchains work?<br />
Exhibit 1 outlines the way in which<br />
data is added to a blockchain.<br />
Step 1: Creating a new block. A node<br />
must create a new block for data to<br />
be added to a blockchain. Any node<br />
can create new blocks of data. These<br />
“blocks” contain the data itself (for<br />
example, the sender, recipient, and<br />
amount of a transaction), a unique<br />
identifier for the block, and a unique<br />
identifier for the previous block.<br />
EXHIBIT 1 | MAKING CHANGES ON A BLOCKCHAIN<br />
How changes get made on a blockchain<br />
Person A wants to<br />
make a change to<br />
the blockchain.<br />
This change<br />
will create a<br />
new “block.”<br />
Step 2: Broadcast and validation. For the<br />
new block to be added to the blockchain,<br />
it must be broadcast to all other nodes on<br />
the network so that they can validate it.<br />
The other nodes must approve and add<br />
it to their local copies of the database.<br />
This approval requires a “consensus<br />
mechanism.”<br />
Consensus mechanisms are<br />
required as the database has no central<br />
administrator. Rather than a central<br />
actor deciding what is added, the<br />
nodes must “agree” to update their own<br />
database copies. Subsequently, the newly<br />
created block is added to all local copies<br />
of the database and becomes immutably<br />
part of the blockchain. Consensus<br />
mechanisms create incentives for nodes<br />
to validate transactions by rewarding<br />
validators with the blockchain’s native<br />
cryptocurrency.<br />
The most common consensus<br />
mechanisms in blockchain are “proofof-work”<br />
(PoW) and “proof-of-stake”<br />
(PoS). PoW is the mechanism used by<br />
Bitcoin and is known for its vast energy<br />
consumption and environmental<br />
impact. 3 Validating transactions under<br />
This block is broadcast<br />
to every computer on<br />
the distributed network.<br />
PoW is referred to as “mining,” while<br />
under PoS it is referred to as “staking.”<br />
The combination of consensus-based<br />
validation for new additions to the<br />
chain and the linking of blocks via their<br />
unique identifiers in a way that can’t<br />
be easily tampered with is why people<br />
are interested in blockchain security.<br />
Consensus mechanisms support<br />
security in two related ways. First, since<br />
the network must agree to a change, it<br />
can remain secure even if an individual<br />
node is compromised. In a centralized<br />
database, the entire database is<br />
compromised if one part of it is hacked.<br />
Second, consensus mechanisms defend<br />
against the network being taken over by<br />
a malicious actor accumulating many<br />
economic resources to grant majority<br />
consensus to itself (known as a 51<br />
percent attack). This is because the act<br />
of granting blockchain consensus is<br />
very costly (either in terms of energy<br />
in PoW or assets in PoS) and thus not<br />
feasible for an individual actor. While<br />
these features have historically made<br />
the consensus layer of the blockchain<br />
resistant to hacks, Web3 is far from hackproof<br />
because secondary infrastructure<br />
like wallet holders’ keys and middleware<br />
connecting blockchains with human<br />
interfaces get compromised quite<br />
frequently.<br />
Step 3: The new block is added to the<br />
chain. Once the consensus mechanism<br />
has been used to approve the block,<br />
it is added to the chain. The name<br />
“blockchain” refers to this structuring<br />
of the database. When the database<br />
is updated, a new block is created and<br />
added to the prior one. The two are linked<br />
by their unique identifiers, as the new<br />
block refers to the one before. This way,<br />
blocks are connected in a referential<br />
sequence, forming a chain.<br />
1<br />
Because the creator of Bitcoin is anonymous, it is<br />
impossible to know what their motives were, but the<br />
first block on the Bitcoin blockchain, in early January<br />
2009, included the text, “The Times 03/Jan/2009<br />
Chancellor on brink of second bailout for banks.”<br />
The new block is added to the<br />
chain. There is a permanent<br />
record of the change and it<br />
can’t be undone.<br />
Those computers<br />
approve of the change.<br />
Credit: Business Insider, 2021<br />
2<br />
Anyone who wants to send a transaction or mine/<br />
validate the next block and is willing to pay a high<br />
enough fee or set up the required crypto-economic<br />
infrastructure can send the transaction or mine/validate<br />
the next block.<br />
3<br />
While Bitcoin’s emissions remain extremely high,<br />
proponents argue that more efficient mining<br />
hardware, combined with supplementary software<br />
protocols, mean Bitcoin has the potential to be far less<br />
environmentally damaging.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 17
SPECIAL SECTION | WEB3 AND BLOCKCHAIN<br />
Typology of Web3<br />
Technologies and Potential<br />
Applications to Local<br />
Government Revenues<br />
T<br />
here are many concepts<br />
and technologies under<br />
the umbrella term of Web3.<br />
Exhibit 1 breaks down how<br />
these relate to one another.<br />
Exhibit 1 breaks down<br />
Web3 into a series of nested<br />
concepts, each based on the one above it<br />
in some way. For example, “blockchain<br />
technology” sits below “Web3” because<br />
Web3 is based on blockchain technology.<br />
Alternatively, “cryptocurrency” sits<br />
below “crypto asset” because it is a<br />
subcategory of this general concept.<br />
Crypto assets appear to be the most<br />
relevant technologies in the context<br />
of local government revenue, so this<br />
section will focus on them for detailed<br />
explanation.<br />
Blockchain platform<br />
A blockchain platform is a particular<br />
instantiation (creating a real instance<br />
or realization of an abstraction or<br />
template) of a blockchain-based<br />
distributed ledger. There are many<br />
distinct blockchain platforms, which<br />
can also be called blockchain networks<br />
because of their distributed nature.<br />
Platforms are the base layer on which<br />
other objects and technologies are built.<br />
By analogy, blockchain platforms are<br />
like computer operating systems such<br />
as MS Windows or Mac OS. Operating<br />
systems use base technologies (for<br />
example, programming languages) to<br />
build environments where programs<br />
(such as word processors, Internet<br />
browsers, and more) are run to perform<br />
different activities. Similarly, blockchain<br />
platforms act as environments where<br />
users can undertake activities. 1 The<br />
difference is that an operating system<br />
is a piece of software stored on a single<br />
computer, while a blockchain platform<br />
is a distributed network of actors (nodes)<br />
comprising many machines.<br />
The two largest and best-known<br />
platforms are Bitcoin and Ethereum.<br />
Bitcoin was the first blockchain platform.<br />
Its standalone functionality—the<br />
things you can do on the platform—has<br />
historically been limited, and it is now<br />
primarily associated with its native<br />
cryptocurrency (bitcoin).<br />
Ethereum is more advanced as it has a<br />
built-in, fully fledged, Turing-complete<br />
programming language, which allows<br />
the platform to run programs in the same<br />
way that a computer operating system<br />
does. This means that Ethereum can run<br />
“smart contracts,” or computer programs<br />
that execute actions as programmed<br />
(for example, when certain predefined<br />
conditions are met). Smart contracts form<br />
the basis for a whole host of more complex<br />
programs, known as “decentralized<br />
applications” (dapps). These encompass<br />
everything from decentralized finance<br />
(DeFi) applications to play-to-earn games.<br />
While the Bitcoin platform’s scripting<br />
language has critical limitations,<br />
particularly the lack of Turingcompleteness,<br />
some applications have<br />
since been created on top of it to provide<br />
additional functions.<br />
Crypto assets<br />
Crypto assets are the most prominent<br />
class of “objects” built on top of blockchain<br />
platforms. The concept is an umbrella<br />
for digital representations of value or<br />
contractual rights built on a blockchain.<br />
These are analogous to other assets, such<br />
as financial products or even physical<br />
assets such as paintings. Crypto assets<br />
can be broadly split into cryptocurrencies<br />
and crypto tokens.<br />
Cryptocurrency<br />
Cryptocurrencies are the best-known type<br />
of crypto asset. They are digital assets<br />
that are “native” to a particular platform.<br />
For example, the Bitcoin platform has<br />
bitcoin cryptocurrency, the Ethereum<br />
platform has ether cryptocurrency,<br />
©<strong>2023</strong> HARRY CAMPBELL C/O THEISPOT.COM<br />
18
and so on. All public blockchains have<br />
native cryptocurrencies. These function<br />
as rewards for miners/validators to<br />
create incentives for them to validate<br />
transactions.<br />
The first cryptocurrency, and with that<br />
crypto asset, was bitcoin. Bitcoin was<br />
initially intended to function as a digital<br />
currency, designed to act as a medium<br />
of exchange through a decentralized,<br />
blockchain-based network—giving<br />
rise to the term “cryptocurrency.” As<br />
Bitcoin was the first cryptocurrency,<br />
it has become a foundational concept<br />
against which all others are compared.<br />
Cryptocurrencies today are generally<br />
divided into bitcoin and the umbrella<br />
term “altcoins,” which references all<br />
non-bitcoin cryptocurrencies. Prominent<br />
altcoins include Ethereum’s ether, 2<br />
Litecoin, XRP, and Dogecoin.<br />
Despite their name, cryptocurrencies<br />
are far from challenging legal tender<br />
status. In fact, as an asset class,<br />
cryptocurrencies may not meet the<br />
criteria for currency at all (for example,<br />
functioning as a unit of account, a store<br />
of value, and a medium of exchange).<br />
Cryptocurrencies are divisible and so can<br />
be a unit of account, but they seem less<br />
suited to acting as a store of value due<br />
to their generally high price volatility. 3<br />
Finally, even the latest technologies have<br />
EXHIBIT 1 | THE COMPONENTS OF WEB3<br />
Web3<br />
Blockchain technology<br />
Blockchain platform<br />
Crypto asset<br />
yet to show they can reliably process<br />
transaction volumes at a similar level<br />
to traditional payment rails, which<br />
undermines their ability to function as<br />
an effective medium of exchange. 4<br />
The conclusions that can be drawn<br />
from on-the-ground activity regarding<br />
the adoption of cryptocurrency as a<br />
medium of exchange are mixed. Let’s<br />
start with bitcoin as an example. In<br />
2021 the number of payments 5 on the<br />
bitcoin network was estimated to have<br />
peaked at around 770,000 per day. 6 This<br />
was also the three-year peak across<br />
2020 to 2022. In the same year, the Visa<br />
network alone processed 164.7 billion<br />
transactions, equating to an average<br />
of 451,232,877 transactions per day. 7<br />
So, Bitcoin’s share of total financial<br />
activity still appears incredibly low. It<br />
is also not the case that daily payments<br />
have been rising dramatically over<br />
time. The 2021 peak was approximately<br />
100,000 daily transactions more<br />
than the 2019 peak, and just short of<br />
200,000 transactions more than the<br />
2018 peak 8 —hardly an exponential<br />
growth rate. Since a significant drop<br />
at the end of 2021, daily payments<br />
also appear to be plateauing. The daily<br />
transaction data for the Ethereum<br />
blockchain shows a similar trend of<br />
moderate growth giving way to plateau. 9<br />
Cryptocurrency Crypto token DAO<br />
Smart contract<br />
DApp<br />
DeFi<br />
On the other hand, the number of<br />
vendors now accepting or intending<br />
to accept cryptocurrency has<br />
increased. As we discuss below, some<br />
US cities and even states are also<br />
starting to accept cryptocurrencies<br />
for tax and utility payments,<br />
albeit via third party conversion<br />
services. These developments<br />
persist despite a relatively small<br />
proportion of Americans—just shy of<br />
13 percent of the population—owning<br />
cryptocurrency now.<br />
Cryptocurrencies and<br />
local government revenue<br />
Experiments are underway with<br />
incorporating cryptocurrencies into<br />
local government revenue systems.<br />
At the most basic level, cities<br />
such as Chandler, Arizona, allow<br />
residents to pay their utility bills in<br />
cryptocurrency. The State of Colorado<br />
also accepts cryptocurrencies for tax<br />
payments. But this is mainly intended<br />
as a customer service option, and the<br />
potential to actually raise additional<br />
revenue appears limited. In both<br />
cases, all payments are converted to<br />
U.S. dollars by a third party before<br />
the government receives payment,<br />
shielding the government from the<br />
significant price volatility of the crypto<br />
markets. For example, the payment<br />
service used by Chandler does not<br />
charge the city extra processing fees<br />
for accepting cryptocurrency. While<br />
data on the volume of crypto payments<br />
made isn’t available, there is anecdotal<br />
evidence that at least some people are<br />
using the service.<br />
Offering the option to pay taxes<br />
in crypto does not increase revenue<br />
directly. Nevertheless, officials may<br />
still hope for indirect benefits, and<br />
those who believe that cryptocurrency<br />
has a future in mainstream America<br />
may seek to get ahead of the curve.<br />
Such offerings serve a signaling<br />
function, indicating an openness to<br />
the Web3 industry that could attract<br />
Web3 businesses, with implications for<br />
tax and other revenue streams. Such<br />
benefits rely on positive assessments<br />
of Web3’s future coming true, however.<br />
A more ambitious approach is<br />
to establish government-owned<br />
validating infrastructure, which<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 19
SPECIAL SECTION | WEB3 AND BLOCKCHAIN<br />
would enable municipalities to earn<br />
cryptocurrency through validating<br />
transactions on blockchain networks—<br />
often referred to as “mining”<br />
cryptocurrency. Mined cryptocurrency<br />
can then be exchanged for real dollars.<br />
For example, the City of Fort Worth,<br />
Texas, has started its own bitcoin<br />
mining operation. Many blockchain<br />
platforms, including Bitcoin, use a<br />
proof-of-work validation mechanism.<br />
Nodes on the blockchain network race to<br />
solve complex math problems, and the<br />
first to complete this “work” validates<br />
the new transaction. Validators gain<br />
cryptocurrency as a reward. More<br />
computing power to solve these<br />
problems means greater potential gains.<br />
There are many potential drawbacks<br />
to local governments engaging in<br />
cryptocurrency mining. Most obvious<br />
is the vast price volatility in crypto<br />
markets, which has implications for<br />
the U.S. dollar value of any earnings.<br />
Securing validations is also not<br />
guaranteed, even using high levels of<br />
computing power. These factors mean<br />
returns are likely to be inconsistent and<br />
difficult to predict.<br />
Cryptocurrency mining is also<br />
infamously energy intensive. For<br />
example, the energy spent globally on<br />
bitcoin mining has been estimated to<br />
exceed Argentina’s total energy use over<br />
a year. 10 Further, mining carries high<br />
upfront investment costs because of the<br />
computing power required. Given these<br />
factors, cryptocurrency mining could<br />
result in a net loss. Finally, it is notable<br />
that the most popular cryptocurrency,<br />
bitcoin, is deflationary. Only 21 million<br />
bitcoins can ever be mined, with no<br />
more produced when this limit is<br />
reached. The Bitcoin platform also has<br />
an algorithm built in that halves the<br />
number of bitcoins yielded by mining<br />
every four years, on average. Combined<br />
with (1) persistently high energy prices<br />
in the short-to medium-term and high<br />
price uncertainty in the long term 11 and<br />
(2) long-term stagnation in the value<br />
of cryptocurrency caused by the recent<br />
popping of the speculative bubble and<br />
the ensuing “crypto winter,” as even the<br />
most ardent crypto currency supporters<br />
have started calling it, mining<br />
cryptocurrency does not appear to have<br />
a lot of potential for local governments.<br />
OUR USE OF THE TERM “ASSET”<br />
We refer to tokens as digital assets because they are intended to represent<br />
some ownership right that has economic value. We are not suggesting that this<br />
intention will come to fruition in real life or that tokens are sound investments.<br />
Crypto token<br />
Crypto tokens are the other major form of<br />
crypto asset. Both cryptocurrency and<br />
tokens are derived from a blockchain.<br />
Cryptocurrencies are intended as stores<br />
of economic value and can be earned<br />
by participating in the validation<br />
of a blockchain (for example, proof<br />
of work). Tokens are created by<br />
software developers, using blockchain<br />
technology, and are intended to<br />
represent ownership of some asset, with<br />
creative art assets being a particularly<br />
high-profile use. Tokens cannot be<br />
“earned,” like cryptocurrencies; instead,<br />
they are bought and sold, more akin to<br />
traditional financial securities. Much of<br />
the excitement around tokens is because<br />
they can represent ownership of assets<br />
that don’t have firm physical form. This<br />
can include digital images but might also<br />
include other examples such as decisionrights<br />
in an organization, where each<br />
token represents a “vote.”<br />
NFT<br />
NFT stands for “non-fungible token.”<br />
These are unique digital assets stored on<br />
the blockchain. Most tokens are fungible,<br />
meaning one token is the same as the<br />
next. They’re interchangeable. NFTs,<br />
however, have a unique digital signature<br />
cryptographically encoded into them—<br />
so even two qualitatively identical NFTs<br />
will not be numerically identical. Two<br />
identical images can become distinct<br />
digital assets, for example.<br />
NFTs are best known for their use in<br />
creating tradeable digital artwork. For<br />
example, digital artist Beeple famously<br />
sold an NFT called “Everydays” for<br />
more than $69 million. They have also<br />
seen applications in other areas like<br />
event tickets. 12 These use cases focus<br />
on areas where uniqueness is good. For<br />
example, art is an area in which owning<br />
the original means something; originals<br />
are worth more than copies, even if they<br />
can’t be told apart by the naked eye. The<br />
same is true of tickets to a concert.<br />
There are two primary potential<br />
use cases for NFTs in the context of<br />
government revenue-raising. The first<br />
and most apparent is that municipalities<br />
can sell them to earn money. The City of<br />
Miami, Florida, for example, had plans to<br />
sell 5,000 digital art NFTs to raise funds<br />
for the city. 13 Similarly, the City of Reno,<br />
Nevada, intended to offer NFTs of a piece<br />
of public art. 14 The idea of creating NFTs<br />
of well-known public landmarks and<br />
other features has also been raised. 15<br />
The crashes that have occurred in<br />
the NFT market in the first half of <strong>2023</strong><br />
should make anyone pause for thought<br />
here. Many purchasers of municipal<br />
NFTs may not be trying to invest to get a<br />
return. They may simply wish to support<br />
their community or feel ownership<br />
of a part of it. This may mean market<br />
volatility is less of a concern—but we<br />
should note that this rationale is largely<br />
hypothetical, and in practice, most<br />
investors do seek to profit when buying<br />
NFTs. Whether price volatility is a<br />
problem unto itself or not, it does speak<br />
to deeper worries about what exactly<br />
people are buying when they buy an NFT.<br />
NFTs are in fact lines of code on a<br />
blockchain, linked to a digital asset<br />
such as an image or animation. It is<br />
this code that creates their uniqueness,<br />
not the assets themselves. The media<br />
comprising a typical NFT can be copied<br />
and distributed endlessly, for free. The<br />
addition of blockchain-based code is<br />
thus an imposition of artificial scarcity.<br />
It builds scarcity (the non-fungible<br />
token) into a fundamentally non-scarce<br />
resource (digital artwork). Municipal<br />
NFTs that imply the opportunity to own<br />
a piece of a public artwork or landmark<br />
carry the risk of reputational harm. The<br />
rise of NFTs may turn out to be a bubble,<br />
leading to a shift in public perception<br />
against them. NFTs could be confused<br />
for actual ownership of physical artwork<br />
itself, rather than ownership of an image<br />
of the artwork. Either way, purchasers<br />
may be left dissatisfied if they feel they<br />
20
Despite their name, cryptocurrencies are far from<br />
challenging legal tender status. In fact, as an asset<br />
class, cryptocurrencies may not meet the criteria for<br />
currency at all (for example, functioning as a unit of<br />
account, a store of value, and a medium of exchange).<br />
have been short-changed. If NFTs start<br />
to be viewed as more akin to gift shop<br />
trinkets, buyers may feel cheated by<br />
having been sold them as “real” art.<br />
NFTs do have potential outside of<br />
speculation, though. For example, they<br />
could help increase the efficiency of<br />
tax systems and reduce tax evasion.<br />
Goods such as cigarettes and alcohol<br />
still use physical stamps to track excise<br />
tax, a system that carries significant<br />
administration costs. There are<br />
also security risks from the theft or<br />
counterfeiting of stamps. Blockchainbased<br />
solutions to this problem are<br />
already being explored, involving a<br />
“digital twin” of a physical good being<br />
stored on the blockchain. This twin<br />
would be directly linked to its physical<br />
counterpart via packaging, potentially<br />
reducing both administration costs of<br />
tax systems and tax leakage. 16 While<br />
this system could take many forms, the<br />
uniqueness of NFTs makes them well<br />
suited to acting as digital twins. (Such<br />
a system would likely also rely on smart<br />
contracts, which we will discuss later.)<br />
An interesting feature of such a system<br />
is that it could be enacted on either a<br />
public or private blockchain. Whether<br />
governments develop their own<br />
blockchain networks or use existing<br />
ones will depend on various factors<br />
including costs—as public chains will<br />
carry far fewer development costs—and<br />
desired levels of publicity.<br />
Security token<br />
NFTs aren’t the only kind of crypto<br />
token. The other form of token most<br />
relevant to government revenue are<br />
security tokens, which are simply<br />
tokens that are also financial securities.<br />
The criteria for securities is laid out<br />
in the Howey Test. 17 Tokens meeting<br />
these criteria are subject to the same<br />
regulation as other securities. But the<br />
crypto industry is still in its infancy, so<br />
the law will lag behind it. The recent U.S.<br />
Securities and Exchange Commission<br />
(SEC) probe of CoinBase, one of the<br />
world’s largest crypto exchanges,<br />
provides an example. CoinBase is<br />
alleged to have listed unregulated<br />
securities on its platform. 18 We should<br />
define security tokens as all tokens<br />
meeting the criteria for a security, even<br />
if they’re not (yet) regulated as such.<br />
A potential use case for securities<br />
tokens is the sale of government debt.<br />
Municipal bonds are a potentially<br />
fruitful source of revenue for local<br />
governments, but they can be relatively<br />
costly to issue, particularly on smaller<br />
scales. 19 High- and low-denomination<br />
bonds often cost almost the same<br />
amount to issue because of regulatory<br />
and administration costs. This makes<br />
the latter relatively unattractive,<br />
and the market is dominated by large<br />
institutional investors. Citizens<br />
may not be able to afford to invest in<br />
their own cities, even if they would<br />
like to—meaning there is apparently<br />
inefficiency in the traditional<br />
municipal bond market.<br />
This is where tokens come in.<br />
Token-based experiments with debt<br />
issuance may hold potential for<br />
local governments by reducing their<br />
administrative burden. 20 Governments<br />
can simply mint and issue tokens<br />
themselves without going through the<br />
complex process of registering and<br />
issuing other forms of bonds, making<br />
it more affordable to issue smaller<br />
denomination bonds—although relying<br />
on Web3’s lack of regulation for this<br />
benefit is likely an unsound strategy.<br />
Further, tokenization can cut out<br />
brokers by enabling the government<br />
to sell directly to individuals, which<br />
can also increase bond affordability.<br />
Supporters argue that tokenization<br />
can thus democratize municipal<br />
financing. 21 Smaller investors may<br />
like the idea of investing in their cities,<br />
and tokenized debt may be a means of<br />
doing so. This opening of the market<br />
has the potential to increase demand<br />
for government debt. Further, tokens<br />
are more easily divisible into smaller<br />
units than traditional financial assets.<br />
This may support growing secondary<br />
markets for tokenized debt, further<br />
increasing demand. Tokenization<br />
could hold the potential to increase<br />
municipal borrowing potential.<br />
Like all potential Web3 applications,<br />
there are many practical issues<br />
to consider. For example, wealthy<br />
investors traditionally favor municipal<br />
debt because of its tax advantages.<br />
These investors are unlikely to struggle<br />
to access the existing municipal debt<br />
market. Civic pride or responsibility<br />
may still attract less-wealthy investors<br />
who would not enjoy these tax<br />
advantages. But it is unclear whether or<br />
not civic mindedness would be enough<br />
to have an impact on the $4 trillion<br />
municipal debt market, so tokenization<br />
may be of limited material financial<br />
benefit. These limits will be more<br />
pronounced if municipal debt has to<br />
compete against other securities that<br />
offer superior returns.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 21
SPECIAL SECTION | WEB3 AND BLOCKCHAIN<br />
Hailed as a potential game-changer since making its debut in 2021, MiamiCoin has lost more than 95% of<br />
its value from its peak price.<br />
CityCoins’ crucial vulnerability is the system’s detachment<br />
from traditional, productive economic activity. The<br />
value of the tokens is not tied to anything in the outside<br />
economy. This feature is shared by the vast majority of<br />
other crypto token projects.<br />
Another relevant case study in security<br />
tokens is CityCoins. The CityCoin project,<br />
and MiamiCoin in particular, is one of<br />
the best-known examples of municipal<br />
adoption of crypto tokens. We should<br />
start by making the point that MiamiCoin<br />
has already attracted controversy for<br />
skirting securities regulation, 22 so this<br />
discussion should not be interpreted as<br />
an endorsement of CityCoins or a position<br />
on their status as regulated securities. We<br />
aim only to describe a prominent, actual<br />
local government use of security tokens.<br />
CityCoins, including MiamiCoin,<br />
are presented as a “community-driven<br />
revenue stream” for cities. CityCoins are<br />
programmable crypto tokens. They are<br />
built on top of the Bitcoin network using a<br />
third-party protocol called Stacks, which<br />
carries its own tokens called Stacks<br />
(STX). CityCoins’ creators intend for<br />
their programmability to lead to a variety<br />
of future uses, although their launch<br />
functionality is limited to producing<br />
more CityCoins or earning STX.<br />
Mining CityCoins uses a “proof-oftransfer”<br />
(PoX) mechanism to validate<br />
the blockchain. PoX is a much less<br />
common validation method than proofof-work<br />
(PoW) or proof-of-stake (PoS). In<br />
essence, the CityCoins PoX is a lottery<br />
system where miners exchange STX for a<br />
chance to win a newly minted CityCoin.<br />
