GFR August 2023

Government Finance Officers Association | AUGUST 2023
Government Finance Review
Rethinking
Reserves
How optimizing their reserve strategy
can help local governments manage
risk and prepare their communities
for an increasingly volatile world
Fiscal Fluency Made Easy
How Artificial Intelligence
Will Affect Your Work
Local Government 2030:
Approaches to Budgeting

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contents AUGUST
2023 | VOLUME 39, NUMBER 4
©2023 MICHAEL AUSTIN; SHAW NIELSEN C/O THEISPOT.COM
SPECIAL SECTION
14
Should We
Rethink Reserves?
A multimillion-dollar
question
By Shayne Kavanagh, Vincent
Reitano, and Peter A. Jones
32
Fiscal Fluency
Made Easy
Communicating
numbers using insights
from behavioral science
By Shayne Kavanagh
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 1

contents
42
AIn’t it Grand?
How AI will affect your work
By Rob Roque and Andrew Soswa
46
Local Government 2030
Tackling approaches to budgeting
By Henrietta Weaver, Yuri Hattersley,
Kevin Fitzgerald, and Taylor Galusha
6 Contributors
8 From the CEO
10 Rewind: A Look Back at
GFR in June 1993
11 GFOA Introduces the
LGBTQIA+ Caucus
12 Why Diversity Efforts are Crucial
By Susanne Tedrick
and Bertina Ceccarelli
53 Addressing the Hiring Crisis
for the City of Dubuque
through Collaboration
By Connor Golden and Samuel Mann
58 Just Go with the Flow—
Cash Flow Reporting
By Susannah Filipovic
60 Tips for Powerhouse
Dashboards
By Katherine Barrett
and Richard Greene
62 Rethinking Revenue
Diversification,
Warren Buffett Style
By Justin Marlowe
64 Rising to the Budgeting
Challenge: An Interview
with Laura Larsen
By Jara Kern
67 Q&A with Shayne Kavanagh
By Mike Mucha
72 10 Steps to Better
Public Engagement
67
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
2

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Publisher
Chris Morrill
Editor in Chief
Michael J. Mucha
Managing Editor
Marcy Boggs
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4

CONTRIBUTORS
Bertina Ceccarelli, as the chief executive officer of nonprofit NPower, is committed to helping young
adults and military-connected individuals launch tech careers and remove barriers to economic
mobility. As a leader, she works to model an inclusive workplace, providing opportunities for growth
at all levels. Bertina is a coauthor of Innovating for Diversity: Lessons from Top Companies Achieving
Business Success through Inclusivity (Wiley, 2023).
Kevin Fitzgerald, MPA, is the American Rescue Plan coordinator for the Town of Groton, Connecticut.
In executing the town’s ARPA allocation strategy, he is charged with managing federal stimulus funds
and leveraging strategic allocations to attract public and private community investment and to deliver
an equitable and transformative pandemic recovery. He approaches this role with a background in
planning and economic development and a Master of Public Administration from the University of
Connecticut with a Certificate in Public Financial Management.
Taylor Galusha, MPA, is the assistant to town manager—communications coordinator for the Town of
Shrewsbury, Massachusetts. She manages the Town’s internal and external communications to increase
public engagement, outreach, and transparency in the community and throughout the organization
through special projects and day-to-day operations. She comes to Shrewsbury after working in a fellowship
position with the Town of Middleton, Massachusetts, while obtaining her Master of Public Affairs from
Merrimack College, with a focus on communications.
Yuri Hattersley, MPA, oversees a Lean continuous improvement pilot program within the City of Bellevue,
Washington’s Finance and Asset Management department. In addition to supporting process improvement
efforts among various business lines and services offered by Finance and Asset Management, Yuri
supports strategic planning, performance measurement, surveying and focus grouping, and diversity,
equity, inclusion and belonging efforts. They came to Washington from the State of Texas, where they
studied sociology on the pre-law track as a Terry Scholar.
Peter A. Jones, Ph.D., is an associate professor at The University of Alabama at Birmingham’s Department
of Political Science and Public Administration. His research focuses on the public budgeting processes and
financial management of local and state governments. He also studies K-12 public schools and considers
the financial ramifications of various education policy issues, and his work has appeared in a number of
publications. Peter earned the 2021 College of Arts and Sciences Dean’s Awards for Excellence in Teaching.
Shayne Kavanagh is the senior manager of research for GFOA. He started GFOA’s long-term financial
planning and policy consulting offering in 2002 and has been working with governments on financial
planning and policies ever since. Most recently, Shayne has pioneered the use of computer simulation
to “stress test” the long-term financial position of local governments. He is also the author of a number of
influential publications on financial planning and budgeting. His work has earned him a fellowship with
the National Academy of Public Administration, a position on the board of advisors for the University of
Chicago’s Center for Municipal Finance, and recognition as one of the 100 most influential people in local
government by Engaging Local Government Leaders.
6

Vincent Reitano, Ph.D., is an associate professor at Western Michigan University’s School of Public
Affairs and Administration. Before that, he was a public finance associate in GFOA’s Research and
Consulting Center. Prior to joining GFOA, he worked in the Department of Defense and completed a
research fellowship at SAS. Additionally, he conducted research on risk analysis for the Department of
Homeland Security and coauthored reports on education finance for the North Carolina Department of
Public Instruction.
Rob Roque is the technology services manager in GFOA’s Research and Consulting Center. He has
been with GFOA since 1998. Rob primarily provides enterprise system implementation advisory
services, enterprise system project management services, and enterprise selection services to
local governments of all sizes and types. He also contributes to GFOA technology publications,
training courses, and conference sessions to keep members informed on the latest developments
in public sector technology.
Andrew Soswa is a business technology executive with more than 20 years of experience delivering
client solutions, driving enterprise project management, and leading transformative initiatives.
He has provided exceptional advisory services to global enterprises and senior executives, guiding
them in evaluating, merging, and acquiring business and technology solutions while driving longterm
strategies and implementations. He has a track record of delivering transformational digital,
cloud, and Agile projects across various industries, including banking, lending, card payments,
financial, trading, retail, e-commerce, big transport, and consumer enterprises.
Susanne Tedrick is a writer and speaker who is dedicated to expanding the professional opportunities
of women and people of color within the tech industry. She is a coauthor of Innovating for Diversity,
and author of Women of Color in Tech, A Blueprint for Inspiring and Mentoring the Next Generation of
Technology Innovators (Wiley, 2020). Susanne has been featured in many influential tech and business
media outlets including Worth Magazine, CompTIA, PECB Insights, and CIO.com.
Henrietta Weaver, CPA, MACC, is the director of budget for the City of Danville, Virginia. She directs,
supervises, and coordinates budget development and administration through collaboration with
all city departments. The department also performs long-range fiscal planning and forecasting and
provides professional management and research assistance on financial management, productivity,
and the effective and efficient use of city funds. She came to work in the public sector after almost
a decade in public accounting, where she specialized in financial and compliance audits for
government and not-for-profit entities.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 7

FROM THE CEO
Christopher P. Morrill
Executive Director/CEO
Are You a CPFO?
T
his summer, GFOA published
the seventh and final test for
our Certified Public Finance
Officer (CPFO) program.
This completes our testing
line-up, and it’s a major milestone in
our four-year project to reinvent the
program, which will provide both
critical resources for members who
want professional development and
assistance for governments that are
recruiting and developing expertise to
the finance office.
The CPFO program prepares
individuals for leadership positions in
state and local government by building
fundamental skills and providing a
better understanding of best practices
in public finance. The program also
supports GFOA’s core beliefs, which
include ethics, leadership, ongoing
professional education, and engagement
in the broader public finance community.
Finance officers are expected to
understand the many topic areas that fall
under the umbrella of “public finance.”
The CPFO program helps candidates
demonstrate their qualifications for
taking on leadership positions. It can
also be a tool to guide future professional
development for you or your staff, or to
use as a self-study program for building
your skills.
GFOA’s CPFO program has been in
place for more than 20 years. During
that time, more than 800 people have
achieved the honor, and another 300
people were working on passing the five
tests that made up the program. Active
CPFOs made up just three percent of
total GFOA membership—less than
comparable certification programs
from some of our peer organizations
operating in other local government
fields. In addition, our partnership
with Radford University, which
administered the program, was ending.
Earning a CPFO designation has
always been a significant achievement,
but we saw an opportunity to make
it better serve GFOA and the overall
profession. After extensively analyzing
the program, best practices in
certification, and the potential demand
among finance officers, we made the
strategic decision in 2019 to invest in a
reinvention of the CPFO program. After
collecting feedback from existing and
potential CPFOs, we aimed to achieve
the following goals:
• Maintain and elevate the standard of
CPFO to make it a distinction worth
achieving.
• Align CPFO with GFOA best practices
and educational and other resources.
• Integrate CPFO with other GFOA
programs to encourage engagement
with the organization.
• Make the program more accessible.
• Better define what a CPFO is and
communicate the benefits of CPFO
participation among a broad publicsector
audience.
Since we announced the new program,
almost 1,000 people have signed up to
participate. And as we move forward
with enhanced marketing efforts, we
expect that number to keep growing.
Major changes to the program include:
GFOA administration. GFOA now
administers the program in-house and
has hired staff with experience leading
certification programs.
Updates to the testing categories.
The new CPFO program requires passing
scores on seven tests to earn certification.
After conducting a job analysis of our
current members, we updated the
exams to make sure they’re relevant
for today’s finance officer. Current
tests include accounting and financial
reporting, planning and budgeting,
debt management, treasury and
investment management, compensation
and benefits, risk management, and
procurement.
8

Certification. Career. Community.
The CPFO program
prepares individuals
for leadership positions
in state and local
government by building
fundamental skills
and providing a better
understanding of best
practices in public finance.
Enrollment fees. Under the old program,
candidates paid an initial enrollment fee
and then paid per test taken; however,
we found that many candidates didn’t
complete the program. Candidates
now pay an upfront enrollment fee and
are able to take advantage of program
benefits (including no fee for testing)
for two years.
Program benefits. GFOA strives to
support candidates in their journey
to earn CPFO status. To that end,
enrolled candidates receive 25 percent
off publications, complimentary
webinars, access to core e-learning
content, participation in the CPFO
online community, complimentary test
registration, and more.
Improved access to testing. In the past,
exam locations were limited. GFOA
now partners with PearsonVue, which
provides thousands of locations along
with online options, making the process
much easier and more convenient.
New requirements for continuing
engagement. Based on feedback from
existing CPFOs, we have clarified the
requirements for maintaining a CPFO
designation. CPFOs must now complete
15 hours of continuing education and
demonstrate engagement within the
public finance profession.
New systems to support certification.
GFOA has invested heavily in systems
to enhance the CPFO experience.
Our learning management system
provides educational content to help
candidates prepare for exams. Current
CPFOs can display digital badges on
their social medial profiles. And we
are implementing tools to help with
scheduling tests and submitting
continuing education requirements.
While our roll-out of the full set of
tests is now complete, we plan to keep
enhancing the program. Our next steps
include exploring partnerships with
state associations and existing statelevel
certification programs, offering
micro-certification, developing
resources for continued development
of leadership competencies, and a
broad campaign to increase awareness
of the CPFO program.
So, are you a CPFO? Are you
considering it? Please visit gfoa.org/cpfo
to learn more about the program and
how it can help you reach your
professional goals, better assess your
own broad understanding of public
finance, and unlock a new network of
experienced and knowledgeable peers.
Sincerely,
Take the next step
Learn how to get started on
your CPFO journey.
gfoa.org/cpfo
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 9

ewind
Wait, How Much Does It Cost?
A look back at GFR in June 1993
The June 1993 issue of
Government Finance Review
led with an article about
using activity-based costing
for efficiency and quality.
Applying activity-based costing
analysis was a necessary first step in
deciding which services the City of
Indianapolis, Indiana, should provide
to its citizens, defining core versus
ancillary activities. City officials knew
the big numbers, of course, but there
was, in general, a lack of detail on things
like how much it cost to fill a pothole or
install a traffic signal.
The lack of accurate information
about how much it cost to provide
specific city services was more than
just an inconvenience. Before the city
government could begin to consider
providing a service more efficiently, it
needed to accurately determine the cost
of providing that service. So, city officials
began asking some basic questions about
how much services cost, if that cost was
competitive in the marketplace, if there
might be an alternative delivery system
that could provide the same service at
less cost or at greater value, if there was
a cause-and-effect relationship between
spending and results, and more.
When city officials started calculating
how much it cost to pick up a ton of trash,
they got some surprising information.
For example, they found garbage trucks
that had been out of service for repairs
for six months. Upon asking, they
were told that the cost of running the
truck was X dollars, and no one had
ever thought about it before because
there was a budget for the garage, the
trucks, the gas, and the drivers—but
the components had never been put
together until employees were forced
to cost out each city service.
So, the city engaged a consultant to
implement an activity-based costing
system (ABC). It helped city officials
determine exactly how many and
what services were provided, and it
also helped identify the services that
might be more efficiently provided
by different departments or external
organizations. ABC assigns costs to
products or services based on their
consumption activities. By identifying
component cost details, cost impacts,
and savings from alternative courses
of action. It also compares delivery
costs for the same service in different
locations, highlighting areas of
efficiency and areas that need work.
ABC assigns costs of overall
functions—for example, payroll,
computers, electric bills, and fixed
assets—to the activities that generate
the expense. The key components are
activities performed by employees,
equipment, and facilities; drivers (as
in, the allocation of activity costs to
outputs); outputs (as in, the results
or accomplishments); and the extent
to which each activity should be
allocated to each output.
Indianapolis’ results-driven
program yielded significant service
improvements and cost-saving.
The results obtained via ABC built
employee confidence and skills. The
city used these strategies to reexamine
both how much government and
what kind of government it wanted
to provide. This approach reinforces
government’s commitment to
delivering more than a dollar’s worth
of service for every dollar invested.
©2023 JIM FRAZIER C/O THEISPOT.COM
10

In Brief
CAUCUSES
GFOA Introduces LGBTQIA+ Caucus
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
GFOA’s LGBTQIA+ Caucus
officially launched in May
2023. Through networking
and education, the group
will advocate for LGBTQIA+
members within the government finance
profession and work to increase the
visibility of LGBTQIA+ people within
GFOA and the profession as a whole.
More than 100 people attended the
first meeting of the LGBTQIA+ Caucus at
the GFOA conference in Portland on May
22, 2023, where the group’s bylaws were
adopted and the first leaders were elected.
“I think that establishing this type of
group is vital for advancing LGBTQIA+
people and letting them know that they
are not alone and have a resource to lean
on,” a GFOA LGBTQIA+ Caucus inaugural
meeting attendee said.
The caucus was begun by a group
of GFOA members and staff as part of
GFOA’s diversity, equity, and inclusion
(DEI) efforts. A task force was formed in
January 2023 to establish interest, and
that interest quickly developed a plan to
draft bylaws and a mission statement, and
to organize for the group’s first meeting.
“We didn’t know how many people were
going to show up for this first meeting,”
Caucus Chair Andrew Kramer said. “We
were blown away by a completely full
room. It was amazing to meet so many
people at the conference who were so
passionate about this. It underscored for
us how vital the need for this group is.
I am personally grateful for the support of
the GFOA Executive Board and especially
the GFOA staff who have been critical in
getting this set up.”
As the group gets established, they
have set goals of reaching 200 members,
finalizing a mission statement, setting up
a series of networking events, and looking
for opportunities to support students
and early-career professionals. “We will
also be working with GFOA’s Executive
Board and staff to make sure that future
meetings and conferences are safe and
inclusive for everyone,” Kramer said.
“I’m looking forward to setting up
networking events to help build and
support this community within GFOA,”
Caucus Vice Chair Jennifer Davis said.
Other LGBTQIA+ groups, like Muni Pride,
have already reached out to find ways to
collaborate and network. “We want to find
ways to get people together for fun, but
also to build our network of support. We
heard so many amazing stories, but also
some difficult ones. As much as anything,
people told us that just knowing that they
weren’t alone was really powerful,” she
explained.
“Over the next year, we’ll be working
to find ways to raise the visibility of the
group and highlight the issues we face, but
also the opportunities. We want everyone
to know that LGBTQIA+ representation
in finance offices is critical to advancing
any DEI initiatives in our governments,”
Caucus Secretary Matthew Lentz said. “We
are excited to be able to launch this caucus
and see where our members take us.”
“It’s about visibility and action. We want
people to know that they can bring their
full selves to their jobs, that they have
incredibly important perspectives and
value, and that they have the support of
hundreds of other finance professionals
across the globe. This year, we are
focusing on increasing that visibility
and growing an active and engaged
membership,” Kramer said.
To learn more about the LGBTQIA+
Caucus and become a member, visit the
affinity group page on GFOA’s website.
From there you will have access to
resources and a community forum to post
questions, share insights, and just say,
“Hi, I’m here, and I’m glad you are, too!”
Get involved
Learn more about the LGBTQIA+ Caucus
and how to become a member.
gfoa.org/lgbtqia-caucus
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 11

IN BRIEF
Why Diversity Efforts
are Crucial
BY SUSANNE TEDRICK AND BERTINA CECCARELLI
Diversity, equity, and inclusion (DEI) programs, often led by human
resources departments, are seen as measures that offer valuable
education and interactions, while also adding to an organization’s
moral and ethical “compass.” But DEI efforts are also seen as
measures that do not add to the financial bottom line. This article will
explore ways of offsetting this narrow view and more fully realizing
the business case for diversity.
Organizations with strong DEI
initiatives are more likely to meet
or exceed financial targets.
A comprehensive 2014 to 2019 study
by McKinsey & Company found that
workplaces with strong gender and ethnic
diversity are more likely to produce
better financial results than less diverse
competitors. 1 The study found that in
2019, companies in the top quartile for
gender diversity on executive teams were
25 percent more likely to have aboveaverage
profitability than companies
in the bottom quartile. What’s more, in
terms of ethnic and cultural diversity,
top-quartile companies outperformed
those in the bottom quartile by 36
percent in profitability that same year.
Organizations with strong DEI
initiatives are more likely to have
high-performing teams.
The business case for diversity goes
beyond quarterly financial reports.
Competition for talent in the business
world is often fierce, and organizations
seen as prioritizing DEI are in a better
position to succeed. The job search
engine Glassdoor reports 67 percent of
job seekers indicate that a diverse work
environment was a key factor in their
decision to work for an employer. 2
The investment community is also
prioritizing DEI criteria. The Institutional
Limited Partners Association’s (ILPA)
Diversity in Action initiative requires
participants to track hiring and
promotions by race and gender and to
report employee demographic data while
raising funds. Private equity firms that
are low in DEI indicators risk losing
coveted investments from large-scale
institutional investors.
Organizations with strong DEI initiatives
are more likely to be considered agile
and innovative.
In today’s fast-moving corporate
environment, agility and innovation
are imperative to success. Business
agility is the ability to adapt quickly
and effectively in the market and the
environment. Agility embraces a
people-centered, organization-wide
capability that strongly encourages
continuous improvement, trust,
and collaboration. Agility empowers
teams, individuals, and companies
to satisfy customers’ changing needs
and expectations, in turn driving
innovation.
Barriers that impede agility and
innovation include:
• Lack of prioritization. An
organization may take its customers
(both employees and residents) for
granted, assuming they are satisfied
with periodic improvements.
And that government may not
invest enough in innovation, in turn
neglecting customers’ needs and
failing to reward the strong innovators
on their teams—some of whom
may accept positions elsewhere.
• Apathy dampens original thinking.
“Success breeds success,” but it can also
lead to complacency and to procedures
that are more about protecting that success
than ensuring its evolution or identifying
the next big idea. There is no question that
certain standardized systems and practices
are important; the danger lies in accepting
only one right way of doing things.
• Humility is overlooked and undervalued.
Any organization needs confident,
assertive leaders. But problems occur
when they are not approached with
humility—that is, an acknowledgment
that someone else may have a piece of the
puzzle that others have not discovered.
A lack of true empowerment can lead to
arrogance, stifling agility and innovation.
Organizations with strong DEI initiatives
are more likely to achieve or exceed
financial outcomes.
A 2018 study by Boston Consulting Group
(BCG) found that companies with aboveaverage
diversity among their leadership
ranks have a greater financial return on
innovation and higher earnings before
interest and tax margins. 3 Moreover, BCG
found that firms with above-average diversity
on their management teams reported revenue
that was 19 percentage points higher than
organizations with less diverse management.
Conclusion
While important, finance concerns
should not be the only reason to act.
There is a compelling moral and ethical
case to pursue DEI programs, as all
workers deserve the right to be treated with
dignity and compensated equitably.
Bertina Ceccarelli is the chief executive
officer of NPower. Susanne Tedrick is a writer
and speaker who is dedicated to expanding
the professional opportunities of women and
people of color within the tech industry.
1
“Diversity Wins: How inclusion matters,” McKinsey
& Company, May 2020.
2
“What Job Seekers Really Think About Your Diversity
and Inclusion Stats,” Glassdoor, July 12, 2021.
3
Rocío Lorenzo, Nicole Voigt, Miki Tsusaka, Matt Krentz, a
nd Katie Abouzahr. “How Diverse Leadership Teams Boost
Innovation,” Boston Consulting Group, January 23, 2018.
©2023 JAMES YANG C/O THEISPOT.COM
12

14

SPECIAL SECTION | RETHINKING RESERVES
SPECIAL SECTION
Should We Rethink
Reserves?
A Multimillion-Dollar Question
BY SHAYNE KAVANAGH, VINCENT REITANO, AND PETER A. JONES
While Fund Balance Guidelines for the General Fund is one of GFOA’s most often-cited best
practices, there are many opportunities for reserve optimization beyond the one-size-fits-all
guidance provided in the best practice. This series of articles brings what we’ve learned together
with university research to describe new opportunities that will help local governments get
the best value from their reserve strategies.
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
RESERVES VERSUS FUND BALANCE
“Fund balance” is an accounting term that describes the difference
between assets and liabilities. “Reserves” is a budget and policy
term that describes the fungible resources available outside of the
budget for use if the resources appropriated inside of the budget
are insufficient. There is an overlap between “fund balance” and
“reserves,” but the most important difference is that fund balance
covers a broader range of resources. For example, fund balance
could include prepaid inventories or receivables for delinquent
taxes, neither of which is available for current spending. 1 This
paper is focused on the budget and policy role of reserves.
1
The Governmental Accounting Standards Board (GASB) provides guidance on how to classify fund balances to differentiate between amounts that are more
constrained or less constrained in their potential use. You can read more about these classifications in “GASB Statement No. 54, Fund balance reporting and
governmental fund type definitions,” available at GASB.org.
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SPECIAL SECTION | RETHINKING RESERVES
Why We Should Rethink Reserves
It has long been thought that having
substantial reserves is desirable—
bigger is better. So why might we
need to do some rethinking here?
The reasons (which are consistent
with many of those cited for GFOA’s
Rethinking Budgeting initiative 1 )
take on special significance when
applied to reserves.
An increasingly volatile and uncertain
world. Reserves play a role in buffering
local government from volatility;
however, if volatility is increasing,
we should reexamine how reserves
are managed to ensure that local
governments have an adequate buffer.
For example, damages from natural
disasters have been on the rise in
recent decades. Reserves fund the
response to natural disasters, and even
if federal or state/provincial financial
assistance is available, reserves fill
the gap until assistance arrives, which
can take months or even years.
Lower trust in government
and experts. Local government
stakeholders may be suspicious of
large reserves, especially if they don’t
understand why the government is
holding these resources instead of
spending them on current services or
cutting taxes. In the past, a finance
officer’s expert opinion, perhaps based
on GFOA’s best practices, might have
been sufficient to justify reserves, but
expert opinion may not be so readily
accepted in the future. 2 Finance officers
may need to provide justification for
reserves that rely less on appeals to
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
16

