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Government Finance Officers Association | AUGUST <strong>2023</strong><br />
Government Finance Review<br />
Rethinking<br />
Reserves<br />
How optimizing their reserve strategy<br />
can help local governments manage<br />
risk and prepare their communities<br />
for an increasingly volatile world<br />
Fiscal Fluency Made Easy<br />
How Artificial Intelligence<br />
Will Affect Your Work<br />
Local Government 2030:<br />
Approaches to Budgeting
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contents AUGUST<br />
<strong>2023</strong> | VOLUME 39, NUMBER 4<br />
©<strong>2023</strong> MICHAEL AUSTIN; SHAW NIELSEN C/O THEISPOT.COM<br />
SPECIAL SECTION<br />
14<br />
Should We<br />
Rethink Reserves?<br />
A multimillion-dollar<br />
question<br />
By Shayne Kavanagh, Vincent<br />
Reitano, and Peter A. Jones<br />
32<br />
Fiscal Fluency<br />
Made Easy<br />
Communicating<br />
numbers using insights<br />
from behavioral science<br />
By Shayne Kavanagh<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 1
contents<br />
42<br />
AIn’t it Grand?<br />
How AI will affect your work<br />
By Rob Roque and Andrew Soswa<br />
46<br />
Local Government 2030<br />
Tackling approaches to budgeting<br />
By Henrietta Weaver, Yuri Hattersley,<br />
Kevin Fitzgerald, and Taylor Galusha<br />
6 Contributors<br />
8 From the CEO<br />
10 Rewind: A Look Back at<br />
<strong>GFR</strong> in June 1993<br />
11 GFOA Introduces the<br />
LGBTQIA+ Caucus<br />
12 Why Diversity Efforts are Crucial<br />
By Susanne Tedrick<br />
and Bertina Ceccarelli<br />
53 Addressing the Hiring Crisis<br />
for the City of Dubuque<br />
through Collaboration<br />
By Connor Golden and Samuel Mann<br />
58 Just Go with the Flow—<br />
Cash Flow Reporting<br />
By Susannah Filipovic<br />
60 Tips for Powerhouse<br />
Dashboards<br />
By Katherine Barrett<br />
and Richard Greene<br />
62 Rethinking Revenue<br />
Diversification,<br />
Warren Buffett Style<br />
By Justin Marlowe<br />
64 Rising to the Budgeting<br />
Challenge: An Interview<br />
with Laura Larsen<br />
By Jara Kern<br />
67 Q&A with Shayne Kavanagh<br />
By Mike Mucha<br />
72 10 Steps to Better<br />
Public Engagement<br />
67<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
2
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Publisher<br />
Chris Morrill<br />
Editor in Chief<br />
Michael J. Mucha<br />
Managing Editor<br />
Marcy Boggs<br />
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All manuscripts should conform to the Editorial<br />
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CONTACT<br />
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District of Lake Country, BC<br />
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GFOA<br />
<strong>GFR</strong> (Government Finance Review) (ISSN 0883-7856) is published bimonthly in February, April, June, <strong>August</strong>, October, and December.<br />
Subscription price is $35 annually. Opinions expressed herein are the viewpoints of the authors. They may differ from the policies and<br />
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4
CONTRIBUTORS<br />
Bertina Ceccarelli, as the chief executive officer of nonprofit NPower, is committed to helping young<br />
adults and military-connected individuals launch tech careers and remove barriers to economic<br />
mobility. As a leader, she works to model an inclusive workplace, providing opportunities for growth<br />
at all levels. Bertina is a coauthor of Innovating for Diversity: Lessons from Top Companies Achieving<br />
Business Success through Inclusivity (Wiley, <strong>2023</strong>).<br />
Kevin Fitzgerald, MPA, is the American Rescue Plan coordinator for the Town of Groton, Connecticut.<br />
In executing the town’s ARPA allocation strategy, he is charged with managing federal stimulus funds<br />
and leveraging strategic allocations to attract public and private community investment and to deliver<br />
an equitable and transformative pandemic recovery. He approaches this role with a background in<br />
planning and economic development and a Master of Public Administration from the University of<br />
Connecticut with a Certificate in Public Financial Management.<br />
Taylor Galusha, MPA, is the assistant to town manager—communications coordinator for the Town of<br />
Shrewsbury, Massachusetts. She manages the Town’s internal and external communications to increase<br />
public engagement, outreach, and transparency in the community and throughout the organization<br />
through special projects and day-to-day operations. She comes to Shrewsbury after working in a fellowship<br />
position with the Town of Middleton, Massachusetts, while obtaining her Master of Public Affairs from<br />
Merrimack College, with a focus on communications.<br />
Yuri Hattersley, MPA, oversees a Lean continuous improvement pilot program within the City of Bellevue,<br />
Washington’s Finance and Asset Management department. In addition to supporting process improvement<br />
efforts among various business lines and services offered by Finance and Asset Management, Yuri<br />
supports strategic planning, performance measurement, surveying and focus grouping, and diversity,<br />