STX can be purchased via exchanges<br />
like CoinBase, like other crypto tokens<br />
and cryptocurrencies. They can also be<br />
earned by participating in the CityCoin<br />
platform in other ways. Most of the STX<br />
transferred by miners are eventually<br />
paid back out to these other CityCoins<br />
users. Some—30 percent—are distributed<br />
to the city government. Cities can cash<br />
out their STX into U.S. dollars or use<br />
them to earn bitcoin. In essence, the<br />
revenue-raising mechanism for local<br />
government is like a local lottery, where<br />
the government keeps some portion of<br />
the currency that participants paid to<br />
enter the lottery.<br />
CityCoin Inc. has stressed that<br />
CityCoins are simply an experiment<br />
rather than a complete financial<br />
solution. 23 Still, the results so far cast<br />
doubt on their viability as a source of<br />
government revenue. Since MiamiCoin’s<br />
launch, the token has lost more than<br />
95 percent of its value from its peak<br />
price. This has led to investor losses and<br />
potential regulatory scrutiny. 24<br />
CityCoins’ crucial vulnerability is the<br />
system’s detachment from traditional,<br />
productive economic activity. The value<br />
of the tokens is not tied to anything in<br />
the outside economy. This feature is<br />
shared by the vast majority of other<br />
crypto token projects. It contrasts with<br />
financial products such as stocks,<br />
which derive their value from the<br />
issuing company’s performance. As<br />
a result, the value of such tokens is<br />
purely a matter of consumer perception.<br />
People buy tokens because they believe<br />
they are valuable. This belief is based<br />
on the activity of other buyers, in a<br />
way that can be subject to bandwagon<br />
bias. 25 For this reason crypto assets<br />
have been accused of being speculative<br />
assets, 26 subject to Greater Fool<br />
Theory. 27 Whatever one makes of these<br />
accusations, it is evident that the crypto<br />
economy is particularly vulnerable to<br />
shifts in the Keynesian “animal spirits”<br />
of investors. 28 Changes in outlook or<br />
other psychological factors can lead to<br />
huge swings in prices.<br />
Whether projects like CityCoin hold<br />
potential as a sustainable, long-term<br />
source of municipal revenue remains to<br />
be seen; significant changes will have to<br />
be made if they are to show real promise.<br />
The programmability of such tokens<br />
may play a role here. They may become<br />
promising investments if they can<br />
be embedded into the wider economy<br />
through new uses. This potential does<br />
depend on practical applications of<br />
the technology being developed, to<br />
underpin the value of related tokens.<br />
Finding such applications is by no<br />
means an easy task.<br />
22
©<strong>2023</strong> HARRY CAMPBELL C/O THEISPOT.COM<br />
Smart contract<br />
A smart contract is a program stored on<br />
the blockchain which runs when some set<br />
of predefined conditions are met. They<br />
can automate agreements without the<br />
need for third parties. This automation is<br />
the primary source of excitement around<br />
smart contracts. Proponents argue that<br />
they can increase speed and efficiency<br />
in areas such as conveyancing. More<br />
radically, some see them as holding the<br />
potential to transform governance. They<br />
argue that immutable and automated<br />
rules reduce the potential for dispute,<br />
corruption, or abuses of power.<br />
Smart contracts may play a role in<br />
tracing tax liability. The use of smart<br />
contracts could potentially increase<br />
government revenue by reducing the<br />
administrative costs of tax systems and<br />
by reducing tax leakage. Smart contracts<br />
have been proposed as a means of<br />
automating the collection of sales taxes<br />
when products change hands, 29 allowing<br />
governments to collect taxes in real time<br />
and removing the need for intermediaries.<br />
This quality has the potential to strip<br />
costly steps from the taxation process and<br />
limit the opportunities for tax evasion and<br />
avoidance between the time of sale and<br />
tax declaration.<br />
It should be noted that smart contractbased<br />
systems come with their own<br />
difficulties. First and foremost, obviously,<br />
is that they are highly complex to design<br />
and implement effectively, carrying<br />
significant upfront investment costs.<br />
Real world use cases remain limited and<br />
are predominantly being considered<br />
at national rather than local scales. 30<br />
Second, smart contract-based payments<br />
can present other tax difficulties.<br />
Regulators are already guarded about the<br />
prospect of automated and anonymized<br />
smart contract-based transactions<br />
happening at larger scales for private<br />
transactions; transactions of this kind<br />
make it hard to identify the parties that<br />
have tax obligations and the jurisdictions<br />
they fall under. 31<br />
If state and local governments<br />
accelerate the use of smart contracts for<br />
some purposes, they may run the risk<br />
of accelerating adoption in other areas,<br />
which in fact make revenue collection<br />
harder. For example, if digital asset<br />
transfers, assisted by smart contracts,<br />
become a more common means of<br />
securing payment for freelance work, this<br />
might make income taxation difficult.<br />
Customer and contractor could make<br />
direct, automated, peer-to-peer payments<br />
through anonymized crypto wallets.<br />
There are ways for regulators to catch up,<br />
but these will take time to develop and<br />
implement.<br />
The key will be to ensure that private<br />
use of such methods does not outrun the<br />
government’s ability to regulate them.<br />
While it is uncertain that government<br />
adoption in one area would accelerate<br />
their spread in this way, the risk is<br />
not trivial. As with all emerging<br />
technologies, smart contracts can act<br />
as a double-edged sword, and the law<br />
of unintended consequences should<br />
give pause to those rushing to adopt<br />
them without fully understanding their<br />
complexities.<br />
1<br />
The most basic of these activities for most public<br />
blockchains is transacting cryptocurrencies; however,<br />
increasing numbers of alternative applications also<br />
feature on many platforms.<br />
2<br />
Given Etherum’s scale, some people now refer to<br />
Altcoins as all non-bitcoin and ether cryptocurrencies.<br />
For simplicity, we are using the original definition here.<br />
3<br />
It should be noted, however, that this level of volatility is<br />
in some sense circumstantial and could at least in theory<br />
change.<br />
4<br />
Daren Fonda, “Solana Could Be the Visa of Crypto<br />
Networks. Not So Fast, Says Visa,” Barrons. January<br />
2022.<br />
5<br />
We use payments per day as a more accurate measure<br />
of activity than transactions per day. This is because a<br />
single transaction can contain a number of payments.<br />
6<br />
“Confirmed Payments per Day,” Blockchain.com.<br />
7<br />
“Reports Fiscal Fourth Quarter and Full-Year 2021<br />
Results”. Visa Inc., October 2021.<br />
8<br />
“Confirmed Payments Per Day,” Blockchain.com.<br />
9<br />
“Ethereum Daily Transactions Chart,” Etherscan.<br />
10<br />
Jeremy Hinsdale “Cryptocurrency’s Dirty Secret: Energy<br />
Consumption,” Columbia Climate School, May 2022.<br />
11<br />
“Global Energy Perspective 2022,” McKinsey &<br />
Company, April 2022. 14 For example, see: “NFT<br />
Tickets—Create, Mint and Sell Online,” Oveit.com.<br />
12<br />
For example, see: “NFT Tickets—Create, Mint and Sell<br />
Online,” Oveit.com.<br />
13<br />
Ornella Hernandez, “Miami Collabs With TIME,<br />
Mastercard, Salesforce to Sell 5K NFTs,” Blockworks,<br />
July 2022.<br />
14<br />
The Biggest Little City in the World series, “The Space<br />
Whale, CityKey, citykey.art/.<br />
15<br />
Mahesh Singarap, “NFTs offer means for governments<br />
to find solutions,” Mint, September 2021.<br />
16<br />
Fernard Rutten, et al., “Leveraging Blockchain for excise<br />
duties in the tobacco and alcohol industry,” Deloitte,<br />
deloitte.com.<br />
17<br />
“What Is the Howey Test?” FindLaw, May 2018.<br />
18<br />
Lily Yang, “Coinbase shares tumble 21% after report that<br />
it’s facing SEC probe,” CNBC, July 2022.<br />
19<br />
Marc Joffe, “Doubly Bound: The Cost of Issuing<br />
Municipal Bonds,” Haas Institute for a Fair and Inclusive<br />
Society, 2015.<br />
20<br />
Marco Scheltz, et al., “Blockchain and Tokenized<br />
Securities: The Potential for Green Finance,” Asian<br />
Development Bank, February 2020.<br />
21<br />
Alex Kostura, “It’s Time to Re-Democratize Our Local<br />
Communities’ Funding,” Consensys, February 2020.<br />
22<br />
Scott Nover, “Miami’s mayor backed MiamiCoin crypto—<br />
then its price dropped 95%,” Quartz, May 2022.<br />
23<br />
“CityCoins Community Officially Launches with<br />
MiamiCoin, Its First City-Based Token,” GlobeNewswire,<br />
August 2021<br />
24<br />
Scott Nover, “Miami’s mayor backed MiamiCoin crypto—<br />
then its price dropped 95%,” Quartz, May 2022.<br />
25<br />
“Why do we support opinions as they become more<br />
popular? Bandwagon Effect, explained,” the Decision<br />
Lab.<br />
26<br />
Kevin Matthews II, “What to know about speculation:<br />
When investors buy high-risk assets with the<br />
expectation of significant returns,” Business Insider, July<br />
2021.<br />
27<br />
Vicki Bogan, “The Greater Fool Theory: What Is It?”<br />
Hartford Funds, July 2022.<br />
28<br />
Carla Tardi, “Animal Spirits,” Investopedia, May 2021.<br />
29<br />
Fernand Rutten, et al, “Leveraging Blockchain for excise<br />
duties in the tobacco and alcohol industry,” Deloitte.<br />
30<br />
Ibid.<br />
31<br />
Allison Christians, “Taxation in the Age of Smart<br />
Contracts: The CryptoKitty Conundrum,” Ohio State<br />
Tech Law Journal, April 2020.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 23
SPECIAL SECTION | WEB3 AND BLOCKCHAIN<br />
Assessing the Viability of<br />
Web3 Applications<br />
W<br />
hile we have explored<br />
many potential<br />
applications of Web3<br />
technologies to municipal<br />
revenue-raising, the<br />
utility of most existing<br />
Web3 applications<br />
remains unclear, 1 and the application of<br />
Web3 to local government revenue thus<br />
remains largely speculative. Present<br />
contributions should therefore focus on<br />
ways of evaluating such applications.<br />
The questions below can help assess<br />
the viability of potential Web3 revenue<br />
applications.<br />
To what extent does the application<br />
rely on speculative bubble dynamics<br />
versus real-world value?<br />
Bubble dynamics mean that asset prices<br />
exceed real-world value. Speculation<br />
drives bubble growth, as investors<br />
assume that prices will continue to<br />
increase. Speculation is fundamental<br />
to the current value attached to Web3<br />
“digital goods,” demonstrated by the<br />
2022 crypto asset crash. 2 Potential local<br />
government applications should therefore<br />
have their reliance on speculative value<br />
questioned. Mining cryptocurrency relies<br />
heavily on speculative valuations. The<br />
value of mined cryptocurrency depends<br />
on investor perceptions, and the same<br />
seems true of CityCoins and selling NFTs<br />
of public art.<br />
When considering any Web3 revenueraising<br />
proposal, a local government<br />
should make sure it understands what<br />
it is that grounds a Web3 application’s<br />
earning potential. If the answer seems<br />
to come down to the value perceived by<br />
others rather than solid underlying social<br />
or economic value, the application may<br />
rely on bubble dynamics.<br />
What real-world problem<br />
does Web3 solve that existing<br />
technology cannot?<br />
Specifically, the question should be,<br />
“What problem does Web3 solve that<br />
more established technologies can’t?”<br />
To start, we may consider the efficacy<br />
of existing “analogues” to a Web3<br />
innovation. The closest analogue in<br />
our CityCoins example appears to be a<br />
lottery. In general, lotteries work well<br />
enough as they are—which should call<br />
the need for technological innovation<br />
around them into question.<br />
In many areas, innovative technology<br />
can add significant value. The next<br />
step should interrogate the merit of<br />
blockchain technology, specifically,<br />
over other possibilities. Many<br />
technologists have observed that<br />
existing technologies are often already<br />
perfectly capable of delivering some<br />
of the same benefits that blockchain<br />
is purported to provide. For example,<br />
leading computer scientist Professor<br />
Jorge Stolfi has commented: 3 “It<br />
[blockchain] promises a decentralized<br />
ledger where multiple organizations can<br />
contribute input data and supposedly<br />
it will be tamper-proof in the sense that<br />
you can’t delete or change the data,<br />
only add to it. But this has been used<br />
forever. Any large bank or a critical<br />
system has to have such a log for several<br />
reasons: if the system crashes, you<br />
have to go back and see what happened<br />
and rebuild the databases. So, this is<br />
nothing new, people have known how<br />
to do distributed databases in a reliable<br />
manner for years.”<br />
Governments considering blockchain<br />
solutions should clarify the unique<br />
added value of this particular<br />
technology. Blockchain’s standout<br />
feature is that it removes the need for<br />
a central, managing authority. This<br />
may be valuable in certain contexts.<br />
For example, it may hold symbolic<br />
value where there is low trust in<br />
certain authorities. It may also enable<br />
secondary markets to emerge more<br />
easily. In the municipal debt example,<br />
the initial sale of tokenized bonds is<br />
only the beginning. These assets could<br />
then be traded peer-to-peer without the<br />
©<strong>2023</strong> HARRY CAMPBELL C/O THEISPOT.COM<br />
24
need for third parties like brokers. Such<br />
secondary markets may help drive demand<br />
for municipal debt in a unique way.<br />
Considering a Web3 application then<br />
requires three steps: 1) asking what problem<br />
the application is supposed to solve; 2)<br />
asking whether the application will be<br />
able to solve it; and 3) asking why, or if,<br />
the Web3 solution will work better than<br />
more established technologies. Engaging<br />
qualified experts who work with other,<br />
related technologies can help clarify this.<br />
Is the mechanism something I can<br />
explain to the public?<br />
Local governments should have a clear<br />
general understanding of how prospective<br />
Web3 applications generate social and<br />
economic value. Technological complexity<br />
should not justify neglecting this<br />
comprehension. A practical test here is to<br />
imagine explaining the mechanism of an<br />
application to a citizen who is informed<br />
but not an expert. This test is realistic,<br />
given the growing regulatory scrutiny, as<br />
government officials may be on the spot to<br />
explain Web3 innovations to a skeptical<br />
public or media. CityCoins, the most<br />
complex use case described in this series,<br />
may offer a cautionary tale. Perhaps not<br />
coincidentally, it is the one that also<br />
appears set to run afoul of regulatory<br />
scrutiny. 4 So, for any Web3 application,<br />
if a simple explanation cannot be given,<br />
this should be a matter of concern. The<br />
same goes for descriptions that must<br />
be carefully framed to avoid regulatory<br />
attention.<br />
To what extent does the application<br />
rely on value as a “collectable”?<br />
Because of their technical novelty<br />
and the powerful social narratives<br />
surrounding Web3, much of the<br />
economic value of early crypto assets<br />
might be due to the “collector’s value” of<br />
owning the earliest ones. For example,<br />
Twitter founder Jack Dorsey sold an<br />
NFT of his first tweet for almost $3<br />
million to a Web3 entrepreneur. 5<br />
Local governments must ask if any<br />
potential Web3 revenue application<br />
relies on novelty and collection value<br />
to raise revenue. For example, if we<br />
understand NFTs of public art in this<br />
way, we might expect diminishing<br />
returns from NFT sales. The first city<br />
to do so may well find success because<br />
of its first-mover status. The first NFTs<br />
of public artworks or landmarks will<br />
A local government<br />
should make sure it<br />
understands what it is<br />
that grounds a Web3<br />
application’s earning<br />
potential. If the answer<br />
seems to come down<br />
to the value perceived<br />
by others rather than<br />
solid underlying social<br />
or economic value, the<br />
application may rely on<br />
bubble dynamics.<br />
hold historic significance through<br />
being the first of something. This<br />
significance is lessened in later<br />
issuances by other cities joining<br />
the trend. Our initial example also<br />
shows that even the first movers<br />
may not be immune—the very same<br />
tweet NFT that sold for $2.9 million<br />
was recently valued at a little more<br />
than $100. 6<br />
WHY NOT SPECULATE?<br />
Economic theory shows that it is possible to make money even in a<br />
speculative bubble. And many people have become vastly wealthy<br />
through Web3 activities. So, what is wrong with government officials<br />
engaging in speculation? The answer is that the benefits of speculation<br />
generally accrue only to a small number of market participants.<br />
Governments will probably not end up on the winning side. A traditional<br />
goal of government investment has been to protect investment<br />
principal, which is composed of taxpayer money accumulated over<br />
multiple generations of taxpayers for the long-term benefit of the<br />
community. For a single generation of officials to essentially “bet”<br />
this principle on a high-risk/high-reward proposition will probably<br />
not be consistent with the long-term interests of a majority of citizens.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 25
SPECIAL SECTION | WEB3 AND BLOCKCHAIN<br />
Consider the actual benefit of a blockchain application as a<br />
remainder. Once we have subtracted the benefits of regulatory<br />
arbitrage, what is left? This should give a more realistic<br />
picture of the value Web3 can generate in the longer term.<br />
To what extent does the application<br />
rely on “regulatory arbitrage”?<br />
“Regulatory arbitrage” means using<br />
the lack of regulation around Web3 to do<br />
things that are difficult or impossible to<br />
do through more established channels.<br />
The sale of unregulated security tokens<br />
is one example of regulatory arbitrage.<br />
Blockchain is still an emerging and<br />
poorly understood technology, contributing<br />
to the current lack of regulation—but this<br />
context will not last forever. The future<br />
will bring increased regulation, evidence<br />
of which is already mounting. 7<br />
Local governments should consider<br />
how much a Web3 application relies<br />
on regulatory arbitrage. If this is one of<br />
the significant benefits of a blockchain<br />
solution, it is at risk from regulatory<br />
expansion.<br />
Take the example of tokenized municipal<br />
debt. Officials should question where<br />
the efficiency and accessibility gains<br />
from tokenization come from. How much<br />
derives from technological benefits versus<br />
bypassing costly regulatory bureaucracy?<br />
The regulatory scrutiny that CityCoins<br />
attracted should spark a similar question.<br />
Consider the actual benefit of a blockchain<br />
application as a remainder. Once we have<br />
subtracted the benefits of regulatory<br />
arbitrage, what is left? This should give a<br />
more realistic picture of the value Web3<br />
can generate in the longer term.<br />
What unintended consequences or<br />
real-world problems might a Web3<br />
application run into, or even create?<br />
Even if a local government application<br />
passes the tests above, it may not be<br />
viable because of real-world problems and<br />
unintended consequences that can still<br />
stand in the way. Take our municipal debt<br />
example. Even tokenized bonds will<br />
carry a price disadvantage relative to<br />
many other securities. This is because<br />
its tax advantages have no value to<br />
investors below a certain level of<br />
wealth. This problem can prove fatal to<br />
an innovation like this. Another<br />
real-world problem may be found in<br />
potential tax applications of Web3.<br />
A foundational premise of many Web3<br />
applications is that participants in<br />
the application are given a financial<br />
incentive to participate (for example,<br />
they can earn cryptocurrency). But<br />
imagine a Web3 application that<br />
attempts to use a blockchain to assign<br />
tax liability. In this case, participants<br />
face a financial disincentive to be part<br />
of the blockchain! This attempt may<br />
give rise to resistance and attempted<br />
circumvention, making implementation<br />
difficult.<br />
Uses of Web3 may also create an<br />
unexpected issue—Web3 applications<br />
risk technological acceleration that<br />
undermines the utility of existing<br />
regulation.<br />
Another example is the potential<br />
for worsening existing economic and<br />
social inequalities. Web3 is sometimes<br />
positioned as a great leveler that will<br />
democratize access to power, but the<br />
reality has not matched the promise.<br />
Not only does a small portion of people<br />
participate in Web3 currently, but<br />
among those who do, the actual power<br />
is held by a small subset of those<br />
people. For example, as of the end of<br />
2021, fewer than 1 percent of bitcoin<br />
holders held more than 90 percent of<br />
total bitcoin wealth. 8 So it seems that<br />
Web3 economies may be subject to<br />
many of the same wealth-concentrating<br />
features of other economies. It is<br />
reasonable to question whether local<br />
government support for some kinds of<br />
Web3 applications might exacerbate<br />
these forces. For example, let’s imagine<br />
NFTs of public art were to experience<br />
the popularity their proponents hope<br />
for. There would likely be a secondary<br />
market where NFTs would be bought<br />
and sold at high prices. High-price art<br />
markets are generally not known for<br />
their wealth-distributing features! This<br />
same concern would apply to any Web3<br />
application where participants stand to<br />
benefit financially from participation in<br />
the application, and financial incentives<br />
are a fundamental feature of many Web3<br />
applications.<br />
Even if all the other questions above are<br />
addressed, there is still cause for caution.<br />
Municipalities are complex social<br />
systems, meaning they can respond<br />
unpredictably to new interventions, with<br />
consequences and failure modes that<br />
may not be immediately apparent. This<br />
reality should temper optimism about the<br />
potential of new technologies and leave<br />
officials with a degree of skepticism.<br />
1<br />
Avivah Litan, “Gartner Hype Cycle for Blockchain and<br />
Web3,” Gartner, July 2022<br />
2<br />
“Post FTX Collapse Reflections on Crypto | Making Sense of<br />
Crypto and Web3” (web3.lifeitself.org).<br />
3<br />
Jordi Colomé, “Jorge Stolfi: ‘Technologically, bitcoin and<br />
blockchain technology is garbage,” El Pais, July 2022.<br />
4<br />
Robert Kim, “ANALYSIS: City Crypto Coins Are Becoming<br />
the Mayor’s New Clothes,” Bloomberg Law, December<br />
2021.<br />
5<br />
Taylor Locke, “Jack Dorsey Sells His First Tweet Ever as an<br />
NFT for over $2.9 Million,” CNBC, March 22, 2021.<br />
6<br />
Gabrielle Bienasz, “Once Worth $2.9 Million, NFT of First<br />
Ever Tweet Is Now $132,” Entrepreneur, October 17, 2022.<br />
7<br />
Gary Gensler, “Prepared Remarks of Gary Gensler on<br />
Crypto Markets,” Penn Law Capital Markets Association<br />
Annual Conference,” Securities and Exchange Commission,<br />
April 2022.<br />
8<br />
Ashish Sai, et al., “Characterizing Wealth Inequality in<br />
Cryptocurrencies,” Frontiers in Blockchain, December 2021.<br />
©<strong>2023</strong> HARRY CAMPBELL C/O THEISPOT.COM<br />
26
Cutting through the hype<br />
Like many new<br />
technologies, Web3<br />
has generated a<br />
lot of excitement—<br />
but it’s difficult to<br />
tell how much of<br />
that excitement is<br />
justified. Following<br />
are a few more points<br />
to further demystify<br />
Web3 technology,<br />
help you evaluate<br />
potential use cases<br />
and pose questions<br />
that can help local<br />
officials assess other<br />
potential use cases.<br />
Governments are not tech<br />
companies, so they don’t<br />
face the same incentives.<br />
Tech companies often face a<br />
phenomenon known as “first<br />
mover” advantage—meaning<br />
the first company to offer a<br />
particular service or product<br />
will dominate the market.<br />
Amazon.com is a leading<br />
example of a firm that was<br />
one of the first in its category<br />
(online retail) and has gone<br />
on to dominate that category.<br />
Information technologies have<br />
features that tend to result in<br />
monopolistic or oligopolistic<br />
markets. “Metcalfe’s Law”<br />
describes the most important<br />
of these features. The<br />
implication is that there are<br />
often very high stakes for<br />
taking a leading position in a<br />
market. Local governments<br />
are not subject to these same<br />
incentives because no local<br />
government will “dominate”<br />
Web3 revenue, just like local<br />
governments in Silicon Valley<br />
don’t “dominate” the benefits<br />
that have accrued to local<br />
governments from Web 2.0.<br />
(These local governments<br />
have enjoyed more property<br />
and sales taxes from<br />
economic activity of the firms<br />
within their boundaries, but<br />
this pales in comparison with<br />
the total revenue generated<br />
by online sales taxes generally,<br />
for example.)<br />
There is a second-mover<br />
advantage.<br />
Second mover advantage is<br />
when a firm benefits by learning<br />
from the mistakes of the first<br />
mover and offering a product<br />
or service that capitalizes on<br />
those mistakes. This concept is<br />
more akin to the situation local<br />
governments are in. It will be a<br />
better use of the government’s<br />
(and hence taxpayers’) time<br />
and energy to let private<br />
entrepreneurs work out the<br />
most practical applications of<br />
Web3. Government can then<br />
apply those lessons.<br />
That said, the first governments<br />
to commit to Web3 may be more<br />
successful in attracting new<br />
Web3 firms to their communities<br />
(a common justification for<br />
government forays into Web3).<br />
Tech firms’ employment and<br />
physical footprints are usually<br />
much smaller than traditional<br />
firms of comparable annual<br />
revenue, though. For example,<br />
in 2021, Google (Alphabet)’s<br />
revenue was $256 billion, with<br />
about 150,000 employees, and<br />
Facebook (Meta) had revenues<br />
of $115 billion, with about 45,000<br />
employees. General Motors<br />
had revenues of $127 billion,<br />
with 157,000 employees,<br />
and General Electric had<br />
168,000 employees, with $74<br />
billion in revenue. For local<br />
governments that derive<br />
most of their income from<br />
property and sales taxes, the<br />
actual revenue benefit from<br />
attracting Web3 firms may be<br />
relatively modest.<br />
There are opportunity<br />
costs to spending time<br />
and energy on Web3<br />
innovation.<br />
Finally, local governments<br />
have limited time and<br />
energy. If the goal is to find<br />
new sources of revenue,<br />
Web3 is just one option.<br />
GFOA’s Rethinking Revenue<br />
program (gfoa.org/rethinkingrevenue)<br />
has identified many<br />
opportunities for new local<br />
revenues that are far less<br />
speculative than Web3 at its<br />
current stage of development.<br />
Most local governments<br />
would be better off spending<br />
their time and energy on these<br />
more promising avenues.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 27
SPECIAL SECTION | WEB3 AND BLOCKCHAIN<br />
What Happened to FTX<br />
(and why government finance officers should care)<br />
F<br />
TX was one of the world’s largest<br />
cryptocurrency exchanges.<br />
Such exchanges are the<br />
locations where users can<br />