expertise and more on the fundamental
reasons why reserves are important.
Local governments are becoming
more resource constrained. Local
governments are expected to maintain a
sizable reserve by “industry standards”
and by bond rating agencies. 3 At the
same time, local governments are
facing more resource constraints,
especially with employee healthcare
and pension costs rising. For many
governments, the increases in costs
have consumed revenue increases,
which may soon level off. GFOA’s Fund
Balance Guidelines for the General
Fund best practice recommends
that—at a minimum—general-purpose
governments, regardless of size,
maintain unrestricted budgetary fund
balance in their general fund of no less
than two months of regular general
fund operating revenues or regular
general fund operating expenditures.
Moody’s Rating Agency looks for fund
balances of more than 35 percent of
annual revenue to provide a AAA rating
for general obligation debt. Long-term
demographic trends point toward an
aging population. Though the U.S.
demographic outlook is not as dire as
it is for other developed countries, an
aging population still doesn’t bode
well for local government revenues. 4
Legislative constraints also limit
revenue growth. For example, there
Building reserves is a
use of current revenues,
and governments need
to weigh the opportunity
costs of doing so. Is
it better to provide
services today or to save
the money for later?
is evidence that local government
revenues do not recover as quickly
from setbacks like recessions as
they once did because of legislative
constraints. 5 (In fact, some
economists believe that the long-term
growth trajectory of the United States
will slow; indeed, the general trend has
been slowing growth since the 1970s.)
Rising costs paired with stagnating
revenue growth mean that local
governments need to make efficient
use of resources, including reserves.
Building reserves is a use of current
revenues, and governments need to
weigh the opportunity costs of doing
so. Is it better to provide services today
or to save the money for later?
None of this suggests that local
government reserves should always
and everywhere be lower than they are
today. Instead, we should look for more
and better options to provide buffers to
local governments than reserves have
traditionally provided. For example,
are there opportunities to make
more cost-effective combinations of
commercial insurance and reserves?
This might not always lead to a
decrease in reserves; in fact, it could
call for reserves to be increased as part
of a high-deductible insurance strategy
for some perils to reduce the total cost
of risk (insurance plus reserves).
Information technology makes
rethinking reserves easier.
Information technologies make it
easier to analyze reserve strategies and
optimize the strategy to the conditions
faced by the government.
1
See “Why Do We Need to Rethink Budgeting?” at gfoa.
org/materials/why-do-we-need-to-rethink-budgeting.
2
For data on declining trust in experts, see: Cary Funk, Alec
Tyson, Brian Kennedy, and Courtney Johnson, “Scientists
Are Among the Most-Trusted Groups in Society,”
September 29, 2020, Pew Research Center.
3
GFOA’s Fund Balance Guidelines for the General
Fund best practice recommends that—at a minimum—
general-purpose governments, regardless of size,
maintain unrestricted budgetary fund balance in their
general fund of no less than two months of regular
general fund operating revenues or regular general fund
operating expenditures. Moody’s Rating Agency looks for
fund balances of more than 35 percent of annual revenue
to provide a AAA rating for general obligation debt.
4
Michael A. Pisano, The Puzzle of the American Economy:
How Changing Demographics Will Affect Our Future and
Influence Our Politics (Praeger: 2017).
5
See, for example, empirical research on state
governments analyzing time to fiscal recovery following
economic recessions: Christian Buerger,“The effect of
economic downturns on state budgets: A counterfactual
analysis of the great recession,” Applied Economic
Letters, 28(21), 2020.
Reserves: What and Why
Reserves are the liquid financial resources (typically cash and investments
that can be turned into cash) that local governments do not include in the
annual spending plan—resources that are held back from the budget and
held in “reserve” for some other purpose. The most important purpose is to
respond to significant, unplanned, and unavoidable costs or revenue losses
such as a natural catastrophe or a recession. Another common purpose is
as a sinking fund, or “piggy bank,” for a large, nonrecurring, planned future,
like purchasing a capital asset. Reserves also support a strong bond rating
by signaling to investors that the local government has resources to pay
back debt even with potential disruptions to its financial position.
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SPECIAL SECTION | RETHINKING RESERVES
How Do We Rethink
Reserves?
We begin rethinking reserves by
starting from “first principles”—
that is, why do local governments
have reserves in the first place? To
reduce volatility and uncertainty
in public finances. Uncertainty
exposes a government to financial
risks, so framing the reserve
explicitly as a risk management
tool and linking the reserve to
concrete risks that decisionmakers
can appreciate is a great
way to communicate why reserves
are important. In examining the
key risks that reserves guard
against, we will see that there
are many possible risks, and it is
difficult, if not impossible, to buy
commercial insurance to protect
against many of them.
The risks we face
Cash flow risk is a concern, especially
for governments where a major
revenue source like property taxes
is received only once or twice a year
in large chunks, while expenditures
occur evenly throughout the year.
A similar problem can occur if large
portions of state-shared revenue
have to be authorized by the state
each year through the state budget
process. Delays in approving the state
budget could result in delays in local
government revenues. Reserves help
smooth out resource availability and
have important advantages over other
options like tax anticipation notes,
which can entail the risk of highinterest
rates.
A big risk for many governments is
revenue instability, with recessions
being the major culprit. If a recession
dramatically reduces revenue,
then reserves can be used to help a
government make a “soft landing.”
For example, in the City of Savannah,
Georgia, sales tax was a large revenue
source that was sensitive to the economy.
The city, therefore, developed a sales tax
stabilization reserve. When the Great
Recession hit, the city was able to draw
from the reserve and avoid layoffs.
There could be other sources of
revenue instability, too. Perhaps a major
revenue source is subject to changes
in the political environment, as in the
case of some state-shared revenue. Or
a local revenue source might be subject
to periodic reapproval by the voters. In
one city, the potential for the closing of
a major industrial employer was a risk
because the city relies heavily on a local
income tax.
Historically, local governments
haven’t consistently used reserves to
offset revenue losses from a recession. 1
This might be because of state and federal
government support during the last
two recessions, through the American
Recovery and Reinvestment Act of 2009
and the American Rescue Plan Act of
2021. While these pieces of legislation
were a major help to local government
fiscal health, local governments should
not expect similar support in future
recessions. Recovery funds require
Congress to pass major legislation, and
the rise of political polarization and
gridlock makes this far from guaranteed.
And even if the federal government
offers relief, future funding might have
restrictions, and it will be impossible
for local governments to predict how
much money they might receive. Local
governments should therefore prepare to
handle the impacts of recession on their
own. Reserves provide another option
than spending cuts.
Another major risk category is natural
disasters like earthquakes, wildfires,
floods, and hurricanes, which can
result in urgent needs like overtime for
first responders or shelter, food, and
supplies for displaced families. And
disaster recovery includes unforeseen
expenditures like the cleanup that
follows the initial devastation.
Sometimes, a local government will
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
18

Rethinking is Local
Each local government will need to decide how to best
apply the ideas in this article to their circumstances.
For example, a local government’s “reserves” are
commonly associated with the general fund. Yet,
many of the same ideas presented in this article could
apply to other funds, like enterprise funds.
have some of its costs reimbursed by
the Federal Emergency Management
Agency (FEMA) and/or state agencies.
If this is the case, reserves are still
important to cover the non-reimbursable
costs—including lost revenue, fees, and
increased operating costs—while also
fronting the costs until reimbursement
arrives. FEMA reimbursement for natural
disasters takes an average of 18 months,
in GFOA’s experience.
Some extreme weather events might
not be declared an “emergency” by
national or state government, in which
case the local government may be on its
own. A common example of this is an
extreme snow season that causes the
local government to dramatically exceed
its snow removal budget. Reserves could
be used to fund the overage, and the
money might be replenished by surpluses
in times of light snow.
Man-made disasters are also a risk.
The possibility of hazardous material
spills that cost a lot to clean up, for
example, can have a material impact
on local finances. Cyberattacks are
another example of a man-made risk that
might have implications for reserves.
Cyber insurance policies are becoming
more expensive or totally unavailable
to some governments, so a government
might need to raise the deductible on
a commercial policy or forgo a policy
altogether. In this case, the government
is either partially or fully self-insuring
against cyberattacks, and reserves
provide the financial backing. Capital
infrastructure also presents risks that
reserves can help mitigate. Debt is a
powerful tool for local governments to
finance infrastructure acquisitions,
and reserves provide assurances to
creditors that the government is not at
unacceptable risk of default. Reserves
can also be used to pay for capital
assets directly (such as pay-as-you-go
funding strategies).
Other risks not covered here might fall
into categories of financial/economic,
health crises, security, reputational,
and more. Here are a few examples from
governments GFOA has worked with to
analyze their risk exposure. You might
think of others that are relevant to your
jurisdiction.
• Financial/economic. For governments
with large pension liabilities, a
reduction in the rate of return on
pension investments could increase the
annually required pension payment. 2
Reserves could be used to cushion
the initial shock from a reduced rate
of return and consequent increase
in required annual contributions,
but a government will, at some point,
need to realign its annual spending to
accommodate increased pension costs.
• Public health. The COVID-19 pandemic
is an extreme example of the potential
financial impact of a health event.
Less extreme outbreaks could still
have financial impacts. For example,
local governments with public health
responsibilities in urban areas could
face large costs from local outbreaks of
serious diseases like hepatitis.
• Public safety. Terrorism and civil
disorder can cause a spike in public
safety costs. Civil disorder events
could become more difficult to insure
against because social media can
spread civil disorder beyond a local
phenomenon. 3 In other words, civil
disorder in one community can easily
spread to others. Insurance companies
try to avoid insuring risks where this
kind of “domino effect” is in play.
Recognizing that reserves are essentially
a tool for risk management leads to our
next point on how to rethink reserves:
adjust your mental model.
Adjusting your mental model: savings
versus insurance
Mental models are the ways in which we
see the world, and they guide how we
make decisions. If public finance officers
can give decision-makers a better mental
model, they will make better decisions.
The traditional mental model for reserves
is a savings account, and this does have
advantages. First, it’s easily understood
by people who are not public finance
experts. Second, it has a seemingly
obvious parallel to the personal lives
of local governments’ stakeholders.
This is particularly true for the “sinking
fund” function of reserves, as most
people have experience with building
up their personal savings to pay for
some consumer expenditure or personal
investment (for example, education,
house, and car).
But this model has disadvantages
as well. First, the analogy to personal
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SPECIAL SECTION | RETHINKING RESERVES
savings as a buffer against risk might
not be as powerful as it seems. Personal
savings rates have been in long-term
decline. 4 Most consumers also start
saving reactively, after an adverse event
has occurred (such as a recession or
pandemic). Obviously, this is not a viable
strategy for local government reserves. 5
Given the reactive strategy that most
savers adopt, it is not surprising that
most Americans are well short of
the amount of personal savings that
personal finance experts recommend
keeping for an emergency. Given the lack
of emphasis on saving for an emergency,
many people may now see personal
savings more as a vehicle for saving up
for future purchases than as a way to
manage risk. 6 There is evidence that
financial managers are more likely than
the average person to view their own
personal savings as a tool for managing
risk. This means that the “savings
account” metaphor for reserves may be
more powerful in the minds of financial
managers than it is for other people.
Second, the savings account mental
model implies that having more in your
account is better, but this is not always
true of local government reserves.
Local governments face opportunity
costs that are different from those faced
by private individuals. Reserves are
resources that are removed from the
private economy. It can be argued that
excess reserves could do better for the
community if those resources were put
to work in the private economy. Even
if excess reserves weren’t returned to
the private economy, one could make a
good argument that the excess amounts
should be used by the government
to benefit the current generation of
taxpayers (the ones who provided the
money to create the reserve). Further,
putting aside money to offset risk
creates diminishing returns.
As a simple thought experiment,
imagine a person had $10,000 in their
savings account to offset personal risk.
This is a healthy amount, but it is not
hard to imagine circumstances where it
would prove insufficient. Now imagine
that a similar person had $1 million in
their savings account. It is much harder
to imagine the circumstances where
this would be insufficient. Finally,
imagine that each person was given
an additional $10,000. It’s easy to see
how the additional money would be a
big help for the first person, but it would
be hard to argue that the second person
would experience an equal gain in risk
mitigation from building their savings
further. The $10,000 creates greater
marginal benefit for the first person
than the second. The same logic applies
to government.
If the savings account mental model
has important limitations, what is the
alternative? We propose insurance
as a new mental model. This does
not necessarily replace the savings
account model but does supplement it by
providing a new and better perspective
on some of the most important purposes
of a reserve.
Insurance has an obvious parallel
to people’s personal lives. Given that
local governments hold reserves to
manage risk, insurance is an accurate
analogy for reserves. Further, insurance
is purchased before an adverse event
occurs, much like reserves must be
built up ahead of time to prepare for
unpredictable adverse events.
Another advantage of insurance as
a mental model is that it invites local
governments to think about ways in
which commercial insurance and selfinsurance
can work together to create
an optimized risk financing strategy.
Reserves are a self-insurance strategy,
but commercial insurance policies
(those purchased from a broker) can
supplement reserves. For example,
commercial insurance could be useful
for protecting against low-probability
but extreme-consequence events.
Using insurance as a mental model
also implies that there is an optimal
amount to have on hand. Non-experts
can appreciate that it is possible to
either over or under-insure the risks
you face. Insurance also implies a
point at which the “policy” should
be used. Let’s consider recessions as
Reserves as Insurance and the Elected Board
In a discussion with a city council about reserve strategy, one council member asked about the practical
implications of spending the reserve. Using the “reserves as insurance” mental model, you would point
out that lower reserves would be the equivalent of taking a lower limit (or higher deductible) on your
insurance policy. The “reserves as savings account” mental model struggles with this question because
of an increasingly prevalent view that savings exist to be spent.
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
20

The savings account mental
model implies that having
more in your account is better,
but this is not always true of
local government reserves.
an example. Recessions are the most
important source of financial instability
for local governments, so reserves can
play a crucial role in counteracting
downturns in economic cycles. But there
is little evidence that local governments
use reserves during times of economic
recessions. In the Great Recession, the 30
largest U.S. cities used their fiscal reserves,
but only 25 percent of the 600 smaller
cities studied drew down their reserves
(the remaining cities cut spending). 7
Failure to use reserves likely caused
distress to the community in the form of
interruption to public services. While local
governments should consider spending
cuts during a revenue downturn, a
strong reserve can help avoid the most
damaging spending cuts.
The insurance mental model is not
without its disadvantages. Insurance
can be an abstract and difficult concept
to grasp, even in our personal lives.
This means that people sometimes
don’t make optimal personal decisions
about insurance, just as they make
suboptimal decisions about personal
savings. Another disadvantage is that
the analogy becomes more complicated
when considering commercial
insurance and intergovernmental aid.
Taking these other risk management
tools into account is necessary for an
optimal risk management strategy, but
the trade-off is additional complexity.
Developing a more comprehensive
perspective
The reserves as insurance mental model
addresses the risk management function
of reserves well. The reserves as savings
account mental model addresses the
“sinking fund” function of reserves, so
we do not suggest discarding the savings
account mental model entirely. Rather,
putting these two models together offers
a more comprehensive perspective on
the role of reserves (see Exhibit 1).
With better mental models in place,
we are positioned to think about the
actions we can take.
1
See, for example, the following journal articles empirically
examining local government expenditure stabilization:
Justin Marlowe, “Fiscal slack and counter-cyclical
expenditure stabilization: A first look at the local level,”
Public Budgeting & Finance, 25(3), 2005; and Win Wang
and Yilin Hou, “Do local governments save and spend
across budget cycles? Evidence from North Carolina,”
American Review of Public Administration, 42(2), 2012.
2
For research examining the relationship between public
pensions and reserves retained in budget stabilization
funds, see Travis St. Clair, “The impact of budget
stabilization funds on state pension contributions,”
Public Budgeting & Finance, 33(3), 2013.
3
This was the view an insurance industry expert expressed
at an educational event hosted by GFOA in 2022.
4
From 1960 to the early 1990s, personal savings rates were
around or above 10 percent but then sharply dropped,
reaching a low of around 3 to 4 percent in 2005 to 2008.
Savings increased after the 2008 Great Recession,
averaging around 7.5 percent until the COVID-19
pandemic, when it jumped to historically high levels.
After the pandemic, savings rates dropped dramatically,
plummeting to the all-time lows of 2005 to 2008.
5
For a few more recent examples of research analyzing
government savings patterns over time, and in relation
to the business cycle, see: Nathan Barrett, Jacob Fowles
Peter Jones, and Vincent Reitano, “Forecast bias and
fiscal slack accumulation in school districts,” American
Review of Public Administration, 49(5), 2019; and
LaShonda M. Stewart, John A. Hamman, and Stephanie
A. Pink-Harper, “The stabilization effect of local
government savings: The case of Illinois counties,” Public
Budgeting & Finance, 38(2), 2017.
6
For example, according to a survey conducted by
Bankrate in 2021, 46 percent of Americans are saving
for a specific financial goal such as a home purchase,
vacation, or education, while only 28 percent are saving
for an emergency fund.
7
For examples of how to empirically analyze reserves,
see: Marlowe and Wang and Hou. For a study of the 30
largest U.S. cities: “America’s big cities in volatile times:
Meeting fiscal challenges and preparing for the future,”
The Pew Charitable Trusts, 2013. For a study of 600
municipalities, see the “Fiscal slack, reserves, and rainy-day
funds” chapter (by Justin Marlowe) of Handbook of Local
Government Fiscal Health (Jones & Bartlett Learning: 2014).
EXHIBIT 1 | COMBINING THE RESERVES MODELS
Reserves as Insurance
Reserves as Savings Account
Addresses reserve’s role in guarding
against risks like revenue instability,
catastrophic events, and cashflow instability.
+
Addresses reserve’s role in accumulating
cash to pay for future costs that would not
be affordable within a single year’s revenue.
A capital asset is an example of such a cost.
=
Savvy
Financial Strategy
Provides a lens that encourages new
and savvy ways to manage risk across
the government.
Provides a lens that encourages multiyear
financing strategies for large costs.
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SPECIAL SECTION | RETHINKING RESERVES
Actions We Can Take to Rethink Reserves
Local government finance officials
have a number of strategies to
help them rethink reserves. In
rough order of importance, they
are: risk-based reserve analysis,
comprehensive reserve policies,
optimizing the combination of
commercial insurance and selfinsurance,
optimizing investment
strategies, pooling risk, and
understanding bond ratings and
reserves.
Risk-based reserve analysis
GFOA strongly recommends that local
governments adopt a formal policy
describing how much they will strive
to maintain in their reserve fund. The
question, of course, is “how much is
enough?” The reserves as insurance
model would say it depends on what
your risks are.
The first step toward a risk-aware
reserve target is to think of it as a range
instead of a single point. For example,
a government might decide its policy is
to maintain reserves between 15 and 25
percent of annual revenue, rather than
equal to 20 percent of annual revenue.
A range has several advantages over a
single point:
• Risks are difficult or often impossible
to estimate exactly. A range expresses
that a government requires a margin
of error to operate within. Conversely,
a single point leaves ambiguity over
whether actual reserves are too high
or too low. To take our example: if the
government’s policy was based on
a single point (20 percent) and the
actual reserves were at 17 percent of
revenue, would that be acceptable?
What if reserves were 27 percent?
Would that be too high? The singlepoint
policy is not clear about
boundaries the government should
stay within. 1 If the policy were based
on a range, we’d know 17 percent was
acceptable, but 27 percent was too
much. This feature of ranges not only
helps decision-makers discuss reserve
strategies, but it might also help with
explaining reserve strategy to the
public.
• A range accommodates different risk
appetites. The “right” level in reserves
will be a function of the risks a
government faces and of local officials’
willingness to bear those risks.
A range can accommodate the views
of risk-averse elected officials and less
risk-averse officials. They can find
grounds for compromise by negotiating
a floor and ceiling that accommodates
different appetites for risk.
• A range better supports the ongoing
management of reserves. Reserves
fluctuate from year to year. If the reserve
stays in range, there is little need to
revisit it, whether the actual reserve
is too high or low relative to the policy.
If the reserve falls outside the range, it
suggests a clear course of action (as in,
do something to get it back in range).
This helps make sure that reserves stay
where they need to be to manage risks.
• A range includes a lower limit,
communicating that being a good
steward of the community requires a
minimum amount of reserves. It also
communicates that there is an upper
limit on the usefulness of reserves and
a point at which excess resources
should be devoted to some other purpose.
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
22

The next step in developing a risk-aware
reserves policy is to analyze the risks
the local government is subject to. A risk
analysis can take place at varying levels
of sophistication, but a qualitative or
subjective risk assessment is the most
accessible approach. A local government
can review categories of risks, like
those described earlier in this section,
and then assess their exposure in each
category and consider if their reserve
target accommodates that exposure.
GFOA has developed a simple template
to facilitate this kind of review. 2
The City of Berkeley, California,
illustrates how the template can be
used. The city’s budget staff led its risk
assessment and included participation
from the Public Works, Police, and Fire
departments. The city determined that
the greatest exposure was “extreme
events and public safety concerns,”
particularly earthquakes, fires,
landslides, floods, hazardous material
spills, and terrorism. Other important
exposures included “expenditure
volatility,” due to upcoming large
expenditure obligations that did not
have a funding source, and “other funds’
dependency on the general fund.” The
city’s general fund was a backstop for
other city operations funded by other
sources, so the city would rely on the
general fund if these operations were
to encounter unplanned, unavoidable
expenditures or revenue interruptions.
By reviewing all the risks on GFOA’s
template, Berkeley determined that it
faced a moderate to high level of risk,
and that 25 to 35 percent of annual
revenues would be reasonable to buttress
the effect of routine downturns in the
economy and respond quickly and
decisively to major emergencies.
The advantage of a qualitative risk
analysis is accessibility. Berkeley
(and many other governments) have
completed such an analysis within their
own resources. A qualitative analysis
also can be effective for acclimating
the government to awareness of risk
as part of its reserve strategy. Berkeley
performed this analysis in 2016 to
2017, and it helped convince the city to
commit to reexamining its risk exposure
five years later—which the city is doing
this year (using the more sophisticated
chance-based approach that we’ll
describe later).
The disadvantage of a qualitative
risk assessment is that the results are
subjective. This means there is likely
to be a gap between the reserve target
suggested by the assessment and the
optimal reserve amount, given the risks.
There is no way to tell how accurate or
inaccurate the subjective estimate might
be, relative to the optimal amount.
The level of sophistication is to
quantify risks to reach a more objective
estimate. This involves looking at
historical experiences, the analogous
experiences of other governments, and
other sources of data to estimate the
potential cost of the risks the government
is subject to. A quantified approach might
be needed when there is controversy
about the right amount in reserves.
The easiest quantified approach to
risk analysis is to build a model using
single numbers to represent the potential
impact of risks. To estimate the risk
posed by recessions, for example, we
might look back at past recessions to see
the losses incurred. We would see that
the 2008 Great Recession represents
a particularly bad recession. Let’s say
revenues decreased by $5 million,
which would suggest that we might
need a $5 million reserve to be prepared
for most future recessions. Outside
studies and the experiences of other
local governments can also help. The
The Problem of Unknown Unknowns
A limit of any risk analysis is that you can only analyze the risks you know about, or the “known unknowns.”
But there’s always a chance of experiencing a loss from a totally unexpected source, or the “unknown
unknowns.” For instance, five years ago, not many governments would have anticipated the current
tightening of the cyber insurance market, which might place pressure on local governments to partially
or fully self-insure cyber risks. The COVID-19 pandemic is another example of an unknown unknown.
Both examples illustrate how to deal with unknown unknowns. First, a local government should
periodically update the risk analysis. Cyber risk losses have been steadily increasing across all local
governments for several years, so cyber risk should have been on the radar of local governments
before the current tightening of the insurance market. Second, a local government should use reserves
to cover multiple purposes. Though pandemics were not considered a high risk by most local
governments prior to 2019, recessions certainly were. The economic slowdown caused by the COVID-19
pandemic could be considered a kind of recession. By grouping multiple risks together into the reserve,
the reserve will be more likely to withstand the addition of previously unknown risks.
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SPECIAL SECTION | RETHINKING RESERVES
Town of Bluffton, South Carolina, used
a publicly available university study
that calculated the per capita cost of
recovering from hurricanes at different
storm category levels. 3 The town applied
these numbers and adjusted for inflation
after the study was completed to derive a
figure that it used as the target number for
its emergency recovery reserves.
The GFOA report, “A Risk-Based Analysis
of General Fund Reserve Requirements,”
describes how to perform this analysis,
including how to account for the
possibility of historically unprecedented
events. 4 The advantage of this “singlenumber”
approach is that many
governments should be able to perform
the analysis using their own resources.
The single-number approach has an
important disadvantage, though. Risks, by
definition, are uncertain quantities. This
approach represents these uncertainties
as single numbers, which obscures the full
range of risk that the government faces.
One of the most important
consequences of obscuring the full range
of risk is revealed in the way a total reserve
goal is determined. A total reserve target
is the sum of potential losses from each
risk a government is subject to. But
because risks are uncertain numbers, the
sum is not as straightforward as adding
the single-number estimates of risk
together. The most important potential
error is dramatically overestimating the
size of reserve the government needs.
An explanation is best provided with a
GFOA video, “Adding Risks Together:
The Surprising Truth.” 5 For example,
imagine that a local government is
subject to three types of extreme events,
where there is a 5 percent chance of each
occurring in a three-year period. A simple
summation would lead a government
to prepare for a 5 percent chance of
each occurring (5 percent + 5 percent
+ 5 percent). But since reserves can be
used to respond to any extreme event,
the optimal strategy is to think about
the total risk from all extreme events at
once. There is a small chance (less than
1 percent) of all three events occurring
within a single three-year period
(5 percent x 5 percent x 5 percent).
The town of Bluffton, South Carolina arrived at a target number for its emergency recovery reserves
by using a publicly available university study that calculated the per capita cost of recovering from
hurricanes at different category levels.
Because risks are
uncertain numbers,
the sum is not as
straightforward as
adding the singlenumber
estimates of
risk together. The most
important potential
error is dramatically
overestimating the
size of reserve the
government needs.
The way to overcome the disadvantages
of the single method is to evaluate the
full range of risk, rather than condensing
risk down to a single number. We will call
this approach “chance-based” because we
can use the full range of risk to determine
the chance that any given reserve level
will be adequate to protect against the
risks in question. GFOA has worked with
several local governments to develop
chance-based reserve models, also
known as probabilistic (or chance-based)
simulations, using Microsoft Excel and
open standards for computer simulation
from ProbabilityManagement.org.
These projects included working with
elected officials to bring the results of
the simulation into policy decisions. A
full explanation of what chance-based
simulation is and what it looks like is best
accomplished with a video from GFOA’s
“Risk-Savvy Thinking about Reserves”
series. 6 The advantages of simulation are
many, including:
• It is the best way to estimate the
potential of pooling risks inside of local
government. (More on this later, but
suffice to say, for now that risk pooling is
a time-honored and powerful strategy for
reducing the cost of risk.) 7
• It will provide the best estimate of
the range of optimal reserves for
addressing the risks that are included
in the analysis. It also provides a clear
illustration of the decreasing marginal
24