equity, inclusion and belonging efforts. They came to Washington from the State of Texas, where they<br />
studied sociology on the pre-law track as a Terry Scholar.<br />
Peter A. Jones, Ph.D., is an associate professor at The University of Alabama at Birmingham’s Department<br />
of Political Science and Public Administration. His research focuses on the public budgeting processes and<br />
financial management of local and state governments. He also studies K-12 public schools and considers<br />
the financial ramifications of various education policy issues, and his work has appeared in a number of<br />
publications. Peter earned the 2021 College of Arts and Sciences Dean’s Awards for Excellence in Teaching.<br />
Shayne Kavanagh is the senior manager of research for GFOA. He started GFOA’s long-term financial<br />
planning and policy consulting offering in 2002 and has been working with governments on financial<br />
planning and policies ever since. Most recently, Shayne has pioneered the use of computer simulation<br />
to “stress test” the long-term financial position of local governments. He is also the author of a number of<br />
influential publications on financial planning and budgeting. His work has earned him a fellowship with<br />
the National Academy of Public Administration, a position on the board of advisors for the University of<br />
Chicago’s Center for Municipal Finance, and recognition as one of the 100 most influential people in local<br />
government by Engaging Local Government Leaders.<br />
6
Vincent Reitano, Ph.D., is an associate professor at Western Michigan University’s School of Public<br />
Affairs and Administration. Before that, he was a public finance associate in GFOA’s Research and<br />
Consulting Center. Prior to joining GFOA, he worked in the Department of Defense and completed a<br />
research fellowship at SAS. Additionally, he conducted research on risk analysis for the Department of<br />
Homeland Security and coauthored reports on education finance for the North Carolina Department of<br />
Public Instruction.<br />
Rob Roque is the technology services manager in GFOA’s Research and Consulting Center. He has<br />
been with GFOA since 1998. Rob primarily provides enterprise system implementation advisory<br />
services, enterprise system project management services, and enterprise selection services to<br />
local governments of all sizes and types. He also contributes to GFOA technology publications,<br />
training courses, and conference sessions to keep members informed on the latest developments<br />
in public sector technology.<br />
Andrew Soswa is a business technology executive with more than 20 years of experience delivering<br />
client solutions, driving enterprise project management, and leading transformative initiatives.<br />
He has provided exceptional advisory services to global enterprises and senior executives, guiding<br />
them in evaluating, merging, and acquiring business and technology solutions while driving longterm<br />
strategies and implementations. He has a track record of delivering transformational digital,<br />
cloud, and Agile projects across various industries, including banking, lending, card payments,<br />
financial, trading, retail, e-commerce, big transport, and consumer enterprises.<br />
Susanne Tedrick is a writer and speaker who is dedicated to expanding the professional opportunities<br />
of women and people of color within the tech industry. She is a coauthor of Innovating for Diversity,<br />
and author of Women of Color in Tech, A Blueprint for Inspiring and Mentoring the Next Generation of<br />
Technology Innovators (Wiley, 2020). Susanne has been featured in many influential tech and business<br />
media outlets including Worth Magazine, CompTIA, PECB Insights, and CIO.com.<br />
Henrietta Weaver, CPA, MACC, is the director of budget for the City of Danville, Virginia. She directs,<br />
supervises, and coordinates budget development and administration through collaboration with<br />
all city departments. The department also performs long-range fiscal planning and forecasting and<br />
provides professional management and research assistance on financial management, productivity,<br />
and the effective and efficient use of city funds. She came to work in the public sector after almost<br />
a decade in public accounting, where she specialized in financial and compliance audits for<br />
government and not-for-profit entities.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 7
FROM THE CEO<br />
Christopher P. Morrill<br />
Executive Director/CEO<br />
Are You a CPFO?<br />
T<br />
his summer, GFOA published<br />
the seventh and final test for<br />
our Certified Public Finance<br />
Officer (CPFO) program.<br />
This completes our testing<br />
line-up, and it’s a major milestone in<br />
our four-year project to reinvent the<br />
program, which will provide both<br />
critical resources for members who<br />
want professional development and<br />
assistance for governments that are<br />
recruiting and developing expertise to<br />
the finance office.<br />
The CPFO program prepares<br />
individuals for leadership positions in<br />
state and local government by building<br />
fundamental skills and providing a<br />
better understanding of best practices<br />
in public finance. The program also<br />