trade crypto assets such as<br />
cryptocurrencies and crypto<br />
tokens, either for other crypto<br />
assets or fiat money. They form the<br />
financial backbone of the mainstream<br />
Web3 ecosystem.<br />
FTX had a partner company, Alameda<br />
Research, which operated as a crypto<br />
hedge fund. Reports surfaced that<br />
Alameda’s main holding was FTT, the<br />
native token issued by the FTX exchange. 1<br />
Given these were meant to be two<br />
separate entities, the value of Alameda<br />
being propped up by a token created<br />
by FTX caused significant concern. In<br />
response, Binance, the world’s largest<br />
crypto exchange, liquidated its holdings<br />
of the FTT token. What ensued was akin<br />
to a bank run—investors scrambled to<br />
withdraw their holdings, leaving FTX in a<br />
liquidity crunch, without the necessary<br />
funds to fulfill all the withdrawal<br />
requests. Binance briefly announced that<br />
it would buy out FTX to ease this liquidity<br />
crunch, but it pulled out after completing<br />
due diligence checks. FTX filed for<br />
bankruptcy soon after.<br />
The implications of the collapse<br />
Government finance officials can<br />
learn a lot from the collapse of FTX,<br />
along with anyone who is interested in<br />
the future of Web3. Most apparently,<br />
the days of lax regulation that have<br />
characterized the Web3 boom appear<br />
to be coming to an end, and rightly so.<br />
Alameda was accused of using FTX<br />
customer deposits without consent to<br />
make highly risky investments, to an<br />
extent that its activities were described<br />
as “old-fashioned embezzlement.” 2<br />
The CEO brought in to oversee FTX’s<br />
bankruptcy described it as suffering a<br />
“complete failure of corporate controls”<br />
to a degree that he had never before<br />
seen in his career. 3 Coming from the<br />
man who managed the fallout from the<br />
collapse of Enron, this statement speaks<br />
volumes. A litany of severe crises<br />
swept the Web3 ecosystem in 2022, 4<br />
with huge numbers of everyday retail<br />
investors losing everything because of<br />
gross misconduct that often resulted in<br />
serious criminal allegations. 5<br />
Not only should this make any<br />
reasonable public official pause before<br />
considering engaging with Web3<br />
projects in any capacity, but it also has<br />
implications for what is often the main<br />
attraction of the ecosystem. The so-called<br />
“regulatory arbitrage” opportunities<br />
of Web3 are the source of many of its<br />
purported speed, efficiency, and costsaving<br />
benefits—and this window of<br />
opportunity appears to be closing.<br />
Second, the collapse is a damning<br />
reality check to one of the most<br />
significant and alluring narratives of<br />
Web3, that of decentralization. The<br />
decentralized nature of the Web3<br />
ecosystem is a source of great excitement,<br />
lauded as the central feature that sets<br />
it apart from, and above, Web 2.0. 6 But<br />
FTX shows that the technical potential<br />
for decentralization does not amount to<br />
decentralization in practice.<br />
The reason that FTX was able to<br />
allegedly conduct such nefarious mixing<br />
of funds with Alameda, and why so many<br />
investors were locked out from their<br />
funds when FTX froze withdrawals, was<br />
because it was a centralized exchange.<br />
Users deposited funds in accounts owned<br />
by FTX to conduct trades and often kept<br />
their assets stored in these centrally<br />
owned accounts. In other words, FTX<br />
operated just like a centralized private<br />
bank. The fact that this crisis took the<br />
shape and reached the scale it did was<br />
due to centralization, the feature Web3<br />
is purported to bypass. That much<br />
of the Web3 ecosystem is in fact not<br />
very decentralized at all has been a<br />
longstanding critique, subject to rigorous<br />
supporting analysis from academia. 7<br />
There are many critics of centralized<br />
exchanges even within the Web3<br />
community. 8 Critics argue that such<br />
centralization contravenes the core<br />
principles of Web3 and that the only<br />
valuable path forward lies with<br />
decentralized finance (DeFi), which<br />
facilitates peer-to-peer transactions<br />
between those holding their own, private<br />
cryptocurrency wallets. This critique<br />
rings true on one level, but the continuing<br />
hope that “true” decentralization is<br />
possible overlooks two things. First,<br />
human beings generally don’t like effort.<br />
Second, marketplaces are subject to<br />
network effects.<br />
28
On the first point, all of us regularly<br />
settle for suboptimal but easier<br />
options in all realms of our lives.<br />
Consider password security. Despite<br />
an awareness of its importance, recent<br />
data shows the five most common<br />
passwords globally are still 123456,<br />
Password, 12345678, qwerty, and<br />
123456789, and a staggering 59<br />
percent of Americans still use their<br />
name or birthdate in their passwords. 9<br />
Similarly, while it is possible to hold<br />
all of one’s crypto assets in an entirely<br />
private wallet and participate in the<br />
Web3 ecosystem in a significantly<br />
more decentralized way, this is a lot<br />
more work. The height of good practice<br />
even goes so far as engraving one’s key<br />
identifying information into metal and<br />
then hiding it for safekeeping. 10<br />
It is not just effort that makes<br />
the world of DeFi unattractive to<br />
many. Using these services requires<br />
significant technical expertise and<br />
leaves users at risk of losing the<br />
entirety of their assets at the click of a<br />
button through scams, bugs, and user<br />
errors. 11 DeFi systems can also carry<br />
prohibitively high transaction costs,<br />
particularly at higher levels of use. This<br />
is because of the inbuilt dynamics of<br />
the Ethereum cryptocurrency network<br />
where most DeFi platforms exist,<br />
which increases transaction costs<br />
(known as “gas fees”) at times of high<br />
demand. This has further led to doubts<br />
as to the scalability of DeFi. 12 Finally,<br />
the need for centralized governance<br />
structures for DeFi platforms have led to<br />
accusations that the ecosystem is not in<br />
fact as decentralized as it claims, 13 and<br />
it has been identified as carrying severe<br />
and systemic financial vulnerability to<br />
boot. Inconvenience aside, none of this<br />
bodes well for DeFi’s status as a serious<br />
contender to centralized exchanges.<br />
Centralized exchanges fill a gap in the<br />
market and meet consumer needs. They<br />
make the exchange process easier and<br />
protect users from risks by overseeing<br />
their transactions, although the value<br />
proposition around risk reduction is not<br />
without irony in the present moment.<br />
Given the choice, it’s likely that many<br />
everyday users of Web3 technology will<br />
gravitate to centralized solutions if they<br />
require less effort and expertise.<br />
The second compounding factor for<br />
this tendency toward centralization<br />
is the economic concept of network<br />
effects, 14 the phenomena whereby the<br />
value of certain goods or services is<br />
affected by the number of actors using<br />
them. They’re often positively correlated,<br />
with more existing users making the<br />
network more valuable. The hegemonic<br />
dominance of many of today’s tech giants<br />
is a result of these effects. Facebook, for<br />
example, dominates because everyone<br />
else using its products makes them<br />
more attractive to other users. Nobody<br />
wants to use a social network that<br />
others aren’t also using. Marketplaces<br />
are one of the prototypical examples of<br />
network effects; there is a reason there<br />
was a single, central Agora in ancient<br />
Greek societies. Marketplaces are most<br />
valuable if others are also using them,<br />
otherwise I might have to look elsewhere<br />
to buy what I want or find a seller for my<br />
product or service. Being able to go to<br />
one place alone provides massive gains.<br />
Crypto exchanges will also be subject<br />
to network effects, meaning they will<br />
likely tend toward a few major players<br />
dominating the market.<br />
Combining the attractive convenience<br />
of centralized exchanges with the<br />
phenomenon of network effects<br />
creates an incredibly strong tendency<br />
toward centralization within the Web3<br />
ecosystem. This tendency has visibly<br />
borne out, with the evidence showing<br />
both that the five largest cryptocurrency<br />
exchanges, by trading volume, are<br />
all centralized, 15 and the centralized<br />
finance portion of crypto holding a<br />
market capitalization that is estimated<br />
at more than 20 times the size of the DeFi<br />
ecosystem. 16<br />
Conclusions<br />
Regulation can remove some of the more<br />
severe risks from using centralized<br />
exchanges and stop a disaster like FTX<br />
happening again. But then if the majority<br />
of the crypto ecosystem becomes people<br />
using large, regulated, centralized<br />
institutions to trade financial products,<br />
there seems to be very little to set this<br />
apart from the world of traditional<br />
finance. The major difference appears<br />
to be a larger role for speculation and<br />
greater detachment from productive<br />
If the majority of the crypto<br />
ecosystem becomes people<br />
using large, regulated,<br />
centralized institutions to<br />
trade financial products,<br />
there seems to be very little<br />
to set this apart from the<br />
world of traditional finance.<br />
economic activity in the real economy<br />
than trading traditional assets such as<br />
stocks and bonds. 17 Such a vision of the<br />
future should pose questions as to where<br />
the value of blockchain technology<br />
really lies.<br />
Theo Cox is head of Life Itself Labs, a<br />
multidisciplinary research institute and<br />
consultancy. Shayne Kavanagh is the<br />
senior manager for research in GFOA’s<br />
Research and Consulting Center.<br />
1<br />
Ian Allison, “Divisions in Sam Bankman-Fried’s Crypto<br />
Empire Blur on His Trading Titan Alameda’s Balance Sheet,”<br />
coindesk.com, November 2, 2022.<br />
2<br />
Brian Goswami and Rohan Schwartz, “FTX Committed<br />
‘Old-Fashioned Embezzlement,’ CEO Tells Lawmakers in<br />
Blistering Hearing,” CNBC, December 13, 2022<br />
3<br />
“’Complete Failure of Corporate Controls’ at FTX, Says New<br />
CEO,” Al Jazeera, November 17, 2022.<br />
4<br />
“Post FTX Collapse Reflections on Crypto | Making Sense<br />
of Crypto and Web3,” Life Itself (web3.lifeitself.org/notes/<br />
post-ftx-collapse).<br />
5<br />
Danny Park, “Terra Cryptocurrency Fugitive Do Kwon Flew<br />
to Serbia Last Month, South Korean Prosecutor Says,”<br />
Yahoo Finance, December 11, 2022<br />
6<br />
Dilip Kumar Patairya, “How Web3 Resolves Fundamental<br />
Problems in Web2, cointelegraph.com, November 28, 2022.<br />
7<br />
Angela Walch, “Deconstructing ‘Decentralization’: Exploring<br />
the Core Claim of Crypto System,”. C. Brummer (Ed.),<br />
Crypto Assets: Legal and Monetary Perspectives (Oxford<br />
Academic, November 2019).<br />
8<br />
Amanda Cassatt, “FTX Showed the Problems of<br />
Centralized Finance, and Proved the Need for DeFi,”<br />
coindesk.com, November 11, 2022.<br />
9<br />
Aimee O’Driscoll, “25+ Password Statistics That May<br />
Change Your Password Habits,” Comparitech blog, August<br />
28, 2020.<br />
10<br />
Daniel Phillips, “The Best Crypto Metal Wallets You Can Buy<br />
Now (UPDATED),” Decrypt, May 21, 2020.<br />
11<br />
“DeFi Investment Risks,” Coinbase Help (help.coinbase.<br />
com).<br />
12<br />
“The DeFi Dilemma: How High Fees Are Crippling DeFi<br />
Growth,” Financial and Business News | Finance Magnates,<br />
February 15, 2021.<br />
13<br />
Sirio Aramonte, Wenqian Huang, and Andreas Schrimpf,<br />
“DeFi Risks and the Decentralization Illusion,” BIS Quarterly<br />
Review, December 2021.<br />
14<br />
“What Are Network Effects?” Business Insights Blog, HBS<br />
Online, November 12, 2020.<br />
15<br />
Top Cryptocurrency Exchanges Ranked By Volume,<br />
CoinMarketCap, accessed December 16, 2022<br />
(coinmarketcap.com/rankings/exchanges/).<br />
16<br />
Akash Takyar, “DeFi vs CeFi | Centralized and Decentralized<br />
Finance Comparison,” LeewayHertz Software<br />
Development Company, November 17, 2020.<br />
17<br />
“Crypto: Can These Financial Perpetual Motion Machines<br />
Work? Making Sense of Crypto and Web3,” Life Itself<br />
(web3.lifeitself.org).<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 29
30
NAVIGATING THE TALENT SHORTAGE<br />
Navigating the<br />
Talent Shortage<br />
The role of just-in-time-talent and virtual CFOs<br />
BY CHARLIE FRANCIS, MIKE MCCANN, AND ADAM STONE<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
As demand for local<br />
government public<br />
finance officers grows,<br />
local governments are<br />
facing challenges in<br />
recruiting and retaining<br />
top talent in this field. A report from<br />
GFOA and Lightcast, “Meeting Demand<br />
for State and Local Government Finance<br />
Jobs” (available at gfoa.org/meetingdemand-public-finance),<br />
demonstrates<br />
that demand for state and local public<br />
finance officers is outstripping the<br />
current supply of workers in the sector<br />
and that increasing the pace of hiring<br />
and the breadth of recruitment will be<br />
necessary to reverse the growing gap<br />
between supply and demand. Local<br />
governments are also facing the prospect<br />
of a wave of retirements, which is<br />
expected to exacerbate the shortage of<br />
public finance officers.<br />
As local governments struggle to<br />
find and hire skilled finance directors<br />
and key finance staff, the use of virtual<br />
CFOs and just-in-time talent is becoming<br />
an increasingly popular option. A<br />
virtual CFO is a remote professional<br />
who provides high-level CFO services<br />
to organizations either full-time or<br />
on a part-time or project basis, while<br />
just-in-time talent refers to the use of<br />
highly skilled contract workers who can<br />
be brought into an organization remotely<br />
or onsite—on a project or part-time basis—<br />
to provide specialized expertise and<br />
support. These approaches can help local<br />
governments access specialized financial<br />
expertise and support when they need it.<br />
In this article we will explore the<br />
evolving role of local government finance<br />
directors and the benefits and challenges<br />
of using virtual CFOs and just-in-time<br />
talent in local government, as well as<br />
provide insights and best practices for<br />
local governments considering these<br />
approaches to support their financial<br />
operations.<br />
THE ROLE IS CHANGING<br />
The role of the local government finance<br />
director is evolving in response to changes<br />
in the political, sociological, and economic<br />
landscapes, along with the increasing<br />
complexity of financial operations. As<br />
local governments face new challenges<br />
and opportunities, finance directors<br />
must adapt and develop new skills and<br />
expertise to meet these changing needs.<br />
One of the key changes in the role of<br />
the local government finance director is<br />
the increasing focus on analytics. With<br />
the proliferation of data in the digital age,<br />
finance directors are expected to be able to<br />
collect, analyze, and interpret financial<br />
data to inform decision-making and<br />
strategy. This may require expertise in<br />
data analysis and visualization tools,<br />
and an understanding of how to use<br />
data to drive financial performance<br />
and growth.<br />
There is also an increasing focus on<br />
external-facing goals such as customer<br />
satisfaction and forward planning.<br />
Finance directors are expected to be<br />
more in tune with the local community<br />
and to have a broader perspective on<br />
the financial needs and goals of the<br />
local government—meaning that CFOs<br />
need to have effective communication<br />
and collaboration skills, as well as<br />
an understanding of how to build<br />
relationships with stakeholders and<br />
partners. They also need to know how to<br />
deploy social media tools to monitor the<br />
needs of the local community.<br />
Local governments have also been<br />
moving toward more decentralized<br />
and distributed models of work,<br />
which means finance directors are<br />
expected to have the ability to manage<br />
horizontally, working in more direct<br />
collaboration with other business units<br />
beyond the traditional boundaries<br />
of the finance department. This may<br />
require finance directors to have strong<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 31
NAVIGATING THE TALENT SHORTAGE<br />
leadership and management skills, as<br />
well as an understanding of how to work<br />
effectively in a distributed and hybrid<br />
work environment. Finance directors<br />
should be able to implement and use<br />
customer-centric community platforms<br />
that connect the front, middle, and back<br />
offices, allowing local governments to<br />
provide more seamless, secure, and<br />
reliable customer-centered services<br />
that meet the evolving expectations of<br />
their customers, enhance the customer<br />
experience, and improve the overall<br />
quality of local government services.<br />
The role of the CFO in local<br />
government is evolving, and the current<br />
labor supply shortage is only increasing<br />
demand for next-generation CFOs who<br />
possess the skills and traits necessary<br />
to navigate these changes.<br />
BENEFITS AND CHALLENGES<br />
One key benefit of using virtual<br />
CFOs and just-in-time talent in local<br />
government is the ability to access<br />
specialized financial expertise and<br />
support on an as-needed basis. Local<br />
governments can bring in temporary<br />
employees who have specific financial<br />
skills or experience to support specific<br />
projects or initiatives, without the<br />
need for a traditional CFO. This can<br />
help local governments save on costs<br />
and resources and can be particularly<br />
useful for small local governments or<br />
those with limited financial resources.<br />
Finance automation and data<br />
analysis are areas in which the use<br />
of virtual and just-in-time talent is<br />
becoming increasingly prevalent.<br />
Automating routine tasks such as<br />
invoice processing, bank reconciliations<br />
and other data entry work can increase<br />
efficiency, enhance accuracy, improve<br />
decision-making, reduce costs, and<br />
improve compliance—which can free up<br />
a government’s resources for the kind<br />
of data analysis that provides insights<br />
into the organization’s financial and<br />
performance health.<br />
Using analytics to support policymaking<br />
provides its own benefits—the<br />
first of which is that policies will be<br />
based on sound, reliable, and accurate<br />
information, which can also help<br />
improve the effectiveness of policies<br />
Local governments<br />
can bring in temporary<br />
employees who have<br />
specific financial skills<br />
or experience to support<br />
specific projects or<br />
initiatives, without the<br />
need for a traditional CFO.<br />
and reduce the risk of unintended<br />
consequences. Using data can also help to<br />
increase transparency and accountability<br />
in policymaking, as decision-makers<br />
can be held accountable for the data and<br />
evidence underpinning their policies. It<br />
can also help identify patterns and trends<br />
that may not be immediately apparent,<br />
which can be used to inform and improve<br />
policy decisions. Other uses for this kind<br />
of data include predictive analytics,<br />
which help the government create longterm<br />
and sustainable policy changes.<br />
There are also some challenges to<br />
consider when using virtual CFOs and<br />
just-in-time talent in local government.<br />
One of these is the potential for<br />
communication and collaboration issues,<br />
as virtual CFOs and just-in-time talent<br />
may not be working onsite. Local<br />
governments must find effective ways to<br />
handle this issue.<br />
Just-in-time professionals have the<br />
experience and expertise to hit the<br />
ground running, but onboarding and<br />
integrating them can be challenging.<br />
Local governments will need processes and<br />
systems to optimize this step, along with<br />
training and support. Just-in-time talent<br />
can bring a fresh perspective to government<br />
leaders, as well as specialized expertise,<br />
but integrating them seamlessly into<br />
the organization is crucial to realizing<br />
the full potential of their contributions.<br />
CASE STUDY #1<br />
Here’s an example of how one county<br />
recently used a virtual budget director<br />
as just-in-time talent to address two<br />
challenges: the immediate need to<br />
get someone into the position, and the<br />
transition to a new budgeting software<br />
system.<br />
The county’s budget director had recently<br />
resigned while the county was in the middle<br />
of moving to a new budgeting software<br />
system. This was a major problem because<br />
the budget preparation had stalled and there<br />
wasn’t a key leader in the financial planning<br />
process, nor was there the ability to prepare,<br />
present, amend, and adopt a new budget.<br />
A virtual CFO is a professional who provides financial guidance and support to<br />
a local government, much like a traditional CFO does for a larger organization.<br />
The main difference is that a virtual CFO provides these services remotely,<br />
usually through telecommuting or online communication, rather than working<br />
on site at the local government. Virtual CFOs can be individual professionals<br />
or part of a third-party firm that provides virtual CFO services to multiple<br />
clients. They may have a wide range of financial expertise and experience,<br />
they and can provide services such as financial planning and analysis,<br />
budgeting and forecasting, financial reporting, and risk management.<br />
Just-in-time talent refers to the use of highly skilled remote or onsite contract<br />
workers who can be brought into a local government on a project or part-time<br />
basis to provide specialized expertise and support. These workers may have<br />
expertise in a specific area of finance such as budgeting or financial analysis,<br />
or they may have a broad range of financial skills and experience. Just-in-time<br />
talent can be used to scale up a local government's financial team during key<br />
moments in the budget planning cycle or financial planning cycle and can be<br />
phased in and out as needed to support the local government's financial goals.<br />
32
So, the county brought in a highly<br />
skilled contract budget director with<br />
experience in both budgeting and<br />
budgeting software implementation, who<br />
worked remotely. The budget process was<br />
reinvigorated to stay on track, transition<br />
to the new software system, and get the<br />
new budget adopted within their state’s<br />
legal deadlines. The county’s chair of the<br />
board of commissioners commented,<br />
“He is everything you want in a<br />
consultant, and someone you rarely<br />
find—available, helpful, and thoughtful,<br />
he provides solutions tailored to<br />
meet our unique needs. His expertise<br />
in local government finance and<br />
budgeting is evident and unmatched.<br />
He has been a tremendous guide.”<br />
Using just-in-time talent in this way<br />
allowed the county to bring in specialized<br />
expertise at a key moment when they<br />
needed it most. It provided a level of<br />
flexibility, and it ensured that the budget<br />
process and transition to a new budgeting<br />
software system were successful.<br />
three months behind, bulk postings<br />
were made into account numbers<br />
without the proper allocation, currentyear<br />
budget-to-actual reports were<br />
inaccurate, and considerable time was<br />
spent looking for data to respond to<br />
requests for information. Bank account<br />
reconciliations were months in arrears.<br />
Outsourcing financial management<br />
provided with the city the following<br />
benefits: immediate access to better<br />
talent, which instantly addressed the<br />
staffing issues and labor shortages;<br />
access to better technology, which<br />
improved processes and productivity;<br />
and reduced risks associated with<br />
ineffective in-house processes.<br />
Outsourcing the city’s financial<br />
management further resulted in<br />
providing management capability that<br />
supported the city’s strategic objectives,<br />
direction, and plans; professionally<br />
directed staff in procedures that<br />
ensured timely and accurate financial<br />
reporting; provided continuous<br />
business process improvement;<br />
leveraged technology into efficiencies;<br />
and identified new innovative financial<br />
management best practices.<br />
Within the first six months, staff<br />
had not only fully reconciled the bank<br />
accounts but also all the general ledger<br />
accounts. The budget was produced<br />
and adopted on time, using new<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
CASE STUDY #2<br />
Another example of using a virtual<br />
CFO in combination with just-in-time<br />
talent was when the CFO for a small<br />
city resigned not only at the start of<br />
the budget preparation process but<br />
also left behind an understaffed and<br />
dysfunctional finance department.<br />
Internally and up until the resignation,<br />
staff had been painstakingly populating<br />
legacy worksheets with updated<br />
calculations for the next fiscal year’s<br />
budget. Many of these worksheets had<br />
broken links and arcane formulas<br />
that staff had difficulty repairing.<br />
The budget work had been also<br />
severely slowed down because of the<br />
overall state of the Finance Department.<br />
Payroll, Accounts Receivable,<br />
Accounts Payable, and general ledger<br />
processes in the Finance Department<br />
were not functioning in a manner<br />
that provided timely and accurate<br />
financial reports. Bottlenecks existed<br />
in each of these functions stemming<br />
from faulty software, unnecessary<br />
business processes, staff turnover,<br />
staff vacancies, and work overload.<br />
As a result, bulk processing of entries<br />
into the general ledger was often<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 33
NAVIGATING THE TALENT SHORTAGE<br />
budget preparation technologies. The<br />
annual audit produced a financial<br />
report, and there was a successful<br />
ERP cloud-migration project.<br />
This project combined using a virtual<br />
CFO with just-in-time talent financial<br />
management and analysts. These<br />
specialized experts were brought in at<br />
the crucial moment before a potential<br />
collapse of the financial system.<br />
CASE STUDY #3<br />
A fast-growing community had<br />
an elected fiscal officer position,<br />
a role that is separately elected<br />
from the community’s council<br />
and administration. The newly<br />
elected fiscal officer found that the<br />
department was short-staffed and<br />
had its hands full maintaining daily<br />
accounting functions. Council and<br />
other community leaders were very<br />
active and demanded a lot of financial<br />
information from the department.<br />
While long-term plans were in place<br />
to grow staffing over time, the daily<br />
staffing wasn’t able to keep up. Rather<br />
than risk burnout, the community<br />
adopted the just-in-time talent<br />
concept to help augment staff for<br />
high-level and more complex tasks.<br />
Within a few months after retaining<br />
a just-in-time talent firm to act as<br />
the virtual CFO, the community had<br />
implemented new procedures that<br />
enabled more informed financial<br />
decisions. This resulted in improved<br />
financial reports that provided timely<br />
and accurate data and evidence for<br />
policymakers. Faster delivery of ad<br />
hoc reports combined with tailored<br />
communications were the key<br />
differences in helping this community<br />
address emerging issues. This also<br />
helped elected and appointed decisionmakers<br />
keep residents and businesses<br />
more informed and ultimately helped<br />
the community make tough decisions.<br />
The combination of just-in-time talent<br />
for day-to-day operations with a trusted<br />
virtual CFO role has empowered a<br />
fast-growing community to compete<br />