enefit of accumulating too much in
reserves and shows the point at which
the marginal benefit decreases. 8
• The simulation can address a multiyear
timeframe. This is important because
it isn’t easy to increase reserve levels
quickly. 9
• A simulation can include forces that
influence reserves outside of risk
factors. For example, the simulation
could include a local government’s
willingness to cut its expenditures
instead of using reserves. Or the
simulation could address how likely it
is that a local government will generate
budget surpluses that build up reserves
and offset losses. 10
• Simulations can highlight the full range
of risk a local government is exposed
to—from risks that could be easily
self-insured all the way to catastrophic
risks that are impossible to fully selfinsure.
This helps highlight the need for
strategies like preventative investments
and a robust disaster response strategy.
RETHINKING RESERVE CHECKPOINTS
Develop a risk-aware reserves policy
• Chance-based simulation is the
method insurance companies use to
develop policies, so it has proven to be
best-suited to problems of insurance.
The major disadvantage of chance-based
simulation is that it is more complex than
the single-number analysis method.
Though chance-based simulations can
be conducted in Microsoft Excel, 11 GFOA
isn’t aware of any local government that
has conducted a simulation of reserves
without outside consulting support.
Also, the results are often expressed in
odds and probabilities, and though odds
and probabilities are essential for the
best understanding of risk, they are not
the first language of many people. Thus,
explaining the result of the simulation can
be more difficult than a single-number
analysis. That said, GFOA’s experience is
that it can be done—especially with the
help of interactive models, like those
you can see in the videos cited. In fact,
we have yet to meet an elected official
who could not grasp the essential ideas
of a chance-based analysis.
Express your reserves policy as a range of desired reserves, with a
floor and a ceiling.
Conduct a risk analysis to get a sense of how the risks you face affect
the reserves you should hold. Any of the three methods presented
would provide a reasonable basis for a more informed discussion
with policymakers about why reserves are necessary and how much
should be kept in reserves.
Quantification of risk offers important advantages over subjective
approaches—we described both “single-number analysis” and
“chance-based simulation” methods of quantification. A quantified
approach might be particularly useful when there is a strong sense
among decision-makers that existing reserves are too high or too low.
The single-number analysis is more accessible to local governments
than a chance-based simulation; however, a chance-based
simulation is better (and how insurance companies conduct their
analysis). The choice between the two depends on factors such as a
government’s ability to pay for outside consulting support, a need for
a more rigorous analysis, and the number of risks and size of reserves
in question (more/bigger risks and reserves means more potential to
make the best use of funds by optimizing the size of the reserve).
Develop a comprehensive
reserves policy
A reserves policy is a method to “precommit”
the organization to wise
decisions about reserves. Rather than
deciding on reserves strategies in the
heat of a moment when a tough decision
is required, a policy can be developed
when the pressure is off. That policy then
provides the boundaries for decisionmaking
when difficult decisions need
to be made about reserves. A policy
should address the following: 1) why
reserves should be accumulated;
2) how much should be accumulated;
3) what strategies should be used for
accumulation; and 4) when and for
what purpose reserves can be used.
Why? To protect the local government
against risks ranging from weather
events like flooding, earthquakes,
wildfires, and snowstorms to manmade
problems like lawsuits. Citing
locally relevant risks and the notion of
self-insurance as part of a policy can
help answer the question of why
reserves are needed.
A policy should also address the
“savings account” role of reserves
in saving up for larger projects.
Differentiating the “insurance policy”
role of reserves from the “savings
account” function could help decisionmakers
be savvier with their reserve
strategies.
A policy can also discuss strategies
to use for accumulation. This could
be as formal as formulas tied to any
yearly surplus or even a formal budget
allocation to hold back some amount of
a year’s revenue for building a reserve.
A policy could also allow for a less
structured approach by encouraging
surpluses and one-time revenue to
be used to build the reserve if the
government is below its target range.
In fact, a government could apply
some of the same risk savviness we’ve
been discussing in these articles to its
forecasting in order to estimate the size
of surpluses that could be produced by a
given spending plan. 12
A policy should also address how
reserves can be used—most importantly,
discouraging the government from using
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SPECIAL SECTION | RETHINKING RESERVES
reserves for ongoing expenditures (such
as hiring more employees). Reserves are
not an ongoing resource. An exception
might be made for supporting continuity
of public services in the face of a
revenue interruption like a recession.
This would be temporary, until revenues
recover or until expenditures can be
restructured to be affordable under the
revenues that are available.
A policy that addresses these
points helps foster a better and shared
understanding of reserves in relation
to the maintenance of public services
amid the risks the government faces.
Finance officers will also have to
consider how to describe the reserve
relative to the “fund balance” figures
that are included in the annual financial
report. Governmental Accounting
Standards Board (GASB) Statement
No. 54, Fund Balance Reporting and
Governmental Fund Type Definitions,
provides a series of categories of fund
balance that must be reported. The
finance officer can make the link
between the reserve (as in, a budgetary/
financial planning strategy) and
fund balances (as in, an accounting
mechanism). Reserves can be shown
as part of the “assigned” or “committed”
categories of fund balance. In this
way, decision-makers can see the
reserve in the financial statements
and differentiate it from other forms
of fund balance, especially forms
that are unavailable for use as selfinsurance.
This might be the case with
RETHINKING RESERVE CHECKPOINTS
Develop a comprehensive reserves policy
fund balances that are being put aside
for spending on a future project, for
example.
Finance officers could positively
influence how stakeholders think about
reserves by developing a comprehensive
policy that describes why reserves
are important to the community
amid a budgetary shortfall or other
contingency, the range of reserves it is
prudent to maintain, and transparency
on how reserves (a budgetary strategy)
connect to the total fund balance
available in financial reports. 13
A reserves policy is a way to “pre-commit” the organization to wise
decisions about reserves.
A policy should address why reserves should be accumulated, how
much should be accumulated, what strategies should be used for
accumulation, and when and for what purpose reserves can be used.
The finance officer should strive for transparency in how reserves
(a budgetary policy) are reflected in the reporting of fund balances
in the annual financial report (an accounting mechanism).
Optimize the combination
of commercial insurance and
self-insurance
Commercial insurance is a valuable
complement to reserves. A useful
analogue is self-insurance programs for
employee healthcare, which have been
shown to provide potential savings for
employers, compared to commercial
insurance. 14 But few governments would
self-insure every last dollar of potential
loss. Instead, self-insured governments
often purchase “stop loss coverage,” where
a commercial insurance policy kicks
in after a certain size of loss is reached.
This spares the government the cost of
covering extremely large losses and the
cost of the more expensive premiums
that would come with using commercial
coverage for more routine losses.
A similar concept can be applied to the
risks a reserve is “self-insuring” against.
Reserves will be most useful for lower
magnitude, higher frequency risks.
Commercial insurance is most valuable
when the losses from a catastrophic risk
would be unaffordable.
The most straightforward example
is purchasing higher-deductible
insurance policies for liabilities that are
commercially insured. This strategy is
useful for insurance policies that have
become more expensive because of
market conditions. Insurance against
cyberattacks is a prime example, with
some governments experiencing 100
percent year-over-year increases in
prices, as of mid-2023. For example,
increasing costs increased the $1
million deductible with $15 million in
coverage paid by Mecklenburg County,
North Carolina (covering Charlotte
and surrounding areas), to a $5 million
deductible with $10 million in coverage. 15
The county has substantial general fund
reserves, so it can “self-insure” the larger
deductible and the lower limit.
Another application might be
“parametric insurance.” Parametric
insurance policies pay out a set sum of
money when a given condition comes to
pass. For instance, a policy might pay out
$10 million if hurricane wind speeds in
the community reach 120 miles per hour.
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
26

Market conditions increased the deductible and decreased the coverage of the insurance policy
held by Mecklenburg County, North Carolina, to protect against cyberattacks. Due to the county’s
substantial general fund reserves, it can “self-insure” the larger deductible and lower limit.
Parametric policies are in wide use in
many other sectors but are a relatively
new instrument for local governments.
Parametric policies might be most useful
for catastrophic events where a local
government’s reserve would be stretched
to respond. Of course, federal and/or state
assistance is often available for these
kinds of events, but the reimbursement
often takes more than a year to arrive. 16
Further, some costs of a catastrophic
event may not be reimbursable by
the state or federal government. For
instance, if the tax base is so damaged
that tax revenues do not recover quickly,
the funds from a parametric policy
could help fill the gap. Also, parametric
policies provide full coverage as soon
as the policy goes into effect, while it
could take years to build up enough in
reserves to cover the full impact of a
catastrophic event. Parametric policies
can also be designed around a specific
geographic area. For example, perhaps
a specific area of a city is particularly
vulnerable to a certain kind of hazard.
A policy could be developed to provide
a payout for an occurrence of that
hazard in that area, allowing the local
government to provide additional
support to the people who live there. 17
You can read more about parametric
insurance in the GFOA report
“Parametric Insurance: An Emerging
Tool for Financial Risk Management.” 18
The report includes case studies
of local governments that have
purchased parametric policies and
how insurance policies complement
FEMA reimbursement.
RETHINKING RESERVE CHECKPOINTS
Optimize commercial insurance combined with reserves
Consider if you have commercial insurance policies with a higher
deductible that could be self-insured by reserves. The highest
potential will usually be with policies where premium prices are
going up substantially.
Consider if a parametric insurance policy could supplement
reserves. Parametric insurance might be particularly useful when a
government finds that it is underinsured for a catastrophic risk. This
is because parametric insurance can provide additional coverage
immediately, while it could take years to build an equivalent reserve.
Optimize investment strategies
Insurance companies invest the monies
collected from premiums to make
substantial profits. 19 A government’s
reserves are basically premiums
collected from the community to
stabilize their government services
against risk. The money held in
reserves will be idle most of the time,
so governments can adopt savvy
investment strategies for it.
A risk analysis is essential for a savvy
investment strategy. A government can
divide its idle funds into tranches, with
each tranche representing a different
likelihood of the government needing
to access the money for emergency
purposes. As a simple example, let’s
assume a government has only two
investment options: 1) short-term,
lower earning; and 2) long-term,
higher earning, where the term of the
investment is three years. Let’s assume
a government does a risk analysis
that suggests $10 million is a good
ceiling amount for its reserve, and
the government has $10 million in its
reserve. The risk analysis also suggests
there is only a 10 percent chance that
the government would need to use more
than $9 million of its reserve in the next
three years. Decision-makers might
conclude that putting $1 million in the
second investment option is worth the
risk. This leaves $9 million in the shorterterm,
lower-earning investments, that
provides greater ability to access the
cash if the need arises. Research by one
financial technology firm that helps local
governments determine their investable
resources suggests that large gains in
investment returns are possible with a
more risk-savvy investment strategy like
the one described above. According to
data provided by the firm, returns could
improve by much as 35 to 40 percent
more than what most governments
get currently from the resources that
comprise their reserves. 20
Our example assumes a probabilistic
risk analysis, but a less rigorous risk
analysis could still help reach a similar
conclusion. For example, if a less rigorous
analysis suggests that $10 million is
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SPECIAL SECTION | RETHINKING RESERVES
A risk analysis is essential for a savvy investment strategy.
A government can divide idle funds into tranches, with each
one representing a different likelihood of the government
needing to access the money for emergency purposes.
the ceiling amount for reserves, then we
know that amounts closer to the ceiling
are far less likely to be used than the “first
dollar” that comprises the reserve. Thus,
a government would still have the bulk of
the $10 million invested in more liquid
assets, while placing a smaller amount in
a less liquid, higher return asset.
Our example also reveals a potentially
sticky question. The decision to invest in
any combination of assets with different
risk/reward profiles will, at some point,
depend on the subjective appetite for risk
of the decision-maker. Going back to our
example, who is to say that a 10 percent
chance of needing more than $9 million
is the objectively correct threshold for
RETHINKING RESERVE CHECKPOINTS
Optimize investment of reserve funds
investing the remaining $1 million in
longer-term securities? Perhaps some
people would be comfortable with a 15 or
20 percent chance, while others may be
uncomfortable with as high as 10 percent.
These decisions will have to be discussed
with the relevant decision-makers to
come to a consensus. GFOA’s experience
has been that reaching an agreement is
easier when the discussion is based on an
objective analysis like a risk assessment.
GFOA has done this kind of analysis with
its own finances and found that reaching
agreement on the preferred investment
strategy was not that difficult, as the risk
analysis provided objective criteria and
data for decision-makers.
Use a risk analysis to identify tranches of funding ranging from more
likely to be needed to cover unplanned, unavoidable needs to less
likely. The less likely tranches may be candidates for less liquid,
higher-return investments.
Convene a discussion with the relevant decision-makers to determine
the level of risk the government is willing to take on with respect to
investment liquidity versus the potential need to draw on reserves.
Pool risk
Risk pooling is widely recognized and
a time-honored strategy for reducing
the cost of risk, and it works because of
diversification. Put simply, it is unlikely
that a loss event will happen to all the
pool participants at the same time. For a
more in-depth explanation, see GFOA’s
Rethinking Revenues series video,
“Why Pooling Reduces the Cost of Risk.” 21
Local governments often pool risk across
multiple local governments (regional
insurance pools). Local governments also
pool risk inside their own organizations.
Let’s return to our example of employee
self-insurance. Local governments do not
set up separate self-insurance pools for
each department or for each accounting
fund. All employees fall under the same
self-insurance program. This saves
money because the total amount needed
to insure the entire organization is less
than you would need if you insured each
department separately. This is an example
of risk not adding up the way you might
think. We also explain the concept in more
detail in GFOA’s Rethinking Reserves
series video, “Adding Risks Together:
The Surprising Truth.” 22
Similarly, local governments could
realize some advantages from pooling
reserves. There are many opportunities to
apply pooling, though these opportunities
entail varying degrees of difficulty.
The first and easiest way is to make
sure there are no unrealized opportunities
for pooling within the general fund. For
example, some governments set up one
reserve for economic uncertainty (such
as recessions) and another for extreme
events (such as natural disasters). These
two reserves could be pooled because
recessions and natural disasters are
unlikely to occur at the same time, so a
combined reserve should be more costeffective.
The combined reserve could
still be labeled as a reserve for extreme
events and economic uncertainty, to make
the intent clear without keeping the two
reserves separate. The most accurate
way to judge the potential savings is a
probabilistic risk analysis. Combining
reserves to make the money in the reserves
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
28

Risk pooling is widely recognized and a time-honored strategy for
reducing the cost of risk, and it works because of diversification.
more fungible could improve costeffectiveness
for the same reasons we
described in our employee health plan
self-insurance example.
Another possibility is to define
policies for emergency interfund
borrowing. The idea is that the total
amount reserved across the entire
government could be less if each fund
did not have to prepare for the most
extreme circumstance but could rely
on financial backup from other funds in
extreme cases. 23
An option that could present some
challenges also presents large potential
payoffs: pooling reserves across funds.
This has a large potential payoff because
the amounts involved will be large.
It can be challenging because monies
may be segregated into different funds
for legal reasons, creating practical
barriers to operating such a pool. Pooling
funds will be most effective when two
conditions are met: 1) the funds involved
do not have legal restrictions that make
pooling impractical; and 2) the risks
faced by funds are not overly similar.
If the risk profiles of the funds are
similar, then pooling will not be of great
benefit because each fund will receive a
shock when a given risk happens. But if
the funds have substantial differences
in their risk profiles, then pooling could
be quite valuable. A given risk may give a
shock to one fund but not the other,
and the fund that was not shocked can
support the fund that was.
Many local governments may be
unwittingly pooling the reserve risks
of several funds. In our work with
local governments, we found that an
important risk for the general fund is
that it is often a de facto “backstop” for
other funds. If those funds run into
unplanned, unavoidable emergency
financial needs, then the general fund
is on the hook. Rather than building up
separate reserves in each fund, it may
be better to formalize the current state of
affairs and enhance the pooled approach
by pulling in the pool of other funds that
have their own reserves.
GFOA is not the only entity to
advocate for the potential of pooling
reserves. In Moody’s November 2022
“U.S. Cities and Counties [Bond Rating]
Methodology,” the company introduced
a government-wide evaluation of fund
balance into its rating methodology.
The strength of fund balances and held
cash combined across all funds is worth
30 percent of the foundational score
when Moody’s evaluates a government’s
creditworthiness. 24 Moody’s found
that the fund balances in different
funds are often flexible enough that
the funds can support each other. The
company believes that there is enough
potential for interfund support to justify
evaluating across the entire government
instead of fund by fund. This marks an
evolution of Moody’s approach, which
was focused on specific funds.
Finally, let’s address regional pooling.
Local governments often participate
in regional insurance pools, so why not
regional arrangements for the risks the
reserves guard against? The reason this
may not provide as much benefit as one
might expect is that the types of risks
the reserves guard against (for example,
RETHINKING RESERVE CHECKPOINTS
Apply risk pooling to reserves
natural catastrophes, recessions) affect
the entire region. If all members of a pool
are impacted at the same time by the
same risk, then a pool loses its value.
Another way to think about it is that a pool
within government brings together funds
that might have different exposures.
A pool between governments brings
together funds (such as, multiple general
funds) that have the same exposures.
If you have separate reserves in the general fund for different risks,
combine those reserves.
Develop a policy for emergency interfund borrowing.
Consider pooling reserves across funds within your government. In
some cases, you may already be de facto pooling the general fund with
financially weaker funds. Improve your risk portfolio by adding other
strong funds to the pool.
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SPECIAL SECTION | RETHINKING RESERVES
Understand bond ratings
and reserves
A rationale for holding a greater amount
in reserves is that it will support a
strong bond rating, which will translate
to lower interest costs on the money a
government borrows. Reserves play an
important role in the ratings process.
According to Moody’s Investors Service’s
rating methodology, available fund
balance ratio 25 is worth 20 percent of the
rating. Moody’s also examines liquidity
ratio 26 because fund balance is an
accounting term that can include assets
not available for current spending. The
liquidity ratio constitutes an additional
10 percent of the rating methodology.
Thus, fund balance and cash together
comprise 30 percent of the total ratings
methodology.
First, remember that “fund balance”
and “reserves” aren’t the same, though
they are related. Fund balance includes
a wider scope of resources, so it will be a
larger number than reserves. With this in
mind, we can see that fund balance/cash
plays an important role in the ratings
method. But what is considered a good
level of fund balance? Moody’s “AAA”
rating (the highest) is associated with
fund balances exceeding 35 percent of
revenues. The “AA” rating is associated
with fund balances between 35 and 25
percent, and the “A” rating with 25 to 15
percent. That said, while 30 percent of
ratings evaluation is made up of fund
balances and cash, 70 percent is not.
Further, the Moody’s documentation is
clear that ratings analysts will consider
local factors and other idiosyncrasies to
arrive at the final rating—so it is possible
to have fund balances/cash below the
range for a given rating yet still achieve
that rating, or even a better one.
We also examined rating methodology
documentation from S&P Global. Though
the specifics of their method are different,
the general conclusion is the same: fund
balances play an important, but not
decisive, role in arriving at a final rating.
A greater fund balance will contribute to a
higher rating, but it may not be sufficient
to guarantee a higher rating. Similarly,
a lower fund balance is not guaranteed
to consign a local government to a lower
rating. Other factors weigh more heavily,
and ratings analysts have some discretion
in assigning ratings based on local context.
The next question to ask is if a higher
bond rating is worth the cost to obtain it?
A bond rating has a quantifiable benefit,
which is the interest savings available at
the next-highest bond rating. To the extent
that greater fund balance (and greater
reserves) can move a local government
from one bond rating to the next, then it is
possible to measure the benefit.
Let’s get a sense of the interest rate
differences between bond ratings. Exhibit
1 shows the differences between interest
rates (percentage points) at different bond
ratings from 1993 to 2022. 27 This shows a
90 percent confidence range, which omits
outliers on both the high and low side. It
is notable that the midpoint (median) is
closer to the low side of the range, which
EXHIBIT 2 | HISTORY OF INTEREST RATE DIFFERENCES BETWEEN BOND RATINGS, 1993-2022
Percentage point
differences from going from
a higher to lower rating
90% of the time,
the difference is
between these
points.
AAA AA AA A A BAA
Low 0.09% 0.10% 0.12%
Mid 0.11% 0.20% 0.38%
High 0.25% 0.62% 0.97%
Notice that the midpoint is
closer to the low side of the
range. This means most of the
time the differences between
ratings are closer to the low
value than the high value.
usually means the differences between
ratings are closer to the low value than to
the high value.
What are the implications of the
differences in interest rates? First, let’s
get a sense of the differences in the total
cost of bond issue due to an interest
rate difference. Imagine a 30-year,
$200-million bond issue at 3 percent
annual interest with a rating of A. The
total cost of interest over the life of the
bond issue would be about $106 million.
If the same bond were to be issued with a
rating of AA, let’s assume it would enjoy an
interest rate that is better by 0.20 percent
(the midpoint on our table). In that case,
the total interest rate paid over the life
of the bond would be about $98 million,
or a difference of about $8 million. This
equates to an average of about $260,000
per year. Conveniently, the midpoint for
changes between ratings in the other
columns on our table is roughly half or
double the midpoint in Exhibit 1, so it is
easy to imagine the financial benefit at
other bond rating levels.
The question of whether these benefits
are worth the cost of accumulating more
fund balance depends on several factors,
such as:
• How much debt a government issues.
If a government issues more debt, it will
get more benefit from a lower interest
rate (assuming it will issue the same
amount of debt no matter its rating).
• The duration of the payback period for
the debt. A longer payback period will
result in the government paying more
total interest over the life of the bond,
giving a lower interest rate more impact.
• How high a bond rating would be
without accumulating a large amount
in reserves. For example, Exhibit 1
shows that the interest rate benefit
between AAA and AA is much smaller
than A and BAA. This means that, all
else being equal, a government that can
improve from BAA to A by accumulating
fund balance would benefit more than a
government that can go from AA to AAA.
• The opportunity costs of holding
fund balances and reserves. Fund
balances/reserves are not without
30

cost. Money held by the government is
money taken out of the private economy.
A less abstract opportunity cost is the
public service forgone because this
money isn’t being spent. In a private
firm, the opportunity cost of idle funds
is, essentially, the rate of profit that
could be made by directing the funds to
a business opportunity. Unfortunately,
there is not yet a widely accepted, useful
way to measure the opportunity costs
of idle funds in local government, so
the cost of holding idle funds in local
government is often underestimated.
• Secondary benefits of a higher bond
rating. A higher bond rating might confer
prestige to the local government, perhaps
RETHINKING RESERVE CHECKPOINTS
Understand bond ratings and reserves
resulting in more trust and confidence
from the public or making the locality
more attractive to businesses.
• How much additional risk coverage
more reserves will buy. This speaks
to the marginal value accrued from
accumulating more reserves. If the
additional reserves are unlikely to be
used, then the potential benefit from
the standpoint of risk mitigation is
low. That said, rating agencies are
measuring fund balance and cash. A
local government could also accumulate
reserves as part of a sinking fund to
pay for a special project. The monies in
the sinking fund would count positively
in the rating agency evaluation.
Fund balances and cash are an important but not overwhelming
determinant of bond ratings.
Because accumulating and holding fund balances/cash is not without
cost, governments should ask if a higher bond rating is worth the cost
of holding. The cost versus benefit of a higher bond rating is a function
of the amount and duration of debt the government issues, the likely
improvement in interest rates available from a rating increase, the
marginal improvement in risk management available from holding more
reserves, and the opportunity cost of holding fund balance/cash.
Conclusion
Reserves help local governments
manage risks by making resources
available for unplanned, unavoidable
expenditures and revenue
interruptions. This makes reserves
a form of self-insurance. We have
advocated for local governments to
treat reserves more like self-insurance,
including using insurance metaphors
to discuss and plan reserve strategies,
using risk analysis to determine the
size of the reserve, complementing
reserves with commercial insurance
strategies, pooling risks that reserves
are used to cover, and more. This
will help local governments make
savvier financial decisions about
how to manage risk and make their
communities more prepared for a
volatile and uncertain world.
Shayne Kavanagh is senior manager
of research for GFOA’s Research and
Consulting Center. Vincent Reitano
is an associate professor at Western
Michigan University’s School of Public
Affairs and Administration. Peter A.
Jones is an associate professor at The
University of Alabama at Birmingham’s
Department of Political Science and
Public Administration.
1
Defining boundaries is essential to good
financial public finance. See Financial
Foundations for Thriving Communities, GFOA,
May 2019.
2
GFOA’s general fund reserve calculation
worksheet is available at gfoa.org/materials/
general-fund-reserve-calculation-worksheet.
3
Michael R. Boswell, Robert E. Deyle, Richard
A. Smith, and E. Jay Baker, “A quantitative
method for estimating probable public costs of
hurricanes,” Environmental Management, 23(3),
April 1999.
4
Shayne Kavanagh, “A Risk-Based Analysis of
General Fund Reserve Requirements,” GFOA,
January 2013.
5
See “Adding Risks Together: The Surprising
Truth” at youtube.com/watch?v=soLvUKp8C4k.
All the videos in this series are available at gfoa.
org/risk-savvy-thinking-about-reserves-videos.
6
See “About Chance Based (Probabilistic)
Reserve Models” at youtube.com/
watch?v=QDI2bYZ1dR4&t=25s. A series of
videos about simulation is available at gfoa.org/
risk-savvy-thinking-about-reserves-videos.
7
See GFOA’s Rethinking Reserves series video,
“Why Pooling Reduces the Cost of Risk,” at
youtube.com/watch?v=IHEA9m0uoaU.
8
To see how, watch GFOA’s Rethinking
Reserves video, “The Decreasing Marginal
Benefit of Reserves” at youtube.com/
watch?v=xjTJtP-yV5s.
9
Watch GFOA’s Rethinking Reserves video,
“Multi-Year Analysis of Reserves,” at
youtube.com/watch?v=uZJftwcCods.
10
The video on analyzing a multiyear time
frame provides an illustration of how
willingness to cut expenditures can be
integrated into a simulation.
11
Visit probabilitymanagement.org for
resources on how to do this.
12
See Shayne Kavanagh and Elizabeth
Fu, “Speaking Uncertainty to Power:
Risk-Aware Forecasting and Budgeting,”
Government Finance Review, April 2016,
to see how one government did just that
and use our mini stress test demonstration,
available at gfoa.org/materials/mini-stresstest-demonstration,
to conduct the same
analysis featured in the article.
13
Find GFOA’s reserve policy template at
gfoa.org/materials/reserve-policy-template.
14
Shayne Kavanagh, “Smart practices for
self-funded employee health insurance,”
Government Finance Review, October 2018.
15
The county also negotiated several
exclusions and limitations to the policy, which
means the final price of the new policy isn’t
comparable to the old one.
16
According to a sample of data obtained by
GFOA, it takes 18 months, on average, for a local
government to obtain FEMA reimbursement.
17
Carolyn Kousky and Helen Wiley, “Improving
the post-flood financial resilience of lowerincome
households through insurance,”
Wharton Risk Management and Decision
Process Center Issue Brief, January 2021.
18
Shayne Kavanagh and Elizabeth Fu,
“Parametric Insurance: An Emerging Tool
for Financial Risk Management,” GFOA,
January 2020.
19
OpenAI’s GPT 4.0 replied to an inquiry by
saying “investment income accounts for
about 25 to 30 percent of the profits of a
typical property and casualty insurance
company.” Further, GPT showed that some
insurance companies even derive most of
their revenue from investments.
20
Data obtained by GFOA from the firm
three+one (which sells a software service
that helps local governments optimize the
amount of money invested in higher return
instruments).
21
The video is available at youtube.com/
watch?v=IHEA9m0uoaU.
22
The video is available at youtube.com/
watch?v=soLvUKp8C4k.
23
For more on how to develop a policy,
see Shayne Kavanagh and Elizabeth
Fu, “The Last Line of Financial
Defense? Internal Loans in Emergency
Situations,” Government Finance
Review, December 2019.
24
Moody’s separates “fund balance ratio”
and “liquidity ratio,” but both cover all
funds. Also, the base score is a starting
point, and Moody’s analysts may adjust
a final rating up or down based on
contextual factors particular to the local
government being evaluated.
25
The formula is: Available Fund Balance
+ Net Current Assets/Revenue.
26
The formula is: Unrestricted cash/
revenue.
27
Data sourced from SDC All Municipals,
an online data portal from Refinitiv.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 31