supports GFOA’s core beliefs, which<br />
include ethics, leadership, ongoing<br />
professional education, and engagement<br />
in the broader public finance community.<br />
Finance officers are expected to<br />
understand the many topic areas that fall<br />
under the umbrella of “public finance.”<br />
The CPFO program helps candidates<br />
demonstrate their qualifications for<br />
taking on leadership positions. It can<br />
also be a tool to guide future professional<br />
development for you or your staff, or to<br />
use as a self-study program for building<br />
your skills.<br />
GFOA’s CPFO program has been in<br />
place for more than 20 years. During<br />
that time, more than 800 people have<br />
achieved the honor, and another 300<br />
people were working on passing the five<br />
tests that made up the program. Active<br />
CPFOs made up just three percent of<br />
total GFOA membership—less than<br />
comparable certification programs<br />
from some of our peer organizations<br />
operating in other local government<br />
fields. In addition, our partnership<br />
with Radford University, which<br />
administered the program, was ending.<br />
Earning a CPFO designation has<br />
always been a significant achievement,<br />
but we saw an opportunity to make<br />
it better serve GFOA and the overall<br />
profession. After extensively analyzing<br />
the program, best practices in<br />
certification, and the potential demand<br />
among finance officers, we made the<br />
strategic decision in 2019 to invest in a<br />
reinvention of the CPFO program. After<br />
collecting feedback from existing and<br />
potential CPFOs, we aimed to achieve<br />
the following goals:<br />
• Maintain and elevate the standard of<br />
CPFO to make it a distinction worth<br />
achieving.<br />
• Align CPFO with GFOA best practices<br />
and educational and other resources.<br />
• Integrate CPFO with other GFOA<br />
programs to encourage engagement<br />
with the organization.<br />
• Make the program more accessible.<br />
• Better define what a CPFO is and<br />
communicate the benefits of CPFO<br />
participation among a broad publicsector<br />
audience.<br />
Since we announced the new program,<br />
almost 1,000 people have signed up to<br />
participate. And as we move forward<br />
with enhanced marketing efforts, we<br />
expect that number to keep growing.<br />
Major changes to the program include:<br />
GFOA administration. GFOA now<br />
administers the program in-house and<br />
has hired staff with experience leading<br />
certification programs.<br />
Updates to the testing categories.<br />
The new CPFO program requires passing<br />
scores on seven tests to earn certification.<br />
After conducting a job analysis of our<br />
current members, we updated the<br />
exams to make sure they’re relevant<br />
for today’s finance officer. Current<br />
tests include accounting and financial<br />
reporting, planning and budgeting,<br />
debt management, treasury and<br />
investment management, compensation<br />
and benefits, risk management, and<br />
procurement.<br />
8
Certification. Career. Community.<br />
The CPFO program<br />
prepares individuals<br />
for leadership positions<br />
in state and local<br />
government by building<br />
fundamental skills<br />
and providing a better<br />
understanding of best<br />
practices in public finance.<br />
Enrollment fees. Under the old program,<br />
candidates paid an initial enrollment fee<br />
and then paid per test taken; however,<br />
we found that many candidates didn’t<br />
complete the program. Candidates<br />
now pay an upfront enrollment fee and<br />
are able to take advantage of program<br />
benefits (including no fee for testing)<br />
for two years.<br />
Program benefits. GFOA strives to<br />
support candidates in their journey<br />
to earn CPFO status. To that end,<br />
enrolled candidates receive 25 percent<br />
off publications, complimentary<br />
webinars, access to core e-learning<br />
content, participation in the CPFO<br />
online community, complimentary test<br />
registration, and more.<br />
Improved access to testing. In the past,<br />
exam locations were limited. GFOA<br />
now partners with PearsonVue, which<br />
provides thousands of locations along<br />
with online options, making the process<br />
much easier and more convenient.<br />
New requirements for continuing<br />
engagement. Based on feedback from<br />
existing CPFOs, we have clarified the<br />
requirements for maintaining a CPFO<br />
designation. CPFOs must now complete<br />
15 hours of continuing education and<br />
demonstrate engagement within the<br />
public finance profession.<br />
New systems to support certification.<br />
GFOA has invested heavily in systems<br />
to enhance the CPFO experience.<br />
Our learning management system<br />
provides educational content to help<br />
candidates prepare for exams. Current<br />
CPFOs can display digital badges on<br />
their social medial profiles. And we<br />
are implementing tools to help with<br />
scheduling tests and submitting<br />
continuing education requirements.<br />
While our roll-out of the full set of<br />
tests is now complete, we plan to keep<br />
enhancing the program. Our next steps<br />