and to navigate growth challenges<br />
without having to take on the longterm<br />
fixed costs associated with<br />
hiring an equivalently skilled CFO.<br />
Ultimately, being able to divide the<br />
duties, personalities, and competing<br />
political interests of the elected<br />
officials from financial management<br />
and oversight has been the major<br />
benefit of this arrangement. Getting the<br />
assistance of an independent advisor<br />
has provided safe space, outlets, and<br />
improved discussion quality. The key<br />
to this community and the benefits<br />
it has realized was the elected fiscal<br />
officer’s openness to change and<br />
willingness to trust an outsider’s input,<br />
along with the will to consistently<br />
implement business process<br />
improvement recommendations.<br />
RECOMMENDATIONS FOR<br />
LOCAL GOVERNMENTS<br />
To make the most effective use of<br />
just-in-time talent to support their<br />
financial operations and achieve<br />
their long-term financial goals,<br />
local governments should consider<br />
the following recommendations:<br />
Completely describe the role. The<br />
first step is to completely describe the<br />
role, which will help local governments<br />
determine their specific needs.<br />
Clearly define the financial<br />
expertise and support needed.<br />
After defining the project, carefully<br />
define the specific financial skills<br />
and support that is required to meet<br />
these needs. This will help ensure<br />
that just-in-time talent is brought<br />
in to address specific areas of need<br />
rather than being used as a general<br />
solution for all financial challenges.<br />
Carefully vet just-in-time talent.<br />
Make sure these professionals have<br />
the necessary skills, expertise, and<br />
experience to meet the government’s<br />
financial needs and goals. This<br />
may involve reviewing resumes,<br />
conducting interviews, and seeking<br />
references and recommendations<br />
from other local governments<br />
or financial professionals.<br />
Establish clear communication<br />
and collaboration channels.<br />
Effective communication and<br />
collaboration are essential for the<br />
success of any financial project or<br />
initiative, particularly when working<br />
with just-in-time talent and virtual<br />
CFOs. Local governments should<br />
establish clear communication and<br />
collaboration channels, including<br />
regular meetings, updates, and<br />
progress reports, to ensure that<br />
all team members are aligned and<br />
working towards common goals.<br />
Monitor progress and adjust course<br />
as needed. Local governments should<br />
regularly monitor progress on financial<br />
projects and initiatives involving<br />
just-in-time talent and virtual CFOs<br />
and be prepared to adjust course as<br />
needed. This may involve adjusting<br />
project scope, timeline, or resources,<br />
or bringing in additional just-in-time<br />
talent or virtual CFOs as needed.<br />
CONCLUSIONS<br />
Virtual CFOs and just-in-time talent<br />
can provide local governments with<br />
the financial expertise and support<br />
they need to achieve their longterm<br />
financial goals. By accessing<br />
specialized financial expertise on an<br />
as-needed basis, local governments<br />
can save on costs and resources, and<br />
can scale up financial support during<br />
key moments in the budget or financial<br />
planning cycle. However, there are also<br />
challenges to consider when using these<br />
approaches, including communication<br />
and collaboration issues and difficulties<br />
in onboarding and integrating just-intime<br />
talent. Local governments will<br />
need to carefully consider the benefits<br />
and challenges of using virtual CFOs<br />
and just-in-time talent to ensure that<br />
they are able to effectively support the<br />
financial needs of the organization.<br />
Charlie Francis is a local government<br />
finance expert with more than 45 years of<br />
local government financial management<br />
experience in both the public and private<br />
sectors, including 20 years of experience<br />
as a CFO. Mike McCann is a consultant<br />
with McCann Consulting, which he<br />
developed to help smaller agencies<br />
achieve their goals. He was a co-founder<br />
of OpenGov.org. Adam Stone, CPA, is<br />
an independently registered municipal<br />
advisor and principal with Stone<br />
Municipal Group.<br />
34
“A must-have publicaaon<br />
for every local government.”<br />
Accounnng for Capital Assets: A Guide for State and Local Governments<br />
(2nd ediion) offers clear and straight-forward guidance to public-sector<br />
accounnng professionals who must confront the pracccal challenges of<br />
accounnng for capital assets and similar items on a daily basis.<br />
Chapter-in-Brief Summaries | Quiz Questions | Sample Journal Entries<br />
Purchase your copy at<br />
gfoa.org/capitalassets
36
FUNDING NEW APPROACHES TO PUBLIC SAFETY<br />
Funding New Approaches<br />
to Public Safety<br />
Alternatives to conventional law enforcement in responding to mental health crises<br />
BY SHAYNE KAVANAGH AND GALEN MCDONALD<br />
Local governments across the United States<br />
are considering how they might better<br />
respond to emergency mental health crises.<br />
Conventionally trained law enforcement<br />
officers (LEO) respond to most calls for<br />
service, but standard LEO training is often<br />
insufficient for calls that involve behavioral<br />
and mental health issues. For this reason, “alternative<br />
response”—a municipality’s capability for responding<br />
to these calls with a better-matched skill set—is<br />
garnering interest among many local governments.<br />
One of the critical questions about alternative<br />
response is how to fund it. To begin finding an answer,<br />
we interviewed jurisdictions of varying sizes and<br />
locations and at different points in their journey of<br />
implementing alternative response and investigated<br />
publicly available records for a number of other<br />
governments. This article describes what we found.<br />
INTERVIEW PARTICIPANTS<br />
City and County of Denver, Colorado<br />
City of Eugene, Oregon<br />
County of Fairfax, Virginia<br />
City of Providence, Rhode Island<br />
City of Redmond, Washington<br />
City of Rochester, New York<br />
City of Rockford, Illinois<br />
City of Scottsdale, Arizona<br />
ABOUT “REIMAGINING PUBLIC SAFETY” AND GFOA<br />
This article came out of GFOA’s work with Reimagining Public Safety (RPS), an initiative of the New York University School of Law’s Policing<br />
Project. Through research, design, and innovation, the Policing Project is helping governments understand how to respond to community<br />
needs when individuals call for help, primarily through 911. RPS works locally in the cities of Chicago, Illinois; Denver, Colorado; Tucson,<br />
Arizona; San Francisco, California; and Minneapolis, Minnesota, to reimagine policing from a one-size-fits-all answer to most community<br />
problems to a vision of first response that fosters real community health and safety. RPS engages with and learns from communities,<br />
conducting much-needed research on dispatch and response, and designing a community-informed, data-driven framework to create<br />
response systems that work.<br />
Learn more about the Reimagining Public Safety initiative: safetyreimagined.org | policingproject.org<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 37
FUNDING NEW APPROACHES TO PUBLIC SAFETY<br />
Out of more than 5,000 calls for alternative response since their civilian-staffed response program<br />
was initiated, the City of Denver hasn’t once had to send police backup to a scene where civilian-led<br />
alternative response was sent first.<br />
What does alternative primary<br />
response look like?<br />
A popular alternative primary response<br />
program is co-response, in which a<br />
trained clinician rides along as part of<br />
a regular patrol shift with a specially<br />
trained LEO (such as training in mental<br />
health crisis intervention). The patrol<br />
car with the clinician is directed to<br />
mental health crisis calls whenever<br />
possible.<br />
Another approach is a 100 percent<br />
non-LEO-staffed program that responds<br />
to less dangerous calls, where scene<br />
safety isn’t a concern. This approach<br />
is not necessarily a replacement for coresponse<br />
with an LEO. The City of Denver,<br />
Colorado, for example, has both types of<br />
programs. Out of more than 5,000 calls<br />
for alternative response, Denver hasn’t<br />
once had to send an LEO to a scene where<br />
civilian-led alternative response was sent<br />
first. In about 17 percent of calls, an LEO<br />
arrived on the scene first and then asked<br />
for an alternative responder to take over.<br />
Obviously, dispatch capabilities<br />
are very important here, especially<br />
for a civilian-led program. Different<br />
staffing models and improved dispatch<br />
capabilities require a funding strategy,<br />
which we’ll explore next.<br />
How is alternative response funded?<br />
There is no single funding model for<br />
alternative response, but we found some<br />
general themes.<br />
Local taxes are often the primary<br />
funding source. The local governments<br />
we interviewed rely largely on local tax<br />
dollars to fund alternative response.<br />
Often, this is the local government’s<br />
general fund, as in the City of Scottsdale,<br />
Arizona. The City of Providence, Rhode<br />
Island, uses its general fund for partial<br />
funding. Denver and the City of Rockford,<br />
Illinois, are both funded by another<br />
common source, a dedicated local tax—<br />
in this case, a special sales tax dedicated<br />
to public safety (but not dedicated<br />
solely to alternative response). The City<br />
of Redmond, Washington, is planning<br />
a special property tax levy to fund its<br />
alternative response. Up until recently,<br />
the City of Eugene, Oregon, funded its<br />
entire program from the general fund,<br />
but more recently, part of its program is<br />
funded through a dedicated payroll tax,<br />
with the rest coming from the general<br />
fund budget.<br />
GFOA’s research report, “New Taxes<br />
that Work” provides guidance on how to<br />
best approach raising a new local tax.<br />
Here are some useful findings from that<br />
report, along with examples of how those<br />
findings apply to the governments we<br />
interviewed:<br />
• Associate the tax with a concrete<br />
service. In Denver, voters approved<br />
a 0.25 percent increase in sales and<br />
use taxes in 2018 specifically to fund<br />
behavioral health services for Denver<br />
residents. At least 10 percent of the<br />
revenue generated by the tax on retail<br />
sales comes back to Denver for funding<br />
alternatives to jail, including Denver’s<br />
co-responder program.<br />
• Engage citizens to help define the need<br />
for new revenues and build a network<br />
of supporters for new revenue. Denver<br />
does both through the Caring for Denver<br />
Foundation, a nonprofit that helps<br />
administer the special tax revenue.<br />
Its board members are drawn from<br />
branches of Denver government and from<br />
community organizations. Caring for<br />
Denver uses tax dollars to make grants<br />
that support behavioral health services.<br />
• Demonstrate that the tax produces<br />
value for the public. In Rockford, the<br />
special tax is collected by the county and<br />
distributed to the city as a “grant” that’s<br />
made available to local agencies (like<br />
the city), which must apply and make<br />
their case for co-response as a worthwhile<br />
use of funds. Similarly, in Denver, the<br />
city also must apply to receive revenue<br />
from the special tax. The funding of<br />
alternative response is not automatic<br />
but predicated on the city government<br />
making the case that the services<br />
provide adequate value.<br />
Read the full report at gfoa.org/<br />
materials/new-taxes-that-work<br />
38
Governments are making limited use of<br />
American Rescue Plan Act (ARPA) funds.<br />
Although our interviewees had access to<br />
ARPA funds, few of them seem to be using<br />
the money for alternative response. 1<br />
But some are. Providence budgeted<br />
approximately $700,000 of its FY <strong>2023</strong><br />
general fund money for city staff and<br />
contractors in its alternative response<br />
program, and it identified an additional<br />
$1.75 million in ARPA funding to expand<br />
the program.<br />
Limited use of ARPA funds may be<br />
a sensible decision—ARPA funding<br />
is a non-recurring revenue, whereas<br />
alternative response is intended to be an<br />
ongoing program. So, ARPA is only useful<br />
as a temporary funding source. To keep<br />
alternative response going, governments<br />
will need a sustainable funding strategy<br />
reaching into the future. That is why,<br />
consistent with GFOA guidance on the<br />
use of ARPA funds, local governments<br />
seem to be using ARPA funding for nonrecurring<br />
expenditures to protect their<br />
long-term financial health. (See the<br />
guidance at gfoa.org/american-rescueplan-spending-guiding-principles).<br />
That said, there are reports of some<br />
local governments using ARPA funding to<br />
support alternative response, including<br />
the cities of Houston, Texas, and Detroit,<br />
Michigan. Publicly available records<br />
are not clear about the extent to which<br />
these cities are spending ARPA funds on<br />
recurring or non-recurring expenditures,<br />
however, nor do they describe the precise<br />
nature of the program being funded. 2<br />
Medicaid reimbursement does not play<br />
a consistent role in funding alternative<br />
response. Medicaid could, in theory,<br />
support co-response. Among the<br />
governments GFOA spoke with, the use of<br />
Medicaid was uneven. Denver appeared<br />
to be the government making the most<br />
use of Medicaid reimbursement. Denver<br />
covers approximately half the costs of<br />
its co-response program with Medicaid,<br />
and the program has benefited from a<br />
Medicaid “carve out” 3 because it diverts<br />
clients from more expensive medical<br />
interventions. The 100 percent civilianled<br />
program had a similar experience—<br />
about half the costs were billable to<br />
Medicaid after the program finished<br />
the pilot stage and was more widely<br />
implemented. As for the other cities we<br />
spoke with, only Rockford enjoyed any<br />
Medicaid reimbursement, exclusively for<br />
their fire department’s role in responding<br />
to people in crisis.<br />
Although Medicaid can be an important<br />
source of alternative response funding,<br />
there are a couple of cautions.<br />
To make Medicaid work, program<br />
partners must be able to do the billing.<br />
Colorado has expanded Medicaid coverage<br />
and has certain Medicaid policies in<br />
place that may play a role in Denver’s<br />
ability to get Medicaid coverage for these<br />
programs. In addition, the nonprofit<br />
that Denver partners with to provide<br />
clinicians has the institutional capability<br />
to bill Medicaid. But if local governments<br />
don’t have the administrative capacity<br />
to go through the steps necessary to get<br />
Medicaid reimbursement, they might<br />
miss an opportunity for support through<br />
Medicaid.<br />
If the geographic area targeted for<br />
alternative response has a high proportion<br />
of people who use Medicaid, the percentage<br />
of reimbursement may be higher that<br />
it would be if the alternative response<br />
program covers other parts of the city.<br />
For example, Denver experienced a much<br />
higher rate of Medicaid reimbursement<br />
for the pilot of its 100 percent civilian-led<br />
program because of the geographic area<br />
where the pilot took place.<br />
The federal government is encouraging<br />
greater use of Medicaid to support<br />
mobile crisis intervention units staffed<br />
with mental health professionals. The<br />
American Rescue Plan included $1.2<br />
billion to support this service.<br />
911 CALLS | BY THE NUMBERS<br />
What are the lessons we can learn?<br />
Our interviews produced several<br />
potential lessons for local government to<br />
draw upon.<br />
Be mindful of the long-term financial<br />
sustainability of the co-response model.<br />
Temporary funds, like ARPA and certain<br />
kinds of grants, can be helpful for getting a<br />
program started, but a long-term funding<br />
strategy is also needed. Temporary<br />
revenues are useful for limited-time costs<br />
like new equipment and vehicles but are<br />
not a good option for supporting a program<br />
over the long-term.<br />
Consider a dedicated tax. Some of the<br />
local governments we spoke with have a<br />
dedicated local tax. The aforementioned<br />
GFOA report “New Taxes that Work”<br />
describes the features of successful new<br />
taxes.<br />
Consider the design of the program<br />
itself. For example, Fairfax County<br />
initially considered various co-response<br />
models that included additional public<br />
safety staff. The county ultimately<br />
selected the police/clinician model<br />
to fill the biggest gap in their crisis<br />
response system, with long-term cost as a<br />
consideration in their decision-making.<br />
Consider contracting. There may be<br />
advantages for contracting out for<br />
significant parts of the alternative<br />
response model, making it easier to adjust<br />
the level of service up or down. The salary<br />
and benefit cost of public employees often<br />
becomes, effectively, fixed costs in local<br />
Below, the reasons for 911 calls by percentage in a large American city (population 500,000–1,000,000)<br />
from 1/1/2018–8/1/2022. The Reimagining Public Safety initiative is helping governments understand<br />
how to best respond to 911 calls, particularly when a conventional law enforcement response isn’t<br />
required, or could potentially make the situation worse.<br />
Disturbances and Suspicious Persons<br />
Administrative and Investigative<br />
Property<br />
Domestic/Family, Threats, Fights, and Weapons<br />
Traffic<br />
Medical and Mental Health<br />
Social and Substance Issues<br />
Alarms<br />
Emergency<br />
Violent Crime<br />
Source: Reimagining Public Safety, safetyreimagined.org<br />
4.2%<br />
3.2%<br />
6.7%<br />
6.7%<br />
6.3%<br />
10.3%<br />
14.6%<br />
14.3%<br />
13%<br />
20.5%<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 39
FUNDING NEW APPROACHES TO PUBLIC SAFETY<br />
EXHIBIT 1 | OPPORTUNITIES FOR FINANCIAL ASSISTANCE FOR ALTERNATIVE RESPONSE FROM THE FEDERAL GOVERNMENT<br />
OPPORTUNITY TIMELINE AND FUNDING FOCUS AND REQUIREMENTS<br />
Accelerating Justice<br />
System Reform<br />
Grant Program<br />
(under the Safer<br />
America Plan)<br />
• Funding is not confirmed<br />
• Request: $15 billion over 10 years<br />
• Part of President Joe Biden’s FY 23 budget<br />
request<br />
Funds can be used to prevent violent crime and/or ease the burden on police officers<br />
so they don’t have to respond to non-violent situations that don’t require police<br />
intervention.<br />
Can be used to expand co-responder or alternate responder programs so calls that<br />
should be answered by mental health or substance use disorder providers or social<br />
workers – alone or in partnership with police – are not solely the responsibility of<br />
law enforcement.<br />
To qualify, jurisdictions must repeal mandatory minimums for non-violent crimes and<br />
change other laws that contribute to increased incarceration rates without making<br />
our communities safer.<br />
American Rescue<br />
Plan Act funds<br />
• $1.2 billion: Medicaid Mobile Crisis Intervention<br />
Services<br />
• Funds appropriated each year over 5 years<br />
(look out for funding each year)<br />
• Funding timeline in unclear<br />
ARPA (Section 9813): “Amends Title XIX of the SSA to add a new section 1947. Section<br />
1947 authorizes a state option to provide qualifying community-based mobile crisis<br />
intervention services for a period of up to five years, during the period starting April<br />
1, 2022, and ending March 31, 2027.” 1<br />
Community-based mobile crisis intervention services with 85% federal matching<br />
funds for the first 3 years 1<br />
U.S. Department of<br />
Justice Office of<br />
Justice Programs<br />
All currently closed:<br />
• Edward Byrne Memorial Justice Assistance<br />
Grant<br />
• Project Safe Neighborhoods (PSN)<br />
• Byrne Criminal Justice Innovation Program<br />
(BCJI)<br />
• Smart Prosecution – Innovative Prosecution<br />
Solutions<br />
Edward Byrne Memorial Justice Assistance Grant Program: Includes funding support<br />
for mental health programs and related law enforcement and corrections programs<br />
such as behavioral programs and crisis intervention teams:1<br />
• Applications are solicited every spring/summer<br />
• Awards of $25,000 or more are for 4 years<br />
• Awards of less than $25,000 are for 2 years<br />
Bipartisan Safer<br />
Communities<br />
Act: Expanding<br />
community-based<br />
behavioral<br />
health services<br />
Includes $40 million for the U.S. Department<br />
of Health and Human Services to support the<br />
Certified Community Behavioral Health Clinic<br />
Medicaid Demonstration Program; includes<br />
support for new planning grants to states<br />
CCBHCs provide comprehensive, coordinated, person-and family-centered services<br />
and 24/7 crisis intervention services.<br />
The Bipartisan Safer Communities Act has expanded to all states the opportunity to<br />
participate in the CCBHC model demonstration and made it permanent.<br />
Could supplement funding for crisis intervention<br />
government. By contracting, staffing<br />
costs could more readily remain variable<br />
costs. For example, the City of Eugene,<br />
Oregon, has a five-year contract with its<br />
provider and can change scope, service<br />
hours, and so on at the end of a term. The<br />
city recently negotiated for an additional<br />
five hours of daily coverage, for a total of<br />
36 coverage hours available in a day (for<br />
example, during high-demand periods<br />
there are two teams available, instead<br />
of just one). Also, outside organizations<br />
may have special skills or competencies<br />
that a government doesn’t.<br />
Consider telehealth tools, authorized by<br />
Medicaid, to provide care in behavioral<br />
health emergencies. States like South<br />
Carolina, South Dakota, Montana, and<br />
Oklahoma supply the police or emergency<br />
medical technicians with tablets that<br />
allow them to connect patients directly<br />
with behavioral health clinicians.<br />
Consider Medicaid billing capability.<br />
A local government’s administrative<br />
capacity may be a barrier to taking<br />
advantage of opportunities to secure<br />
reimbursement from Medicaid. Denver<br />
partnered with a nonprofit to provide<br />
clinician staffing for its alternative<br />
response; the nonprofit already had<br />
Medicaid billing capacity. Federal policy<br />
to encourage alternative response could<br />
result in expanded opportunities for<br />
Medicaid reimbursement. In fact, the<br />
ARPA has established new funding<br />
through Medicaid for community mobile<br />
crisis intervention services. See Exhibit<br />
1 for more information on this and other<br />
opportunities for federal support.<br />
Consider grant opportunities. The City<br />
of Rochester, New York, makes extensive<br />
use of grants to fund its alternative<br />
response program, including external<br />
grants from the U.S. Department of Justice,<br />
New York Office of Victims Services and<br />
Department of Criminal Justice Services,<br />
and Monroe County (with local taxes<br />
covering the rest). The city has been able<br />
to revamp longstanding grant budgets and<br />
secure modest increases in grant support<br />
to create new positions for alternative<br />
response.<br />
As national and state governments look<br />
for ways to encourage alternative response,<br />
more grant funding may become available.<br />
That said, governments must keep in mind<br />
the difference between one-time grants<br />
and ongoing grants. Some of the local<br />
governments we spoke with were accessing<br />
ongoing grant programs that provide the<br />
prospect of longer-term funding (these<br />
include Rochester and Rockford). Some<br />
grant opportunities may provide a one-time<br />
infusion of money, and these would be<br />
appropriate for startup costs like vehicles<br />
40
The advantage of a<br />
regional approach is<br />
that it makes it easier<br />
to access economies of<br />
scale, spreading fixed<br />
costs of public service<br />
across a larger tax base.<br />
and equipment, but not appropriate for<br />
ongoing costs like staff salaries—unless<br />
a plan is in place to cover those costs with<br />
other sources of funds in subsequent<br />
years. There may also be a variety of<br />
federal grant opportunities in the next<br />
few years, as summarized in Exhibit 1.<br />
Consider regional approaches. Regional<br />
approaches may have the potential to<br />
reduce the cost of alternative response<br />
to participating jurisdictions. The City of<br />
Eugene’s alternative response program<br />
shares a contract with the neighboring<br />
City of Springfield, Oregon. Each city<br />
funds its own participation in the<br />
program and handles calls for service<br />
on its own, but the program relies on the<br />
same local nonprofit (White Bird Clinic)<br />
to provide the core service.<br />
The advantage of a regional approach<br />
is that it makes it easier to access<br />
economies of scale, spreading the fixed<br />
costs of public service across a larger<br />
tax base. Sources of economies of scale<br />
might include:<br />
• To the extent that the potential<br />
workload for alternative responders in<br />
one community is not enough to justify<br />
coverage, multiple communities could<br />
share the responders.<br />
• Administrative support services like<br />
payroll, accounting, legal, and so on.<br />
• After the immediate crisis is over,<br />
the person who was in crisis is often<br />
in need of specialized mental health<br />
attention. Multiple communities could<br />
collaborate to start or fund a mental<br />
health clinic for this kind of treatment.<br />
• Regional approaches to 911 systems<br />
have benefited many governments<br />
because of capital costs and<br />
the specialized labor required.<br />
Regionalized dispatch might also be<br />
able to build specialized capabilities<br />
more easily for alternative response.<br />
Hear More About Regionalism and Alternative Response on the Public Money Pod<br />
The December 19, 2022, episode of the Public Money Pod features Beth Goldberg<br />
from the City of Kirkland, Washington, explaining how five communities in greater<br />
Seattle collaborated to fund and launch an alternative response service. The Public<br />
Money Pod can be found on all major podcasting platforms. It is produced by the Center<br />
for Municipal Finance at the Harris School of Public Policy and is sponsored by GFOA.<br />
There may be limits, however, on how<br />
much can be achieved with economies<br />
of scale. The greatest cost of municipal<br />
services (including alternative<br />
response) is labor. After a certain size<br />
of program, the cost of labor will scale<br />
up with the workload. In fact, research<br />
on economies of scale for other kinds<br />
of municipal services have found that<br />
the potential for economies of scale is<br />
largely realized at populations as low as<br />
20,000 to 40,000. 4<br />
Conclusions<br />
As local governments look to new ways<br />
to provide services to meet the changing<br />
needs of their communities, they<br />
will also need new funding models.<br />
Alternative response for mental health<br />
crises is an example of a service change<br />
that many local governments are<br />
exploring. This article has presented<br />
findings that can be helpful both for (1)<br />
designing a viable long-term funding<br />
strategy for alternative response; and<br />
(2) identifying principles for funding<br />
strategies for service innovations<br />
other than alternative response.<br />
Shayne Kavanagh is the senior manager<br />
of research in GFOA’s Research and<br />
Consulting Center. Galen McDonald is<br />
a policy associate in GFOA’s Federal<br />
Liaison Center.<br />
1<br />
Among the other local governments GFOA consulted,<br />
very little use is being made of ARPA funds. Denver,<br />
Rockford, Scottsdale, and Redmond are not using ARPA<br />