32

FISCAL FLUENCY MADE EASY
Fiscal Fluency
Made Easy
Communicating Numbers Using Insights from Behavioral Science
BY SHAYNE KAVANAGH
©2023 SHAW NIELSEN C/O THEISPOT.COM
Numbers are at the core of
a public finance officer’s
job, and a big part of that
is communicating those
numbers to other people.
The challenge is that
numbers are not a first language for
many people in the finance officer’s
audience. In fact, the average American
has only “basic” number skills (defined
as the ability to do simple calculations
and interpret simple tables and
graphs), according to the Program for
the International Assessment of Adult
Competencies. 1 Even so, there are
opportunities for finance officers to
communicate numbers better and, in
doing so, generate a better understanding
of and enthusiasm for savvy financial
decision-making.
For a glimpse into the possibilities,
consider sports fandom. You have
probably met someone who does not
have exceptional math skills yet has
considerable interest in the statistics for
their favorite player or team. They have
taken an interest in the numbers because
of how the numbers are presented and
the context in which they are presented.
Though local government finance will
likely never garner the same enthusiasm
as spectator sports, public finance
officers can harness at least some of the
same potential.
Psychological science provides some
insights into how this is possible. The
book Making Numbers Count 2 by Chip
Heath and Karla Starr provides principles
for communicating numbers in a way
that anyone can grasp. GFOA’s Rethinking
Budgeting (gfoa.org/rethinkingbudgeting)
initiative examined this book
to identify the techniques with the most
potential for public finance.
WE ARE OF TWO MINDS:
THE LIMITS OF RATIONALITY
There have been important advances in
our understanding of how the human
mind processes information in recent
decades. Researchers have identified
two modes of thinking that people
engage in. 3 The first is “automatic”
thinking, which is fast, unconscious,
and/or emotional. The second is
“controlled” thinking, which is slow,
conscious, effortful, and/or logical.
Most of our thinking falls in the first
category, “automatic,” for simple reasons
of biology: “controlled” thinking takes
Can you make
numbers count?
Let us know and win a trip to
the GFOA annual conference.
We want to see if public finance
officers can make numbers count
in their own governments. Share
your presentation with us, and
you might win a trip to the GFOA
Annual Conference. Check out
gfoa.org/fiscalfluency for details.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 33

FISCAL FLUENCY MADE EASY
a lot of energy. Relying on automatic
thinking conserves energy—a useful
feature from times in human history when
food was much scarcer than it is today.
However, Western culture prizes
rationality, which can lead us to
overestimate its place in human cognition.
This can lead us to overestimate people’s
ability to grasp numbers. This does not
mean we should give up on rationality;
it just means that our efforts to present
numbers must be mindful of the limits of
rationality and work within those limits.
THE FOUR BUILDING BLOCKS OF
BETTER COMMUNICATION
We, as people, are inherently limited in
our ability to grasp numbers. Numbers,
by themselves, are abstract concepts.
Abstractions require effortful thinking.
This is why young children are taught to
count objects, like fingers and toes. This
makes the numbers more concrete. The
numbers that public finance officers need
to communicate often go well beyond what
can be accommodated by fingers and toes.
Large numbers can become abstract, so
their full meaning is not well understood.
To take one example, consider the
phenomena of “psychological numbing.”
This means that the higher a number gets,
the less sensitive we get to that number.
To illustrate, someone might drive from
one appliance store to another store across
town if they discover the other store
offers a sale of $10 off on a $40 toaster.
But that same person would be less likely
to make the trip if they discovered they
could save $15 on a $1,400 television.
Logically, they should make the trip. If
the trip is worth $10, then it is also worth
$15. But due to psychological numbing,
the difference between the sale price
and the full price doesn’t feel as great
for the television. Many public finance
officers have witnessed a similar
situation when an elected body spends a
lot of energy debating a small change in
a minor budget line item but soon after
approves a multimillion-dollar capital
project with minimal discussion.
The essence of dealing with
psychological numbing and other
impediments to understanding
numbers (especially large numbers)
is to take a cue from our childhoods
and transform numbers into a human
experience. We can do better than
fingers and toes, though. Making
Numbers Count suggests four basic
building blocks for transforming
numbers into a human experience:
• Translate numbers to human scale
• Help people grasp your numbers
• Catalyze action with emotional
numbers
• Build a scale model.
Translating numbers to human scale
Returning to sports statistics, one
of the reasons these statistics are
understandable is that they typically
focus on individuals. For example, we
might look at the individual player’s
performance over the course of a game,
like how many points a basketball player
typically scores in a game, or how many
yards a football running back gains. Some
statistics even focus on individual plays
by individual players, like a basketball
player’s free throw shooting percentage or
a running back’s yards per carry.
The authors of Making Numbers Count
refer to this strategy as “focusing on one
at a time.” This helps make large and
otherwise abstract numbers more
concrete. Research has shown that
adding even basic context can reduce
error rates substantially when people
need to recall facts. 4 A simple example
in public finance would be to use percapita
figures in place of grand totals. For
example, what is the cost per resident
to add a new public service? Another
example would be showing the impact on
the average household. For instance, if
we were to increase property taxes, what
would the impact be on the tax bill for an
average home?
Another strategy for translating
numbers to human scale is to “favor
Most of our thinking falls in the first category, “automatic,”
for simple reasons of biology: “controlled” thinking takes
a lot of energy.
The sparse historical track
record of large numbers
The authors of Making Numbers Count
point out that “most languages in the
world and throughout history have names
for the numbers 1, 2, 3, 4, and 5. But after
that, the supply of numbers with names
runs dry, and the language is forced to
resort to a generic word such as ‘lots’ for
all the other numbers—from 6 and 7 on
up….” This shows that large numbers are
not instinctive to the human mind.
©2023 SHAW NIELSEN; DAN PAGE C/O THEISPOT.COM
34

©2023 CHRIS GASH C/O THEISPOT.COM
user-friendly numbers.” Research has
shown that the human working memory
can hold around five to nine pieces of
information. 5 A single numerical digit
(such as “2”) would be one piece of
information. This is why, for example,
telephone numbers were originally
designed to be seven digits long (seven
is in the middle of five to nine digits).
The implication for public finance is
that numbers with many digits take up
more space in the audience’s working
memory, making it difficult for them to
follow the larger message.
The authors of Making Numbers Count
advocate “rounding with enthusiasm”
to reduce the number of digits. For
example, $3,405,892 should become
$3.4 million. This reduces a seven-digit
number to two, leaving more room in
working memory for other information.
Though numbers of less than “1” are
not as common in public finance, the
same rule applies. Percentages, for
example, are numbers of less than “1,”
and the authors of Making Numbers
Count recommend using whole numbers
to describe fractions, portions, and
percentages. Exhibit 1 illustrates this
concept by comparing the percentage of
total spending to the number of dollars
spent by each department for every
$10 in the budget. The second column,
expressed in whole numbers, gives a
clearer and memorable sense of the
proportion of the spending undertaken
by each department. It is true that
some precision is lost, and it would be
up to the finance officer to determine,
in each case, if the loss in precision is
counterbalanced by the increase in
comprehension for a wider audience. If
the precision is important, the finance
officer could still use whole numbers
by showing how much each department
spends per $100 in the budget. It would
be the same figures in both cases (for
example, 36 percent for police versus
$36), but the whole numbers put the
figures in a more understandable
context: percentages are an abstract
concept, but an audience can readily
imagine having $100 and dividing it
among the departments.
Help people grasp your numbers
When we say “grasp” numbers, the use
of a physical metaphor is not a mere
EXHIBIT 1 | USING WHOLE NUMBERS TO DESCRIBE FRACTIONS
Department Percent of spending For every $10 in the budget…
Police 36% $4
Fire 31% $3
Public Works 22% $2
Administration 11% $1
Percentages are an abstract
concept, but an audience
can readily imagine having
$100 and dividing it among
the departments.
coincidence. Tactile sensations and
involving the body in learning can
greatly boost understanding. 6 The
authors of Making Numbers Count
cite a survey showing that among 84
cultures, most related their units of
measurement to part of the body. 7 For
example, about half of the cultures
have a unit of measurement based on
the length of outstretched arms (called
a “fathom” in English).
The lesson for public finance officers
is to use simple, familiar comparisons
to help people understand numbers. For
example, local government financial
concepts can be related to everyday
personal or consumer finance. You could
compare the average taxes paid per
person to a common household expense
like cable and streaming bills. Or you
could compare the price of 16 ounces
of tap water to the cost of 16 ounces of
store-bought bottled water.
Another readily understood basis
of comparison is time. The authors of
Making Numbers Count point out that we
may not know how far away our favorite
coffee shop is in miles, but we know how
long it takes to get there in minutes. In
a local government finance context,
figures could be compared to the amount
of staff time a given amount of money
would buy: “That amount of money
would be enough to pay for two full-time
patrol officers for a full year.”
The common theme of these examples
is to relate numbers to common things
and experiences in everyday life.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 35

FISCAL FLUENCY MADE EASY
Catalyzing action with emotional
numbers
Sometimes a finance officer needs to
inspire action in others, and they may
need to use numbers to make the case—
but actions are more likely to be spurred
by emotion than logic. The finance
officer can fuse the logic of numbers
with a presentation that engages the
emotional (“automatic”) part of our
thinking. Making Numbers Count
provides many potential techniques,
but before we review some of them, we
should recognize that catalyzing action
with emotional numbers poses a risk of
treading into ethical gray areas. This is
because using emotion in a presentation
could be perceived as manipulative if
emotion is used inappropriately.
The foundational technique for
catalyzing action with emotional
numbers is to use a vivid comparison
to relate the number to some other
experience that looms large in the
minds of the audience. After the
2008 Great Recession, some creative
public finance officers would compare
potential new revenue problems to
what the local government experienced
during the Great Recession. This
provided a visceral sense of the scale of
response that might be required.
Another foundational technique is
to subvert the audience’s expectations
by introducing an element of the
unexpected. Making Numbers Count
suggests “category jumping,” which
means to pull the number out of the
category the audience normally
associates it with and put it in a new,
unexpected context. Imagine a city
government that runs a water and sewer
utility. The utility is quite large and has
a budget that is comparable in size to
the government’s general fund, but the
utility tends to fade into the background
during budget discussions. The finance
officer believes that the elected leaders
should exercise greater oversight of
the utilities’ financial performance
to ensure their ongoing viability. The
finance officer could point out that if
the utilities were (in theory) their own
government, they would have a budget
equal to the city’s general fund. This
unexpected way of thinking about the
utilities would help highlight their
considerable budget.
Another way to subvert expectations
is to establish a pattern and then break
it. Imagine that a survey shows that
around 40 percent of a city’s residents
think they are getting good value for
their tax dollars from city government.
By itself, that might not mean much
and could be dismissed with a bromide
like: “Well, people just don’t like paying
taxes.” However, real-life surveys show
that cities often have higher levels of
satisfaction, which doesn’t bode well
for our hypothetical city’s ongoing
relationship with its taxpayers. 8 To help
drive the point home, the finance officer
could share the results from nearby cities
with more average levels of resident
satisfaction and then highlight their
own city’s score: “Six of ten residents in
the City of X are satisfied with the value
they get for the taxes they pay to the
municipal government. For the City of Y,
it is about seven of ten residents. In the
City of Z, it is also seven of ten residents.
But in our city, only four of ten residents
are satisfied with the value of their tax
dollars…or less than half.” A pattern of
about 60 to 70 percent satisfaction is
established with the first three cities,
and then our hypothetical city’s more
concerning score breaks the pattern.
A related technique is to highlight
“incomparables,” or to show how
the number of interest is radically
different from what could be reasonable
comparisons. An example in public
finance could be the rate of increase in
expenditures. A high rate of increase
could make an object of expenditures of
moderate size grow to an unmanageable
size quickly. Imagine the elected board is
looking at several expenditure categories
of comparable size. One of them has been
growing so quickly over the past number
of years that, if the trend persists, that
expenditure category will become much
larger and stress the budget. The finance
officer could shift the focus away
from the absolute size of the spending
categories (which is comparable) and
put the focus toward the rate of growth
(which is incomparable).
An important technique is to make
the number personal to the audience.
Imagine a recession is coming and
the finance officer is forecasting a
decline in revenue. The finance officer
recommends slowing down hiring
and freezing hiring for nonessential
positions to prepare for a time of lower
revenues. Because there hasn’t been a
conventional recession in some time, 9
The foundational technique for catalyzing action with
emotional numbers is to use a vivid comparison to
relate the number to some other experience that looms
large in the minds of the audience.
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
36

department heads can’t appreciate the
gravity of the situation and don’t want
to change hiring practices. The finance
officer could point out the number of
employees each department would have
to lay off if they continued hiring as
they have been and if revenues decline
as much as the finance officer thinks
they might. The finance officer could
then ask each department head to think
about who they would lay off. Thus,
an abstract problem (future revenue
decline) becomes a personal concern for
the department heads.
Another way to make the number
personal would be to help people touch
and feel the things that public money
accomplishes. For example, the City of
Decatur, Georgia, held an event where
people could visit a fire station and see
the equipment; and the city also included
information about how the public’s tax
money paid for the equipment.
Finally, numbers can be shown as
a process that evolves over time. For
example, imagine that a large school
district has not been keeping up on the
maintenance of its school buildings,
resulting in emergency repair costs. At
a monthly management meeting, the
finance officer could point out the cost
of the unscheduled repairs that will be
incurred, if past trends hold, between
now and the next meeting. A similar
example is to highlight the cost of the
unnecessary/unproductive meeting by
adding up the cost of the staff time spent
in the meeting.
Build a scale model
EXHIBIT 2 | PROPERTY TAX PER ACRE FOR DURANGO, COLORADO
Downtown Durango
If you were told a house is 1,600 square
feet, you might have trouble envisioning
how large that is. However, if you
were shown a floor plan, it would be
much easier. Not only do scale models
communicate well, but people also find
them inherently interesting. Consider
that maps and globes are often used as
decoration, without any use for real-life
navigation.
Maybe the best example of scale
models in public finance is combining
financial information with geospatial
information. Unlike most private
firms or nonprofit organizations,
local governments are firmly rooted
to a defined geographical area.
This means some aspects of local
government finance are best understood
geospatially. The GFOA report, The Root
of Local Government Revenue, provides
several examples. 10 To take one example,
Exhibit 2 shows property tax per acre in
neighborhoods of the City of Durango,
Colorado. Much like a bar chart, the
higher an area is raised on the map, the
more revenue per acre it produces. We
see on this map that the downtown area
produces more property tax per acre
than other areas of Durango. This is due
to the density and quality of buildings
found in the downtown area. It makes
the point that the local governments of
Durango should be mindful of how land
is used, as it has important implications
for the local government’s ability to
fund public services.
MAKING NUMBERS COUNT IN
PUBLIC FINANCE
In this section, we will show how the
building blocks of Making Numbers
Count could be applied to common
communication challenges faced by
public finance officers. Before we jump
into the examples, we will note that
applying the ideas of Making Numbers
Count will require more effort and
creativity than conventional tables
and graphs. Therefore, we are not
suggesting that you apply these ideas
to every number you present. Rather,
these ideas can be applied to situations
where the juice is worth the squeeze,
like high-profile, weighty issues the
audience especially needs to grasp.
Challenge:
Describing the value of government
North Durango
Graphic courtesy of Urban3
South Durango
Government services have peculiar
characteristics that make it difficult
for individuals to appreciate the value
they are getting from the service. 11
For instance, it is easy to appreciate
the value one would get from buying
groceries but more difficult to
appreciate the value of paying for
police, fire, and emergency medical
services for community safety.
A solution could be to compare the
value of government to the value of a
consumer good. For example, the City of
San Mateo, California, provides public
safety, public works, library, parks and
recreation, and city administration
services. (See Exhibit 3.) The general
government operating budget is about
$170 million. The city serves 103,779
people living in 40,233 households,
and it also has sizable non-residential
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 37

FISCAL FLUENCY MADE EASY
EXHIBIT 3 | (RE)CONSIDERING THE OPERATING BUDGET
Consider the City of San Mateo’s General Governmental Operating Budget
$170
MILLION ANNUAL
OPERATING BUDGET
$260
constituency, equal to about 25 percent
of the property tax base. So, a single
household’s share of the operating budget,
after deducting the share of commercial
properties, comes to around $3,200
annually, or about $260 per month. This
figure includes more than property taxes
and sales taxes; it includes all financial
contributions that households make
to the city government (for example,
taxes, fees, and more). We could then
compare this to other kinds of “operating
expenditures” that households make.
Let’s take entertainment. According
to the U.S. Bureau of Labor Statistics,
households spend about $300 per month
on entertainment. So, the total financial
contribution for essential services like
public safety, transportation system
maintenance, parks, and building safety
regulations is less than what is typically
spent on television/streaming, video
games, movie/concert tickets, and related
expenditures.
Sometimes the value of government is
harder to measure because the benefits
seem less tangible than the benefits a
consumer gets from buying a private good.
Fortunately, there are many strategies to
help with this problem. 12 First, check to
see who has tried to measure the value
$260 40K
IN SAN MATEO PER MONTH
HOUSEHOLDS
PER HOUSEHOLD
PAYS FOR PUBLIC
SAFETY, PUBLIC WORKS,
LIBRARY, PARKS/
RECREATION, AND MORE
VS TO
MAKE THIS NUMBER CONCRETE,
WE CAN COMPARE IT TO COMMON
HOUSEHOLD EXPENDITURES...
$300
SUCH AS THE AVERAGE
HOUSEHOLD MONTHLY
ENTERTAINMENT BILL
of that public service before. Especially
with the availability of large language
model artificial intelligence (such as
ChatGPT), it should be easy to find out
how other people have defined the value
of public services in the past. Next, you
might imagine what life would be like
without public service. What would the
observable differences be in the world?
If there is any observable difference,
then it is potentially measurable.
Finally, it can help to break down the
problem into component parts and think
about the smaller components rather
than everything at once.
Let’s apply these ideas to the problem
of central sewer services. It might be
difficult to communicate the monetary
value of sewers because there is no
obvious private-sector analogue. For
example, one does not have to make much
of a conceptual leap to compare tap water
purchased from a water utility to bottled
water from a grocery store. With sewer, it
is not so easy.
We could start with a query to ChatGPT
to nail down some of the benefits of
central sewerage. ChatGPT returned nine
and, following our principle of breaking a
problem into component parts, we’ll focus
on just one: public health/sanitation.
It is not hard to imagine life without
central sewers; that’s how life was
in the United States until the early
1900s. We can also look to see who
else has measured the impact of
sewers on public health. ChatGPT
points us to a 2006 study show that the
implementation of central sewers in the
United States resulted in an increase in
life expectancy of about 30 percent—or
about 10 years. Living 10 years longer is
something that might be easy for people
to appreciate.
We might be able to make the example
even better by comparing the cost of
sewer to another source of increased
life expectancy: modern medicine.
According to ChatGPT, a study from
the Journal of American Medicine
showed that medical advancements
such as antibiotics, vaccinations,
and improvements in cardiovascular
disease treatment accounted for
approximately a five-year increase in
life expectancy in the United States
between 1960 and 2010. ChatGPT tells
us that the average monthly premium
for an individual health insurance
plan was $456 in 2020. This could be
compared to the typical bill for sewer
utilities (which was around $70 on
average across the United States). That’s
a pretty good deal! Ten years of extra life
for $70 compared to five years for $450!
There are many possibilities. For
example, many sewer utilities convert
used water supplies into fertilizer that is
sold to commercial users in the region.
Perhaps those sales could be translated
to per ratepayer revenue and consequent
reduction in sewer bills. This could then
be compared to dividends available by
investing in a private company.
Challenge:
Justifying growth in the budget
Stakeholders may have difficulty
understanding why costs are going up—
and the need to pay for those costs.
This challenge could be particularly
germane to rapidly growing
communities, but inflation also puts
upward pressures on the budget that
might need an explanation.
One strategy would be to show how
failing to accommodate growth in
ILLUSTRATIONS BY JUSTIN CARMIEN
38

The essence of dealing with psychological numbing and
other impediments to understanding numbers is to take
a cue from our childhoods and transform numbers into
a human experience.
Challenge:
Describing the absolute size of the budget
Challenge:
Encouraging efficiency and cost avoidance
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
the budget would lead to diminished
public services. An easily understood
example is class sizes in public schools.
For example: “If we don’t increase the
budget to account for a growing schoolage
population, class sizes will rise from
25 kids per classroom to 30. Put another
way, for every five kids that were in a
class before, there would be six.” Perhaps
a city government could explain the
need to expand roadways in a growing
community this way: “Nowadays, there
are three cars on our roads for every
two there were before. As a result, the
average commute time has increased
by 15 minutes one way. That is equal to
spending 2.5 more hours commuting a
week, if you work a five-day work week.”
Inflationary pressures could be
illustrated in a similar way but might
focus on areas of the budget that are
susceptible to inflation—the cost of fuel,
for instance. A county’s finance officer
might point out that an annualized ten
percent increase in fuel costs means
the county would lose the ability to put
one out of every ten sheriffs’ cars on the
road unless the budget is increased to
compensate.
Budget growth needs to be paid for
somehow. If tax or rate increases are
being considered, the finance officer
could take inspiration from our
discussion of value and compare
the increased cost per household for
government services and what that is
paying for, and the increased cost per
household for common consumer items.
For example, perhaps if the audience
appreciates that the cost of a gallon of gas
at the pump is going up, it will be easier
for them to understand that the cost of
busing children to school is also going up.
Regardless of any increases, the local
government budget commands a
significant amount of money. People
may have difficulty understanding
how large of an operation the local
government is. One possibility might
be to compare the total revenue of local
government to that of notable local
businesses: “If our local government
were a private company with the same
revenues we have today, we’d be a bigger
business than firms X, Y, or Z.” Another
possibility might be comparing it to
multiples of a single firm that people
know well: “If our local government
were a private business with the
same revenues we have today, we’d
be the equivalent of three Firm Xs.”
Another common problem is
describing the relative spending on
different departments within the
government. A common solution is the
classic pie chart. Pie charts are subject
to a surprising amount of criticism from
graphic design experts, 13 though we
might take inspiration from pie charts to
come up with a better solution. Imagine
the audience is the city council. They
are likely familiar with the layout of
city hall. The finance officer could
ask them to imagine the floor plan of
city hall as the equivalent of the entire
budget and then apportion (imaginary)
floor space to each area of spending
according to the number of dollars
spent. The same idea could be applied
to the council chambers, with floor
space in the chambers apportioned to
spending areas. This might even allow
the audience to physically walk through
the spending proportions. Or council
members could be given actual coins,
and they would physically categorize
the coins into the departments.
Efficiency and cost avoidance are
generally good things but often not
very exciting. Imagine the local
government has the opportunity to
take some cost-saving measures, and
the finance officer wishes to raise
the profile of the opportunity.
They could express the potential
savings in person hours made available.
The presentation would be more effective
if the person’s hours could be translated
into some other activity that the audience
would find valuable. For example: “This
project is estimated to save $30,000 a
year in the public works department,
which is the equivalent of 20 hours a week
for a public works maintenance worker.
Those are hours that could be used, for
example, by the graffiti removal program
to improve our response to graffiti to two
days instead of three.” This example
also reminds us to be mindful of the
risks and ethical gray areas of Making
Numbers Count. For example, if it is not
realistic that the saved hours could be
used to accomplish graffiti removal (or
whatever task is of interest), then it would
be unethical to imply that they could.
Challenge:
Communicating the burden of debt
Capital asset financing poses not just
the communication problem of the big
dollar amounts involved but also the long
timeframe over which the debt used to
purchase the asset is paid back (30 years
is not uncommon).
One common communication challenge
is the cost of a new asset to taxpayers.
A communication strategy might be
one that brings costs to the individual
level and to a near-term time scale. For
example, what might the equivalent costs
on a daily or monthly basis be? Could that
be compared to some other relevant cost?
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 39