include exploring partnerships with<br />
state associations and existing statelevel<br />
certification programs, offering<br />
micro-certification, developing<br />
resources for continued development<br />
of leadership competencies, and a<br />
broad campaign to increase awareness<br />
of the CPFO program.<br />
So, are you a CPFO? Are you<br />
considering it? Please visit gfoa.org/cpfo<br />
to learn more about the program and<br />
how it can help you reach your<br />
professional goals, better assess your<br />
own broad understanding of public<br />
finance, and unlock a new network of<br />
experienced and knowledgeable peers.<br />
Sincerely,<br />
Take the next step<br />
Learn how to get started on<br />
your CPFO journey.<br />
gfoa.org/cpfo<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 9
ewind<br />
Wait, How Much Does It Cost?<br />
A look back at <strong>GFR</strong> in June 1993<br />
The June 1993 issue of<br />
Government Finance Review<br />
led with an article about<br />
using activity-based costing<br />
for efficiency and quality.<br />
Applying activity-based costing<br />
analysis was a necessary first step in<br />
deciding which services the City of<br />
Indianapolis, Indiana, should provide<br />
to its citizens, defining core versus<br />
ancillary activities. City officials knew<br />
the big numbers, of course, but there<br />
was, in general, a lack of detail on things<br />
like how much it cost to fill a pothole or<br />
install a traffic signal.<br />
The lack of accurate information<br />
about how much it cost to provide<br />
specific city services was more than<br />
just an inconvenience. Before the city<br />
government could begin to consider<br />
providing a service more efficiently, it<br />
needed to accurately determine the cost<br />
of providing that service. So, city officials<br />
began asking some basic questions about<br />
how much services cost, if that cost was<br />
competitive in the marketplace, if there<br />
might be an alternative delivery system<br />
that could provide the same service at<br />
less cost or at greater value, if there was<br />
a cause-and-effect relationship between<br />
spending and results, and more.<br />
When city officials started calculating<br />
how much it cost to pick up a ton of trash,<br />
they got some surprising information.<br />
For example, they found garbage trucks<br />
that had been out of service for repairs<br />
for six months. Upon asking, they<br />
were told that the cost of running the<br />
truck was X dollars, and no one had<br />
ever thought about it before because<br />
there was a budget for the garage, the<br />
trucks, the gas, and the drivers—but<br />
the components had never been put<br />
together until employees were forced<br />
to cost out each city service.<br />
So, the city engaged a consultant to<br />
implement an activity-based costing<br />
system (ABC). It helped city officials<br />
determine exactly how many and<br />
what services were provided, and it<br />
also helped identify the services that<br />
might be more efficiently provided<br />
by different departments or external<br />
organizations. ABC assigns costs to<br />
products or services based on their<br />
consumption activities. By identifying<br />
component cost details, cost impacts,<br />
and savings from alternative courses<br />
of action. It also compares delivery<br />
costs for the same service in different<br />
locations, highlighting areas of<br />
efficiency and areas that need work.<br />
ABC assigns costs of overall<br />
functions—for example, payroll,<br />
computers, electric bills, and fixed<br />
assets—to the activities that generate<br />
the expense. The key components are<br />
activities performed by employees,<br />
equipment, and facilities; drivers (as<br />
in, the allocation of activity costs to<br />
outputs); outputs (as in, the results<br />
or accomplishments); and the extent<br />
to which each activity should be<br />
allocated to each output.<br />
Indianapolis’ results-driven<br />
program yielded significant service<br />
improvements and cost-saving.<br />
The results obtained via ABC built<br />
employee confidence and skills. The<br />
city used these strategies to reexamine<br />
both how much government and<br />
what kind of government it wanted<br />
to provide. This approach reinforces<br />
government’s commitment to<br />
delivering more than a dollar’s worth<br />
of service for every dollar invested.<br />
©<strong>2023</strong> JIM FRAZIER C/O THEISPOT.COM<br />
10
In Brief<br />
CAUCUSES<br />
GFOA Introduces LGBTQIA+ Caucus<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
GFOA’s LGBTQIA+ Caucus<br />
officially launched in May<br />
<strong>2023</strong>. Through networking<br />
and education, the group<br />
will advocate for LGBTQIA+<br />
members within the government finance<br />
profession and work to increase the<br />
visibility of LGBTQIA+ people within<br />
GFOA and the profession as a whole.<br />
More than 100 people attended the<br />
first meeting of the LGBTQIA+ Caucus at<br />
the GFOA conference in Portland on May<br />
22, <strong>2023</strong>, where the group’s bylaws were<br />
adopted and the first leaders were elected.<br />
“I think that establishing this type of<br />