funds at all. Fairfax County had anticipated using ARPA to<br />
help fund its pilots but decided to rely mostly on its own<br />
funding sources because the schedule for implementing/<br />
expanding co-response did not match the schedule of<br />
ARPA funding availability.<br />
2<br />
We consulted academic researchers who are examining<br />
publicly available ARPA data and they confirmed that<br />
the records don’t differentiate between recurring and<br />
non-recurring expenditures, and that the categorizations<br />
of spending are often not well defined.<br />
3<br />
A carve-out is a Medicaid-managed care financing model<br />
where some portion of Medicaid benefits are separately<br />
managed and/or financed.<br />
4<br />
Read more about the research on economies of scale in<br />
local government services in: Shayne Kavanagh, Clarence<br />
Wardell III, and Jennifer Park, “Does Consolidating Local<br />
Governments Work? Part 1 in a Four-Part Series About<br />
Improving Local Government Coordination and Reducing<br />
Waste from Local Government Fragmentation,” GFOA<br />
research report, December 2020.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 41
42
THE SECRETS OF VISIONARY THINKERS<br />
The Secrets of<br />
Visionary Thinkers<br />
5 Steps to Living in Possibility<br />
BY SUSAN ROBERTSON<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
We tend to believe that<br />
famous innovators<br />
or other “creative”<br />
people have some<br />
inherent quality<br />
that the rest of us<br />
don't have. But the<br />
truth is—they don’t.<br />
They've simply cracked the code on<br />
how to consistently live in possibility<br />
instead of living in obstacle.<br />
Visionary thinkers see possibilities.<br />
Always. Most of us mostly see obstacles,<br />
most of the time. We move through work,<br />
and life, by addressing whatever the<br />
next obstacle is that falls into our path.<br />
We problem-solve the next issue on a<br />
project, we deal with the next customer<br />
complaint, we address the next<br />
challenge with our kids. But too rarely do<br />
we look up, survey the world, and make<br />
a conscious choice to shape our world to<br />
make it the way we want it to be.<br />
Visionary thinkers make that daily<br />
choice—to imagine the possibility of a<br />
different world, to hold on to that vision,<br />
and to refuse to let the obstacles limit<br />
their thinking. They live in possibility.<br />
Visionary thinkers are open-minded,<br />
innovative, imaginative, willing to take<br />
risks, optimistic, and collaborative—all<br />
skills related to creative thinking. They<br />
regularly imagine, consider, and pursue<br />
new ideas and solutions.<br />
The good news is that all these creative<br />
thinking skills are learnable! Anyone<br />
can become a more visionary thinker by<br />
learning to leverage the creative genius<br />
that’s already hidden inside.<br />
One of the primary barriers to living<br />
in possibility is the negativity bias, a<br />
cognitive bias, or mental shortcut, that<br />
all humans share. It’s the phenomenon<br />
that negative experiences have a greater<br />
impact on our thoughts, feelings, and<br />
behaviors than positive experiences<br />
do. That seems counterintuitive, but a<br />
wealth of research shows that negative<br />
affects us more than positive. As a result,<br />
we are much more motivated to avoid<br />
negative than to seek positive.<br />
Our brains have evolved to excel at<br />
identifying potential negative so we can<br />
avoid them. It’s a survival mechanism,<br />
and it happens in the most primitive<br />
part of our brain, the amygdala. The<br />
amygdala is responsible for detecting<br />
threats and triggering the fight-orflight<br />
response. It’s laser-focused and<br />
lightning fast at identifying potential<br />
problems. This instant identification<br />
of negatives is what can trap us into<br />
living in obstacle.<br />
Living in possibility requires<br />
refusing to let the negativity bias rule<br />
our thinking. There are a few steps<br />
that can make a significant impact,<br />
helping us manage around this pitfall<br />
and transform the way we think.<br />
#1 Pinpoint the problem.<br />
First, we must be able to spot when<br />
the negativity bias is at work.<br />
The easiest way to do that is by<br />
monitoring one simple phrase: “Yes,<br />
but….” On the surface, these words<br />
seem innocuous. And because we say<br />
them and hear them so frequently,<br />
they don’t seem like a problem.<br />
But this short phrase is a massive<br />
blockade to creative and visionary<br />
thinking. It dismisses any potential<br />
positives in an idea or concept before<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 43
THE SECRETS OF VISIONARY THINKERS<br />
#4 Teach the team.<br />
When working with others, ask them<br />
to do the same. Help them understand<br />
that letting our natural negativity bias<br />
dominate the conversation has the<br />
potential to immediately kill any idea.<br />
Let everyone know that, of course, there<br />
will be a time to solve the problems, but<br />
the first task is to identify the potential<br />
the idea holds. If there aren’t enough<br />
potential positives, then it’s time to<br />
move to a new idea.<br />
But if the idea is visionary and can<br />
make a real difference, it’s imperative<br />
to hold off on the negativity bias<br />
momentarily and allow the brilliance<br />
of the idea to shine through.<br />
Visionary thinkers make that daily choice—to<br />
imagine the possibility of a different world, to hold<br />
on to that vision, and to refuse to let the obstacles<br />
limit their thinking. They live in possibility.<br />
even identifying what those positives<br />
might be. Instead, it focuses the energy<br />
and attention of both the speaker<br />
and the listeners on all the possible<br />
negatives. This can easily overwhelm<br />
any idea and immediately kill it.<br />
#2 Manage your mind.<br />
Once you’ve determined the negativity<br />
bias is at work (someone said “yes,<br />
but…”), the next step is to make a<br />
conscious choice to change your<br />
thinking. The key is to first identify<br />
the potential positives in any idea<br />
before focusing on the negatives.<br />
This sounds easy, but it’s actually<br />
quite hard. It’s counter to a basic<br />
instinct, so it really does require a<br />
conscious choice to think this way,<br />
plus very real discipline to put it<br />
into practice regularly.<br />
#3 Nix the negatives.<br />
The next critical step is to refrain<br />
from saying the negatives out<br />
loud—not yet anyway. The truth is,<br />
regardless that you’ve consciously<br />
chosen to identify the positives<br />
first, your brain will subconsciously<br />
identify the negatives anyway.<br />
It’s instinctive and instant. Even<br />
while you’re enumerating positives,<br />
your brain will be busy identifying<br />
negatives, too. But the simple trick<br />
of not saying those negatives out<br />
loud will help dramatically. Force<br />
yourself to speak out loud—and<br />
write down—the positives first.<br />
#5 Transform the<br />
troublesome term<br />
Once the above steps have led you to<br />
a potentially winning idea, it’s time<br />
to address the problems with it. To<br />
continue to remain in possibility, you<br />
must change the conversation; you<br />
cannot return to “yes, but…” language.<br />
Instead, articulate the challenges<br />
as a “how might we…?” question. So,<br />
instead of saying “Yes, but it’s too<br />
expensive,” say, “How might we do it<br />
more affordably?” This trick of flipping<br />
a problem statement into a problemsolving<br />
question is a neuroscience<br />
brain hack that will revolutionize your<br />
thinking and problem-solving.<br />
This process of identifying positive<br />
potential first is the only way to find big<br />
ideas. Every successful innovation, in<br />
any industry or endeavor, is the result<br />
of someone, or a team, choosing to live<br />
in possibility in this way.<br />
Visionary thinking requires making<br />
space for ideas that, at first, seem scary<br />
or difficult. It takes some real courage<br />
to push past our immediate “yes,<br />
but…” response and instead focus the<br />
conversation on “what if…?” If we don’t<br />
hold ourselves accountable to looking<br />
for the positives, we’ll never consider<br />
or implement any truly new ideas.<br />
Visionary thinkers must master this<br />
skill and learn to live in possibility.<br />
Susan Robertson is a creative thinking<br />
expert with more than 20 years of<br />
experience speaking and coaching in<br />
Fortune 500 companies.<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
44
Got GASB Quessons?<br />
As GFOA members connnue to have quessons<br />
related to GASB 87 and GASB 96, we've compiled<br />
a list of resources in one place on GFOA's website.<br />
This new resource center includes recent arrcles<br />
and do-it-yourself tools and templates to help in<br />
the learning and implementaaon process.<br />
Learn more at<br />
gfoa.org/gasb-resource-center
46
BETTER DECISIONS IN THREE STEPS<br />
Better Decisions<br />
in Three Steps<br />
Using a triage process for more efficient problem-solving<br />
BY SHIELA MIE LEGASPI<br />
Managers face any number of challenges that require immediate attention and action, so the ability to make<br />
decisions and solve problems quickly can be critically important. One tool that can be of help is the triage<br />
decision-making process. Triage decision-making is used in emergency medical situations to determine<br />
the treatment required for patients, who are prioritized based on the severity of their condition and the<br />
likelihood of recovery, as well as what additional measures will need to be taken for them to fully recover.<br />
This same approach can be applied to business management. Managers can use this to prioritize issues<br />
and allocate resources to address the most pressing problems. More importantly, it puts a process in<br />
place: each person knows how they fit into the triage decision-making process and can tap in if needed.<br />
Without triage and defined roles, the issue can escalate rapidly. Here is how to put it into practice.<br />
©<strong>2023</strong> JAMES YANG C/O THEISPOT.COM<br />
Identify the issue.<br />
The first step is to identify the issue or problem. To determine<br />
the scope and impact of the problem, gather all relevant<br />
information and data. At this stage, involving stakeholders—<br />
including employees and customers—will help you<br />
understand the full scope of the issue. Adopting a big-picture<br />
mindset to better understand the issue helps you effectively<br />
strategize and appropriately allocate people and resources<br />
toward the desired outcome.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 47
BETTER DECISIONS IN THREE STEPS<br />
Prioritize the urgency of the issue.<br />
Based on its urgency and importance, prioritize the<br />
problem into three levels: high, medium, or low. Highpriority<br />
issues are critical and require immediate<br />
attention, while medium-priority issues can wait<br />
a little longer before action is needed. Low-priority<br />
issues are not time-specific and don’t require immediate attention.<br />
Some managers like to color-code their problems like nurses do in the<br />
hospital emergency room. Color-coding allows you to categorize each<br />
type of problem and reference it easily if it comes up again.<br />
After prioritizing the situation, immediately allocate resources to<br />
address the high-priority problems—assigning personnel, providing<br />
funding, or delegating responsibilities. This ensures that your teams<br />
focus their efforts where they are most needed.<br />
Monitor progress.<br />
The final step in the triage decision-making process<br />
is to monitor progress and adjust the plan as needed.<br />
As with any decision-making process, unforeseen<br />
obstacles or challenges that may arise will need to<br />
be accounted for. Continually monitor progress and<br />
adapt the strategy to resolve the issue as effectively and efficiently as<br />
possible. Also record the entire process, which helps create a system<br />
to better tackle other problems that arise in the future.<br />
Using the triage<br />
decision-making<br />
process allows for<br />
quick and efficient<br />
problem-solving,<br />
helps reduce<br />
stress, increases<br />
productivity, and<br />
significantly improves<br />
team communication<br />
and collaboration.<br />
Benefits<br />
This general triage process emulates the one<br />
used by emergency nurses but setting up a<br />
three-point decision-making process for each<br />
department can work just as efficiently.<br />
For example, start by determining if you or<br />
your team has set the right expectations, and<br />
if the “client” understood them (or vice versa).<br />
Have an evaluation call or meeting to verify<br />
that the priorities, tasks, and job descriptions<br />
were clear, and address the mismatch or<br />
misunderstanding, perhaps by providing more<br />
or better training.<br />
Using the triage decision-making process<br />
allows for quick and efficient problem-solving,<br />
helps reduce stress, increases productivity, and<br />
significantly improves team communication<br />
and collaboration. You might fail, and possibly<br />
many times, but as they say, hard times create<br />
strong people. Failure, while disappointing,<br />
can lead to further learning opportunities, and<br />
implementing clear processes helps minimize<br />
the severity of most problems.<br />
Shiela Mie Legaspi is the president of<br />
Cyberbacker, a provider of virtual assistant<br />
services and administrative support.<br />
©<strong>2023</strong> JAMES YANG C/O THEISPOT.COM<br />
48
Welcome GFOA’s Newest<br />
Affinity Group!<br />
At GFOA’s Annual Conference in<br />
May, the LGBTQIA+ Caucus<br />
officially launched. Through<br />
networking and educaaon, this<br />
caucus will advocate for<br />
LGBTQIA+ members within the<br />
profession and work to increase<br />
the visibility of LGBTQIA+ people<br />
within GFOA and the profession<br />
as a whole.<br />
Join today at<br />
gfoa.org/lgbtqia-caucus<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 49
LEADERSHIP OPPORTUNITY<br />
Standing Commiiee<br />
Applicaaons Open<br />
Accve throughout the year, GFOA's standing commiiees<br />
are key links between the changes happening in the<br />
finance offices of members and the services the<br />
associaaon provides to help finance officers successfully<br />
manage those changes. The commiiees give direccon for<br />
GFOA's services by formulaang new policies and raising<br />
professional standards via best praccces.<br />
Apply now at<br />
gfoa.org/commiiees
In Practice<br />
FINANCE | ACCOUNTING | PERSPECTIVES | INTERVIEWS<br />
FINANCE<br />
METRO, OREGON<br />
Creating a Collaborative Culture of Curious<br />
People Who Are Committed to Public Service<br />
BY KATIE LUDWIG<br />
Metro, a regional<br />
government agency<br />
serving northwestern<br />
Oregon, has developed a<br />
collaborative structure<br />
and culture that helped the organization<br />
navigate the COVID-19 pandemic and<br />
its effects, while continuing to focus<br />
on delivering better outcomes through<br />
compromise and problem-solving.<br />
Metro serves about 1.7 million<br />
people in Clackamas, Multnomah,<br />
and Washington counties. Brian<br />
Kennedy, Metro’s chief financial officer,<br />
explained that the organization was<br />
created in the 1980s through the merger<br />
of a council of governments focused on<br />
land use and transportation planning<br />
and a solid waste service district. Since<br />
this merger, the organization has grown<br />
to accommodate other operations<br />
including the Oregon Convention<br />
Center, parks and nature systems across<br />
the region, the Oregon Zoo, the Portland<br />
Expo Center, and several performing<br />
arts centers in the City of Portland.<br />
“We exist to do a lot of things that<br />
don’t fit easily into other governments’<br />
niches,” Kennedy said, adding that<br />
Metro recently issued a $653 million<br />
bond to fund affordable housing<br />
construction in the region, and in 2020,<br />
voters passed a personal and business<br />
income tax to raise about $250 million a<br />
year to fight chronic homelessness.<br />
Metro has a centralized finance<br />
operation, providing budget, accounting,<br />
financial reporting, procurement,<br />
and risk management services to the<br />
entire agency. “No organization has<br />
Finance just because they think it’s a<br />
super-awesome thing to have or they<br />
love producing financial statements,”<br />
explained Kennedy. “We exist to make<br />
the rest of the organization work. Part<br />
of my vision for our team is that we’re<br />
at the table for every big decision that<br />
gets made, and I don’t want to force<br />
that. I want to be invited to those tables.<br />
I think we have the best data in the<br />
organization. We have visibility into<br />
the entire organization. We have some<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 51
IN PRACTICE | FINANCE<br />
of the best tools for helping to evaluate<br />
decisions. The way we get invited to<br />
those tables is by being good partners.”<br />
“Early in my career, I worked for<br />
some finance departments that very<br />
much enjoyed telling everyone ‘no’<br />
and being the mean parent in the<br />
relationship. What I saw is that we didn’t<br />
get involved in decisions; we didn’t get<br />
invited into conversations. We were<br />
always finding out about things after<br />
the fact,” Kennedy said. “I really want<br />
us to have a different path, so we have<br />
finance managers who are embedded<br />
in each of our departments. Part of what<br />
we want them to do is earn the trust<br />
of the directors and the departments<br />
they’re supporting, so when somebody<br />
says, ‘I have a big problem to solve,’ the<br />
first person they think about inviting<br />
to that conversation is their finance<br />
manager. I want them to be one of their<br />
most trusted advisors. That’s how we<br />
try to enshrine good financial decisionmaking<br />
throughout the organization.”<br />
Craig Stroud is the executive director<br />
of the Oregon Convention Center. “We<br />
strive for excellence in daily operations<br />
and in making decisions that are<br />
strategic for the future. We need the<br />
right disciplines at the table to make<br />
and enact decisions, and that comes<br />
through collaboration,” he said. “I don’t<br />
have a team that’s expert in finance,<br />
but Metro has an entire team of finance<br />
experts. Bringing the right people in, all<br />
contributing to mission-focused service<br />
delivery and excellence—that to me is<br />
collaboration.”<br />
Rachael Lembo is a finance manager<br />
at Metro. She currently supports the<br />
housing and planning department,<br />
but she previously served the venues,<br />
including the convention center, the<br />
expo center, and the performing arts<br />
centers. “I think our structure excels<br />
at collaboration because our finance<br />
managers are encouraged to understand<br />
the operations, and they feel passionate<br />
about the mission of their particular<br />
department,” Lembo said. “I will look<br />
at something through a financial<br />
lens, while somebody else is going to<br />
bring a sales perspective, or a building<br />
maintenance perspective—but we all<br />
have a shared understanding of what<br />
the department is trying to do. Knowing<br />
that we have the best interests of the<br />
My vision for our team<br />
is that we’re a the table<br />
for every big decision<br />
that gets made.<br />
BRIAN KENNEDY,<br />
CHIEF FINANCIAL OFFICER<br />
department front and center keeps us<br />
respectful of each other as we share<br />
our unique perspectives. Even though<br />
I didn’t report to Craig, like the rest of<br />
the convention center team, our shared<br />
interest helped us work well together.”<br />
Navigating the pandemic together<br />
“Our business basically evaporated<br />
overnight—two weeks and we were shut<br />
down—and we had no foresight for when<br />
we would be able to reopen and get back<br />
into our core business,” Stroud said. “We<br />
shed about 75 percent of our full-time<br />
staff and all our variable-hour workers.<br />
We had about 115 full-time folks before<br />
the pandemic, and we cut to around 40.”<br />
Metro’s current chief operating<br />
officer, Marissa Madrigal, started<br />
working for the agency in early March<br />
2020, just as COVID-19 was beginning<br />
to spread rapidly across the United<br />
States. The organization was exploring<br />
operational scenarios and developing<br />
contingency plans for their venues.<br />
Because Madrigal couldn’t visit all the<br />
venues and meet with the directors in<br />
person, because of the speed of service<br />
impacts from the pandemic, she relied<br />
heavily on the finance managers to<br />
provide her with weekly updates on each<br />
venue’s current financial position and<br />
outlook. “We were able to collaborate<br />
in a unique way, where rather than her<br />
having to speak to each venue, she got<br />
the information consolidated from the<br />
finance managers,” Lembo explained.<br />
This information made it clear that<br />
the organization’s immediate financial<br />
outlook was bleak, and Metro’s executive<br />
leadership was going to have to make<br />
significant short-term cutbacks.<br />
On April 1, 2020, Metro laid off 700<br />
employees, approximately 40 percent of<br />
its workforce. Most of these staff worked<br />
in the venues.<br />
“The layoff process was unlike<br />
anything I’ve ever done before. I think<br />
Human Resources and Finance were<br />
brought into that process because, as<br />
emotional as it was for me, it was even<br />
more devastating for the managers in<br />
the venues,” Lembo said. “The managers<br />
knew we needed to move forward with<br />
layoffs, but I think it was just too hard<br />
for them to do. They really leaned on<br />
Finance and Human Resources to assist<br />
in that process, and we supported them<br />
as much as we could through that really<br />
awful undertaking.”<br />
“There wasn’t enough time to provide<br />
the emotional support to the organization<br />
and the technical execution,” Stroud<br />
said. “I think there’s little instances of<br />
this happening every day, but this was an<br />
exceptional example of how Finance and<br />
Human Resources stepped in. It really<br />
did take a huge burden off my plate, so<br />
I could focus on the people and let our<br />
partners deal with the process.”<br />
Lembo stressed that Finance and<br />
Human Resources were only able to<br />
provide this needed support because<br />
they had existing relationships with<br />
these other parts of the organization.<br />
“The support could only happen because<br />
there had been collaboration for years<br />
before that moment, and there was real<br />
trust. Having any old Finance person<br />
come in and provide input about whom<br />
52
you’re going to lay off—no. But we were<br />
able to do that because of those strong<br />
relationships and our understanding of<br />
the overall business and operations,” she<br />
explained.<br />
“There was a real existential crisis in<br />
that moment. We didn’t know if we’d be<br />
able to come back if we shut everything<br />
down. That was on the table at some<br />
point—do we lay every single person off<br />
and just lock the doors, turn off the lights,<br />
and try to come back at a later date?”<br />
Kennedy said. “We decided not to do that<br />
because we knew we wanted to be able to<br />
come back, and we knew that there would<br />
be opportunities for our venues, especially<br />
the convention center, to serve the<br />
community, even during the pandemic.”<br />
“If there was any silver lining of the<br />
pandemic, it was our ability to pivot and<br />
support our community,” Stroud said. Very<br />
early on, the convention center hosted<br />
drive-through COVID testing in its parking<br />
garages, which provided protection from<br />
spring rains and summer heat.<br />
The convention center also partnered<br />
with Multnomah County to house<br />
homeless people. The county’s existing<br />
shelter locations weren’t sufficient to<br />
allow for adequate social distancing.<br />
A portion of the convention center halls<br />
were converted to a homeless shelter,<br />
eventually providing about 55,000<br />
nightly stays.<br />
Stroud said the convention center’s<br />
biggest accomplishment was operating<br />
as a regional mass vaccination center.<br />
The vaccination operation ran for<br />
about six months, starting with about<br />
1,000 vaccinations per day in the<br />
initial periods and ramping up to<br />
close to 10,000 vaccinations per day<br />
at the peak. In total, nearly 550,000<br />
vaccinations were administered at the<br />
convention center.<br />
“If we had shut everything down,<br />
we couldn’t have responded quickly<br />
enough to accommodate those critical<br />
needs,” Stroud said.<br />
Making collaboration work<br />
“Having a human connection is<br />
incredibly important” for collaboration<br />
to be successful, Stroud said. “When<br />
Rachael was the finance manager<br />
for the convention center, she was<br />
an active part of my leadership<br />
team. She had a seat at the weekly<br />
strategy meeting and participated<br />
in the conversations. So, for me, for<br />
collaboration to really be successful,<br />
you must have a human connection<br />
and appreciation for their expertise. It’s<br />
really about that human connection,<br />
and then in times of stress, that<br />
relationship can be built upon.”<br />
Lembo explained that she once<br />
worked for a nonprofit and enjoyed the<br />
mission-driven aspect of that work,<br />
but as part of a small finance team<br />
she didn’t have colleagues she could<br />
collaborate with on finance-related<br />
work. Conversely, she once worked at<br />
a CPA firm that was all finance folks—<br />
but she didn’t feel a connection to a<br />
broader goal or purpose. “For me, the<br />
structure at Metro is just perfect, where<br />
I have both of those things, and I feel<br />
super-supported,” she said.<br />
“I’ve always been attracted to<br />
operations and the mission of<br />
whichever entity I’m working at.<br />
That’s a big draw for me, as important<br />
as my job duties,” Lembo said. “The<br />
amazing thing about the structure<br />
at Metro is that I get to be part of the<br />
operations team of the department<br />
I’m supporting, and I’m also part of<br />
the finance manager team. The other<br />
finance managers help me brainstorm<br />
ideas and solutions that improve<br />
the finance support I provide to the<br />
department. I have two teams that I<br />
can collaborate with in different ways.”<br />
Challenges to collaboration<br />
The current remote and hybrid<br />
workplace makes collaboration a bit<br />
more challenging because it can be<br />
more difficult to establish a human<br />
connection and get to know people<br />
as individuals, Stroud mentioned.<br />
“A lot of that doesn’t happen online;<br />
it happens when you’re at the water<br />
cooler. It happens when you grab<br />
lunch together. It happens in those<br />
off-moments, and we’re not spending<br />
time like that together,” he said. “I<br />
think that’s a barrier that we haven’t<br />
mastered yet, and we need to master<br />
it in order to really be prepared to roll<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 53
IN PRACTICE | FINANCE<br />
Metro serves more than 1.7 million people<br />
in Clackamas, Multnomah, and Washington<br />
counties. The agency’s boundary<br />
encompasses Portland, Oregon and<br />
23 other cities.<br />
out collaboration and teamwork and get<br />
through stresses in the future.”<br />
Difficulty in retaining and recruiting<br />
staff has been a bit of a challenge to<br />
collaboration in recent years. “A lot of<br />
people we’ve had have stuck around<br />
for relatively long periods of time, but<br />
over the last couple of years—we’ve<br />
had two different finance managers<br />
supporting the venues since we asked<br />
Rachael to move to another department<br />
to fill a finance manager vacancy,”<br />
Kennedy explained. He thinks one factor<br />
driving the higher attrition rate in these<br />
positions is that right now, there are<br />
plenty of good job opportunities working<br />
in local government in the Portland area.<br />
Folks who work at Metro as a finance<br />
manager get a good combination of<br />
budget, accounting, and operations<br />