FISCAL FLUENCY MADE EASY
Let’s take an example from the City
of San Mateo. The city issued a general
obligation bond to finance the cost of
its main library. The total principal and
interest is $2 million per year, or about
$37 per year per household, or $15 per
year per person in San Mateo, after
considering the tax contributions from
non-residential properties in the city.
These figures could then be compared
to other costs that citizens incur for
reading. (See Exhibit 4.) For example,
according to the Bureau of Labor
Statistics, households spend about
$110 per year on reading materials,
and a library seems like a reasonable
investment by that measure. However,
“amount spent on reading materials”
may still be rather abstract. We could
break the costs down to per-month
spending for the library bond, which is
$3.10 per household, or about $1.20 per
person. This could then be compared
to the cost of buying the latest New
York Times best-seller or some other
popular book. For example, The DaVinci
Code is one of the best-selling books
in the last 20 years, and you can buy a
copy for about $7. Let’s assume it would
take a month to read The DaVinci Code.
For a fraction of the cost of the book,
you could build a library that would
give you access to every novel written
by the author of The DaVinci Code. Of
course, this says nothing of the many
other services the San Mateo library
offers, from technology services (for
example, borrowing a tablet computer)
to assistance with filing federal
income taxes. And our example could
incorporate these services as well.
In another example, the annual
debt service for school buildings at
Palm Beach County Public Schools
is $177 million (see Exhibit 5.) The
adult population in the public school
boundaries is 1.2 million. This equates
to $98 per adult, or about $8 per month.
Most adult Americans consume at least
some coffee, and most consume two or
more cups each day. Whether buying
from coffee shops or making coffee at
home, most Americans spend at least
$10 a month on coffee. 14 Therefore,
the cost of the average adult’s monthly
coffee (at least $10) is more than enough
to pay for their monthly share of local
school building construction.
EXHIBIT 4 | COMPARISONS THAT HELP EXPLAIN THE COST OF A LIBRARY
Consider San Mateo’s General Obligation Bond to Finance the Cost of its Main Library
$2
MILLION
Or Consider it By Month
Another option would be to show what
a debt repayment stream would add to the
average tax bill—or to compare the added
cost to the typical monthly mortgage
or rent, with the idea that housing and
public assets are both kinds of “capital
spending” a community requires.
Challenge:
Communicating insignificance
PER YEAR
TOTAL PRINCIPAL $37
WITH INTEREST PER HOUSEHOLD
PER YEAR
$7
A BEST-SELLING PAPERBACK
MIGHT COST AROUND $7 AND
TAKE ABOUT A MONTH TO READ
VS
Up to now, we have considered the
challenges of communicating important
issues. But sometimes, public finance
officers have the opposite problem,
in which a small, insignificant issue
becomes a distraction. Of course,
sometimes issues that don’t have big
financial implications do have big
cultural, moral, or other implications
that are not easily quantified—we are
not suggesting that the finance officer
dismiss these issues as a distraction.
But there are cases where an issue that is
truly insignificant consumes time and
attention for no good reason. For example,
at one city, which has a $250 million
operating budget, the council would
spend an inordinate amount of their (and
the staff’s) time each year debating a
$10,000 contribution to a local nonprofit.
In cases like this, the finance officer has
VS $110
PER HOUSEHOLD
PER YEAR
good cause to redirect the conversation to
something more important.
This is a good opportunity to translate
money to time: “The amount we are
discussing is the equivalent to two months
of a single patrol officer’s time. In the
meantime, we have another issue on the
agenda that is the equivalent of the time of
six patrol officers—for an entire year each.”
THE ETHICS OF MAKING
NUMBERS COUNT
COMPARE THE $37 TO THE
AVERAGE HOUSEHOLD
ANNUAL SPENDING ON
READING MATERIALS!
$3
PER HOUSEHOLD
PER MONTH
HOWEVER, THE MONTHLY HOUSEHOLD
COST TO BUILD THE PUBLIC LIBRARY
IS A FRACTION OF THAT AMOUNT
Using more “creative” presentations of
numbers does expose the finance officer
to risk, especially if the presentation is
designed to have an emotional impact. For
example, a presentation could be seen as
misleading or manipulative. These risks
can be managed, though.
The first point is to avoid misrepresentation.
Intentional misrepresentation is
obviously unethical, but numbers can
be presented in ways that introduce
unintentional misrepresentation. For
example, imagine a government has a
large, unfunded, accumulated sick leave
liability, and employees are paid their
unused balance when they retire. To
communicate the size of the liability, a
well-meaning finance officer compares
the size of the liability to the number
of additional teachers, police officers,
ILLUSTRATIONS BY JUSTIN CARMIEN
40

firefighters, and more, who could be hired
with that money (as in, total size of liability
divided by average salary of a teacher).
There are a few problems with this
demonstration. First, if the liability were
wiped away tomorrow, the government
would not then have access to new funds to
hire the additional staff. Second, a liability
like accumulated sick leave is paid out over
time (not everyone will retire this year).
This means the time value of money must
be considered. 15 So, the current burden
the liability places on the budget is less
than simply adding up the value of the
current amount of unused time. Finance
officers can test presentations with trusted
colleagues and ask them to play devil’s
advocate and look for ways in which a
creative presentation could be misleading.
For the second point, we turn to the role
of emotion in presentations. The finance
officer relies primarily on logical reasoning
and a reputation for trustworthy analysis
to get their message across. Emotion,
though, is a tool that a finance officer
may need to use at times. Emotion is an
important part of how people understand
the world around them. The finance officer
can evaluate the ethics of an opportunity
to use emotional communication by
considering the following questions: 16
• Does the communication make a useful
contribution to the discussion about
public finance? For example, does it help
illustrate the gravity of a decision? Or
does it help people better understand
issues of sound public finance?
• Does the communication help move the
decision process forward? For example,
does it help highlight trade-offs or better
engage people in the discussion?
• Is the communication consistent with
a fair and accurate presentation of the
underlying data? Is it consistent with
the finance officer’s own code of ethics?
(See gfoa.org/ethics.)
For example, WaterOne, a water utility near
Kansas City, Kansas, was concerned about
the affordability of water for low-income
households. To better emphasize what the
cost of water means to the individual, they
began showing their board what portion
of an individual’s disposable income is
consumed by water charges. This helped
better illustrate the importance of the
issue for low-income households as well
as provided a better basis for discussing
options WaterOne might have to help
low-income households. It was also an
accurate representation of WaterOne’s fee
structures.
EXHIBIT 5 | COMPARISONS THAT HELP EXPLAIN THE COST OF SCHOOLS
Consider the Debt Service for School Buildings at Palm Beach Public County Public Schools
$117
MILLION ANNUAL
DEBT SERVICE COSTS
1.2
MILLION ADULT
RESIDENTS
$8
PER PERSON
PER MONTH
THEN COMPARE THE $8 TO THE AVERAGE ADULT’S MONTHLY COFFEE EXPENDITURE:
$10
PER
PERSON
PER MONTH
CONCLUSION
Numbers and the communication of
numbers are essential to the role of the
public finance officer. Ultimately, though,
the finance officer’s role is to help other
public officials make better decisions
and to provide assurances to the public
that tax money is being used wisely.
But if public officials or citizens can’t
understand the numbers, the finance
officer will not succeed. The strategies
presented in this article can help
finance officers create the fiscal fluency
necessary for good conversations about
public finance and good decisions.
Shayne Kavanagh is the senior manager
of research for GFOA’s Research and
Consulting Center.
1
Madeline Goodman, Robert Finnegan, R., Layla Mohadjer,
Tom Krenzke, and Jacquie Hogan, Literacy, numeracy, and
problem solving in technology-rich environments among
U.S. adults: Results from the Program for the International
Assessment of Adult Competencies 2012: First Look (NCES
2014-008). U.S. Department of Education, National Center for
Education Statistics, 2013.
2
Chip Heath and Karla Starr, Making Numbers Count (Avid
Reader Press/Simon & Schuster: 2022).
3
The best-known publication on this topic is: Daniel Kahneman,
Thinking, Fast and Slow (Farrar, Straus and Giroux: 2011).
4
The authors of Making Numbers Count cite research
conducted by Microsoft as part of search engine
development.
5
George Armitage Miller, “The magical number seven, plus
or minus two: Some limits on our capacity for processing
information,” Psychological Review, 63(2), 1956.
6
Annie Murphy Paul, The Extended Mind: The Power of
Thinking Outside the Brain (Mariner Books: 2021).
7
Kensy Cooperrider and Dedre Gentner, “The career of
measurement,” Cognition, 191, October 2019; and Heath,
C., & Starr, Making Numbers Count: The Art and Science
of Communicating Numbers (Avid Reader Press/Simon &
Schuster:2022).
8
Michelle Kobayashi at Polco provided insights on typical
scores cities might receive on such surveys.
9
One could argue that the economic decline associated with
COVID-19 was unconventional because of the cause, length,
and unprecedented federal government response.
10
Joseph Minicozzi and Shayne Kavanagh, The Root of Local
Government Revenues, GFOA, April 2022.
11
In economics, these characteristics are known as nonexclusionary
and non-rivalrous. The former means that it is
not possible to exclude someone who doesn’t pay for the
good from receiving the benefit. For instance, a visitor to a
town who hasn’t paid any taxes can’t be excluded from a
public work service that keeps sidewalks well maintained and
cleaned. Non-rivalrous means that one person’s use of the
service does not diminish the service for others. If I eat a meal
at a restaurant, you can’t also eat that meal, but we can both
walk the same sidewalk to get to the restaurant.
12
The strategies here are inspired by: Douglas W. Hubbard,
How to Measure Anything: Finding the Value of Intangibles in
Business, 3rd Ed. (Wiley: 2014).
13
You can read more about this in: Shayne Kavanagh and Daniel
W. Williams, Informed Decision-Making Through Forecasting:
A Practitioner’s Guide, GFOA, January 2017.
14
Lark Allen, “2022 coffee statistics: Consumption, purchases,
and preferences,” Drive Research, July 27, 2022.
15
The time value of money refers to the idea that a dollar
received a year from now is worth less than a dollar received
today. This is because of factors like inflation and opportunity
costs.
16
Robert Bloomfield of Cornell University’s Johnson School
of Management and ethicalsystems.org made significant
contributions to this section.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 41

AIN’T
IT GRAND?
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
42

HOW AI WILL AFFECT YOUR WORK
HOW
AI
WILL AFFECT
YOUR WORK
BY ROB ROQUE AND ANDREW SOSWA
Artificial Intelligence
(AI) has been around
for decades as another
name for automation.
It has aided the
medical industry, the
vehicle industry, and
aviation industry,
just to name a few. Largely based on
complex algorithms, the technology was
usually piloted by those in science and
academics and used in their research.
This evolved into the Internet of Things
(IoT), which showed most of the world
how AI can be used in the common
household and workplace. The advent
of technologies such as ChatGPT has
brought on a new generation of AI tools
that have enabled non-programmers
to harness the technology and open
opportunities never thought of before.
This article presents a condensed
history of AI and how it has evolved into
the everyday practices of our society.
After an overview of how AI works, we will
suggest ways in which it can be leveraged
in local government and highlight
governments that are exploring this
realm. We’ll also address tough questions
like, “Will I lose my job to AI?” Finally, we
will conclude with policy implications.
A BRIEF HISTORY
Whether you like it or not, AI is
everywhere. How does your social media
feed know to include vacation posts?
AI. How do popular shopping sites know
what enticing products to present?
That’s right—AI. And did you assume
that a human was on the other end of
the keyboard last time you used a chat
tool at your bank or ticket consolidator
site? It was probably AI, until it got stuck
and typed back, “Hold on. I must get my
supervisor.”
For more than a millennium,
humans have been dreaming up ways
to automate human tasks. Since at least
1 BCE, humans have reflected on how
human tasks could be automated. 1 A few
centuries back, Leonardo DaVinci and
others proposed machines to calculate
data. Ada Lovelace is considered the
world’s first computer programmer
because she wrote an algorithm to
program Charles Babbage’s Analytical
Engine in the 1840s.
In the 1930s, Alan Turing asked the
question, “Can machines think?” He
developed a thought experiment in
which an interrogator sought answers
from two participants, a human and a
computer. The participants were only
allowed to type their answers to hide
the thinking machine in “artificial
flesh.” The interrogator asked a series of
questions and tried to determine whether
the response came from a human or
a “thinking machine.” Turing posed
questions that can easily be handled
today by OpenAI’s ChatGPT. For example,
Turing prepared several illustration
questions such as, “Please write me a
sonnet on the subject of the Forth Bridge”
(which he assumed future AI would
demure—as most humans would). 2 The
modern application of this challenge is
known as the “Turing Test” (and ChatGPT
was able to churn one out just fine). 3
John McCarthy, a mathematics professor
at Dartmouth College, is credited with
creating the term “artificial intelligence.”
AI as a field was born at a conference he
facilitated (along with Marvin Minsky,
Claude Shannon, and Nathaniel Rochester)
for leading computer scientists. The vision
established at the Dartmouth Conference
was “that computers can be made to
perform intelligent tasks.” 4 Although the
conference failed to establish a common
approach, participants went home and
started forming AI trajectories under a
common vision.
AI has taken various paths since the
Dartmouth Conference. Most are based on
models that are based on psychological
or logistic algorithms. Although it’s too
technical and lengthy to address in this
article, psychological methods focus on
human reason or behavior (think shopping
recommendations), while logistic
methods are used more for processes
such as language translation and work
processing. But either method can be
used interchangeably. In short, there is no
agreed-upon approach to AI—but one truth
universally acknowledged is that AI relies
on data—lots of it.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 43

HOW AI WILL AFFECT YOUR WORK
The evolution of AI since Dartmouth
can be represented by a series of tiers 5
described below:
LEVEL 1: Reactive machines. Provide
predetermined responses based on
specific input and cannot recognize
patterns or past experiences.
LEVEL 2: Limited memory. AI begins to
store memory and apply experience to
responses to user input.
LEVEL 3: Theory of mind. AI gains social
intelligence, enabling it to personalize
responses to user inquiries.
LEVEL 4: Self-awareness. AI has selfawareness.
Its responses can be adjusted
based on the limitations it recognizes due
to its perceived environment.
LEVEL 5: Automation. AI machines begin
self-learning without user direction.
LEVEL 6: Large language models.
AI uses natural language and neural
networks (imitating the human brain)
to consume large amounts of data,
learn from it, and summarize for user
inquiries. This level is commonly known
as generative AI, or “text to X.”
Underlying the AI technologies are the
large sets of data, mostly commercialized
(for example, Amazon, Google, IBM,
and Microsoft), and the data is collected
instantaneously from your electronic
footprint. (More about this later.)
The way AI works (in short) is by
“training” itself from a set of data (such
as, text, data, and pictures) to formulate
patterns and predictions. 6 The machine
uses an algorithm to provide an answer
based on one of the following functions:
descriptive (uses input data to explain
what happened); predictive (uses input
data to explain what could happen);
or prescriptive (uses input data to
recommend actions to take). The quality
of the data input affects the quality of
the results/output. If the source data
is biased or stale, the results will also
probably reflect bias or be out of date.
ChatGPT, for instance, is based on data
through September 2021. OpenAI, the
owners of ChatGPT, decided to baseline
their data set through September 2021
to improve their algorithms. Interacting
with ChatGPT will therefore yield results
based on two-year-old data.
THE BENEFITS OF AI
It is a misnomer that AI is ChatGPT.
It is more than that. AI is actually an
entire field of technology, and ChatGPT
is a conglomeration of multiple AI
disciplines. When viewed from this
perspective, it’s easier to understand that
AI technology can be used for purposes
other than chatbots. The following are
examples of how AI is being used in the
public sector.
State of Massachusetts. The state uses
chat functions to allow internal users
to interact with some business systems
using natural language. The government
is also using chat to field queries from
its public-facing website. In both cases,
the state controls the chat function and
recognizes that more can be done with AI,
which it may explore in the future. 7
City of Surrey, British Columbia. The
city offers its citizens an app based on
IBM Watson to field public inquiries.
Residents can use the MySurrey app to
submit queries using natural language
and receive answers that are more
informative than scraping the internet. 8
Spokane Public Schools, Washington.
The district uses AI to help teachers
improve their classroom practices.
Teachers upload videos of their classroom
instruction, answer a series of questions,
and an AI coach works alongside them
to adjust their curriculum and teaching
style. The process is purely voluntary and
is in its infancy. 9
City of Columbus, Ohio. The city has
implemented several technology
platforms based on AI, which it
highlighted at GFOA’s 2023 annual
conference. Columbus uses AI to generate
form letters, conduct data analysis, and
assist with audits.
U.S. Census Bureau. U.S. Census chat
users can make inquiries using natural
language. Data is only available for a
few elements such as demographics
and crime, but additional data will be
available in the future.
Intentional use of AI by the public sector
in the U.S. and Canada is still in its
infancy. It’s being used in other parts
of the world to monitor commuters and
other transactions, although these are
mostly in countries where personal
information is not heavily regulated.
Unintentional use of AI happens all of
the time, however, since most public
sector data is in the public domain. Public
domain data is used, particularly by the
private sector, to build data to train their
own AI applications.
Although AI still isn’t prevalent in the
public sector, most people in the industry
recognize that it is a rapidly evolving
and expanding field of increased
productivity. Local governments are
beginning to experiment with ways in
which AI can augment their operations,
particularly when it is difficult to hire
new employees. Other institutions are
learning, through AI methods, why they
need to collect data for AI purposes.
For example, the founders of Recidiviz
worked with prison systems to collect
and consolidate data so AI would be able
to identify prisoners who were eligible for
release from prison or parole. In the past,
some inmates and parolees had been
held past their release eligibility dates
because the prisons didn’t have enough
data. 10 AI tools were used to identify
individuals who had been incarcerated
beyond their sentencing guidelines.
HOW WILL AI AFFECT MY JOB?
Most people fear that AI will replace
their jobs—and that includes the
current AI technologists responsible
for programming AI. It is predicted that
more than 80 percent of the workforce
will be affected by AI technologies. In
part, the concern is warranted. A study
commissioned by the World Economic
Forum suggests that AI will affect up to
40 percent of the world’s working hours.
(These are the jobs most likely to be lost—
and created—because of AI.) 11 Recent
studies suggest that AI will replace
certain employees, but they also suggest
that AI will open up opportunities for
displaced workers. In short, the studies
theorize that the success of future
workers will be defined by how well
individuals can adapt and leverage AI in
the future.
Nonetheless, nearly all AI experts
agree that AI won’t replace human beings
or human workers in the foreseeable
future. Instead, they foresee a whole new
workforce specializing in AI-infused
processes. They also believe that AI will
create net new growth in jobs. One of
44

these, for example, is the job of “prompt
engineer,” who is responsible for asking
AI the right questions to elicit the best
response. Gone are the days where an
employee’s job safety could be based on
hoarding information. The future is more
likely to embrace individuals who can use
AI to augment their duties.
WHAT ARE THE RISKS?
General use of AI tools should be
approached with caution at this stage.
Users should be fully aware that the
current generation of AI is based on the
quality of the data sources. The potential
for introducing biased data, fake data, and
even harmful data into the environments
that are used to train AI tools is a real
concern. As a result of one famous study,
IBM stopped developing facial recognition
software. A combination of biased data
and subsequent algorithms led to AI
computers misclassifying gender based
on darker complexions. 12 The study
stressed the need for more representative
datasets and the reporting of algorithmic
performance (as in, no more black box
calculations).
Those who fail to learn from history
are doomed to repeat it. Big Tech leaders
are already calling for some form of
regulation before AI truly morphs into an
autonomous machine. In an open letter
to the world, Elon Musk, Steve Wozniak,
It is predicted
that more than
80 percent of the
workforce will be
affected by AI
technologies.
Yuval Noah Harari, and others called on
AI developers to pause progress for six
months to allow regulatory agencies to
catch up. 13 Their concerns are not only
rooted in the issues we face now because
of the mishandling of social media, but
also how AI will be used in the future
and the need for transparency. This is
popularly known as “establishing the AI
guardrails.”
Local governments that implement AI
will need to consider many factors. For
example, if a government is providing
information through a chatbot, and the
bot provides authoritative but incorrect
information, who is liable if the answer
results in harm? Policies will need to be
developed to test AI and to ensure that
the data local government AI tools are
training on is reliable, safe, and unbiased.
And government agencies are already
working on it; the National Institute of
Standards and Technology (NIST)—
which is a part of the U.S. Department of
Commerce—is working on guidelines for
minimizing bias in AI. 14
CONCLUSION
We are in an exciting evolution of AI
technology, and where it will take us is
anybody’s guess. Who knew, for example,
that networked computers developed at
the U.S. Department of Defense would lead
to Internet commerce? No doubt, there
will be changes in the workforce because
of AI—but local governments shouldn’t be
hampered by the notion that jobs could
be lost. Instead, they should focus on
how services can be improved by using
AI. Those who are willing to explore the
potential uses of AI should proceed with
some caution, however, and recognize
the shortcomings of AI training data and
potential flaws in the AI algorithms. The
Internet has created some problems, but
it has also created many benefits. The
same should be expected from AI.
And in the words of ChatGPT (May 3,
2023 version) itself, “AI has the potential
to improve efficiency, accuracy, and
decision-making in various industries,
leading to advancements in healthcare,
education, transportation, and more.”
Rob Roque is the technology services
manager in GFOA’s Research and
Consulting Center. Andrew Soswa is a
client delivery/engagement manager at
NTT DATA, a global consulting firm; he is
also chief executive officer and founder of
Agile Project Advisors.
1
Dario Guarascio, Lucrezia Fanti, and Massimo Moggi, “From
Heron of Alexandria to Amazon’s Alexa: a stylized history
of AI and its impact on business models, organization and
work,” Economia e Politica Industriale, August 2022.
2
Alan Turing, “Computing Machinery and Intelligence,” Mind,
1950.
3
Seth Perlow, “AI is better at writing poems than you’d
expect. But that’s fine,” Washington Post, February 13, 2023.
4
James Moor, “The Dartmouth College Artificial Intelligence
Conference: The Next Fifty Years, AI Magazine, 2006.
5
Andrew Soswa, “AI as a Source of Truth: How Reliable is AI
Information?” ResearchGate, May 2023 (researchgate.net).
6
Machine learning can be supervised (requiring humans
to label data) or unsupervised (the machine learns from
unstructured or unlabeled data), or it can be achieved
through reinforcement (award-based analysis such as game
theory). See: Sara Brown, “Machine learning, explained,” MIT
Management-Sloan School, April 21, 2021 (mitsloan.mit.edu/).
7
Lauren Harrison and Noelle Knell, “Massachusetts Dabbles
in Generative AI: ‘ChatGPT With Controls,’” Government
Technology, May 12, 2023 (govtech.com).
8
Surrey Uses AI to Deliver Services to Its Residents, University
of Canada West, 2022 (ucanwest.ca).
9
Lauraine Langreo, Can AI Conduct Teacher Evaluations in
Schools? Government Technology, May 15, 2023 (govtech.
com).
10
Clementine Jacoby, The Future of Corrections is
Data-Informed, Correctional News, December 8, 2022
(correctionalnews.com).
11
These are the jobs most likely to be lost—and created—
because of AI, World Economic Forum, May 4, 2023
(weforum.org).
12
Joy Buolamwini and Timnit Gebru, “Gender Shades:
Intersectional Accuracy Disparities in Commercial Gender
Classification,” presented at Conference on Fairness,
Accountability, and Transparency: Proceedings of Machine
Learning Research 81:1–15, 2018.
13
Daniel Van Boon, Elon Musk Is Right: We Need to Regulate
AI Now, CNET, May 17, 2023 (cnet.com).
14
Reva Schwartz, Apostol Vassilev, Kristen Greene, Lori Perine,
Andrew Burt, Patrick Hall, “Toward a Standard for Identifying
and Managing Bias in Artificial Intelligence,” National
Institute of Standards and Technology-U.S. Department of
Commerce, 2022.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 45