group is vital for advancing LGBTQIA+<br />
people and letting them know that they<br />
are not alone and have a resource to lean<br />
on,” a GFOA LGBTQIA+ Caucus inaugural<br />
meeting attendee said.<br />
The caucus was begun by a group<br />
of GFOA members and staff as part of<br />
GFOA’s diversity, equity, and inclusion<br />
(DEI) efforts. A task force was formed in<br />
January <strong>2023</strong> to establish interest, and<br />
that interest quickly developed a plan to<br />
draft bylaws and a mission statement, and<br />
to organize for the group’s first meeting.<br />
“We didn’t know how many people were<br />
going to show up for this first meeting,”<br />
Caucus Chair Andrew Kramer said. “We<br />
were blown away by a completely full<br />
room. It was amazing to meet so many<br />
people at the conference who were so<br />
passionate about this. It underscored for<br />
us how vital the need for this group is.<br />
I am personally grateful for the support of<br />
the GFOA Executive Board and especially<br />
the GFOA staff who have been critical in<br />
getting this set up.”<br />
As the group gets established, they<br />
have set goals of reaching 200 members,<br />
finalizing a mission statement, setting up<br />
a series of networking events, and looking<br />
for opportunities to support students<br />
and early-career professionals. “We will<br />
also be working with GFOA’s Executive<br />
Board and staff to make sure that future<br />
meetings and conferences are safe and<br />
inclusive for everyone,” Kramer said.<br />
“I’m looking forward to setting up<br />
networking events to help build and<br />
support this community within GFOA,”<br />
Caucus Vice Chair Jennifer Davis said.<br />
Other LGBTQIA+ groups, like Muni Pride,<br />
have already reached out to find ways to<br />
collaborate and network. “We want to find<br />
ways to get people together for fun, but<br />
also to build our network of support. We<br />
heard so many amazing stories, but also<br />
some difficult ones. As much as anything,<br />
people told us that just knowing that they<br />
weren’t alone was really powerful,” she<br />
explained.<br />
“Over the next year, we’ll be working<br />
to find ways to raise the visibility of the<br />
group and highlight the issues we face, but<br />
also the opportunities. We want everyone<br />
to know that LGBTQIA+ representation<br />
in finance offices is critical to advancing<br />
any DEI initiatives in our governments,”<br />
Caucus Secretary Matthew Lentz said. “We<br />
are excited to be able to launch this caucus<br />
and see where our members take us.”<br />
“It’s about visibility and action. We want<br />
people to know that they can bring their<br />
full selves to their jobs, that they have<br />
incredibly important perspectives and<br />
value, and that they have the support of<br />
hundreds of other finance professionals<br />
across the globe. This year, we are<br />
focusing on increasing that visibility<br />
and growing an active and engaged<br />
membership,” Kramer said.<br />
To learn more about the LGBTQIA+<br />
Caucus and become a member, visit the<br />
affinity group page on GFOA’s website.<br />
From there you will have access to<br />
resources and a community forum to post<br />
questions, share insights, and just say,<br />
“Hi, I’m here, and I’m glad you are, too!”<br />
Get involved<br />
Learn more about the LGBTQIA+ Caucus<br />
and how to become a member.<br />
gfoa.org/lgbtqia-caucus<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 11
IN BRIEF<br />
Why Diversity Efforts<br />
are Crucial<br />
BY SUSANNE TEDRICK AND BERTINA CECCARELLI<br />
Diversity, equity, and inclusion (DEI) programs, often led by human<br />
resources departments, are seen as measures that offer valuable<br />
education and interactions, while also adding to an organization’s<br />
moral and ethical “compass.” But DEI efforts are also seen as<br />
measures that do not add to the financial bottom line. This article will<br />
explore ways of offsetting this narrow view and more fully realizing<br />
the business case for diversity.<br />
Organizations with strong DEI<br />
initiatives are more likely to meet<br />
or exceed financial targets.<br />
A comprehensive 2014 to 2019 study<br />
by McKinsey & Company found that<br />
workplaces with strong gender and ethnic<br />
diversity are more likely to produce<br />
better financial results than less diverse<br />
competitors. 1 The study found that in<br />
2019, companies in the top quartile for<br />
gender diversity on executive teams were<br />
25 percent more likely to have aboveaverage<br />
profitability than companies<br />
in the bottom quartile. What’s more, in<br />
terms of ethnic and cultural diversity,<br />
top-quartile companies outperformed<br />
those in the bottom quartile by 36<br />
percent in profitability that same year.<br />
Organizations with strong DEI<br />
initiatives are more likely to have<br />
high-performing teams.<br />
The business case for diversity goes<br />
beyond quarterly financial reports.<br />
Competition for talent in the business<br />
world is often fierce, and organizations<br />
seen as prioritizing DEI are in a better<br />
position to succeed. The job search<br />
engine Glassdoor reports 67 percent of<br />