experience, which makes them<br />
attractive job candidates. “In terms of<br />
building those relationships, we’ve had<br />
to start over a couple of times when we<br />
get new people in, and just like everyone<br />
else, it’s a challenge to recruit and a<br />
challenge to find the people who have<br />
the right set of skills—great interpersonal<br />
skills to build those relationships, but<br />
also the solid finance background.”<br />
Advice on becoming more<br />
collaborative<br />
The Metro team offered their advice on<br />
how Finance and Operations teams can<br />
collaborate to achieve better outcomes<br />
for their organizations.<br />
Knowing that we have<br />
the best interests of<br />
the department front<br />
and center keeps us<br />
respectful of each<br />
other as we share our<br />
unique perspectives.<br />
RACHAEL LEMBO,<br />
FINANCE MANAGER<br />
Better collaboration might initially be<br />
uncomfortable, Lembo acknowledged,<br />
but over time it becomes easier. “For<br />
the finance person, developing a real<br />
interest, providing creative ideas, and<br />
saying, ‘Yeah, I can look into that,’<br />
instead of immediately saying no—even<br />
if you later have to follow up with a no—<br />
is very effective,” she said. “I think one<br />
of the barriers to collaboration is that it<br />
can feel like you’re giving up a little bit of<br />
power. For the operations side, it’s about<br />
knowing that if you let that finance<br />
person in a little bit, you’re going to get<br />
their creativity and you’re going to be<br />
able to get to yes more often, which is<br />
ultimately where you want to go. Doing it<br />
behind their back isn’t going to work.<br />
Both of you have to lean in a little bit<br />
from the natural stance, but then that<br />
becomes more comfortable and becomes<br />
the new natural.”<br />
Stroud agreed and explained that<br />
effective collaboration requires “having<br />
people who are appreciative and excited<br />
about the mission and operations, and<br />
they’re learning about it, and they’re<br />
trying to figure out how to improve it. That<br />
creates the opportunity to move forward<br />
and meet in the middle.”<br />
“I come out of the finance world, so I<br />
appreciate cash controls,” Stroud. said<br />
“I understand why finance requires we<br />
use effective controls that others see as<br />
bureaucratic. They think, ‘Oh, Finance<br />
is just making us do this.’ No, they’re not.<br />
They’re requiring controls to protect us<br />
should money go missing.”<br />
Kennedy’s advice for developing a more<br />
collaborative culture stressed hiring<br />
curious people who are committed to<br />
public service. “I come with an unusual<br />
background. I started as a land use<br />
planner and then ended up in Finance and<br />
spent some time in Parks running park<br />
operations and park capital projects. I love<br />
government. I’m a true believer. I think<br />
government can do great things, and we<br />
should put more trust and confidence<br />
in the ability of government to solve<br />
problems,” he explained. “Part of what<br />
I want from the people on our team is a<br />
deep curiosity and interest in what we do<br />
as an agency. You run into a lot of Finance<br />
people who are just deeply uncurious<br />
about the rest of the things that happen in<br />
the organization. I think that’s the wrong<br />
way to approach it. I want people who are<br />
really excited and interested in diving<br />
into the work that we do because the work<br />
that happens at our venues, the solid<br />
waste transfer stations, or at the parks is<br />
incredibly fascinating. You can care about<br />
both—producing great, accurate financial<br />
statements and this amazing work.”<br />
Katie Ludwig is director of resource<br />
development in GFOA’s Research and<br />
Consulting Center.<br />
54
“Very informaave, touched on a lot of<br />
important informaaon.”<br />
2022 Forum AAendee<br />
“Speakers were great, and introduccons<br />
were thorough. I liked hearing real-life<br />
examples.”<br />
2022 Forum AAendee<br />
“Good breadth of different experiences<br />
in local government.”<br />
2022 Forum AAendee<br />
New to public finance? We’ve got just the event for you! This year’s Fundamentals<br />
Virtual Forum will walk you through a day in the life of a finance officer. Topics will<br />
include Accounnng, Budgeeng, Leadership, Treasury Management, Procurement,<br />
and Risk Management.<br />
July 10-14 | gfoa.org/fvf<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 55
IN PRACTICE | ACCOUNTING<br />
ACCOUNTING<br />
Subscription Supposition<br />
A Look at Practical SBITA Examples<br />
BY MICHELE MARK LEVINE<br />
T<br />
he authoritative accounting<br />
guidance in Governmental<br />
Accounting Standards<br />
Board (GASB) Statement<br />
No. 96, Subscription-Based<br />
Information Technology Arrangements<br />
(GASB 96), is effective for fiscal<br />
years beginning after <strong>June</strong> 15, 2022,<br />
and all reporting periods thereafter.<br />
This implementation is challenging<br />
governments in many of the same<br />
ways we were challenged by GASB<br />
Statement No. 87, Leases (GASB<br />
87), 1 and in some different ways as<br />
well. Like leases, subscription-based<br />
information technology arrangements<br />
(SBITAs) are often not centrally<br />
managed, so just gathering information<br />
about contractual arrangements that<br />
might be—or contain—SBITAs from<br />
multiple departments can be a timeconsuming<br />
first step. Like for leases,<br />
the information necessary to properly<br />
classify contracts as being SBITAs<br />
or containing SBITA components, to<br />
determine the subscription term, and<br />
to recognize and measure subscription<br />
liabilities and assets, may require<br />
legal expertise for interpretation.<br />
But for SBITAs, there is arguably<br />
more complexity to measurement of<br />
subscription assets than there is for<br />
lease assets, as certain development<br />
costs are included. The good news is that<br />
GASB has already issued a substantial<br />
amount of implementation guidance for<br />
lessees, much of which can be applied<br />
by analogy to governments in SBITAs,<br />
and that identifying the additional<br />
capitalizable costs has considerable<br />
precedent in preexisting generally<br />
accepted accounting principles (GAAP)<br />
applicable to internally generated<br />
computer software, so it will be familiar<br />
to some. 2<br />
GFOA has prepared two examples of<br />
SBITAs (available online at gfoa.org/<br />
gasb-resource-center), each based on a<br />
different subscription model. In each<br />
case, incurred costs are identified and<br />
categorized in accordance with the three<br />
stages of development and the capitaleligibility<br />
rules identified in GASB 96.<br />
The calculations used to measure the<br />
subscription liabilities and subscription<br />
assets are shown, along with their<br />
amortization schedules. Finally, journal<br />
entries for each event are provided, linked<br />
back to the calculations from which the<br />
amounts are derived. Entries for the<br />
SBITAs are illustrated both (1) on the<br />
current financial resources measurement<br />
focus and the modified accrual basis<br />
56
of accounting used for governmental<br />
funds and (2) on the economic resources<br />
measurement focus and accrual basis of<br />
accounting used for all other reporting.<br />
The entries to convert between the<br />
two are also shown. While this article<br />
will point out some key aspects of<br />
these examples, their full benefit<br />
can only be derived by reading the<br />
complete assumptions and reviewing<br />
the workbook, which links amounts<br />
from assumptions categorizations<br />
summarizations liability and<br />
asset measurements and amortization<br />
schedules journal entries. This<br />
article cannot cover or describe all<br />
the important details. 3 Before delving<br />
further into the examples, though,<br />
let’s do a quick review of the basics of<br />
accounting for SBITAs.<br />
Highlights of GASB 96 and<br />
similarities to GASB 87<br />
GASB 96 defines a SBITA as “a contract<br />
that conveys control of the right to use<br />
another party’s (a SBITA vendor’s) IT<br />
software, alone or in combination with<br />
tangible capital assets (the underlying<br />
IT assets), as specified in the contract<br />
for a period of time in an exchange or<br />
exchange-like transaction.” 4 The only<br />
difference between this definition and<br />
the definition of a lease is the phrase “IT<br />
software, alone or in combination with<br />
tangible capital assets (the underlying<br />
IT assets)” in place of “nonfinancial<br />
assets” in the lease definition. This<br />
reflects the broad similarity in the<br />
accounting and financial reporting by<br />
governmental lessees and governments<br />
in SBITAs. The apparent overlap of the<br />
definitions (IT assets are nonfinancial<br />
assets) is resolved by the statement<br />
in GASB 96 that it does not apply to<br />
arrangements “in which the software<br />
component is insignificant when<br />
compared to the cost of the underlying<br />
tangible capital assets.” 5<br />
A subscription term is determined<br />
in essentially the same manner as a<br />
lease term, and it begins as soon as the<br />
first independently functional module<br />
is—or the first set of interdependent<br />
modules are—placed into service. 6 That<br />
is the point at which the subscription<br />
liability and the subscription asset<br />
(which are discussed further below) are<br />
first recognized, and amortization of<br />
The good news is that<br />
GASB has already issued<br />
a substantial amount of<br />
implementation guidance<br />
for lessees, much of which<br />
can be applied by analogy<br />
to governments in SBITAs.<br />
the asset begins. It is also the point after<br />
which payments to the SBITA vendor<br />
for the right to use the underlying IT<br />
assets should be treated as subscription<br />
payments. Any payments made to the<br />
vendor for that purpose at or before the<br />
SBITA inception date are prepayments.<br />
In many cases, the subscription term<br />
will begin after the term of the contract<br />
that contains the SBITA began, as it is<br />
quite common for license payments to<br />
be required before any configuration—let<br />
alone usage—can begin. While there is<br />
a parallel requirement that a lease term<br />
and lease payments not begin until<br />
the lessee has access to the underlying<br />
capital asset, 7 this has nonetheless<br />
caused some confusion for many<br />
governments implementing GASB 96.<br />
The present value (PV) of<br />
future payments to be made by the<br />
government to the SBITA vendor<br />
for the use of vendors’ underlying<br />
IT assets (subscription payments)<br />
constitutes a subscription liability,<br />
just as the PV of future lease payments<br />
to a lessor constitutes a lease liability<br />
for a governmental lessee. The<br />
kinds of payments to be included as<br />
subscription payments (such as fixed,<br />
fixed-in-substance) are similar to<br />
those treated as lease payments, and<br />
similar remeasurement requirements<br />
apply. As in the case of lease<br />
liabilities, the subscription liabilities<br />
must be amortized using the effectiveinterest<br />
method. 8<br />
The primary difference between<br />
the accounting for SBITAs and leases<br />
is in the measurement of the related<br />
intangible right-to-use capital assets,<br />
called the subscription asset, in the<br />
case of a SBITA. Unlike a lease asset,<br />
for which only necessary ancillary<br />
costs (transportation, testing) are<br />
added to the lease liability and the<br />
net of other payments to or from the<br />
vendor (prepayments, incentives),<br />
the subscription asset’s measurement<br />
includes certain implementation<br />
costs, as shown in Exhibit 1.<br />
EXHIBIT 1<br />
IMPLEMENTATION COSTS INCLUDED IN THE MEASUREMENT OF THE SUBSCRIPTION ASSET<br />
Lease Asset = Subscription Asset =<br />
Lease liability (PV future<br />
lease payments)<br />
+ Prepayments<br />
+ Ancillary costs<br />
+ Incentives received<br />
Subscription liability (PV future<br />
subscription payments)<br />
+ Prepayments<br />
+ Certain capitalizable<br />
implementation costs<br />
+ Incentives received<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 57
IN PRACTICE | ACCOUNTING<br />
EXHIBIT 2 | EXAMPLES OF THE ACTIVITIES AND TREATMENT OF COSTS IN 3 IMPLEMENTATION STAGES<br />
Beginning of<br />
subscription term<br />
1. Preliminary Project Stage<br />
• Formulate and evaluate alternatives<br />
• Determine existence of needed<br />
technology<br />
• Select among alternatives<br />
Expensed as incurred<br />
2. Initial Implementation Stage<br />
• Design, configure, code, install, and test<br />
• Convert data needed to make<br />
underlying assets operational<br />
Certain costs are capitalized, becoming<br />
part of subscription asset<br />
3. Operation and Additional<br />
Implementation Stage<br />
• Train users<br />
• Convert data (other than that needed<br />
to make underlying assets operational<br />
• Maintain software (and hardware)<br />
• Implement additional modules<br />
Expensed as incurred, unless improves<br />
functionality or efficiency<br />
GASB 96 provides guidance on what<br />
costs should be included in the asset<br />
measurement (for example, capitalized)<br />
and that guidance very closely<br />
resembles the capitalization guidance<br />
for internally generated computer<br />
software, including the use of three<br />
implementation stages, although the<br />
stages differ slightly. 9 Exhibit 2 gives<br />
examples of the activities and treatment<br />
of costs in each of those stages.<br />
Following the initial implementation,<br />
costs incurred to increase the<br />
functionality or efficiency of an<br />
existing subscription asset, such as the<br />
implementation costs of subsequent<br />
modules, should be capitalized. 10 Thus,<br />
there can be additions to subscription<br />
assets after they are first put into<br />
service, at the same time that they are<br />
also being depreciated. Subscription<br />
assets are amortized in a “systematic<br />
and rational manner over the shorter of<br />
the subscription term of the useful life<br />
of the underlying IT assets,” 11 generally<br />
using the same method used to<br />
depreciate or amortize the government’s<br />
owned capital assets. Most other<br />
aspects of accounting for SBITAs (such<br />
as contract modifications, contacts<br />
with multiple SBITA and non-SBITA<br />
components, disclosures) are also very<br />
similar to those of lessee accounting for<br />
leases.<br />
With that bare-bones refresher, let’s<br />
turn back to the examples.<br />
1. In Example 1, a government contracts<br />
to use proprietary workflow and<br />
document management software,<br />
to be hosted on the vendor’s servers<br />
(hardware) and accessed by the<br />
government’s staff and the public<br />
through the internet. The government<br />
pays the vendor to initially configure<br />
the software for the government’s<br />
use and then for licenses to use the<br />
vendor’s software and hardware,<br />
and also pays the vendor to perform<br />
ongoing maintenance.<br />
2. In Example 2, a government contracts<br />
for an enterprise-wide license to use<br />
a vendor’s proprietary enterprise<br />
resource planning (ERP) system<br />
(software and hardware) with multiple<br />
modules. The government also<br />
separately contracts with a third party<br />
to configure modules and to maintain<br />
the system. This example illustrates<br />
how the sequential implementation of<br />
independently functioning modules<br />
may be accounted for.<br />
Example 1<br />
In Exhibit 3, all costs related to the<br />
workflow and document management<br />
system (system) are first classified using<br />
the stages discussed above. Only a single<br />
column is needed for the preliminary<br />
project stage, as none of those costs<br />
should be capitalized. For the initial<br />
implementation stage, in which most<br />
costs are capitalizable, the example uses<br />
three columns to classify costs as being<br />
(1) paid to the vendor and capitalizable,<br />
(2) paid to others (in this case, internal<br />
staff) and capitalizable, and (3)<br />
noncapitalizable costs, regardless of the<br />
payee. For the operating and additional<br />
implementation stage, no costs are<br />
incurred that increase the subscription<br />
asset’s functionality or efficiency, as<br />
would be the case if a new module were<br />
implemented, so there are no additional<br />
capitalizable costs. The operating<br />
and additional implementation stage<br />
payments are either subscription<br />
payments or period costs for ongoing<br />
system maintenance rather than for the<br />
right to use the underlying IT assets.<br />
As seen in Exhibit 3, payments to the<br />
vendor for the right to use the underlying<br />
IT assets and for their implementation<br />
work that are made at or after the<br />
inception date (totaling $11,000 on<br />
January 1 and $12,000 on March 1)<br />
are reported as capital outlays in the<br />
general fund and as development-inprogress<br />
(a capital asset) in statements<br />
prepared on an economic resources<br />
measurement focus. Other capitalizable<br />
costs—$2,040 in employee costs in this<br />
58
EXHIBIT 3 | CLASSIFYING ALL COSTS RELATED TO THE WORKFLOW AND DOCUMENT MANAGEMENT SYSTEM<br />
Stage 1:<br />
Prelimimary<br />
Project Stage<br />
Stage 2:<br />
Initial Implementation<br />
Stage<br />
Stage 3:<br />
Operation and Additional<br />
Implementation<br />
Date Incurred<br />
Description<br />
Amount<br />
Capitalizable–<br />
Paid to SBITA<br />
Vendor<br />
Capitalizable–<br />
Other<br />
Noncapitalizable<br />
Subscription<br />
Payments<br />
Noncapitalizable<br />
FY 20X0 Consultant costs (scope, technical feasibility, RFP and specifications development) $6,000 $6,000<br />
FY20X0 City staff time (scope, technical feasibility, RFP and specifications development) $3,000 $3,000<br />
1/1/X1 Five full licenses full year @$600 $3,000 $3,000<br />
1/1/X1 First installment for implementation $8,000 $8,000<br />
3/1/X1 Eight full licenses @ $600 for 10/12 months $4,000 $4,000<br />
3/1/X1 Second installment for implementation $8,000 $8,000<br />
$11,000<br />
$12,000<br />
3/31/X1 City staff time for implementation, of which $960 is for training $3,000 $2,040 $960<br />
4/1/X1 Twelve full licenses @ $600 for 9/12 months $5,400 $5,400<br />
4/1/X1 Final installment for implementation, of which $3,000 is for data conversion and training $9,000 $6,000<br />
$24,900 $3,000<br />
4/1/X1 Block of 50,000 user licenses @ $18,000 for 9/12 months $13,500 $13,500<br />
4/1/X1 Annual maintenance/support @ $12,000 for 9/12 months $9,000 $9,000<br />
4/X1-12/X1 City staff time for system administration @ $6,000 for 9/12 months $4,500 $4,500<br />
1/1/X2 25 full licenses for year @ $600 $15,000<br />
$15,000<br />
$33,000<br />
1/1/X2 Block of 50,000 user licenses @ $18,000 for year $18,000 $18,000<br />
1/1/X2 Annual maintenance/support @ $12,000 $12,000 $12,000<br />
FY 20X2 City staff time for system administration @ $6,000 $6,000 $6,000<br />
1/1/X3 25 full licenses for year @ $600 $15,000<br />
$15,000<br />
$33,000<br />
1/1/X3 Block of 50,000 user licenses @ $18,000 for year $18,000 $18,000<br />
1/1/X3 Annual maintenance/support @ $12,000 $12,000 $12,000<br />
FY 20X3 City staff time for system administration @ $6,000 $6,000 $6,000<br />
$178,400 $9,000 $47,900 $2,040 $3,960 $66,000 $49,500<br />
example—are reported in the same<br />
manner. When the subscription asset<br />
is put into service (April 1, 20X1),<br />
the accumulated development-inprogress<br />
($11,000 + $12,000 + $2,040<br />
= $25,040) is eliminated (debited), and<br />
the balance of that account is added to<br />
the amount of the initial subscription<br />
liability ($61,270, the present value of<br />
the two $33,000 future subscription<br />
payments) and capitalizable payments<br />
to the vendor that are made at that<br />
time ($24,900), and recognized as the<br />
subscription asset. See Exhibit 4 for the<br />
calculations of the subscription liability<br />
and subscription asset values.<br />
EXHIBIT 4 | SUBSCRIPTION LIABILITY AND ASSET MEASUREMENTS<br />
Subscription Liability and Asset Measurements<br />
$ 61,270 Net present value of future payments ($66,000) = subscription liability<br />
$ 61,270 Subscription liability<br />
47,900 Prepayments (1/1, 3/1, and 4/1/20X1 payments to vendor)<br />
2,040 Other capitalizable implementation costs<br />
$ 111,210 Subscription asset<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 59
IN PRACTICE | ACCOUNTING<br />
The subscription liability<br />
amortization table for this example,<br />
part of which is shown in Exhibit 5, is<br />
prepared using monthly periods even<br />
though the licenses are annual. While<br />
the term of the contract that contains<br />
the SBITA begins in January 20X1,<br />
the subscription term doesn’t begin<br />
until April 1, necessitating part-year<br />
amortization. Also note that interest<br />
accrues even during months in which<br />
no payments are made, as the interest<br />
is assumed to compound monthly, and<br />
that the interest payable is tracked<br />
separately from the subscription liability,<br />
based on implementation guidance GASB<br />
promulgated for leases that appears<br />
applicable to the SBITA in this example. 12<br />
Since there are no subsequent modules<br />
implemented in this example, the<br />
amortization table for the subscription<br />
asset can be established at the time of<br />
implementation. A portion of that table is<br />
also shown in Exhibit 5.<br />
Example 2<br />
This example is different from Example<br />
1 in that:<br />
• The full cost of annual licensing begins<br />
to be paid at the start of the contract;<br />
• The implementation and maintenance<br />
work are performed by a thirdparty<br />
contractor, rather than by the<br />
SBITA vendor through a non-SBITA<br />
component of the same contract; and<br />
• A second module is implemented after<br />
the first module is put in service.<br />
EXHIBIT 5 | SUBSCRIPTION LIABILITY AMORTIZATION<br />
Period #<br />
Payment Date<br />
Subscription<br />
Payment<br />
Amount<br />
Interest @<br />
Monthly Rate<br />
of 0.50%<br />
Amortization of Subscription Liability<br />
Subscription<br />
Interest<br />
Payable<br />
Interest<br />
Payment<br />
Principal<br />
Payment<br />
Subscription<br />
Liability<br />
61,270<br />
Total<br />
Remaining<br />
Liability<br />
1 4/1/X1 61,270 61.270<br />
2 5/1/X1 306 306 61,270 61,576<br />
3 6/1/X1 308 614 61,270 61,884<br />
4 7/1/X1 309 924 61,270 62,194<br />
5 8/1/X1 311 1,235 61,270 62,505<br />
6 9/1/X1 313 1,547 61,270 62,817<br />
7 10/1/X1 314 1,861 61,270 63,131<br />
8 11/1/X1 316 2,177 61,270 63,447<br />
9 12/1/X1 317 2,494 61,270 63,764<br />
10 1/1/X2 33,000 319 2,813 30.187 31,083 31,083<br />
11 2/1/X2 155 155 31,083 31,238<br />
12 3/1/X2 156 312 31,083 31,395<br />
13 4/1/X2 157 469 31,083 31,552<br />
14 5/1/X2 158 626 31,083 31,709<br />
Amortization of<br />
Subscription Asset<br />
Monthly<br />
Periods<br />
Straight-line<br />
Unamortized<br />
33 Balance<br />
111,210<br />
3,370 107,840<br />
3,370 104,470<br />
3,370 101,100<br />
3,370 97,730<br />
3,370 94,360<br />
3,370 90,990<br />
3,370 87,620<br />
3,370 84,250<br />
3,370 80,880<br />
3,370 77,510<br />
3,370 74,140<br />
3,370 70,770<br />
3,370 67,400<br />
3,370 64,030<br />
EXHIBIT 6 | CLASSIFICATION OF COSTS INCURRED DURING THE OPERATING AND ADDITIONAL IMPLEMENTATION STAGE<br />
Classification of costs:<br />
Date<br />
incurred<br />
Description<br />
Amount<br />
Stage 3: Operation and Additional Implementation<br />
Subscription<br />
Prepayment<br />
& Payments<br />
7/1/X1 Semiannual payment to PERP for right to use cloud-based software and related hardware $ 250,000 250,000<br />
Stage<br />
Capitalizable<br />
– Additional<br />
Implementation<br />
7/1/X1 1st installment payment to SLEEPS for implementation of AP module $ 300,000 300,000<br />
Noncapitalizable<br />
– Operation<br />
7/1/X1 SLEEPs annual support (1 module for 6 months of 20X1) $ 100,000 100,000<br />
7/31/X1 County employee work on system AP module implementation $ 35,000 35,000<br />
8/1/X1 2nd installment payment to SLEEPs for implementation of A/P module $ 300,000 300,000<br />
8/31/X1 County employee work on system AP module implementation $ 35,000 35,000<br />
9/30/X1 3rd installment payment to SLEEPs for implementation of AP module ($180,000 data conversion and training) $ 400,000 220,000 180,000<br />
9/30/X1 County employee work on system AP module implementation ($8,000 data conversion and training) $ 35,000 27,000 8,000<br />
9/30/X1 GFOA Phase 2 consulting: implementation assistance for AP module ($5,000 data conversion); payable 10/31 $ 30,000 25,000 5,000<br />
10/1/X1 SLEEPs annual support (additional module for three months of 20X1) $ 50,000 50,000<br />
1/1/X2 Semiannual payment to PERP for right to use cloud-based software and related hardware $ 250,000 250,000<br />
1/1/X2 SLEEPs annual support (2 modules for 20X2) $ 400,000 400,000<br />
7/1/X2 Semiannual payment to PERP for right to use cloud-based software and related hardware $ 250,000 250,000<br />
1/1/X3 Semiannual payment to PERP for right to use cloud-based software and related hardware $ 250,000 250,000<br />
1/1/X3 SLEEPs annual support (2 modules for 20X3) $ 40,000 400,000<br />
7/1/X3 Semiannual payment to PERP for right to use cloud-based software and related hardware $ 250,000 250,000<br />
$ 4,921,000 $ 1,250,000 $ 942,000 $ 1,143,000<br />
60
EXHIBIT 7 | SUBSCRIPTION LIABILITY AND ASSET MEASUREMENTS<br />
Subscription Liability and Asset Measurements<br />
$ 929,275 Net present value of future payments = subscription liability<br />
$ 929,275 Subscription liability<br />
500,000 Vendor prepayments (1/1X1 and 7/1/X1)<br />
893,000 Other capitalizable pre-term implementation costs (Stage 2 Capitalizable - Other)<br />
$ 2,322,275 Initial subscription asset<br />
EXHIBIT 8 | SUBSCRIPTION ASSET AMORTIZATION<br />
Subscription Asset<br />
Months of<br />
Subscription Term<br />
Lapsed in Period<br />
Module 2<br />
placed into<br />
service<br />
9/1/X1<br />
Remaining<br />
Life at End of<br />
Period (Months) Period Ending Additions<br />
Amortization<br />
of In-Service<br />
Subscription Asset<br />
Balance<br />
36 1/1/X1<br />
$2,322,275 / 30<br />
30 6/30/X1 2,322,275 months<br />
2,322,275<br />
1 29 7/31/X1 335,000 77,409 2,579,866<br />
1 28 8/31/X1 335,000 77,409 2,837,457<br />
1 27 9/30/X1 272,000 77,409 3,032,048<br />
1 26 10/31/X1 112,298 2,919,749<br />
1 25 11/30/X1 $3,032,048 /<br />
112,298 2,807,451<br />
27 months<br />
1 24 12/31/X1 112,298 2,695,153<br />
6 18 6/30/X2 673,788 2,021,365<br />
6 12 12/31/X2<br />
$112,298 *<br />
673,788 1,347,577<br />
6 months<br />
6 6 6/30/X3 673,788 673,788<br />
6 – 12/31/X3 673,788 –<br />
3,264,275 3,264,275<br />
Asset as<br />
measured<br />
at inception<br />
$2,322,275<br />
+ $335,000<br />
- $77,409<br />
Exhibit 6 shows the classification of<br />
costs incurred during the operating and<br />
additional implementation stage. While<br />
the classification is similar to that in<br />
Example 1 for preliminary project stage<br />
and the initial implementation stage,<br />
here we see capitalizable costs incurred<br />
during this final stage because of the<br />
additional module that is implemented.<br />
Exhibit 7 uses data from the<br />
classifications of costs incurred at all<br />
stages, not only those in the operation<br />
and additional implementation stage<br />
in Exhibit 6, and shows the calculation<br />
of the subscription liability and the<br />
subscription asset.<br />
Exhibit 8 shows the subscription asset<br />
amortization table for this example,<br />
illustrating that amortization of the inservice<br />
component occurs concurrently<br />
with additions to the asset value based<br />
on capitalizable costs incurred for the<br />
implementation of a second module<br />
while the first is in use. This treatment<br />
would be applicable to any costs<br />
incurred to increase the functionality or<br />
efficiency of an in-service subscription<br />
asset, whether or not planned for at the<br />
inception of the subscription term. Note<br />
that for the purpose of this illustration,<br />
the asset value is tracked on a monthly<br />
basis until all implementations have<br />
been completed.<br />
Please pardon the crowded<br />
appearance of this final exhibit.<br />
Hopefully it will encourage you to look<br />