46

LOCAL GOVERNMENT 2030
Local Government
2030
TO
TACKLING APPROACHES
BUDGETING
BY HENRIETTA WEAVER, YURI HATTERSLEY,
KEVIN FITZGERALD, AND TAYLOR GALUSHA
©2023 JAMES FRYER C/O THEISPOT.COM
Local Government 2030—an
initiative organized to address
the 12 “Grand Challenges
in Public Administration”
identified four years ago by the
National Academy of Public
Administration—is working on three
important projects, with plans to convene
again in Phoenix, Arizona, in January
2024 to assess progress and to make
plans to continue this work in the years
to come. These projects are:
• G.R.O.W. a Resilient Workforce.
This initiative reexamines pipelines
of recruitment, retention, and
development in local government
to ensure that the workforce is
supported and prepared to address
the Grand Challenges and more.
• The Art of Public Service:
The Communication Continuum.
This initiative seeks to develop a
toolkit for new strategies of emotionally
intelligent communications from
governments to their residents, visitors,
and employees, revolutionizing the
way public servants convey information
and deliver services across disciplines.
• Promised Pathways. This initiative
recognizes the role that governments
have played in causing harm through
the criminal justice system, seeking
to connect people who have had such
experiences—along with their families—
with skills training and resources to
prepare them to fill vacancies in the
public service workforce.
Throughout the Local Government 2030
experience, delegates continued to fall
back on a key theme—that the challenges
facing our profession require us to break
down the silos among our disciplines and
geographies. In addition to continuing
the work of the three strategic initiatives,
delegates are bringing back the lessons to
their jurisdictions and exploring ways of
carrying the spirit of the convening into
everything they do.
MEETING THE MOMENT
At a 2019 meeting, The National Academy
of Public Administration (NAPA) called
public servants to come together to address
the pressing issues of our time. These
challenges highlight the complex realities
facing governments today, and in their
call to action, NAPA argued that new ideas
and enhanced collaboration among all
sectors will be critical in meeting the
moment. This argument inspired Wally
Bobkiewicz, the city administrator
for the City of Issaquah, Washington,
and others to help meet the call. These
conversations led to partnerships with
more than 25 professional associations
to create an initiative called Local
Government 2030 (at localgov2030.
com), which brought together 51
delegates, all under the age of 40, from
across the nation to review the Grand
Challenges and propose targeted ways
for local governments to address them.
The work of Local Government
2030 began soon after delegates were
notified of their selection. Delegates
were sorted into one of seven groups
based on discipline, including general
On November 4-5, 2022, the Local Government 2030 convening brought together 51 practitioners
under the age of 40 from cities, counties and regional councils around the United States on the
campus of the University of Nebraska, Omaha.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 47

LOCAL GOVERNMENT 2030
administration, finance, public works,
administrative services, community
services, public safety, and planning
and development services. These
groups, in collaboration with the 16
superdelegates who served as mentors
to the delegates, analyzed the Grand
Challenges and wrote papers exploring
the challenges in the context of our work
in preparation for a national meeting
hosted by the University of Nebraska-
Omaha (UNO). The diversity of roles
within each discipline group highlighted
an important lesson as delegates saw
that our individual challenges were
shared by others, regardless of role or
geographic location.
Upon arriving in Omaha in November
2022, the delegates, superdelegates, and
professional organization representatives
convened on the UNO campus to discuss
the discipline papers and develop ideas
to address the identified challenges,
modeled after the Minnowbrook
Conference of 1968. 1 Using the Pecha
Kucha format of presenting, 2 each of
the seven discipline groups shared
information about how the NAPA Grand
Challenges were affecting their fields
of work, while presenting arguments
about which of the challenges should be
prioritized as a focal point throughout the
meeting. Consultants helped with multiday
conversations about the challenges,
reorganizing the delegates into groups
based on geographic region. Each group
developed nine potential initiatives to
address the Grand Challenges before
ultimately pitching three initiatives to
the broader body of delegates. After a few
rounds of voting, the body of delegates
and superdelegates identified three
initiatives that combine the shared
experiences of the delegation with
areas of public service the group felt
passionate about (G.R.O.W. a Resilient
Workforce, The Art of Public Service:
The Communication Continuum, and
Promised Pathways).
BREAKING DOWN THE SILOS OF
FINANCE—TOMORROW IS NOW
The federal government’s response to
economic and social disruption caused by
the COVID-19 pandemic has been largely
anchored by the concept of “Build Back
Better,” a public reinvestment framework
focused on stabilizing the American
economy with a series of historic
stimulus packages aimed at financing
sustainability initiatives, workforce
development efforts, infrastructure
improvements, and opportunities to
improve the quality of life for lowerincome
and middle-class families.
A keystone program of this endeavor
is the American Rescue Plan’s State and
Local Fiscal Recovery Funds (SLFRF),
which provides local governments with
a historic infusion of stimulus relief
funding and a broad directive to address
the broad disruptions caused by the
COVID-19 pandemic. While presented
with a unique opportunity to invest in
transformative services and capital
improvements, many municipalities
have taken a narrow definition for their
community, limited to their current
residents. While each local government
is accountable for addressing their
residents’ unique pandemic challenges
and ensuring compliance with the U.S.
Treasury’s guidelines, the funding from
the American Rescue Plan Act presents
local government leaders with a historic
infusion of federal funds that have
flexible guidelines to shift resources
toward their community’s unique
pandemic pain points. This directive
is accompanied by the challenge for
public officials to dig deeper and to think
entrepreneurially about strategies that
target entrenched economic and social
inequities and set the stage to unlock
new opportunities for public and private
investment.
The Build Back Better agenda’s
commitments to transform
America’s social, infrastructure, and
environmental conditions through
enormous public investments are
frequently compared to the Great
Depression-era programs of the New
Deal. This comparison sets the scene for
the long-term impact that present-day
local government officials can unlock
through bold policy initiatives that take
accountability for improving conditions
for current residents and acknowledge
the public servant’s obligation to
build a more equitable, resilient, and
technologically advanced society.
To execute that pivot and unlock
the potential of public investments as
the catalysts of long-term community
growth, government finance officers
need to break the silos that exist among
the fields of public finance, urban
planning, public works, human services,
and general administration to take on a
more multidisciplinary approach to local
government. To reignite the public’s faith
in municipal officials as the stewards of
the public’s investments, government
finance professionals must acknowledge
their obligations to a broader pool of
stakeholders by expanding their definition
of community to include future residents
and people that live in neighboring
municipalities. Expanding the definition
of stakeholders to embrace these groups
can position local government officials
with new opportunities to build a more
equitable, resilient, and technologically
advanced society.
Below are four examples of breaking
down silos to achieve success across many
facets of the work of government finance
professionals.
PLANNING FOR THE FUTURE
The established method for measuring
the fiscal impact of a public investment
proposal takes an overly technical
approach that standardizes results to
key performance indicators and shortterm
time horizons. As an early effort
to transform the public investment and
budgeting processes, GFOA partnered with
seven other state and local government
organizations approximately 25 years ago
to develop the National Advisory Council
on State and Local Budgeting (NACSLB)
as a guiding framework for informed and
stakeholder-driven budgeting. One of the
key characteristics of the NACSLB budget
process is the importance of incorporating
a long-term perspective in a way that
evaluates community conditions and
outlines options for responding to a range
of economic, political, and environmental
scenarios.
While the NACSLB’s contributions to the
public finance field provided a framework
for distilling a universe of information into
organized options that inform present-day
decision-makers, the collection of best
practices overlooks the government finance
officer’s obligation to advance bold and
entrepreneurial initiatives that address the
interests of future residents. In the quarter
century since the seven organizations
formally endorsed NACSLB, the quality of
life and economic stability of American
48

12 GRAND CHALLENGES IN PUBLIC ADMINISTRATION
Protect Electoral Integrity and
Enhance Voter Participation
Modernize and Reinvigorate
the Public Service
Develop New Approaches to
Public Governance and Engagement
Advance National Interests
in a Changing Global Context
Foster Social Equity
Connect Individuals to
Meaningful Work
Build Resilient
Communities
Advance the Nation’s
Long-Term Fiscal Health
Steward Natural Resources
and Address Climate Change
Create Modern Water Systems
for Safe and Sustainable Use
Ensure Data Security and
Privacy Rights of Individuals
Make Government
AI Ready
Graphics courtesy of National Academy of Public Administration
communities has significantly degraded
because of overly cautious policymaking
and the entrenchment of austerity as
virtues of the public finance field.
Evidence of this failure to proactively
advance policies that address the
interests of future residents is
documented in measures of America’s
quality of life from the U.S. Census,
Government Accountability Office, and
the Federal Reserve’s annual analysis
of the Economic Well-Being of U.S.
Households. While the government is
charged with an array of competing
priorities for investing scarce resources,
and public officials are obligated to
minimize risk by carefully studying
every policy design option, the tradeoff
is a cumbersome and frustrating process
that undermines the public’s trust.
The critique that transformative
policies employed 25 years ago could
have offered a silver bullet for local
governments to preemptively address
Americans’ present-day economic and
quality of life concerns should be seen as
an overly simplified and potentially offputting
sentiment. But the opportunity
to invest in real solutions for the Grand
Challenges of the 21st century presents
the call to action for government
finance officers to embrace a bolder
and more fluid approach to budgeting
that acknowledges the cascading
risks from failing to act. This principle
represents a significant pivot away
from the established approach to public
financing by balancing predictability
with the flexibility to deliver results.
COLLABORATION IN FINANCE—
NEW APPROACHES TO BUDGETING
In a common scenario, a city council
has identified a strategic initiative
to “improve the quality of life for
all residents.” This is hopeful and
aspirational, but not very specific.
After this lofty goal has been shared
with the public, now it is up to the local
government departments to determine
what role they play in accomplishing it.
Parks and Recreation decides they must
build a new park. Public Works believes
new roads and sidewalks will be more
useful. Economic Development staff set
their sights on finding a large company
that will offer higher-paying jobs. Every
department across the organization takes
up the mantle and they all independently
determine the best course of action and
proceed to request the required funding
in the upcoming budget.
This scenario is all too common in
local government. Departments often
work independently of each other and
end up competing for limited resources to
accomplish the same goals. What’s more,
the functions don’t usually collaborate
with the budget office in developing
plans for future spending to ensure
that all cost elements and variables
are considered, and efforts are not
duplicated across departments. Without
collaboration, it is not usually apparent
through the traditional budget process
that increased requests for funding are
even related to a new initiative.
The traditional approach to budgeting
is centered on line-item spending for
operations. This approach invites and
encourages silos across the organization
because the link between functions
performed and services provided is
unknown or disjointed. Each department
functions as if it works independently
of the overall mission and goals of the
organization. The budget process and
structure reinforce this misguided idea
and encourage each unit to make less
informed decisions that ultimately result
in wasted resources—making it even
more difficult to develop an organizationwide
approach to accomplish strategic
initiatives and to allocate resources in
the most efficient manner. A GFOA report,
“Why Do We Need to Rethink Budgeting?”
(January 2022), discusses the idea that
traditional budgeting is a zero-sum game
in which one party wins and another
loses. It goes on to say that “zero-sum
thinking makes it difficult to address
problems that require collaboration
across participants in the budget.”
Much more can be said about the
inefficiency of silos in developing
an efficient, effective budget that
represents the strategic priorities of
local government leadership, but it
should be noted that silos disappeared
during the Local Government 2030
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 49

LOCAL GOVERNMENT 2030
The opportunity to invest in real solutions for the
Grand Challenges of the 21st century presents the call
to action for government finance officers to embrace
a bolder and more fluid approach to budgeting that
acknowledges the cascading risks from failing to act.
Convening (LG2030). At LG2030, local
government professionals representing
all disciplines from across the U.S.
gathered to discuss today’s issues and
to develop solutions addressing some
of them. An individual’s department
mattered less than their knowledge
and passion as it related to the final
three initiatives chosen by the larger
group. This approach can be applied to
local governments by building special
project teams across departments
that collaborate to discuss ways of
implementing strategic initiatives and
developing the corresponding budget.
The teams could even help formulate
these initiatives with leadership.
A cohesive, collaborative work
environment that functions across
department lines is built from the top
down. Departments do need to work
somewhat independently to perform
their unique functions, but the walls
must come down to foster more
cooperation around the use of limited
resources throughout the organization.
Management must set the precedent and
institute measures to encourage and
enforce these standards.
ENGAGING THE WHOLE
COMMUNITY—COMMUNICATION
INNOVATION
Communication and collaboration with
the community are essential to building
trust and transparency, especially
within the local budgeting process. We
now have access to information we never
had before, along with the much greater
speed with which information can
travel. This is a powerful tool that local
governments need to channel and adapt
in order to help build better connections
with residents through engagement and,
in turn, build trust and transparency
with the community as a whole. Gaps in
information and information-sharing
can lead to mistrust in government.
The need on the end of the government
is to make information accessible and
available to residents, whether online
or in print. When it comes to where tax
dollars are allocated and spent, reaching
the whole community helps us build
stronger relationships.
To channel the power of
communications, local governments
need to be “trendy.” Local governments
have historically struggled with building
strong communications connections
with residents, especially after the death
of the daily local newspaper. Previously,
a municipality could place an ad in a
local newspaper for a budget hearing and
consider their outreach and engagement
complete. This is not enough in the 21st
century. Local governments must harness
the power of social media and the Internet,
while also building and improving on print
materials, to reach the whole community.
Communications must be multifaceted
and accessible to be effective in building
trust, transparency, and credibility with
the community.
Adaptation in action. Each month, the
Town of Shrewsbury, Massachusetts,
produced an online newsletter that it made
available on the town website and via
social media, summarizing the key actions
taken by the select board for residents to
view. But the community still felt that
information on the board’s actions wasn’t
transparent enough. In addition to the
newsletter, each meeting is live streamed
on Facebook and cable television, and it is
posted to the town’s YouTube channel the
following day.
But a multi-page, online newsletter
wasn’t meeting the needs of effectively
communicating with the community
or meeting the public’s expectations of
transparency for their elected public body.
Since then, the town has started producing
30-second videos the morning after the
meeting that summarize the board’s
actions and direct people to resources
that will provide more information. It also
transcribes the information from the video
for those who don’t want to consume the
information in a video format.
This multifaceted approach has been
well-received, and it aligns more closely
with communications efforts in the
private sector. This strategy can be applied
to outreach related to local budgeting
processes or project allocation. Local
governments must modernize and have
access to resources and tools to present and
distribute information in a multifaceted
way to meet the needs and expectations
of the community in today’s world.
Building trust and transparency through
communications makes us more effective
and successful as public leaders, as well as
builds trust within budgeting processes.
Our job as local government leaders is
to make accessing information as easy
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
50

and streamlined as possible for our
communities. It is not the residents’
full-time job to be an expert on the
community or the budget—it is ours. By
enhancing communications, we are able
to work more efficiently and effectively
as an organization to build trust and
transparency around the budgeting
process in general, and not just through
segmented factions of departments or
the community at large.
CONTINUOUS IMPROVEMENT
MOVING FORWARD
The Finance and Asset Management
Department at the City of Bellevue,
Washington, seeks to break down silos
within the department and across the
organization through its continuous
improvement program, which is rooted in
a Lean management system.
At the core of the program and
management system are two principles:
respect for people (emphasizing those
who do the work in a process) and
continuous improvement of customer
value. These principles shape the
department’s strategy for collaborating
with other departments to deliver on the
mission and vision of the organization.
The success of continuous
improvement initiatives in public finance
hinges on putting ourselves in our
customers’ shoes and recognizing who
requires goods, services, or information,
and how. While many public servants
would be quick to recognize a resident
as a customer, most of us interact
with other customers as well. Public
finance professionals tend to serve as
internal service providers, ensuring
that other departments have visibility
into budgets, processing invoices to
pay vendors, or producing and routing
contracts that support service delivery
across a community. This means that
the transportation project manager, the
administrative assistant to the executive,
and the recreation program manager
are all customers too, and we should
collaborate with each of them to deliver
higher quality service in support of all
who live, work, or play in your community.
We will explore this through one of
Bellevue’s largest process improvement
efforts—currently underway—which
involves changes to the procurement
process through a Lean model line.
Reimagining procurement with
a lean model line. During the first
convening of the Local Government
2030 initiative, five priorities were
identified, including a revamping of our
public procurement system to promote
equitable, community-driven outcomes
and support. Nine months before that
conversation occurred, staff within
Bellevue’s Procurement team embarked
on the journey to establish a Lean model
line that, once built, would better equip
the team as they work to deliver the very
goal outlined in LG2030. A Lean model
line is a closely connected series of
processes that are the target of focused
implementation of Lean principles, built
so others can see a Lean implementation
in real time and model their own efforts
after something already built in an
organization. This effort, which is still
underway today, continues to highlight
the importance of breaking down silos
so we can deliver much-needed change
to a process that very few people find
easy or enjoyable.
The challenges associated with the
procurement process are not unique
to Bellevue, but they do provide an
interesting case study about the role
silos can play in limiting our ability to
innovate. Customers hold conflicting
perceptions of the procurement
process: on one hand, they view it as
being complicated and ever-changing,
making it hard to keep up with what
is necessary to successfully procure
goods or services; but on the other
hand, they view the process as fixed
and immovable, and will navigate
the process using the same rules they
followed for procurements a decade ago.
These seemingly polarizing views of the
same process are exacerbated by the fact
that, until recently, the average length
of tenure for employees skewed longer
than the average organization, with
many staff members having a decade or
more of experience working for the city.
To simplify these processes, Bellevue
procurement staff are applying a Lean
lens to their process improvement
efforts. After mapping out a new future
state for the process that we hope to grow
into, the team has divided into small
groups that work with customers across
the organization to identify gaps in the
current state, to brainstorm new ways
of achieving success, and to prototype
new processes to identify the best way of
doing things. This work is still very much
underway, but a key lesson that everyone
involved in this effort has learned is the
same lesson that delegates to LG2030
took away: More often than not, we are
all experiencing the same problems in
our very different roles, and any path
to successfully address and resolve
those problems will require breaking
down silos and collaborating to develop
innovative solutions.
BUDGETING INTO THE FUTURE
As we move toward a more modern
local government, we, as leaders in
our communities, must continue to
challenge norms and to find new and
innovative ways to tackle challenges our
ever-changing world presents to us. We
must tackle these challenges through
collaboration, continuous improvement,
communication, and engagement with
our local communities. This multifaceted
approach lends itself to every area
of local government, whether that is
budget development, asset management
and procurement, or building trust
and transparency in the fabric of
our communities. We must strive to
collaborate and solve the challenges
we face now and in the future.
Henrietta Weaver is the director of
budget for the City of Danville, Virginia.
Yuri Hattersley oversees a Lean
continuous improvement pilot program
within the City of Bellevue, Washington’s
Finance and Asset Management
department. Kevin Fitzgerald is the
American Rescue Plan coordinator
for the Town of Groton, Connecticut.
Taylor Galusha is the assistant to town
manager—communications coordinator for
the Town of Shrewsbury, Massachusetts.
1
The Minnowbrook Conference, held every 20 years, is one
of the most significant academic conferences in public
administration in the United States. Minnowbrook I, which
took place in 1968 at Minnowbrook, the Syracuse University
conference center, marked the beginning of the “New Public
Administration.” Minnowbrook II, which took place in 1988,
reflected on the impact of the New Public Administration.
Both Minnowbrook I and Minnowbrook II resulted in
significant, historic publications. You can read the best of
Minnowbrook III, held in late 2008, at esadepublic.esade.
edu/posts/post/the-future-of-public-administration-aroundthe-world-the-minnowbrook-perspective,
Esade business
school at Ramon Llull University.
2
The PechaKucha 20x20 presentation format is a slide show
of 20 images, each auto-advancing after 20 seconds. It’s
nonstop and you have 400 seconds to tell your story, with
visuals guiding the way. PechaKucha was created in Japan in
2003 by architects Astrid Klein and Mark Dytham. The word
“PechaKucha” is Japanese for “chit chat.”
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 51

In Practice
FINANCE | ACCOUNTING | PERSPECTIVES | INTERVIEWS
FINANCE
THE CITY OF DUBUQUE, IOWA
Addressing the Hiring Crisis for the
City of Dubuque through Collaboration
BY CONNOR GOLDEN AND SAMUEL MANN
As is the case for many
local governments, the
City of Dubuque, Iowa,
has faced serious staffing
challenges over the last
three years. The combination of a yearlong
COVID-19 hiring freeze, increased
attrition, and a particularly tight labor
market have forced city officials to get
creative as they try to work their way
back to pre-pandemic staffing levels
without decreasing the quality of
their services. Thankfully, Dubuque’s
city leaders understand the power of
collaboration and are up to the task.
Mike Van Milligen has been Dubuque’s
city manager for 30 years. He started his
career as a police officer for the City of
Carbondale, Illinois, and later became
assistant village manager for the Village
of Skokie, Illinois, before stepping into
his role with the City of Dubuque, where
he oversees nearly 30 departments with
a total of 750 full-time equivalents or
1,100 employees.
Jenny Larson is the chief financial
officer in the city’s Finance Department.
With approximately 20 employees, the
Finance Department oversees Budget,
Payroll, Accounts Payable, Accounts
Receivable, miscellaneous billing,
and utility billing for Sewer, Water,
Stormwater, and Refuse. Jenny has been
with the city for 17 years. In March 2019,
the Budget and Finance departments
were combined, and she was promoted to
manage the newly merged department.
Amy Scheller was hired as Dubuque’s
fire chief in 2021, and she directs six fire
stations and 103 full-time employees.
She has been in the fire service for
almost 30 years. Starting as a volunteer
firefighter, she worked her way up to
paid on-call status while in college. She
then worked full-time at a municipal
fire department in Illinois, moving
through the ranks from firefighter
paramedic to company officer.
Jeremy Jensen has been the city’s
chief of police for a little more than
one year, leading a department of
115 authorized and sworn officers,
along with eight civilian employees
and eight interns. He has more than 30
years of experience in law enforcement
and spent most of his career with the
City of Dubuque as he made his way
through the ranks.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 53

IN PRACTICE | FINANCE
City Manager’s Office
Dubuque has shown remarkable
resilience by embracing innovative
solutions and fostering collaboration
among stakeholders. Van Milligan
sheds light on the proactive measures
taken to address the challenges he
faced during the pandemic to ensure
a sustainable future for the city.
When the pandemic hit in March
2020, the economic outlook seemed
uncertain, prompting a cautious
approach. Instead of resorting to
layoffs, the city implemented a hiring
freeze. Although necessary at the time,
this decision resulted in a backlog of
vacant positions across departments,
particularly in public safety. As the
true impact of the pandemic became
evident, however, the mayor and city
council recognized the need to adapt,
and they identified key priorities during
their annual goal-setting session.
The first priority identified was
retaining existing employees and
acknowledging their invaluable
experience and dedication. The second
was recruiting new employees to fill
the vacant positions and maintain
essential city services. By emphasizing
these goals, Dubuque aimed to ensure
continuity and stability in its workforce.
To demonstrate their commitment,
the mayor and council approved
changes to union contracts and ensured
that all city employees would receive
a pay increase of 5 percent instead of
the 3 percent initially guaranteed. In
recognition of their exceptional service,
the Police, Fire, and 911 Emergency
Communications departments
received a 6 percent pay increase.
It’s important to listen
to staff members
and their needs, as
well as candidates
who are stressing
the importance of
work-life balance.
JENNY LARSON
CHIEF FINANCIAL OFFICER,
CITY OF DUBUQUE
Furthermore, the city took a significant
step by introducing a new policy known
as “recognition leave.” Each employee
was granted 40 hours of recognition
leave, which could be used for time off
or converted into compensation upon
retirement or separation from the city.
Dubuque also recognized Juneteenth as
an additional paid holiday as part of its
commitment to inclusivity and diversity.
Finally, to ensure fair and competitive
compensation, Dubuque authorized a
pay-in-class study, currently underway
and set to conclude in December 2023.
This study assesses the pay structure
of every position in the city government
and compares it to comparable cities
in the State of Iowa. By conducting this
analysis, Dubuque aims to ensure that
its remuneration aligns with market
standards, allowing the city to attract and
retain talented individuals who contribute
to the city’s growth and development.
Finance Department
The Finance Department has not been
immune to the city’s staffing challenges,
which has led to increased workloads
for staff members and the need for
external support. Larson describes the
journey of filling crucial vacancies and
implementing strategic restructuring
measures to address these challenges.
The Finance Department’s staffing
issues first began during an enterprise
resource planning (ERP) system
implementation, a lengthy project
initiated before the pandemic. Several
employees resigned before the system
went live, and the assistant finance
director resigned just after, resulting
in a total of four vacancies. While
the lower-level positions were filled
relatively quickly, finding a new assistant
finance director proved challenging.
The city initially attempted to fill
this position using existing hiring
processes through the Human Resources
Department. They extended three
offers to candidates, but each time,
the candidates’ current employers
promoted them or offered bonuses to
dissuade the candidate from leaving.
Finally, the city was forced to engage an
external recruiter, and the position was
finally filled after almost 12 months.
During this time, Larson also proposed
restructuring the Finance Department
to address gaps revealed by these
vacancies. In January 2023, the city
council approved her restructuring
plan, which included creating three new
positions: a finance director, a budget
director, and a purchasing and safety
coordinator. This time the city decided
to use external recruiters from the
Mike Van Milligen
Dubuque City Manager
Jenny Larson
Chief Financial Officer
Amy Scheller
Dubuque Fire Chief
Jeremy Jensen
Dubuque Chief of Police
54