job seekers indicate that a diverse work<br />
environment was a key factor in their<br />
decision to work for an employer. 2<br />
The investment community is also<br />
prioritizing DEI criteria. The Institutional<br />
Limited Partners Association’s (ILPA)<br />
Diversity in Action initiative requires<br />
participants to track hiring and<br />
promotions by race and gender and to<br />
report employee demographic data while<br />
raising funds. Private equity firms that<br />
are low in DEI indicators risk losing<br />
coveted investments from large-scale<br />
institutional investors.<br />
Organizations with strong DEI initiatives<br />
are more likely to be considered agile<br />
and innovative.<br />
In today’s fast-moving corporate<br />
environment, agility and innovation<br />
are imperative to success. Business<br />
agility is the ability to adapt quickly<br />
and effectively in the market and the<br />
environment. Agility embraces a<br />
people-centered, organization-wide<br />
capability that strongly encourages<br />
continuous improvement, trust,<br />
and collaboration. Agility empowers<br />
teams, individuals, and companies<br />
to satisfy customers’ changing needs<br />
and expectations, in turn driving<br />
innovation.<br />
Barriers that impede agility and<br />
innovation include:<br />
• Lack of prioritization. An<br />
organization may take its customers<br />
(both employees and residents) for<br />
granted, assuming they are satisfied<br />
with periodic improvements.<br />
And that government may not<br />
invest enough in innovation, in turn<br />
neglecting customers’ needs and<br />
failing to reward the strong innovators<br />
on their teams—some of whom<br />
may accept positions elsewhere.<br />
• Apathy dampens original thinking.<br />
“Success breeds success,” but it can also<br />
lead to complacency and to procedures<br />
that are more about protecting that success<br />
than ensuring its evolution or identifying<br />
the next big idea. There is no question that<br />
certain standardized systems and practices<br />
are important; the danger lies in accepting<br />
only one right way of doing things.<br />
• Humility is overlooked and undervalued.<br />
Any organization needs confident,<br />
assertive leaders. But problems occur<br />
when they are not approached with<br />
humility—that is, an acknowledgment<br />
that someone else may have a piece of the<br />
puzzle that others have not discovered.<br />
A lack of true empowerment can lead to<br />
arrogance, stifling agility and innovation.<br />
Organizations with strong DEI initiatives<br />
are more likely to achieve or exceed<br />
financial outcomes.<br />
A 2018 study by Boston Consulting Group<br />
(BCG) found that companies with aboveaverage<br />
diversity among their leadership<br />
ranks have a greater financial return on<br />
innovation and higher earnings before<br />
interest and tax margins. 3 Moreover, BCG<br />
found that firms with above-average diversity<br />
on their management teams reported revenue<br />
that was 19 percentage points higher than<br />
organizations with less diverse management.<br />
Conclusion<br />
While important, finance concerns<br />
should not be the only reason to act.<br />
There is a compelling moral and ethical<br />
case to pursue DEI programs, as all<br />
workers deserve the right to be treated with<br />
dignity and compensated equitably.<br />
Bertina Ceccarelli is the chief executive<br />
officer of NPower. Susanne Tedrick is a writer<br />
and speaker who is dedicated to expanding<br />
the professional opportunities of women and<br />
people of color within the tech industry.<br />
1<br />
“Diversity Wins: How inclusion matters,” McKinsey<br />
& Company, May 2020.<br />
2<br />
“What Job Seekers Really Think About Your Diversity<br />
and Inclusion Stats,” Glassdoor, July 12, 2021.<br />
3<br />
Rocío Lorenzo, Nicole Voigt, Miki Tsusaka, Matt Krentz, a<br />
nd Katie Abouzahr. “How Diverse Leadership Teams Boost<br />
Innovation,” Boston Consulting Group, January 23, 2018.<br />
©<strong>2023</strong> JAMES YANG C/O THEISPOT.COM<br />
12
14
SPECIAL SECTION | RETHINKING RESERVES<br />
SPECIAL SECTION<br />
Should We Rethink<br />
Reserves?<br />
A Multimillion-Dollar Question<br />
BY SHAYNE KAVANAGH, VINCENT REITANO, AND PETER A. JONES<br />
While Fund Balance Guidelines for the General Fund is one of GFOA’s most often-cited best<br />
practices, there are many opportunities for reserve optimization beyond the one-size-fits-all<br />
guidance provided in the best practice. This series of articles brings what we’ve learned together<br />
with university research to describe new opportunities that will help local governments get<br />
the best value from their reserve strategies.<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
RESERVES VERSUS FUND BALANCE<br />
“Fund balance” is an accounting term that describes the difference<br />
between assets and liabilities. “Reserves” is a budget and policy<br />
term that describes the fungible resources available outside of the<br />
budget for use if the resources appropriated inside of the budget<br />
are insufficient. There is an overlap between “fund balance” and<br />
“reserves,” but the most important difference is that fund balance<br />