at the example itself, and hopefully you<br />
will find it worth your time to do so.<br />
Michele Mark Levine is the director of<br />
GFOA’s Technical Services Center.<br />
1<br />
Leases guidance can be found in GASB 2022-<strong>2023</strong><br />
Codification of Governmental Accounting and<br />
Financial Reporting Standards (Cod.), Section (Sec.)<br />
L20, “Leases.”<br />
2<br />
GASB Cod. Sec.1400, “Reporting Capital Assets,”<br />
paragraphs .128 to .134.<br />
3<br />
The examples illustrate possible approaches to<br />
recognizing and measuring elements of SBITAs.<br />
They do not necessarily represent the only<br />
acceptable, or the best, application of GAAP.<br />
4<br />
GASB 96, paragraph 6.<br />
5<br />
GASB 96, paragraph 4.a.<br />
6<br />
GASB 96, paragraphs 9, 15, and 30.<br />
7<br />
GASB Cod. Sec. L20.702-1.<br />
8<br />
GASB Cod. Sec. L20.715-4.<br />
9<br />
GASB Cod. Sec. 1400, “Reporting Capital Assets,”<br />
paragraphs 128 to 134.<br />
10<br />
This is reflected in the name of the last stage:<br />
Operation and Additional Implementation.<br />
11<br />
GASB 96, paragraph 27.<br />
12<br />
GASB Implementation Guide 2021-1 paragraphs 4.10<br />
and 4.17, effective for fiscal years beginning after<br />
<strong>June</strong> 15, 2022, and all reporting periods thereafter.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 61
IN PRACTICE | PERSPECTIVE<br />
PERSPECTIVE<br />
Are Tax Incentives Good for Cities and States?<br />
BY KATHERINE BARRETT AND<br />
RICHARD GREENE<br />
Alittle more than 30<br />
years ago, the State of<br />
Alabama used hundreds<br />
of millions of dollars in<br />
tax incentives to attract<br />
a giant Mercedes-Benz plant to the state.<br />
That was the beginning of an escalating<br />
battle on the part of cities, counties, and<br />
states to attract business by handing<br />
over large amounts of taxpayer dollars.<br />
According to David Brunori, visiting<br />
professor of public policy at George<br />
Mason University and senior director<br />
at RSM US—which provides audit, tax,<br />
and consulting services to the public<br />
sector—“they’ve been proliferating ever<br />
since, and the number has grown every<br />
year since 1992. In fact, there’s a whole<br />
industry that does nothing but look for<br />
tax incentives for companies.”<br />
The big question, of course, is whether<br />
this is genuinely good business for cities,<br />
which generally give up property taxes,<br />
and states, which largely forfeit income<br />
taxes. Most experts, as well as much<br />
academic literature, say that the answer<br />
to this is no.<br />
Shayne Kavanagh, senior manager<br />
of research in GFOA’s Research and<br />
Consulting Center, said, “There is<br />
compelling evidence that these things are<br />
often not effective.” He noted that many<br />
places use tax incentives largely because<br />
they don’t want to take the chance of being<br />
the only player who isn’t in the game—even<br />
if there’s little to nothing to win. “It’s an<br />
arms race phenomenon in games theory,”<br />
he said. “If you don’t do it, the next guy will.”<br />
The costs of tax abatements can be huge,<br />
and when property tax money is used in<br />
cities, those dollars aren’t available for<br />
other important services. The obvious<br />
losers are the schools, which tend to be<br />
the largest single users of property taxes.<br />
According to a report by Good Jobs First,<br />
“Schools in New York State lost at least<br />
$1.8 billion in fiscal year 2021 to corporate<br />
tax abatements.” 1<br />
©<strong>2023</strong> DAN BEJAR C/O THEISPOT.COM<br />
62
The irony here is obvious. Businesses<br />
are attracted by a well-educated workforce,<br />
and if the schools suffer and fail to attract<br />
businesses in any one year, it makes the<br />
city less attractive for further economic<br />
development in the future. To make<br />
matters worse, there isn’t much evidence<br />
that the tax incentives are a powerful<br />
economic incentive tool in the first place.<br />
Nathan Jensen, professor of government<br />
at University of Texas at Austin and an<br />
authority on the topic, said: “Academic<br />
research shows that the majority of firms<br />
would have made the same decision, to<br />
relocate, expand or stay, even without<br />
incentives. In these cases, incentives are<br />
just a transfer of taxpayer-funded benefits<br />
to firms for no new economic activity.” 2<br />
Despite this, corporate America has<br />
long been able to pit one city against<br />
another when it comes time to settle or<br />
expand. It’s a giant game of poker in which<br />
corporations can easily bluff their way<br />
into a big payoff.<br />
One of the most notorious examples<br />
of this was uncovered a few years ago by<br />
The New York Times, which reported that,<br />
“In total, over five years, 12 companies<br />
threatened to leave New Jersey and move<br />
to Blue Hill Plaza (in New York) unless<br />
the state provided tens of millions in tax<br />
credits. None followed through on the<br />
threat. In fact, an investigation by The<br />
New York Times suggests that most of the<br />
12 companies never seriously considered<br />
moving to New York. But all 12 received<br />
lucrative tax credits from New Jersey<br />
to stay—more than $100 million in<br />
total, according to documents obtained<br />
by the Times.” 3<br />
The promises made by the corporations<br />
involved frequently don’t come to pass.<br />
Katherine Loughead, senior policy analyst<br />
at the Tax Foundation, said, “We’ve<br />
seen countless examples of massive tax<br />
incentive deals offered to companies that<br />
overpromise but underdeliver, tying up<br />
taxpayer resources in the process.”<br />
Unfortunately, as much as elected<br />
officials may enjoy the ribbon cuttings<br />
and newspaper headlines when a new<br />
deal is announced, the details can be<br />
difficult to find. “A lot of this is very<br />
nontransparent,” says Loughead. “Many<br />
of these incentive deals are made behind<br />
closed doors to a mystery company going<br />
to locate in the state.”<br />
The costs of tax<br />
abatements can be huge,<br />
and when property<br />
tax money is used in<br />
cities, those dollars<br />
aren’t available for other<br />
important services.<br />
With all this in mind, why do states<br />
and localities continue to fixate on tax<br />
incentives?<br />
One clear reason is essentially<br />
political in nature. It’s difficult for<br />
elected officials to take credit for many<br />
of the things that genuinely attract<br />
new businesses, like good education<br />
systems, a willing workforce, local<br />
amenities like golf courses and,<br />
naturally, the weather. Even the most<br />
hyperbolically inclined politician in the<br />
world simply can’t take credit for blue<br />
skies and a temperate climate.<br />
But whatever the incentives, “voters<br />
think they work,” Jensen said. “If a<br />
company comes to your area because of<br />
other factors involved in the location,<br />
the mayor or the governor can’t<br />
take credit for it. But if they give out<br />
incentives, they can take credit.”<br />
One area in which tax incentives<br />
are sometimes seen as a worthwhile<br />
approach is when they are used to<br />
attract business to blighted inner city<br />
areas that are desperate for investment<br />
of any kind. These are frequently given<br />
through tax increment financing (TIF)<br />
districts that are designed so that local<br />
governments can use increased tax<br />
revenue generated in designated areas<br />
to pay for development costs in those<br />
areas. Governments often issue bonds<br />
in anticipation of the increased revenue<br />
generated in the district and then can<br />
use the proceeds to pay for upfront<br />
development costs.<br />
This sounds like a win-win situation,<br />
but there are some serious shortcomings<br />
to this means of using taxes to create<br />
incentives for business development in<br />
blighted areas. Josh Goodman, a senior<br />
officer who works on state fiscal policy for<br />
the Pew Charitable Trusts, ticks off three:<br />
• Tax revenue in the districts may have<br />
increased even without the creation of<br />
the TIF district and, if so, schools miss<br />
out on revenue they otherwise would<br />
have received. This is particularly<br />
likely when local governments create<br />
TIF districts in neighborhoods where<br />
investment is occurring and property<br />
values are rising prior to the creation of<br />
the TIF district.<br />
• Businesses and residents that<br />
otherwise would have located<br />
elsewhere in the locality may choose<br />
to locate in the TIF district instead. As<br />
a result, revenue from these taxpayers<br />
that would have gone to general<br />
purposes is used for the TIF district<br />
instead.<br />
• Depending on how the bonds are<br />
structured and the willingness of local<br />
leaders to accept a default, there could<br />
be some risk that general dollars will be<br />
needed to pay the debt service on bonds<br />
if incremental increases in tax revenue<br />
in the district aren’t sufficient to do so.<br />
Another challenge Goodman brings up is<br />
that TIFs are designed to help the people<br />
in the geographically targeted areas, “but<br />
most people don’t work where they live.<br />
So, they could go to the distressed area<br />
for their jobs, and then travel back to their<br />
homes elsewhere.”<br />
Katherine Barrett and Richard Greene<br />
are principals of Barrett and Greene, Inc<br />
(greenebarrett.com). and are co-authors of<br />
the recently released Making Government<br />
Work: The Promises and Pitfalls of<br />
Performance-Informed Management.<br />
1<br />
Christine Wen and Greg LeRoy, “Corporate<br />
Subsidies versus Public Education: How Tax<br />
Abatements Cost New York Public Schools,” Good<br />
Jobs First, February <strong>2023</strong>.<br />
1<br />
Nathan M. Jensen, “Job Creation and Firm-specific<br />
Location Incentives,” Journal of Public Policy,<br />
published online by Cambridge University Press,<br />
March 28. Available at https://www.cambridge.<br />
org/core/journals/journal-of-public-policy/article/<br />
abs/job-creation-and-firm-specific-location-incenti<br />
ves/8DEF2F1624A629AEA87B71A533E4EB9D<br />
1<br />
Nick Corasaniti and Matthew Haag, “Businesses<br />
Are Cashing In on Empty Threat to Leave New<br />
Jersey,” The New York Times, September 24, 2019.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 63
IN PRACTICE | PERSPECTIVE<br />
PERSPECTIVE<br />
A New Premium on Discount Rates<br />
BY JUSTIN MARLOWE<br />
M<br />
oments after his<br />
inauguration, President<br />
Biden signed a document<br />
titled, “Memorandum<br />
on Modernizing<br />
Regulatory Review.” It’s as technocratic,<br />
inconspicuous, and inside-the-beltway<br />
as the title suggests. But it could reshape<br />
the way we think about the costs and<br />
benefits of state and local government.<br />
This memorandum set in motion a<br />
review of how the federal government<br />
evaluates the impact of proposed<br />
regulations. That review has several<br />
components, including a careful look at<br />
how to better incorporate perspectives<br />
from those who are affected by regulation<br />
but haven’t traditionally had a voice in<br />
policymaking. But the component that<br />
could affect state and local finance the<br />
most is a rethinking of discount rates.<br />
As a quick refresher, recall that a<br />
discount rate is a number used to adjust<br />
future benefits to today’s terms. For<br />
instance, imagine that a friend owes<br />
you $1,000. They offer to pay you<br />
back the full $1,000 in three years<br />
or pay you $500 today. They’re also<br />
quite unreliable, so there’s a good<br />
chance the future payment will be less<br />
than $1,000. You need to build that<br />
uncertainty into your decision.<br />
We quantify that intuition through a<br />
discount rate. Discount rates are higher<br />
when a future outcome is less certain,<br />
when an outcome is simply more<br />
valuable to us today than in the future,<br />
and when we expect higher inflation,<br />
among other reasons. Discount rates<br />
and interest rates go hand in hand.<br />
A borrower who is less creditworthy<br />
will pay a higher interest rate for a loan<br />
precisely because the lender applies a<br />
higher discount rate to the repayment<br />
of that loan. This same thinking also<br />
applies to costs. In that case, a higher<br />
©<strong>2023</strong> KOTRYNA ZUKAUSKAITE C/O THEISPOT.COM<br />
64
discount rate means future spending<br />
feels “less costly” in today’s dollars.<br />
Discount rates are everywhere<br />
in the federal government. Today<br />
approximately $50 billion of annual<br />
federal spending on certain state and<br />
local infrastructure projects, especially<br />
in areas like mass transit systems and<br />
levees, is subject to formal benefit-cost<br />
analysis. Federal agencies also conduct<br />
benefit-cost analysis of many proposed<br />
regulations. The Office of Management<br />
and Budget and the Congressional<br />
Budget Office use discount rates in<br />
their long-term projections of future<br />
federal revenues and spending. In all<br />
these cases, policymakers’ views on<br />
whether a proposed project, regulation,<br />
or budget appropriation will generate<br />
more benefits than costs are tied to the<br />
discount rate in play.<br />
Discount rates are hard-wired into<br />
state and local government finance,<br />
too. Perhaps the most visible, and<br />
often controversial, application is in<br />
calculating liabilities for state and<br />
local government defined benefit<br />
pensions. Pension plan sponsors use<br />
a rate based on long-term investment<br />
returns to express the cost of future<br />
retiree benefits in today’s dollars. A<br />
small decrease in that discount rate can<br />
increase those liabilities by millions or<br />
billions. Several state departments of<br />
transportation use benefit-cost analysis<br />
to evaluate different procurement<br />
options for the same project. We also see<br />
benefit-cost analysis at work in state<br />
and local budget shops, internal audit<br />
programs, tax incentive evaluations,<br />
and many other areas. Perhaps no<br />
other single, wonky number is quite as<br />
consequential.<br />
For decades, federal agencies have<br />
relied on two basic discount rates. One<br />
is a 3 percent rate, used to evaluate<br />
proposed regulations. It follows from<br />
the idea that proposed regulations lead<br />
to higher prices, and that causes us<br />
to consume fewer goods and services<br />
over time. What’s that consumption<br />
worth? About as much as investing the<br />
Higher discount<br />
rates will mean<br />
more valuable future<br />
benefits and more<br />
“costly” costs today.<br />
same amount of money in risk-free<br />
U.S. Treasury bonds. When the federal<br />
guidelines were last updated in 2003,<br />
the average yield on US Treasuries was<br />
3 percent. The 7 percent rate applies<br />
to the benefits of federal government<br />
investments in infrastructure projects.<br />
That investment displaces privatesector<br />
investment, the logic suggests,<br />
so the benefits of that regulation should<br />
exceed the return on investment of<br />
private capital. Those guidelines were<br />
last updated in 1992, and back then<br />
those returns averaged 7 percent.<br />
In April <strong>2023</strong> the administration<br />
took the next step toward some major<br />
changes when it released a draft set of<br />
revisions to the two main documents,<br />
OMB Circular A-4 and OMB Circular<br />
A-94, that apply to these issues. In<br />
short, those revisions call for replacing<br />
the 3 percent rate with a 1.7 percent<br />
rate based on more recent trends in U.S.<br />
Treasury yields, and the 7 percent rate<br />
with a to-be-determined lower rate.<br />
These changes are only proposals, but<br />
assuming they’re adopted, they’ll have<br />
three big implications.<br />
First, and practically speaking,<br />
higher discount rates will mean more<br />
valuable future benefits and more<br />
“costly” costs today. If a taxpayer<br />
today expects to receive $100,000 in<br />
benefits from a new local government<br />
project over 20 years, the present<br />
value of those benefits at a 3 percent<br />
discount rate is $55,000, and at a 7<br />
percent discount rate it’s a bit more<br />
than $25,000. At discount rates of 1.7<br />
and 4.5 percent, those present values<br />
are $71,300 and $41,400, respectively.<br />
Those are qualitative shifts.<br />
Second, with this proposal the<br />
federal government acknowledges<br />
that interest rates and returns on<br />
investment for private capital have<br />
both trended lower over time. Critics<br />
of state and local pensions have<br />
long argued those plans employ<br />
unrealistically high discount rates<br />
of 7 to 8 percent. Proponents say<br />
those rates properly reflect longterm<br />
market trends, even though<br />
markets as of late have defied those<br />
trends. With this proposal the federal<br />
government has come down clearly in<br />
favor of the opponents. They’ll almost<br />
certainly seize on this point.<br />
And third, this proposal solidifies<br />
that climate change has forever<br />
changed the relationship between<br />
current and future benefits. Imagine,<br />
for instance, that a city government<br />
proposes to spend millions today<br />
to decarbonize all its public<br />
buildings. Most of the benefits of<br />
that investment will be “discounted<br />
away” at a discount rate of 7 percent<br />
over several decades. And yet, many<br />
believe that without decarbonization,<br />
climate change will destroy, in just a<br />
few decades, the markets from which<br />
that 7 percent discount rate was<br />
derived. These proposed changes give<br />
federal agencies the option to explore<br />
even lower discount rates on climate<br />
adaptation projects for precisely that<br />
reason. This opens the door for state<br />
and local governments to do the same.<br />
The federal government is about<br />
to put an even larger premium on<br />
discount rates. State and local<br />
finance professionals should prepare<br />
in earnest.<br />
Justin Marlowe is a research professor at<br />
the University of Chicago, Harris School of<br />
Public Policy, and a fellow of the National<br />
Academy of Public Administration.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 65
IN PRACTICE | INTERVIEW<br />
Embracing Complexity and<br />
Continuous Improvement<br />
Since joining the City<br />
of Guelph in January<br />
2011, Tara has moved<br />
progressively through<br />
roles including corporate<br />
analyst and manager<br />
before moving into her current position<br />
in <strong>June</strong> 2016. In 2022 and early <strong>2023</strong>,<br />
she served as acting general manager<br />
for IT before returning to finance. Before<br />
entering the municipal finance sector,<br />
Tara was an assurance manager at KPMG.<br />
A chartered professional accountant,<br />
Tara has been an active member of<br />
GFOA since 2011 and has been part of<br />
GFOA’s Rethinking Budgeting team<br />
since its inception in 2021.<br />
Finding her place ‘in industry’<br />
Tara didn’t begin her career in municipal<br />
finance, but she has certainly found her<br />
passion as she’s built a career working for<br />
the City of Guelph. After graduating from<br />
McMaster University with a Bachelor of<br />
Commerce in business, Tara became a<br />
CPA and went into public accounting.<br />
At KPMG, Tara conducted audits in a<br />
AN INTERVIEW WITH TARA BAKER<br />
Jara Kern, writer with Right Angle Studio,<br />
spoke with Tara Baker (left), treasurer<br />
and general manager of finance for the<br />
City of Guelph in Ontario, Canada, about<br />
her career path in municipal finance,<br />
the biggest challenges facing local<br />
governments, and how finance officers<br />
can better embrace complexity.<br />
wide range of industries, including<br />
manufacturing, non-profit, education,<br />
health care, and local government.<br />
“When I left public accounting to go into<br />
‘industry,’ as we call it,” she recalled, “it<br />
was local finance that appealed to me<br />
because I really liked the people and the<br />
culture I had encountered. I could also<br />
see how the work really impacted people<br />
and that it mattered.” Her first role<br />
with the City of Guelph was as a senior<br />
corporate analyst, a financial reporting<br />
role similar to her work in audit—but now<br />
on the other side, in a new sector.<br />
Tara immediately embraced the<br />
complexity and challenges. “Right<br />
away, I found the dynamic between<br />
an elected council of decision makers<br />
and a professional administration very<br />
interesting. We deliver many different<br />
services, and it’s a challenge to stay<br />
connected to everything that’s going<br />
on, see the need, and bring the financial<br />
strategies and recommendations<br />
that pull it all together for council and<br />
community. I enjoy the whole process<br />
and all its moving parts.”<br />
Shifting toward strategy<br />
For Tara, success in her career has come<br />
from not shying away from its complexity,<br />
but instead developing a level of comfort in<br />
bringing knowledge, skills, and experience<br />
to move ideas and problem solving forward.<br />
As she advanced into new roles with the<br />
City of Guelph, she had to transition away<br />
from a pure focus on financial reporting<br />
and accounting, and toward strategy and<br />
budgeting. “In accounting, you have a<br />
historical lens on the business, creating the<br />
financial statements and conducting the<br />
trend analysis after things have happened,”<br />
she explained. “It’s different in budgeting.<br />
As you find disconnects, or explain why<br />
actual results differ from projections,<br />
you see how essential it is to connect the<br />
dots between finance and strategy at the<br />
front end of any planning. This is where I<br />
could get involved in how to change policy<br />
and the budget presentation to address<br />
gaps between what’s actually happening<br />
between accounting, budgeting, and<br />
planning.”<br />
Tara relishes the challenge of<br />
orchestrating the budgeting process,<br />
including performance reporting, the<br />
strategic planning cycle, and functions that<br />
feed into and flow out of the budget, to create<br />
successful outcomes and communications.<br />
“As treasurer, I have to set the tone. I lead the<br />
process of generating the budget as well as<br />
the education and communications around<br />
it. Budgeting brings individual departments<br />
together as one entity, with financial<br />
strategies and policies that can help council<br />
make better, more informed decisions. As<br />
government finance officers, we can be<br />
an important part of the solution for the<br />
important issues our communities face.”<br />
For the last three years, Tara has<br />
served on GFOA’s Rethinking Budgeting<br />
team. “When it comes to the principles<br />
and process, budgeting has been done<br />
the same way for a long time. Rethinking<br />
Budgeting is so interesting and important<br />
because it’s focused on improvement and<br />
innovation in the budgeting process.” Such<br />
areas include community engagement,<br />
equity considerations, innovations in<br />
communication, and the relationship of<br />
the budget to the strategic planning cycle.<br />
“Together we are generating innovation<br />
that will change how communities across<br />
the United States and Canada address<br />
budgeting.”<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
66
Addressing local government<br />
challenges<br />
Despite being on different sides of<br />
the same border, local governments<br />
in the United States and Canada<br />
face many of the same urbanization<br />
challenges: housing affordability, aging<br />
infrastructure, social service delivery,<br />
limited revenue and data access and<br />
use, climate change, and more. “The<br />
significant weather events resulting from<br />
climate change are forcing us to look at<br />
infrastructure in new ways to mitigate<br />
the impacts,” Tara emphasized, “as well<br />
as how we can fund these needs and more<br />
with a limited revenue base.”<br />
Tara pointed to asset management and<br />
infrastructure renewal as an area where<br />
Canadian government finance officers<br />
are making progress, perhaps ahead of<br />
their U.S. counterparts. “In budgeting and<br />
strategies, we are very focused on having<br />
asset management plans and aligning<br />
our budget to the priorities that come<br />
out of these plans, as well as creating<br />
financial strategies that maintain<br />
current assets. These plans also define<br />
the service level of these assets, and the<br />
different financial investments required<br />
to maintain them at the standard the<br />
council expects for the community.”<br />
With a population of 145,000 and<br />
growing, the City of Guelph faces many<br />
of the same urbanization challenges<br />
outlined above, particularly housing<br />
affordability and demand for social<br />
services to address homelessness and<br />
support for mental health, including<br />
addiction. Tara said, “When you really<br />
unpack these problems, they are not core<br />
functions of city service delivery. But<br />
they are the real needs in our community,<br />
and we in local government are closest<br />
to them. When you layer on things<br />
like the limits to property tax dollars,<br />
infrastructure needs, and high inflation,<br />
you see the financial pressure start to<br />
stack.” It’s this kind of complexity and<br />
the opportunity to advance solutions<br />
that have always drawn Tara to work<br />
through the fiscal challenges of meeting<br />
community needs. “It’s really about<br />
the importance of being the fiduciary<br />
responsibility over public funds.”<br />
Communicating process and progress,<br />
though, is not always easy, and there<br />
is room for improvement in the ways<br />
local governments share financial<br />
information with stakeholders, including<br />
the public. “If you can turn your complex<br />
financial reports into more accessible<br />
communications, it builds trust. There<br />
is such a return on that investment in<br />
building trust.”<br />
Building and maintaining connections<br />
Tara makes connecting with other<br />
municipal finance officers a professional<br />
priority. In addition to taking an active<br />
role with the GFOA Rethinking Budgeting<br />
team, she belongs to the Municipal<br />
Finance Officers’ Association of Ontario.<br />
This provincial-level association enables<br />
members to share best practices as well as<br />
work through changes to legislation that<br />
may affect service delivery and policy<br />
at the local level. She also participates<br />
on the peer review board of MFOA’s ONE<br />
Investment, which opens investment<br />
management opportunities on behalf of<br />
municipalities in the province, helping<br />
them pool assets or maximize potential<br />
returns on excess cash.<br />
Connection is also critical to effective<br />
process improvement. At the City of<br />
Guelph, Tara is continually focused on<br />
building relationships between her team<br />
and other departments. Like many other<br />
governments, the city has experienced<br />
recent turnover. This has brought new<br />
ideas and energy, but it also resulted in<br />
a loss of some institutional knowledge<br />
about processes. Recently, Tara and her<br />
team introduced a new learning and<br />
improvement initiative, the “Who Does<br />
What Series.” The inaugural event focused<br />
on capital funding and brought all staff<br />
together to learn, interact, and build<br />
relationships. “Because our workplace<br />
has a hybrid model, we don’t see each<br />
other in person all the time. This session<br />
helped provide some foundational process<br />
education but also built rapport. We ended<br />
it with a valuable list of opportunities for<br />
improvement that we are working through.”<br />
Being relationship-focused also helps<br />
in navigating politics, which can present<br />
challenges for finance officers in any<br />
municipality. “My colleagues and I try to<br />
remember that our role is not political,<br />
that we are to provide the best professional<br />
advice we can, and frame it for our<br />
audiences. Key to this is being agile and<br />
flexible, and building relationships based<br />
on trust that endure over time.”<br />
Meeting the future head-on<br />