PHOTO COURTESY OF CITY OF DUBUQUE
start, but it still took almost six months
to fill these newly created positions.
These prolonged vacancies and
additional staffing challenges, such as
parental leave for two staff members
and the recent resignation of an
accountant, have placed significant
stress on the department. To relieve
some of this pressure and ensure that
services continue uninterrupted, the
department has increasingly relied
on consulting firms and contracting
temporary employees. Additionally,
the former assistant finance director,
who now works for one of the consulting
firms hired by the Finance Department,
continues to contribute part-time, helping
manage responsibilities previously
handled by the departing accountant.
Through these challenges, the Finance
Department has instituted numerous
changes designed to encourage retention
and boost recruitment. Understanding
that flexible work schedules are an
attractive perk to employees, the
Finance Department adjusted its hours
to allow staff to work a short day on
Fridays. It also started providing the
opportunity for most staff members
to work from home two days a week.
In a creative attempt to increase its
applicant pool, the city also recently
changed its residency requirements.
Before the change, candidates were
required to live in Iowa and within a few
miles of city limits. The new residency
requirements allow candidates to live
in any state if they are within 30 miles
of the city limits. Given Dubuque’s
location across the Mississippi
Creating an environment
where creativity
and collaborative
problem-solving are
encouraged is going to
be a game-changer.
AMY SCHELLER
FIRE CHIEF, CITY OF DUBUQUE
River from the border of the states of
Illinois and Wisconsin, this change
has dramatically increased the area
from which candidates can apply.
Fire Department
Dubuque’s Fire Department has also been
grappling with recruitment challenges in
recent years. Scheller discusses efforts
to enhance diversity, adapt to changing
trends in the profession, and secure a
strong workforce.
Recently, the department has
experienced a decline in the number of
candidates on their recruitment lists
and a significant drop in candidate test
numbers. Despite this, Scheller recognizes
the continuing importance of diversity,
and she actively participates in diverse
workforce and recruitment teams.
To overcome these challenges and
widen its candidate pool, the Fire
Department has embraced innovative
strategies—with the city’s full support. One
notable example involves hiring emergency
medical technicians. Traditionally,
the Dubuque Fire Department has only
hired trained paramedics; however, the
Fire Department has recently begun
allowing EMTs to apply for entry-level
roles alongside paramedics. This switch
expanded the pool of qualified candidates
and has resulted in multiple successful
hires. The collaboration between EMTs
and experienced paramedics within the
department ensures comprehensive
training and support for new recruits.
Another positive development for the
Fire Department’s recruitment involves
‘’over-hiring.” Candidates who made it onto
the recruitment list would often face long
waiting periods because of limited hiring
capacity. As a result, the city often lost
promising recruits to cities that could hire
them sooner. Recognizing an opportunity,
the department was recently granted
approval to “over-hire.” This change allows
more individuals on the list to enter the
profession right away, ensuring that
Dubuque can compete for talented recruits
and provide greater opportunities for
aspiring firefighters.
Scheller highlights the competitive
nature of recruitment within a limited
pool of candidates. With creative
strategies such as signing bonuses and
increased recruitment efforts observed
in other organizations, Dubuque’s Fire
Department is taking proactive steps to
attract and retain talented individuals.
The department is also mindful that
10 to 15 members will retire within
the next few years, so it is preparing to
address the resulting workforce gaps.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 55

IN PRACTICE | FINANCE
Police Department
Although many departments across
the city have experienced staffing
issues, none has felt the same level
of pain as the Police Department.
Jensen describes the events of the
past three years as a “perfect storm”
that has deeply affected his staff.
In 2020, Dubuque’s Police Department
was on the cusp of achieving full staffing
when unforeseen circumstances struck.
The COVID-19 pandemic dramatically
increased the demanding nature of
public safety work, as officers were
often exposed to a deadly virus that
we knew very little about. In addition
to this stress, the nationwide impact
of the Black Lives Matter movement
resulted in officer fatigue and a negative
public perception of policing. The two
forces combined were overwhelming for
many active and prospective officers,
leading to increased officer attrition and
a decreased applicant pool. Finally, the
preference for regular work schedules
and the desire to start in specialized roles
posed challenges in attracting qualified
candidates. As a result, the Police
Department has 15 open positions.
The legal requirements that go along
with the officer recruitment process
also present significant obstacles.
State-sanctioned police academies
have limited seats available, and
of the candidates that Dubuque’s
Police Department is able to send to
the academy, only 30 percent end up
passing the state-mandated written
and physical exams. Additionally,
recruits must undergo a background
check, psychological examination,
physical examination, and 20 weeks
of field training. When all is said and
done, it takes a full year to replace a
retiring officer. The limited capacity
for field training further compounds
this issue, as the department struggles
to train enough new hires due to a
shortage of field training officers.
The department also faces
discontent about pay disparities, as
compared to other agencies such as
the neighboring sheriff’s office. These
disparities have resulted in officers
feeling undervalued and frustrated.
Despite these complex issues,
Dubuque’s Police Department is
actively creating a more stable and
rewarding work environment for law
enforcement professionals. Recently
the department was able to get a city
clerk trained and certified in scoring
candidates’ tests. This allows the
department to evaluate candidates
more often, which not only decreases
the time required to hire a new officer
but also decreases the burden placed
on field training officers by spreading
out when new hires join the force.
Additionally, recognizing the
burden felt by the officers training
new recruits, the Police Department
has prioritized the retention of its
field training officers. On top of the 6
percent raises received by all Dubuque
police officers, the Police Department
recently provided field training
officers with an additional raise.
Advice from Dubuque
Having faced his own fair share of
roadblocks, Jensen knows how crucial
it is to “identify what you actually have
control over and what you don’t have
control over.” Making this distinction
clear can help managers avoid
frustration and focus on recognizing
actions they can take to improve their
situation, no matter how marginally.
Scheller recognizes that her
department is at an inflection point,
saying, “If we continue to do things the
way we have done them in the past,
we are not going to succeed. Creating
an environment where creativity and
collaborative problem-solving are
encouraged is going to be a game-changer.
I’m hoping that the way I manage and
the way I treat people will trickle down
to the other leaders of this department.”
Larson offers advice for other finance
departments that are struggling with
retention and recruitment centers on
listening. “It’s important to listen to
staff members and their needs, as well
as candidates who are stressing the
importance of work-life balance. That is
not going to change, so we need to change
as an organization to meet that need.
Hybrid working, flex schedules, and
vacations are all coming up as I have been
going through interviews in the Finance
Department. You just need to keep an
open mind. What we offer today may
not be what is needed in the future.”
Connor Golden and Samuel Mann
are both graduate student interns with
GFOA’s Research and Consulting Center.
PHOTO COURTESY OF CITY OF DUBUQUE
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IN PRACTICE | ACCOUNTING
ACCOUNTING
Just Go with the Flow—Cash Flow Reporting
History of Statement No. 9
BY SUSANNAH FILIPOVIC
When the Berlin
Wall came down
and while people
were singing to
Madonna’s “Like a
Prayer,” the Governmental Accounting
Standard Board (GASB), in its fifth year
of existence, approved Statement No.
9 on cash flow reporting of proprietary
funds and governmental entities that
use proprietary fund accounting. While
much has changed in the international
and social environments, as well as in
the world of governmental accounting,
very little has changed regarding cash
flow reporting. There continues to be
no indications of major changes on the
horizon. The challenge is that minimal
authoritative guidance has been
developed to specifically address newer
transactions, such as how pensions,
asset retirement obligations, and lease
activity fit into the existing structure
of the statement of cash flows. The
consensus appears to be that Statement
No. 9’s guidance stands strong and
sufficient, as is.
Relevant guidance subsequent to 1989
includes an amendment to remove the
indirect method as an allowable method
of reporting the cash flows from operating
activities and periodic implementation to
guide questions and answers to address
specific issues. Overall, guidance on cash
flows reporting has largely remained
intact for over 33 years. The current
standards and implementation guidance
on cash flow reporting is found in GASB’s
current Codification of Governmental
Accounting and Financial Reporting
Standards (Cod.), Section (Sec.) 2450,
“Cash Flows Statements.”
The cash flow statement can help
governments—and users of their
financial statements—understand how
their proprietary funds are meeting their
cash needs in the four categories defined
by GASB Cod. Sec. 2450.112:
OPERATING
NONCAPITAL FINANCING
CAPITAL AND RELATED FINANCING
INVESTING
How to fit in the flows
Asset Retirement Obligations (ARO).
Many enterprise funds were impacted
by Statement No. 83, Asset Retirement
Obligations (as amended, in GASB Cod.
Sec. A10, “Certain Asset Retirement
Obligations”), which resulted in the
reporting of a long-term liability and a
related deferred outflow of resources.
The annual activity for Asset Retirement
Obligations (AROs), as well as for the
similar landfill closure and postclosure
(as amended, in Cod Sec. L10, “Landfill
Closure and Postclosure Care Costs”), will
likely result in both cash and noncash
reporting on the statement of cash flows.
On the statement of cash flows,
the actual cash paid for the ongoing
retirement efforts of an asset (reduction
of the liability) would likely meet the
criteria of a cash outflow from operating
activities and not be specifically
identified as ARO related. While the
annual recognition of the deferred
outflow of resources over the expected
life of an ARO is not directly impacted by
cash activity, the change in this balance
sheet line item should be reported on the
©2023 JIM FRAZIER C/O THEISPOT.COM
58

econciliation of operating income (loss)
to net cash from (for) operating activities.
Liabilities for Leases and SBITAs. Efforts to
implement leases and subscription-based
information technology arrangements
(SBITAs) (GASB Cod. Sec. L20, “Leases”
and Cod. Sec. S80, “Subscription-Based
Information Technology Arrangements,”
respectively), are well underway.
The initiation of a lease (by a lessee
government) or SBITA, and the resulting
recognition of the intangible right-touse
asset, as well as remeasurement
adjustments throughout the life of the
lease, should be reflected in the schedule
of noncash financing and investing
activities.
Throughout the life of the lease or
SBITA, the cash outflows for principal
and interest payments should be reflected
as a capital and related financing outflow,
consistent with the concept that the
associated intangible right-to-use asset is
a capital asset. The annual amortization
of the intangible right-to-use asset can
be aggregated with depreciation of other
capital assets in the reconciliation of
operating income (loss) to net cash from
(for) operating activities.
Lease receivable and other long-term
notes receivable. As a reminder, when
a government enterprise fund is the
lessor in a lease of a capital asset, the
proprietary fund statement of fund
net position reports a long-term lease
receivable and a related deferred inflow
of resources. The government will
continue to report the capital asset at
historical cost and depreciate annually.
The categorization of the cash receipts
for principal and interest related to this
lease are identified in authoritative
implementation guidance (GASB Cod.
Sec. 2540.707-16) as capital and related
financing. The path to this conclusion
is based on the principle that leases are
financings with the categorization of
proceeds analogized to a sale of capital
assets. This categorization should be
applied even when the ongoing operations
of the government or proprietary fund is
leasing property to third parties.
If a government proprietary fund is
the lessor of an asset that is classified
as an investment on its statement of
fund net position, then the government
should follow recognition, measurement,
and reporting guidance applicable to
the underlying asset (an investment)
in GASB Cod. Secs. 3100, “Fair Value
Measurement” and I50, “Investments”).
Hence, this would not result in a
lease receivable and deferred inflow
of resources. Instead, since the cash
flows receipts for principal and interest
relate to an investment, the lessor
would categorize them as cash flows
from investing activities. This analysis
takes us back to the implementation
of GASB Statement No. 72, Fair Value
Measurement, (GASB Cod. Secs. 3100
and I50) which required governments
to identify assets as investments at the
time of implementation.
Other long-term receivables may
be the result of a sale of capital assets,
such as a note receivable, or the
result of cash lending, such as a loan
receivable. Understanding the origin of
the receivable is paramount to proper
categorization on the statement of cash
flows. For a note receivable, the cash
inflow associated with a sale of a capital
asset should be reported as a capital and
related financing inflow. However, the
cash inflow related to the loan receivable
(principal and interest), would be
reported as an investing activity.
American Rescue Plan Act Funding.
With some governments allocating
American Rescue Plan Act (ARPA)
funding (unrestricted federal revenue)
to proprietary funds for a variety
of purposes, including pursuing
capital projects, understanding the
crosswalk between the governmentwide
statement of activities and
the proprietary funds statements is
important. These federal revenues are
not restricted to a specific purpose. Even
if a government chooses to use ARPA
funds to complete capital projects, the
cash inflow does not meet the criteria to
be reported as a capital related financing
activity. Cash receipts from grants
that are not specifically restricted for
capital purposes should be reported as a
cash inflow from noncapital financing
activities.
Reminders!
Always Double Check NICA—If the cash
flow for principal and interest payments
is reported as a cash flow for capital and
related financing activities, then the
amount of the related debt proceeds that
have been spent on capital assets should
be included in the calculation of the net
investment in capital assets.
Mismatch—While operating revenues
and expenses are defined by each
government for reporting on the
statement of revenues, expenses and
changes in fund net position, cash flows
from operating activities are considered
the catchall group on the statement of
cash flows. As such, the cash flows from
nonoperating revenues and nonoperating
expenses should not automatically be
excluded from cash flows from operating
activities.
Noncash items matter, too!—Capital
contributions reported on the statement
of revenues, expenses and changes
in fund net position can be noncash
(contribution of a capital asset) or cash
(contribution or grant of cash restricted
to fund a capital asset). Cash receipts
from grants restricted for capital
purposes should be reported as part
of cash flows from capital and related
financing activities, while noncash
contributions should be included in
the schedule of noncash financing and
investing activities. The schedule of
noncash activities should also include
donated commodities, donated capital
assets, debt refunding activity when an
escrow agent is used, and issuances of
other liabilities, including loans, leases,
and SBITAs that directly result in a
capital asset.
Keep your eyes on the flow of the
Financial Reporting Model Project
GASB’s major project on the Financial
Reporting Model continues to move
through deliberations. Tentative changes
to the proprietary fund’s statement of
revenues, expenses and changes in fund
net position may impact how operating
revenues and expenses correspond to
cash flows from operating activities
in the statement of cash flows. And to
all those who had their fingers crossed
during this project’s initial deliberations,
there should be no government-wide
statement of cash flows requirement
coming. Stay tuned!
Susannah Filipovic is manager of
technical accounting for GFOA’s Technical
Services Center.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 59

IN PRACTICE | PERSPECTIVE
PERSPECTIVE
Tips for Powerhouse Dashboards
BY KATHERINE BARRETT AND
RICHARD GREENE
Communicating information
about cities to both leaders
and citizens has become
increasingly important as
transparency is seen as a
key to efficiency and the ability to garner
trust. As a 2017 report from the Volcker
Alliance put it, “Legislators, advocacy
groups, executive branch officials, and
citizens are at a huge disadvantage if it
is extremely difficult or even impossible
for them to dig out the data they need.”
One of the most useful ways for cities
to provide just this kind of information
is through dashboards, which can be
graphically appealing ways to give users
information they need in a quick, concise
fashion. Multiple cultures have a saying
similar to “a picture is worth a thousand
words.” The parallel here is “a dashboard
is worth a thousand data points.”
But creating powerful, useful
information that will attract users isn’t
easy, so we’ve turned to experts in the
field to assemble the following list of ten
concrete approaches that cities should
consider when developing or improving
their dashboards.
Knowing your audience is key
“The best piece of advice I have is to
design from the outside in, not the inside
out,” said Don Kettl, co-author (with
William D. Eggers) of BridgeBuilders: How
Government Can Transcend Boundaries
to Solve Big Problems (Harvard Business
Review Press, 2023). This is particularly
important for city dashboards because
they may be serving two very different
audiences, or sometimes a combination
of both: the government leaders who
want an easy way to understand what’s
happening in the institution they serve,
and residents who want to understand
more about their cities and the value they
are getting from their tax dollars.
Be selective in the data you display
As Mark Funkhouser, founder and
president of Funkhouser and Associates,
said, “Too many dashboards are scattered
with too many concepts, and sometimes
even with a lot of different measures
that don’t get to the core concepts.” One
key to selecting the measures on which
a dashboard focuses is to concentrate on
the missions of the organization, and then
©2023 PAIGE STAMPATORI C/O THEISPOT.COM
60

give careful thought to the information
that people really want to see. “You can’t
assume you know what the residents care
about,” Funkhouser said. “So, you need
to do the work of finding this out with an
ongoing dialogue with residents,” and
then design a dashboard that shows those
things.
Let people drill down for more detail
Devin LuBean, user experience leader
at Domo, a software company that helps
people create data experiences, said:
“Some people just say to keep it simple,
but you may be dealing with complex
data, so I like to think of it more like a kind
of progressive disclosure. Users see one or
two important things and then click to get
to another part of the dashboard for more
detail, rather than plopping them down to
the destination.”
Refresh the dashboard regularly and
provide the date of the latest refresh
Understaffed governments can easily
allow dashboards to fall out of date—
particularly when there’s a great deal of
manual work involved in updating them
frequently. But this can come at a cost.
“When users see that a dashboard isn’t
updated, they don’t check back,” said
Julian Metcalf, partner of GPP Analytics
Inc., a consulting firm in performance
auditing, internal auditing, co-sourcing,
and data analytics.
Rock Regan, alliance manager for
system integrators at Qlik (a company that
helps organizations turn data into action)
and one-time chief information officer of
Connecticut, said, “Anybody who builds
a dashboard should have an indication of
how fresh the data is.” Places that provide
this kind of information are a step ahead
of the pack. Consider the dashboard the
City of Mesa, Arizona, built. It shows
“computer-aided dispatch events,” or the
calls for service dispatched to Mesa police
patrol officers. A quick glance at the page
shows when the data was last updated—
which is particularly impressive as this
information is typically refreshed daily.
Make your dashboards as dynamic
as possible
Before the Internet, people thought of
dashboards exclusively in the context
of the control panels in automobiles that
showed speed, miles traveled, fuel level,
and so on. But if any of those dials were
stuck in one spot, they’d be worthless
(if the gas gauge was fixed to “full,” the
auto would eventually come to a grinding
stop). The same thing is true with online
performance dashboards, which must
show the trend of performance indicators
over time. “Data without context isn’t
useful, and it’s important to have details
about progress,” said Elizabeth Steward,
vice president of research and marketing
at Envisio, a performance management
software company.
One excellent example is the New
Orleans Library Operational Plan
dashboard, which shows the status of
individual projects like efforts to enhance
opportunities for jobseekers and job
creators. A quick glance at the dashboard
shows the degree to which efforts
like this are “on track,” “experiencing
some disruption,” “experiencing major
disruption,” “completed,” or “upcoming.”
Use colors carefully
Some websites are overloaded with a
rainbow of colors, presumably with
the idea that people will be attracted to
a beautiful array of reds, greens, and
blues. Color can be a powerful device
in dashboards, but it should be used
intentionally. Too many colors can
obscure the message you’re trying to
communicate. David Osborn, cofounder
of ThirdLine, Inc., a company that helps
governments with analytics, said: “You
really want to use shades of black, white,
and gray for most things, and color for the
things you want to stand out. Grays and
blacks with a dash of orange or blue will
help the colored items stand out. I think
for someone who doesn’t understand
design, lots of colors seems fun. They’re
trying to build a piece of art, but that’s not
the goal.”
Consider the type of graphics that
works best
For example, pie charts take up a great
deal of space because they are circular,
and the loss of the area around the pie
can forfeit a lot of valuable real estate on
a dashboard. A bar chart, on the other
hand, takes up less space,” LuBean
explained. And that’s just the beginning.
For example, line charts may not have as
much visual impact as bar charts because
they don’t have as much visual mass,
but “line charts are fantastic when you’re
trying to show things over time,” he added.
Help users translate the dashboard
into different languages
“You want to communicate with all
residents,” said Mike Bell, cofounder and
chief executive officer of Envisio. “The
early adopters are beginning to embrace
this practice.” Bell points to the City of
Denton, Texas, and its Strategic Plan’s
dashboard as a strong example of a city
that makes it easy to see lots of data in
a number of languages, ranging from
Spanish to Hindi to Korean to Arabic. A
simple menu at the top of the home page
offers dropdown options to select any of
the 22 featured languages to make the
translation process effortless.
Use the blur test
This is a recommendation from Domo’s
LuBean, who explains that if a user
squints and takes note of the element
on a computer screen that they see first,
that should be the most important item
in front of them. “In most government
organizations, people don’t have a lot of
time,” he says. “So, the blur test is a pretty
quick way to get a reasonably accurate
idea of what people are going to see first.”
Make the dashboard
comprehensible on a mobile device
According to Exploding Topics, a search
engine optimization detection platform,
55 percent of website traffic comes
from mobile devices, while 92 percent
of users who access the Internet use
a mobile phone. Yet it can be difficult
cramming dashboards onto the tiny
screens available on mobile phones—
which is a problem, according to Mike
Maciag, policy researcher and former data
journalist. “Too often, displaying data on
mobile devices is still an afterthought.
Governments can greatly expand
and broaden their reach by making
dashboards mobile-friendly.”.
Katherine Barrett and Richard Greene are
principals of Barrett and Greene, Inc., at
greenebarrett.com. They are advisors to GFOA,
senior advisors and columnists for Route
Fifty, NAPA Fellows, senior advisors to the
Government Finance Research Center at the
University of Illinois, and senior advisors to the
American Society for Public Administration.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 61

IN PRACTICE | PERSPECTIVE
PERSPECTIVE
Rethinking Revenue Diversification,
Warren Buffett Style
BY JUSTIN MARLOWE
B
illionaire Warren Buffett
is famous for his blunt
commentary on everything
from tax policy to baseball
to ukulele playing. And
of course, his advice on investing has
moved markets and made personal
fortunes. According to some recent
research, his ideas on picking stocks
might also be good advice for managing
local government revenues.
Local government revenue structures
are front and center these days. For
this we can thank GFOA’s pathbreaking
“Rethinking Revenue” initiative.
Rethinking Revenue is a deep dive into
big questions—what local governments
tax, why they tax it, and how they can
build better tax structures for the future.
One of its core principles is that “today
local revenue structures are largely
based on assumptions that no longer
hold true as digitization, globalization,
demography, political changes, and other
trends continue to shift the landscape.”
Many of these assumptions surround
local revenue systems’ ability to generate
the requisite resources for essential
services. Tax policy experts call this
“revenue adequacy.” Rethinking Revenue
points out that adequacy is under
assault for many reasons that local
governments can’t control. Consumers
continue to shift a growing portion of
their spending away from goods that
are subject to local sales taxes. Reliable
revenue sources like charges for services
have been shown to disproportionately
affect the poor—and so on.
But there’s another, often-overlooked
dimension of adequacy: performance
over time. A revenue system that can
produce big annual revenue increases
sounds exciting. And yet, the laws of
financial physics tell us that the system
is also prone to big annual decreases.
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
62

Most local budgeting officials will trade
the chance at a budget windfall for the
certainty of avoiding a budget shortfall.
This lines up well with Buffett’s most
famous investment advice: “The first
rule of an investment is don’t lose
money. And the second rule of an
investment is don’t forget the first rule.”
That leaves us with a challenging
question: how can we ensure that a
local revenue system generates enough
revenue, and minimizes the risk of
large annual declines?
The answer is diversification.
Professional money managers have
espoused the virtues of a diversified
investment portfolio for decades.
Stocks, bonds, real estate, and other
assets tend to move in different
directions as markets improve or
decline. It follows that holding a mix
of otherwise uncorrelated assets can
prevent unexpected losses. Academic
researchers have applied this same
principle to local government revenues.
They have carefully studied how local
governments distribute their revenue
burden across different revenue
sources, and what happens when new
revenue sources are made available.
The problem with this approach is
that broader does not always mean
more predictable. In fact, research has
shown that when revenue systems
increase their dependence on new
but pro-cyclical revenue sources—for
example, those that generate more
revenue when the economy is growing,
and vice versa—such as local sales
taxes, they often become less stable.
Rethinking Revenue calls this out
as a key consideration for the future
of local revenues. It asks, “Does (the
revenue source) contribute to a system
wherein the productivity of the revenue
sources that make up the system are
not correlated with each other? This is
the essence of diversification.’” Here,
Rethinking Revenue once again sounds
a bit like Buffett, who once said, “Wide
diversification is only required when
investors do not understand what they
are doing.”
All this leads us to a different way of
thinking about diversification. Instead
of analyzing dependence on different
revenue sources, we should instead
How can we ensure that
a local revenue system
generates enough
revenue, and minimizes
the risk of large annual
declines?
examine if the sources we use tend to
move together. Professional money
managers have a well-developed set of
tools to that effect. One of those tools
is a measure—known as “portfolio
variance”—of the tendency for an
investment portfolio’s annual gains/
losses to deviate from their long-term
trend. We calculate portfolio variance
by observing whether the prices
of individual assets in a portfolio
increase or decrease in tandem
over time—if they tend to move
independently of each other, if there’s
less variance, and if the portfolio’s
gains and losses are more predictable.
Many investors strive to build a
portfolio that maximizes investment
gains while minimizing variance.
Until now, no one has applied
these concepts to local government
revenues. But in some recent research
at the University of Chicago’s Center
for Municipal Finance, we did just that.
We used the Census of Government’s
data to compute the five-year revenue
portfolio variance for all local
governments with populations greater
than 25,000 from 1970 through 2020.
What did we learn?
First, local revenue systems are
volatile. The average five-year revenue
portfolio volatility—as indicated by
its standard deviation—was around
25 percent. That means if you had to
guess the annual change in a local
government’s total revenues, you’d be
correct at least two-thirds of the time if
you guessed +/- 25 percent. Depending
on the size and type of government,
that volatility can be as little as +/- 10
percent or as much as +/- 48 percent.
Does that mean actual revenue
collections will fluctuate by 25
percent each year? Not necessarily.
In fact, most localities’ actual revenue
collections fluctuate by around +/- 6
percent. Volatility is based on past
fluctuations. Whether that pattern of
fluctuations continues depends on the
condition of the real estate market,
consumer confidence, and many other
factors. In general, those intervening
factors stabilize actual revenue
collections.
Second, we find that volatility is
tightly linked with fluctuations in
actual revenues. This is especially true
for losses. More volatility is almost
always associated with revenues falling
well short of their long-run trend at
some point in the following three to
five years. To put it differently, revenue
structures that are more diversified
in the portfolio management sense
of the word—meaning they have less
correlation across revenue sources and
lower overall volatility—are also more
stable. This reinforces the idea that less
volatility makes for easier budgeting.
Third, and perhaps most important,
diversification as it’s been measured
so far has little to do with volatility. We
find that our revenue portfolio variance
measure and traditional measures of
diversification as distribution barely
correlate. In fact, local governments
that depend on fewer revenue sources
often have lower volatility, so long as
they are “own source” revenues like
property taxes and utility taxes.
When we think about local revenues
the way investors think about
investments, we find that diversification
doesn’t always pay dividends. In fact,
as Warren Buffett reminds us, smart
local finance professionals might prefer
less diversification. These complex
links between diversification and
predictability are an essential part of
rethinking revenue.
Learn more about GFOA’s Rethinking
Revenue initiative:
gfoa.org/rethinking-revenue
Justin Marlowe is a research professor at
the University of Chicago, Harris School of
Public Policy, and a fellow of the National
Academy of Public Administration.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 63