covers a broader range of resources. For example, fund balance<br />
could include prepaid inventories or receivables for delinquent<br />
taxes, neither of which is available for current spending. 1 This<br />
paper is focused on the budget and policy role of reserves.<br />
1<br />
The Governmental Accounting Standards Board (GASB) provides guidance on how to classify fund balances to differentiate between amounts that are more<br />
constrained or less constrained in their potential use. You can read more about these classifications in “GASB Statement No. 54, Fund balance reporting and<br />
governmental fund type definitions,” available at GASB.org.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 15
SPECIAL SECTION | RETHINKING RESERVES<br />
Why We Should Rethink Reserves<br />
It has long been thought that having<br />
substantial reserves is desirable—<br />
bigger is better. So why might we<br />
need to do some rethinking here?<br />
The reasons (which are consistent<br />
with many of those cited for GFOA’s<br />
Rethinking Budgeting initiative 1 )<br />
take on special significance when<br />
applied to reserves.<br />
An increasingly volatile and uncertain<br />
world. Reserves play a role in buffering<br />
local government from volatility;<br />
however, if volatility is increasing,<br />
we should reexamine how reserves<br />
are managed to ensure that local<br />
governments have an adequate buffer.<br />
For example, damages from natural<br />
disasters have been on the rise in<br />
recent decades. Reserves fund the<br />
response to natural disasters, and even<br />
if federal or state/provincial financial<br />
assistance is available, reserves fill<br />
the gap until assistance arrives, which<br />
can take months or even years.<br />
Lower trust in government<br />
and experts. Local government<br />
stakeholders may be suspicious of<br />
large reserves, especially if they don’t<br />
understand why the government is<br />
holding these resources instead of<br />
spending them on current services or<br />
cutting taxes. In the past, a finance<br />
officer’s expert opinion, perhaps based<br />
on GFOA’s best practices, might have<br />
been sufficient to justify reserves, but<br />
expert opinion may not be so readily<br />
accepted in the future. 2 Finance officers<br />
may need to provide justification for<br />
reserves that rely less on appeals to<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
16
expertise and more on the fundamental<br />
reasons why reserves are important.<br />
Local governments are becoming<br />
more resource constrained. Local<br />
governments are expected to maintain a<br />
sizable reserve by “industry standards”<br />
and by bond rating agencies. 3 At the<br />
same time, local governments are<br />
facing more resource constraints,<br />
especially with employee healthcare<br />
and pension costs rising. For many<br />
governments, the increases in costs<br />
have consumed revenue increases,<br />
which may soon level off. GFOA’s Fund<br />
Balance Guidelines for the General<br />
Fund best practice recommends<br />
that—at a minimum—general-purpose<br />
governments, regardless of size,<br />
maintain unrestricted budgetary fund<br />
balance in their general fund of no less<br />
than two months of regular general<br />
fund operating revenues or regular<br />
general fund operating expenditures.<br />
Moody’s Rating Agency looks for fund<br />
balances of more than 35 percent of<br />
annual revenue to provide a AAA rating<br />
for general obligation debt. Long-term<br />
demographic trends point toward an<br />
aging population. Though the U.S.<br />
demographic outlook is not as dire as<br />
it is for other developed countries, an<br />
aging population still doesn’t bode<br />
well for local government revenues. 4<br />
Legislative constraints also limit<br />
revenue growth. For example, there<br />
Building reserves is a<br />
use of current revenues,<br />
and governments need<br />
to weigh the opportunity<br />
costs of doing so. Is<br />
it better to provide<br />
services today or to save<br />
the money for later?<br />
is evidence that local government<br />
revenues do not recover as quickly<br />
from setbacks like recessions as<br />
they once did because of legislative<br />
constraints. 5 (In fact, some<br />
economists believe that the long-term<br />
growth trajectory of the United States<br />
will slow; indeed, the general trend has<br />
been slowing growth since the 1970s.)<br />
Rising costs paired with stagnating<br />
revenue growth mean that local<br />
governments need to make efficient<br />
use of resources, including reserves.<br />
Building reserves is a use of current<br />
revenues, and governments need to<br />
weigh the opportunity costs of doing<br />
so. Is it better to provide services today<br />
or to save the money for later?<br />
None of this suggests that local<br />
government reserves should always<br />
and everywhere be lower than they are<br />
today. Instead, we should look for more<br />
and better options to provide buffers to<br />
local governments than reserves have<br />
traditionally provided. For example,<br />
are there opportunities to make<br />
more cost-effective combinations of<br />
commercial insurance and reserves?<br />