Tara and her team cultivate a continuous<br />
improvement mindset when it comes to<br />
the big challenges and opportunities for<br />
local government. She highlighted two<br />
that many face: attracting talent and<br />
advancing digital transformation.<br />
“We are competing for talent with all<br />
sectors, not just municipal finance,” Tara<br />
said. “We must be more progressive to<br />
be competitive, and this means offering<br />
flexibility like remote and hybrid work.<br />
We could also do more to market the<br />
importance of the work our sector does,<br />
and to foster a positive culture between<br />
council and administration. This requires<br />
a shift, for councils to think of themselves<br />
as employers and board of directors as<br />
much as community representatives.”<br />
She also pointed out the importance<br />
of building a solid talent development<br />
pipeline to attract more graduates directly<br />
from university programs into municipal<br />
finance roles.<br />
Recently Tara spent eight months<br />
as acting general manager for IT with<br />
the City of Guelph, which has given her<br />
perspective on the importance of digital<br />
transformation for local governments.<br />
“The way of the future is data. While I<br />
was in IT, I saw firsthand that one of our<br />
biggest obstacles to a more data-driven<br />
environment is the way government<br />
technology has been built over time—<br />
these are historically on-premise legacy<br />
systems that are siloed, that don’t<br />
integrate with each other at all.” This<br />
reality is forcing governments to think<br />
differently about their entire technology<br />
infrastructures to enable the kind of<br />
workflows that pull and push data across<br />
all systems, for all customer interactions.<br />
This is where true customer centricity<br />
and customer service can happen. “We<br />
must step back and really think about<br />
system architecture to make it more<br />
integrated and agile, so we don’t have to<br />
rebuild and reinvent for the future again.<br />
It’s about building for change.”<br />
Embracing the idea of building for<br />
change takes a great deal of flexibility and<br />
resilience—qualities Tara has drawn on<br />
and honed during her career, and qualities<br />
that any government finance professional<br />
would do well to cultivate, too.<br />
Jara Kern is a marketing strategist at<br />
Right Angle Studio.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 67
IN PRACTICE | INTERVIEW<br />
WITH SAMANTHA BABICH BY MIKE MUCHA<br />
Mike Mucha, GFOA’s deputy executive<br />
director, spoke with Samantha Babich,<br />
the chief administration officer for<br />
the Renton Regional Fire Authority,<br />
about a career in fire service, what<br />
it’s like to build a finance organization,<br />
the benefits of transparent budget<br />
decisions, and how governments can<br />
improve their recruiting.<br />
Mike: Can you tell us about the Renton<br />
Regional Fire Authority and your role as<br />
chief administration officer?<br />
Samantha: Renton Regional Fire<br />
Authority, or Renton RFA as we call it,<br />
was established in April of 2016 when<br />
Renton voters decided to separate fire<br />
protection and life safety services<br />
from the City of Renton and create a<br />
special purpose district. We originally<br />
began operations in July 2016. Our<br />
organization serves over 138,000<br />
community members across 38 square<br />
miles of response area, just south of<br />
Seattle, and last year, we provided more<br />
than 23,000 emergency responses to the<br />
Renton community and surrounding<br />
jurisdictions. We have five divisions:<br />
response operations; EMS, health, and<br />
safety; the office of the fire marshal;<br />
support services; and administration.<br />
I joined the team two weeks after<br />
operations began and quickly took on<br />
the role of the chief administration<br />
officer over the administration division.<br />
As CAO, I oversee finance, IT, human<br />
resources, communications, and<br />
administrative support. Together,<br />
these sections conduct the behind-thescenes<br />
work that makes the more visible<br />
aspects of the organization possible.<br />
That’s interesting that residents voted<br />
to create another government. It<br />
seems like we hear more focus around<br />
consolidation. What was the driver for<br />
creating a Regional Fire Authority?<br />
We are seeing an increasing number of<br />
RFAs pop up across the state. One of the<br />
biggest benefits we have experienced<br />
is the ability to diversify our funding.<br />
Typically, fire departments under<br />
the umbrella of a city are beholden to<br />
property tax as a primary funding source.<br />
As you know, property taxes are based on<br />
assessed property values and can often<br />
contain revenue growth restrictions. In<br />
Washington, there is a one percent cap<br />
on property tax revenue growth yearover-year,<br />
which does not keep pace with<br />
inflation. When we branched out to form<br />
the RFA, the voters also approved what is<br />
called a fire benefit charge, or FBC, which<br />
allows for an additional funding source.<br />
Unlike property tax, a FBC is based on<br />
the size, risks, and resources needed to<br />
protect a structure, making it a much<br />
more predictable source of funding, and<br />
more directly related to our organization’s<br />
cost to protect life and property. When<br />
you pair these two funding sources<br />
together, they provide more financial<br />
stability to the organization and more<br />
freedom to not only bolster existing<br />
services but truly assess and respond to<br />
the needs of the community.<br />
68
Before accepting your current role in<br />
Renton, you worked for another fire<br />
service organization. Is there something<br />
specific about fire service that you enjoy?<br />
When I was in college, I thought I wanted<br />
to be an attorney. I received a degree<br />
in justice, but I quickly realized that<br />
criminal justice was not for me. In the<br />
90s I worked in the .com and technology<br />
sector in the Seattle area and found that<br />
to be very stimulating, but it lacked the<br />
public service element I was drawn to.<br />
In 2003, I moved to Idaho and was<br />
working on finishing the basement of my<br />
home. I reached out to Kootenai County<br />
Fire and Rescue to approve a permit that<br />
I needed to move forward. When I went<br />
in to discuss the permit, I also found<br />
out there was an opening for a business<br />
manager. I applied, got the job, and fell<br />
in love with the work and the people. My<br />
role was to manage the administrative<br />
support functions for the organization,<br />
but I really just became a part of the<br />
family. I enjoyed all of the challenges,<br />
the opportunities, and the success<br />
stories from my time there.<br />
That’s a great story, as other governments<br />
struggle to hire finance officers.<br />
It is. I didn’t really know much at all about<br />
fire service and wasn’t expecting to apply<br />
for a job. And it turns out that I didn’t<br />
even need the permit I went to discuss.<br />
You just never know where or when an<br />
opportunity will open up to you.<br />
When you started with Renton RFA, the<br />
organization was brand new. What was<br />
it like to develop policies and processes<br />
from scratch?<br />
It was both stressful and exhilarating.<br />
It felt a lot like working in the .com<br />
industry in its early years where we<br />
were building something from the<br />
ground up and anything was possible.<br />
When I went to work for Kootenai County<br />
Fire and Rescue, they were working to<br />
modernize their systems and processes,<br />
and I was able to bring my knowledge and<br />
experience in the tech sector to the public<br />
sector. When I started at Renton RFA,<br />
the chief asked what I wanted from the<br />
position, and I said that I loved building<br />
and wanted to be a part of creating an<br />
organization from the ground up. Turns<br />
out, the organization was a good fit for<br />
what I wanted in my career journey, and<br />
I think I have been a good fit for the needs<br />
of the RFA as well.<br />
“Start with the end in mind. You need a clear vision on what<br />
the organization should look like and then work backwards.”<br />
What was the most challenging part?<br />
We didn’t know what we didn’t know. We<br />
were learning, building, and growing all<br />
at the same time. Coming from Idaho,<br />
I wasn’t familiar with the Budgeting,<br />
Accounting, and Reporting Systems<br />
(BARS) used in Washington. Our first<br />
finance person came from the private<br />
sector, so there was a bit of a learning<br />
curve for her in government accounting.<br />
When we started, we had no chart of<br />
accounts, no policies, and no ERP system.<br />
So, like I said, we did a lot of learning and<br />
building at the same time. Kind of like<br />
designing and building a bridge as you are<br />
crossing it.<br />
Are you still adding policies and<br />
implementing new functions, or have<br />
things stabilized?<br />
It’s been almost seven years, but I<br />
would say that we are still adding new<br />
policies. One of our financial analysts<br />
came back from the Washington GFOA<br />
conference with information about GFOA’s<br />
Distinguished Budget Presentation Award.<br />
She asked if we could apply for next year,<br />
but I suggested that we do it now, because<br />
why wait? We ended up submitting it<br />
for the award in February. I’m proud of<br />
what we produced. It’s concise and really<br />
communicates the story of Renton RFA.<br />
and it connects our values, mission,<br />
and guiding principles to how we spend<br />
money. It also made us take a hard look<br />
at our finance policies to ensure that we<br />
had all the proper ones in place.<br />
Is there anything you would have done<br />
differently, or do you have any advice<br />
for other finance officers who may be<br />
facing the challenge of creating a finance<br />
organization?<br />
I’m not sure we would have done<br />
anything differently—maybe we’d<br />
have decided on our ERP system a little<br />
earlier. It took us a while to implement<br />
the system, but having the technology<br />
in place is necessary. In terms of overall<br />
guidance, I would say start with the end<br />
in mind. You need a clear vision of what<br />
the organization should look like and<br />
then work backward. I had ten years of<br />
finance experience in the fire service<br />
before coming to Renton RFA and felt like<br />
I had a pretty good feel for what elected<br />
officials and the fire chief would want<br />
from our finance team. Once we knew<br />
what that end looked like, we were able<br />
to develop processes, reports, and many<br />
other little things to support the plan.<br />
The RFA website and budget talk a lot<br />
about the organization’s mission, vision,<br />
and guiding principles. How do those<br />
align with financial processes?<br />
Our vision, mission, and values posters<br />
are everywhere in our facilities. We all<br />
live by them. Our organization’s vision is<br />
to make our community safer, healthier,<br />
and stronger. In finance, we often use<br />
this as our compass when setting our<br />
budget. Everything we fund should tie<br />
back to this vision. For example, we have<br />
recently funded a new service in our<br />
budget called FDCARES. This program<br />
is intended to service frequent 911<br />
users with non-emergent care needs and<br />
provide proactive services to remove their<br />
dependency on the 911 system and the<br />
hospital emergency departments. This<br />
not only improves the level of care for our<br />
most vulnerable community members<br />
but also takes stress off our emergency<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 69
IN PRACTICE | INTERVIEW<br />
responders by ensuring that they are ready<br />
for truly emergent calls. As far as our values<br />
of professionalism, integrity, leadership,<br />
loyalty, accountability, and respect are<br />
concerned, we lean into these when we<br />
are unsure of what the right decision or<br />
course of action is. The right thing to do<br />
is usually pretty clear when you use our<br />
values as a lens.<br />
Having finance staff work together<br />
with fire personnel is a focus of GFOA’s<br />
partnership with the International<br />
Association of Fire Chiefs (IAFC) to<br />
develop better budget practices for local<br />
government fire service and to ensure<br />
that fire chiefs have an understanding of<br />
finance issues. How would you describe<br />
the relationship between administrative<br />
services and fire chief at RFA?<br />
I’m thrilled to hear about the joint effort<br />
between GFOA and IAFC. We have<br />
membership in both organizations, and<br />
the collaboration this project is working<br />
to achieve is spot on. In my current and<br />
former organizations, they embraced the<br />
CAO as a position to help advise the fire<br />
chief just like any other division chief.<br />
The relationship between administrative<br />
services and the fire chief can be a<br />
challenge if you are not on the same page<br />
about how funds are allocated. Fortunately,<br />
I have a very positive working relationship<br />
with my fire chief and enjoy coming to work<br />
each day. Finance is often perceived as the<br />
one who only says ‘no’ and who holds the<br />
purse strings too tight. As finance officers,<br />
I think the best thing we can do is to be as<br />
open and transparent as possible.<br />
Fire chiefs are really under a lot of<br />
pressure to perform, but protecting the<br />
community and ensuring the health and<br />
safety of our first responders is always a<br />
priority. Apparatus and equipment are<br />
highly specialized and expensive. Staffing<br />
response operations 24x7x365 is also<br />
expensive. When I started in Idaho, the<br />
fire chief built the budget, and finance<br />
would ensure that expenses aligned with<br />
revenue. Because much of that work<br />
was done in a silo, it seemed like we were<br />
always defending the budget and resource<br />
allocations to the firefighters. So, in<br />
2006, we opened up the budget process to<br />
everyone in the organization and really<br />
engaged our membership to help us<br />
determine our priorities. It was amazing<br />
to see how many firefighters came to<br />
meetings on their own time to help guide<br />
the budget process. Having discussions<br />
in the open helped make those decisions<br />
more transparent and strengthened<br />
the trust between the firefighters and<br />
administration.<br />
In addition to our elected officials and<br />
our citizen advisors, approximately<br />
ten percent of our Renton RFA members<br />
are involved in the budget process in<br />
some way. Most are budget managers<br />
with responsibility for either a division,<br />
a section, a special team, or a special<br />
program/project. It is a very collaborative<br />
process. Sometimes discussions can get<br />
tense. People have opinions, and that’s<br />
okay. Elected officials, leadership, and<br />
even new firefighters can provide feedback<br />
and weigh in. We want to have all of the<br />
ideas out there. I love the way we do it<br />
now. There are no secrets and no hidden<br />
agendas, just complete transparency.<br />
I believe strongly that while many<br />
new fire chiefs could benefit from better<br />
knowledge of finance, at the same time<br />
administrative staff need to really get out<br />
and spend time with the first responders.<br />
By getting boots on the ground, you get<br />
to see what their needs are and gain a<br />
greater sense of and empathy for what it is<br />
that they do each and every day to protect<br />
our residents.<br />
You also oversee IT. How has cloud<br />
technology changed the way that fire<br />
service operates?<br />
Cloud computing is great. I fell in love with<br />
technology tools to streamline processes<br />
using automated flows in 2005. At Renton<br />
RFA we leverage everything we can out<br />
of the Microsoft power platform. We have<br />
reduced paper to support sustainability<br />
and reduce clutter. Most of our forms<br />
are electronic which trigger workflows<br />
that send information to the teams that<br />
need it, ensuring timely information<br />
flow throughout the organization. The<br />
IT team here has also worked to develop<br />
two automated bots. They work to gather<br />
and analyze data from our IT systems<br />
and publish information to screens that<br />
we have hung throughout our offices and<br />
firehouses. Our ERP system is entirely in<br />
the cloud, which allows us to work from<br />
any device anywhere, at any time. We take<br />
the approach that we want to make use of<br />
technology for everything that it can do and<br />
save the human touch for things that need<br />
a human touch. Coming to work is exciting<br />
and has a start-up feel to it. We don’t have<br />
anyone telling us no; it’s about what’s next.<br />
That’s impressive. When used strategically,<br />
technology can help lessen the impact of<br />
hiring challenges that many governments<br />
face. I also learned a bit about WA Fire<br />
Careers. Can you explain more about this<br />
program?<br />
One of the challenges in the fire service<br />
is recruiting—it’s just hard. We have more<br />
retirements than incoming firefighters.<br />
At Renton RFA one of our primary goals is to<br />
build a membership that is representative<br />
of the community we serve. In the South<br />
King County area, it seemed like we were all<br />
trying to hire the same people, at the same<br />
time. We participate in a joint training<br />
consortium with other agencies which<br />
allows us to train together, but it also means<br />
that we are all hiring simultaneously,<br />
70
“While many new fire<br />
chiefs benefit from better<br />
knowledge of finance,<br />
administrative staff need<br />
to really get out and<br />
spend time with the first<br />
responders. By getting<br />
boots on the ground,<br />
you can really see what<br />
their needs are.”<br />
and only two times per year. In our<br />
area, candidates were routinely getting<br />
four or five job offers for each academy.<br />
When someone accepts a conditional job<br />
offer from an agency, the agency then<br />
incurs costs for medical testing, psych<br />
evaluations, background checks, and<br />
gear to prepare the individual for the<br />
academy. Some departments had the<br />
same costs for the same candidate. When<br />
the candidate finally selected their final<br />
choice, the other departments were left<br />
to start over or lose a spot in the academy.<br />
It was painful. With WA Fire Careers,<br />
Renton RFA joined Enumclaw Fire, King<br />
County Fire District #20, Puget Sound<br />
Fire, and Valley Regional Fire to approach<br />
recruiting and hiring collaboratively. Our<br />
joint recruiting efforts make the process<br />
more accessible. Candidates take one test<br />
for all agencies and can get on a list for any<br />
of them. Firefighters then interview with<br />
the departments that select them and rank<br />
the departments they want to work for. At<br />
the same time, departments are able to<br />
rank candidates. We then use algorithms<br />
to match candidates to their highestranked<br />
organization, and each will<br />
receive only one job offer. We’re no longer<br />
competing with neighboring organizations<br />
for the same people.<br />
What a great idea, and a great example<br />
of governments working together.<br />
Do you see programs like this working<br />
for government finance officers?<br />
I don’t know. Hiring firefighters is much<br />
different than hiring finance officers,<br />
but I’d like to think that there could be<br />
opportunities for local governments to<br />
collaborate. If we were able to create more<br />
standardization, it might even be easier to<br />
fill positions and be more productive when<br />
new hires start.<br />
As someone who has spent most of your<br />
career in public service, and with some<br />
time spent in human resources, what do<br />
you think the key to attracting talent is?<br />
How can government recruit the next<br />
generation of public administrators?<br />
Government agencies need to approach<br />
their recruitment strategy with<br />
authenticity. As a leader, be honest with<br />
yourself about what your organization can<br />
and can’t do. We tend to get so caught up in<br />
the formality of government interactions<br />
that we forget to be personable and help<br />
potential candidates truly feel connected<br />
to the work we do in our communities<br />
every day. My division has a great<br />
communications team, and that is<br />
something I think we do differently from<br />
other government agencies when we<br />
market our positions.<br />
I’ll give you an example. We recently<br />
hired a new human resources manager. He<br />
is a 30-year human resource veteran and<br />
former vice president of a major private<br />
sector organization. Realistically, we knew<br />
we could not pay him as much as he could<br />
make in the private sector, but we were<br />
able to bring him on board by positively<br />
communicating our culture, our diversity,<br />
our style of leadership, and our mission.<br />
A lot of people in the job market right now<br />
are seeking work that not only makes<br />
them feel valued but makes them feel like<br />
they’re providing value to others, and<br />
those are the people we want on our team.<br />
We hired our IT manager in a very<br />
similar way. He came to us as a highly<br />
experienced professional out of the<br />
Seattle IT scene, but he was woefully<br />
tired of the negative culture and the<br />
lack of work-life balance. We showed<br />
him how he could have a home with our<br />
organization, and he came aboard. Not<br />
long after he was hired, he was doing<br />
some IT work at a firehouse when a<br />
community member in distress came<br />
in but could only speak Spanish. As<br />
a native Spanish speaker, he jumped<br />
in to translate and ultimately helped<br />
ensure she received the care she needed<br />
as quickly as possible. He later shared<br />
with me that the experience proved to<br />
him that he was meant to be here at our<br />
organization. He is a public servant at<br />
heart. That is the type of people you<br />
want on your team, and that is the type<br />
of people you attract when you approach<br />
your recruitment strategy with genuine<br />
authenticity.<br />
I want to switch topics and ask your<br />
opinion on GFOA. You are well into your<br />
career in local government but only<br />
joined GFOA recently. What motivated<br />
you to become a member, and what do<br />
you hope to get out of your membership?<br />
We have always encouraged membership<br />
in GFOA for our finance members,<br />
but when we applied for the budget<br />
award, I asked about getting my own<br />
membership. For most of my career, I<br />
thought that GFOA was all about finance,<br />
finance, and more finance. And it is,<br />
but there is more, too. I was recently<br />
looking at the program for the Portland<br />
conference and noticed there is quite a<br />
bit for someone like me.<br />
From a financial perspective, I feel<br />
like I have more to learn, and I know that<br />
I will be able to use resources from GFOA<br />
as we get more involved in long-term<br />
financial planning. I’m very excited<br />
about the partnership with IAFC and am<br />
looking forward to getting involved more<br />
in GFOA. The ability to bring together<br />
different parts of the organization and<br />
build relationships is critical. I love that<br />
GFOA is focused on relationship building,<br />
both within finance and with other areas<br />
of government.<br />
Mike Mucha is the deputy executive<br />
director of GFOA.<br />
JUNE <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 71
10 STEPS<br />
TO BETTER COLLABORATION BETWEEN<br />
FINANCE OFFICERS AND FIRE CHIEFS<br />
GFOA and the International Association of Fire Chiefs (IAFC) are working together<br />
to develop resources to promote better collaboration between finance officers and<br />
fire chiefs. An introductory public finance curriculum geared toward firefighters is<br />
in the works, along with checklists that finance officers can use when meeting with<br />
their counterparts in the fire department (and vice versa for fire chiefs).<br />
As a first step, the working group, which is made up of GFOA and IAFC staff and<br />
members, developed this list, with items geared toward both central office finance<br />
professionals and fire department executives. We encourage you to share this list<br />
with your colleagues in the fire department to precipitate a larger conversation<br />
about how to work together better.<br />
1<br />
For both: Go to lunch or have<br />
coffee together without specific<br />
work-based tasks in mind. Get to<br />
know each other as individuals, which<br />
allows you to build a relationship and<br />
earn each other’s trust, an important<br />
precursor to effective collaboration.<br />
2<br />
For<br />
Fire Department staff: Get<br />
Finance involved early with<br />
purchases that are outside the<br />
norm. If you need to purchase a new fire<br />
engine or fire truck (yes, Finance folks,<br />
there is a difference), talk to your Finance<br />
colleagues as soon as the need arises.<br />
Even better, work with Finance to develop<br />
a long-term equipment replacement<br />
schedule for all gear and apparatus.<br />
3<br />
For<br />
Finance Department staff:<br />
Ask questions and do some<br />
basic due diligence to learn<br />
more about firefighting. Start by learning<br />
the difference between a fire engine and<br />
a fire truck! (In the simplest terms, an<br />
engine holds water and hoses, and a<br />
truck is a mobile toolbox that can include<br />
large ladders that extend from the truck<br />
and don’t come off.)<br />
4<br />
For<br />
both: Express your<br />
gratitude and appreciation<br />
for each other’s work.<br />
It demonstrates that you’re paying<br />
attention and genuinely appreciate<br />
each other’s contributions.<br />
5<br />
For Fire Department staff:<br />
Invite Finance Department staff<br />
to get an up-close-and-personal<br />
view of your department. Invite them to<br />
come out and see new equipment when<br />
it arrives. Ask them to go on inspections<br />
with you. These efforts will give finance<br />
folks a much better understanding of<br />
your job and the challenges you face.<br />
6<br />
For Finance Department staff:<br />
Build a more collaborative<br />
budget process and involve<br />
the Fire Department early on. Ask them<br />
to provide a representative to participate<br />
in any multi-department committee<br />
work, opportunities, or initiatives.<br />
When a department makes you aware<br />
of a concern and wants to work together<br />
to develop solutions, embrace the<br />
opportunity. Make sure you understand<br />
the need and urgency, so you can assist<br />
with developing a plan.<br />
7<br />
For both: Hold monthly<br />
meetings with members of<br />
both departments. Review<br />
Fire Department budget reports and<br />
performance indicator reports to better<br />
understand how the money is being<br />
spent and how the community benefits.<br />
Also, share information about revenue<br />
collections, expenditures, and community<br />
priorities across the entire government<br />
so the Fire Department staff can see<br />
how they fit into the bigger picture.<br />
8<br />
For Fire Department staff:<br />
Don’t be afraid to ask for advice<br />
from Finance staff when needed.<br />
If you anticipate a need for additional<br />
funding or foresee a decrease in revenue,<br />
reach out to Finance right away so they<br />
can help develop solutions.<br />
9<br />
For Finance Department staff:<br />
Know your fire department’s<br />
staffing model. Fire suppression,<br />
rescue, and emergency medicine are 24/7<br />
jobs, and the Fire Department may need<br />
to use more overtime and acting pay than<br />
you’d expect. If you really want to see this<br />
schedule in action, ask to do an extended<br />
ride-along with a fire crew.<br />
10<br />
For both: Be open to<br />
questions and finding<br />
new ways of doing things.<br />
Don’t be offended if someone asks<br />
questions about processes. Model this<br />
behavior at all levels of your department<br />
to promote an organizational culture that<br />
fosters curiosity, learning, and innovation.<br />
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