IN PRACTICE | INTERVIEW
Rising to the
Budgeting Challenge
AN INTERVIEW WITH LAURA LARSEN
Jara Kern, writer with Right Angle Studio, spoke with Laura L. Larsen,
budget director for the City of Baltimore, Maryland, about her career
journey in government budgeting, key differences between state and
local government budgeting, and how municipal government leaders
can best navigate labor challenges and uncertainty.
Laura began her career in
government finance as
a budget management
analyst with the City of
Baltimore, Maryland,
before moving to the City
of Madison, Wisconsin, as budget and
program evaluation manager. She
then became capital budget director
for the State of Wisconsin, from 2020
to 2022, before returning to the City
of Baltimore in September 2022 as
budget director. She also serves on
GFOA’s Committee on Governmental
Budgeting and Fiscal Policy.
Blending professional passion with
public service
Laura traces her career arc back to
her undergraduate experience at the
University of Nebraska at Kearney,
where she worked at the front desk for the
Nebraska Game and Parks Commission.
As a staff member, Laura worked with
wildlife and fishery biologists and game
wardens, and she saw firsthand the
power of blending a professional passion
with public service. “I saw up close what
public service looks like and how you
could make a career out of it in a number
of avenues,” Laura recalled. “That’s when
I decided I wanted to pursue my MPA.”
Laura enrolled in the University of
Nebraska at Omaha’s Master of Public
Administration (MPA) program with
the goal of working at the state or federal
level in policy analysis. As she neared
graduation, one of her professors urged
her to cast a broader net. “She explained
that a local government budget office
can be an interesting place to work, with
opportunities to learn a lot, very quickly,”
Laura explained. She applied for a budget
analyst role at the City of Baltimore, a
place she had never even visited.
64

Ultimately, she was energized by
the type of team the budget office was
working to create and the possibilities
for growth in the job. “At the time, they
took a leap of faith with me, and I took
a leap of faith with them. I discovered I
like to be in the place where everything
comes together, where you can really be
involved with different areas of service
delivery.”
Laura reflected on why she needed
a push to consider local government
finance—and why others might,
too. “People may not realize that in
these positions, they could be doing
analysis for big proposals with a major
impact on their community or working
with procurement or on big capital
projects. The field is broad with many
opportunities to do interesting work
with real impact.”
A passion for budgeting
In 2015, Laura left Baltimore for the
City of Madison to advance her career
in a new role as budget and program
manager. She found immediate
similarities between Madison and
Baltimore. Both cities were in the
process of embracing new technology in
the budgeting process. Forward-thinking
leaders in both cities were working to
leverage the budget process to engage
the community and to enable innovation
and improvement in service delivery.
As Laura discovered, though, working
in the budget office in a growing city
like Madison is very different than in
Baltimore, which is grappling with
population loss. She highlighted this
difference by comparing infrastructure
funding. “Madison has relatively new
infrastructure that we were routinely
updating, while Baltimore has aging
infrastructure with high deferred
maintenance. In Madison, we were
borrowing $182 million annually,
backed by our general fund, for capital
investment—and in Baltimore, a city
three times larger, our annual borrowing
for capital investment is $80 million.”
In 2020, Laura took on a new role as
capital budget director for the State
of Wisconsin. This experience, too,
opened her eyes to new differences
and complexities in budgeting. “The
dynamics around facilitating a capital
budget process are much different than
“People may not realize that in these positions, they
could be doing analysis for big proposals with a major
impact on their community or working with procurement
or on big capital projects. The field is broad with many
opportunities to do interesting work with real impact.”
an operating budget.” She described
positives like additional staffing to share
the workload of the budget process, as
well as challenges like additional layers
of approval. “In local government, you
have more autonomy and sometimes
it’s easier to make changes,” she noted.
“And you feel more connected to the
impact of your decisions, as you can see
them more readily in your community.”
This experience, in addition to
Laura’s connection to Baltimore, was
instrumental in bringing her back east
in September 2022 when she was
hired for the budget director position,
where she leads the 15-member team
responsible for the city’s $3.3 billion
operating budget.
As she has built her career, Laura has
learned that her favorite part of budgeting
is the opportunity to solve internal
problems, making better service
delivery possible. She pointed to a
recent example with the Department of
Housing and Community Development
in Baltimore as a powerful breakthrough
during her first year as city budget
director. “Our housing commissioner
was frustrated with how vacancies were
accounted for in her budget. Together
we were able to come up with a new
approach that will ultimately allow the
housing authority to better leverage
their budget, while also getting more
people into critical roles, and that in
turn will enable better service delivery.
In a city of this size, there are so many
opportunities to use the budget process
to help agencies solve real problems.”
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 65

Confronting budget challenges
Like many other communities, Baltimore
is confronting key challenges that
intersect with budget expenditures.
Laura shared two as examples: balancing
the budget amid ongoing uncertainty
and unlocking the promise of evolving
technology. Each presents particular
complexity.
Being ready for the headwinds of
an anticipated recession creates more
questions than answers for the budget
office. “We’re trying to figure out how we
strike the right balance in the budgeting
process, without being overly cautious
or excessively optimistic,” Laura said.
“These are pressures that are outside
our control but would have a significant
fiscal impact on the city.”
Like many other jurisdictions,
Baltimore has been on the journey of
ERP implementation, with a system that
recently went live. “Technology changes
how we can put the budget together and
report on the city’s financials,” Laura
stressed. “It shapes the whole process,
what we can see happening in real time,
and how it affects what comes back
through the budget process.”
Laura has brought experience in
implementing data-driven budgeting
to her new role in Baltimore, as she led
efforts to incorporate performance and
data into the budget planning process for
both the City of Madison and the State of
Wisconsin. With perspective on both the
pitfalls and promise, Laura commented
on the keys to successful implementation.
“The most important step is to find
partners in the work, because if you’re
going it alone as the budget director,
people may think that this is a new
way to try to cut their budgets.” These
partners can include leaders, a planning
department, or a data team.
She also counseled that success can
be found in merging complementary
workstreams. “In Madison, we brought
together our data work and our effort to
rewrite the city’s comprehensive plan.
This helped stakeholders understand
how data was going to inform priorities
and turned the temperature down.”
Laura also emphasized that creating an
environment of trust will make it possible
to collect meaningful metrics, which
ultimately unlock data’s power to help us
“Budgeting is about
making sure operations
and dollars are
connected, and the
budget committee
focuses on tools that
can make this easier
for organizations.”
understand what is happening—and
the reasons why.
Beyond the budgeting process,
technology is also reshaping how the
City of Baltimore approaches public
engagement. Before the pandemic, most
town hall and pop-up events were in
person—and often done on what Laura
described as an annual “drop in” basis.
The city then shifted online through
Zoom and other digital tools, which
opened up new ways of thinking about
public engagement. “Now, we are focused
on how to build a strategy for ongoing
communication with the community,
from the early informational stage
through feedback sessions.” The city
is investing in this effort by hiring for
a new position that will focus full time
on public engagement, providing the
capacity to sustain this effort year-round.
Hiring in a tight labor market
During her first year as budget director,
Laura focused heavily on rebuilding a
team ready to take on the challenges of
navigating the post-pandemic period.
Like many other employers, the City of
Baltimore has struggled with higherthan-normal
vacancy rates over the last
two years. Laura noted that the current
vacancy rate is 20 percent, compared to a
pre-2020 normal of 10 to 15 percent.
A leaner team has created real
challenges. “We went through this budget
process at about a 50 percent staffing
level, and now we’re onboarding a lot of
people,” she explained. “And of course,
it takes a time investment to find good
candidates, hire them, and carve out the
time to put them through a really good
onboarding process so that they have the
tools to be successful in their roles.”
When hiring budget staff, Laura values
curiosity and drive. “There are so many
things that come across our desks that we
just don’t have the perfect answers for—but
people look to our office for those answers.
A high level of curiosity helps you dig in
to find a way to solve the problem. I also
look for someone who has the drive to do
the best work at the standard we expect, to
influence a clean, transparent decisionmaking
process.”
Thinking back to her own entry into
the field, Laura stressed that local
governments could do more to build
a talent pipeline. These efforts could
range from building partnerships with
educational institutions at the high
school and college levels to clearly
communicating the positives to overcome
ingrained perspectives. “Sometimes
people don’t understand that you can
make a solid career out of working in local
government finance, and you’re not going
to have to make a compensation sacrifice
for interesting work.”
Contending with uncertainty
Looking forward, Laura and her team
are focused on improving the efficiency
of how they collect budget proposals
from agencies, streamlining the data
collection that goes into tracking budget
performance, and continuing to advance
public engagement within the community.
In addition to her work in Baltimore,
Laura serves on GFOA’s Committee on
Governmental Budgeting and Fiscal
Policy to update and create new best
practices. “Budgeting is about making sure
operations and dollars are connected, and
the budget committee focuses on tools that
can make this easier for organizations.”
She described the committee’s intense
focus over the last year on the topic of
appropriate fund balance guidelines
for the general fund. “As we go through
uncertain times like these, we’ve learned
how much government leaders rely on
leadership like GFOA’s, particularly
around how fund balance targets are
established and what communities should
aim for. It’s one more way that finance
officers can be problem-solvers for their
communities through budgeting.”
Jara Kern is a marketing strategist at
Right Angle Studio.
66

IN PRACTICE | INTERVIEW
WITH SHAYNE KAVANAGH
BY MIKE MUCHA
Mike Mucha, GFOA’s deputy
executive director, spoke with
Shayne Kavanagh, GFOA’s
senior manager of research
and frequent GFR author,
on challenges facing local
government, the future of
public finance, and GFOA’s role
in supporting government and
finance officers as they work
to build thriving communities.
Mike: As senior manager of research
at GFOA, what is your typical day like,
and how does the work you do relate to
GFOA’s mission?
Shayne: What makes my job interesting
is that there is no typical day. My job
includes a wide range of things like
writing books and articles, direct
consulting assistance for GFOA
members, building financial models,
organizing research projects, and much
more. GFOA’s work is broad and covers
many technical areas of finance. It also
goes beyond accounting, budgeting,
treasury, and other areas to make
organizations work more effectively.
Our mission is ultimately about thriving
communities and supporting the
important role that governments play.
I’ve heard members refer to GFOA as the
“research and development” arm for
public finance, so our job is to prepare
finance officers with new and better
ways to help their communities thrive.
Have you always been involved
with research, or were there other
responsibilities you had at GFOA?
Yes, I’ve always been involved with
research at GFOA, which is what
attracted me to the organization. I was
an assistant city manager for a suburb
of Chicago and was working on a PhD
part time. I didn’t have much of an
interest in joining academia, but I did
have a big interest in research. GFOA
seemed like a great opportunity. Back
in my early days at GFOA, I was also
involved in GFOA consulting services
to help local governments select ERP
systems. I negotiated contracts for local
governments. I’ve been told by different
clients that they’d like me to be their
marriage counselor or to come with
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 67

IN PRACTICE | INTERVIEW
them to negotiate next time they buy a
car, which shows the different character
negotiations can take on!
We don’t have an official count, but
unofficially, it seems like you are the
clear leader in the number of GFR
articles you’ve authored. Is there
anything specific you enjoy about
writing?
I have an interest in many topics within
public finance, but I’ve also heard
members say that one of the best things
that GFOA does is translate learnings and
innovations from other fields into public
finance. So, I enjoy articles that take
important concepts from other fields,
like economics, psychology, and so on,
and then I like finding the application to
public finance.
One example of this is your work to
apply behavioral science. To me, these
concepts are extremely useful to public
finance and the role of a finance officer.
Thanks. When people who don’t know
anything about local government
finance ask me about public finance, I
tell them it isn’t a math problem. Adding
up the numbers is easy. It’s a people
problem—getting people with different
interests to agree on taxing and spending
policies. I characterize GFOA research
as “decision science,” and behavioral
psychology is an emerging and
potentially high-impact part of decisionmaking.
GFOA and Behavioral Science
Behavioral scientists study how we, as human beings, naturally interact with each other
and our environment, in ways that impact our preferences, decisions, and behaviors.
GFOA has developed research reports titled:
• Designing for the Decision-Making Environment
• Of Narratives and Numbers
• The Myth of the Neutral Finance Officer
Learn more about how behavioral science applies to public finance and download reports:
gfoa.org/behavioral-science
With “people problems,” communication
is critical. Are there any strategies you
can share that helped you become a
better writer?
Read Sense of Style by Steven Pinker
(Penguin Books, 2015). Pinker is a
psychologist who is an excellent writer,
so his recommendations are based on
writing in a way that works with how the
reader’s mind works.
Over the past few years, GFR readers
have become very familiar with your
work. Can you provide an overview of
what you are working on now and what
they can expect to see in future issues
of GFR?
We have three “rethinking” projects,
which are about taking a fresh look at
traditional approaches to public finance
in light of the latest developments in
other fields like psychology, decision
science, technology, and more. We
are “rethinking” budgeting, revenues,
and financial reporting. Budgeting is
the furthest along, and we are going
to bring the project to conclusion this
year. Revenues is making very good
progress, and that should conclude
in 2024. Financial reporting is just
getting started. That means readers of
GFR can probably look forward to a lot of
new content about financial reporting,
including topics like the application
of artificial intelligence to financial
reporting, what psychology tells us about
the best way to communicate financial
information, and much more.
Looking back on previous initiatives, is
there a project from your time at GFOA
that stands out as being more memorable
than others?
That would be Financial Foundations for
Thriving Communities. We translated a
Nobel Prize-winning body of economic
research called common pool resource
theory to public finance. It stands out
because I think it marked a transition point
where GFOA research went from being
limited to what I will call adjustments on
the margin of public finance to thinking
bigger about what public finance could do
to prepare local governments to help their
communities thrive. What I mean by that
is before this project, GFOA research was
only about how to make improvement to
68

Timothy Martin interviews Shayne Kavanagh about GFOA’s Rethinking initiatives at the GFOA Hub during the 2023 annual conference in Portland, Oregon.
financial policies and work practices.
While this is important, it misses
underlying forces that make a big
difference in whether public finance
is successful or not, such as power
dynamics, relationships and connections
between people, and the way in which
decision-makers think about public
finance. For example, if they think of it as
a zero-sum game, they are going to make
very different decisions than if they don’t.
Are there any projects you would
do differently if you had the chance to
start over?
A long time ago, I was part of a project to
help a city with budget reform. The team
I was a part of strongly recommended a
very specific budgeting technique that
the team leader was a big fan of, but the
method was simply not a good fit for the
city, so it was like pounding a square
peg into a round hole. Things did not go
well. That project probably does a lot
to explain my aversion to “one size fits
all” recommendations on what is the
best way to do public finance and my
attraction to approaches that provide
room for accommodating the diversity
among local governments.
Speaking of changes, what is one thing
you would change about public finance
if you could?
Understandably, public finance takes a
lot of its cues from private-sector finance.
Financial Foundations Framework
Created by GFOA, the Financial Foundations Framework helps
facilitate collaboration and support for public policies and
programs. Organized into five pillars, the Framework shows
you how to improve your financial position now and create a
strong foundation for a thriving community over the long-term.
Learn more about the Financial Foundations Framework:
gfoa.org/fff
Certainly, there is much that can
be learned from the private sector.
However, the public sector has some
very fundamental differences, even
more than is commonly recognized.
So, I wish the influence of private
finance and its limitations were more
widely recognized and that systems
more appropriate to the distinct
circumstances of the public sector
were available. The good news is
that I don’t just have to wish for it.
GFOA research is actively working
on these types of solutions, with
Financial Foundations for Thriving
Communities being one good example.
“Rethinking” aspects of budgeting
and local government revenue has
been a constant theme. For members
who aren’t familiar with GFOA’s
efforts, can you provide a summary?
Surveys show that large portions of the
public (more than 80 percent!) think
major change is needed to our political
system. GFOA’s corner of the political
system is public finance. So, in short,
the rethinking programs are about
reexamining long-held assumptions
about topics like budgeting, revenue
raising, and financial reporting to find
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IN PRACTICE | INTERVIEW
new and better ways to conduct public
finance that will contribute to thriving
communities.
Where do you see these projects going
in the future?
The most important thing is that these
projects are ultimately about “doing,”
not just “talking.” These projects will
translate into action. For instance,
Rethinking Revenue has resulted in a
large incubator program called Putting
Assets to Work, which is about how
local governments can realize ongoing
revenue streams from assets they own.
We also have a pilot project for segmented
pricing, which personalizes the prices
constituents are charged based on ability
to pay. This could have the unexpected
effect of both raising total revenue and
making prices more affordable because
before, people who couldn’t pay wouldn’t
pay, and government gets nothing. If
they get a price they can pay, then they
are more likely to pay it. So, in the future
we will be continuing to translate the
results from these projects into action.
Before coming to GFOA, you earned an
MPA from Northern Illinois University
and worked in city government. Is there
a reason you would go back and seek a
job in the public sector?
Doing the hands-on work of interacting
with the public was a great part of the
job in city government. The good news
is that I get to do some of that as part of
consulting work, where I often interact
with elected officials about financial
policies and managing financial risk.
Why do you think so many governments
report having trouble hiring qualified
finance officers?
There are probably many causes,
but some likely include: a tight labor
market, low labor market participation
rate, declining trust in government
(and therefore less interest in working
for it), diminishing pipeline of students
going into accounting and public
administration, and a mismatch
between government’s compensation
strategies and current labor market
realities. For example, pensions are
not going to be attractive to people who
don’t see themselves as lifetime public
servants. So, we have a perfect storm of
factors, some structural (compensation
mismatch) and others transitory (labor
market conditions).
If you were hiring a finance officer, what
skills would you prioritize? What do you
think will be most valuable in the future?
I had a chance to ask this very question
to a group of leading recruiters for local
government executives and they agreed
that the skills described in the GFOA
“In a nutshell, a decision
architect is someone who
can design a decisionmaking
environment that
helps decision-makers
reach their full potential
and make their best
decisions.”
Download the report
gfoa.org/materials/budgetofficer-as-decision-architect
©2023 MICHAEL AUSTIN C/O THEISPOT.COM
70

eport, “Budget Officer as a Decision
Architect,” accurately represented the
skills employers are looking for. In a
nutshell, a decision architect is someone
who can design a decision-making
environment that helps decision-makers
reach their full potential and make their
best decisions.
Do you consider staffing shortages the
biggest threat facing local governments
today?
No, I consider the biggest threat to be
declining trust in government. Not only
does it affect the ability to attract staff,
but it also affects the very ability of
government to do its work. A government
that is fully staffed but not trusted will
be ineffective or even a net-negative for
its community. For example, if we take
staffing shortages to an extreme, we can
look to other industries to see how they’ve
responded. We see the responses have
included increased automation and
outsourcing to firms that have more
flexibility to hire people needed to
do the job. There is no reason local
governments couldn’t do the same
thing. However, the prospect of
distrusted local governments run by
algorithms and private contractors
sounds potentially dystopian.
Looking at the future more positively,
what do you consider to be the next
big thing in government? Where do
you see governments succeeding?
It is hard not to answer “artificial
intelligence” as the next big thing.
That said, new technologies are
almost always overhyped at first,
so we will have to remain mindful
of the limits and realistic about
the potential. That said, artificial
intelligence should have a lot of
potential for relieving labor shortages
Others in GFOA’s Research and Consulting Center
can do surveys too. When asked to finish the
sentence, “Shayne is…” GFOA staff members said:
• Always looking for new ideas and approaches
• Passionate
• Hauntingly intelligent
• Always making me think (and “rethink”)
• A mystery
• Not something you can explain in a survey
in public finance. Accounting, for example,
is a series of rules. Artificial intelligence
thrives in environments that have clear
rules. We have a research/pilot program
with Rutgers University to apply robotic
process automation to public finance.
Some local governments have already
started doing this, so success has been
proving possible.
Wrapping up our interview, here are a
few short and easy questions.
The best kind.
Best book you’ve read recently?
Power and Progress: Our Thousand-Year
Struggle Over Technology and Prosperity
by Daron Acemoglu and Simon Johnson
(PublicAffairs, 2023). Acemoglu is one of
the most respected economists today and
thought to be a likely future Nobel Prize
winner. His grasp of history, sociology,
and other disciplines provides for a
great multidisciplinary look at complex
problems. Artificial intelligence is being
described by many as the most important
human invention since fire, so it is good
time to think about how the benefits from
technology will be distributed.
Favorite GFOA conference location?
Chicago. I live in Chicago, and it is hard
to beat sleeping in your own bed for a big
conference—which doesn’t often happen!
Best state/provincial association
conference you’ve been to?
I go to a lot of state/provincial conferences,
and I love them all equally.
And it looks like you want to be invited
back. OK. What is one thing that GFOA
staff would say about you?
As a researcher, I’d want to do a survey on
that to find out. (Author’s note: see sidebar.)
Hear more from Shayne by following GFOA on YouTube:
youtube.com/@GFOA
If not for government finance, what would
you be doing?
I came within 24 hours of being a police
officer. Out of school I applied to both a local
government finance office and the police
department. The finance office got back to
me a day before the police department. So,
maybe I’d be talking about police research
right now!
Mike Mucha is the deputy executive
director of GFOA.
AUGUST 2023 | GOVERNMENT FINANCE REVIEW 71

10 STEPS
TO BETTER PUBLIC
ENGAGEMENT
The budget is the most important document a local government
produces because it outlines how resources will be utilized to
address a community’s policy priorities. Citizen engagement is
therefore foundational to a sufficient budgeting process, providing
benefits including increased government legitimacy and reduced
public cynicism.
1
Quality over quantity.
More public engagement is
not always better. Select
suitable issues for engagement, set
clear goals, and avoid overburdening
the public with excessive
information. By focusing on quality
interactions, public finance initiatives
can make the best use of resources
and give citizens the best experience.
2
Build
or bolster
institutions to support
public engagement.
Collaborate with existing
departments specializing in public
information or communication,
create internal facilitation teams,
or seek external resources
like universities, community
foundations, or civic organizations.
3
Think
of public
engagement as an
improved capacity for
sense-making. Move beyond
conventional engagement methods
that collect individual opinions and
preferences and instead focus on
deliberative engagement processes
that facilitate interaction, nuanced
discussions, and exploration of
trade-offs.
4
Help
the public engage
with complexity. Many
of the issues that most
inspire the passion of citizens are
complex problems. Complex
problems pose distinct challenges
to democratic discourse, but
embracing complexity and fostering
dialogue can enhance public
understanding, refine priorities,
and promote collaborative actions
to address complex challenges.
5
Push back against the
politics of cynicism with
the politics of co-creation.
Public engagement can be designed
to promote common understanding,
and it can be used to jointly work
toward solutions. Rather than focusing
on what divides the community, focus
on what unites it and begin public
engagement efforts from a position
of mutual understanding.
6
Revitalize
the
“responsibilities” that
go along with “rights.”
Shift citizens’ mindset from being
individualistic consumers of public
services to active participants in
addressing community issues
through coproduction and tradeoffs.
Ask how they would solve
the problem instead of just what
they want.
7
Develop
robust strategies
for dealing with bad actors.
Design the engagement to
minimize the potential for bad actors,
like using deliberative engagement
methods, small group discussions,
and trained facilitators.
8
Understand the role
of the “expert” and
play it with care.
The public is less likely than it once
was to defer to the expertise of a
local government’s professional staff,
so try adopting a facilitative approach
that encourages citizen discovery
rather than simply presenting facts.
9
Balance expert judgment
and public engagement
to find the solutions.
Public engagement is not the same
as direct democracy. Quality public
engagement weaves together input
from both experts and the public to
help public officials reach wise
decisions.
10
Make
public
engagement work
for elected officials.
Elected officials have a lot to
gain from high-quality public
engagement, but they also face
risk when it goes wrong. Work
with them to codesign public
engagement so it manages risks
and reduces the public officials’
direct time investment.
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72