This might not always lead to a<br />
decrease in reserves; in fact, it could<br />
call for reserves to be increased as part<br />
of a high-deductible insurance strategy<br />
for some perils to reduce the total cost<br />
of risk (insurance plus reserves).<br />
Information technology makes<br />
rethinking reserves easier.<br />
Information technologies make it<br />
easier to analyze reserve strategies and<br />
optimize the strategy to the conditions<br />
faced by the government.<br />
1<br />
See “Why Do We Need to Rethink Budgeting?” at gfoa.<br />
org/materials/why-do-we-need-to-rethink-budgeting.<br />
2<br />
For data on declining trust in experts, see: Cary Funk, Alec<br />
Tyson, Brian Kennedy, and Courtney Johnson, “Scientists<br />
Are Among the Most-Trusted Groups in Society,”<br />
September 29, 2020, Pew Research Center.<br />
3<br />
GFOA’s Fund Balance Guidelines for the General<br />
Fund best practice recommends that—at a minimum—<br />
general-purpose governments, regardless of size,<br />
maintain unrestricted budgetary fund balance in their<br />
general fund of no less than two months of regular<br />
general fund operating revenues or regular general fund<br />
operating expenditures. Moody’s Rating Agency looks for<br />
fund balances of more than 35 percent of annual revenue<br />
to provide a AAA rating for general obligation debt.<br />
4<br />
Michael A. Pisano, The Puzzle of the American Economy:<br />
How Changing Demographics Will Affect Our Future and<br />
Influence Our Politics (Praeger: 2017).<br />
5<br />
See, for example, empirical research on state<br />
governments analyzing time to fiscal recovery following<br />
economic recessions: Christian Buerger,“The effect of<br />
economic downturns on state budgets: A counterfactual<br />
analysis of the great recession,” Applied Economic<br />
Letters, 28(21), 2020.<br />
Reserves: What and Why<br />
Reserves are the liquid financial resources (typically cash and investments<br />
that can be turned into cash) that local governments do not include in the<br />
annual spending plan—resources that are held back from the budget and<br />
held in “reserve” for some other purpose. The most important purpose is to<br />
respond to significant, unplanned, and unavoidable costs or revenue losses<br />
such as a natural catastrophe or a recession. Another common purpose is<br />
as a sinking fund, or “piggy bank,” for a large, nonrecurring, planned future,<br />
like purchasing a capital asset. Reserves also support a strong bond rating<br />
by signaling to investors that the local government has resources to pay<br />
back debt even with potential disruptions to its financial position.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 17
SPECIAL SECTION | RETHINKING RESERVES<br />
How Do We Rethink<br />
Reserves?<br />
We begin rethinking reserves by<br />
starting from “first principles”—<br />
that is, why do local governments<br />
have reserves in the first place? To<br />
reduce volatility and uncertainty<br />
in public finances. Uncertainty<br />
exposes a government to financial<br />
risks, so framing the reserve<br />
explicitly as a risk management<br />
tool and linking the reserve to<br />
concrete risks that decisionmakers<br />
can appreciate is a great<br />
way to communicate why reserves<br />
are important. In examining the<br />
key risks that reserves guard<br />
against, we will see that there<br />
are many possible risks, and it is<br />
difficult, if not impossible, to buy<br />
commercial insurance to protect<br />
against many of them.<br />
The risks we face<br />
Cash flow risk is a concern, especially<br />
for governments where a major<br />
revenue source like property taxes<br />
is received only once or twice a year<br />
in large chunks, while expenditures<br />
occur evenly throughout the year.<br />
A similar problem can occur if large<br />
portions of state-shared revenue<br />
have to be authorized by the state<br />
each year through the state budget<br />
process. Delays in approving the state<br />
budget could result in delays in local<br />
government revenues. Reserves help<br />
smooth out resource availability and<br />
have important advantages over other<br />
options like tax anticipation notes,<br />
which can entail the risk of highinterest<br />
rates.<br />
A big risk for many governments is<br />
revenue instability, with recessions<br />
being the major culprit. If a recession<br />
dramatically reduces revenue,<br />
then reserves can be used to help a<br />
government make a “soft landing.”<br />
For example, in the City of Savannah,<br />
Georgia, sales tax was a large revenue<br />
source that was sensitive to the economy.<br />
The city, therefore, developed a sales tax<br />
stabilization reserve. When the Great<br />
Recession hit, the city was able to draw<br />
from the reserve and avoid layoffs.<br />
There could be other sources of<br />
revenue instability, too. Perhaps a major<br />
revenue source is subject to changes<br />
in the political environment, as in the<br />
case of some state-shared revenue. Or<br />
a local revenue source might be subject<br />
to periodic reapproval by the voters. In<br />
one city, the potential for the closing of<br />
a major industrial employer was a risk<br />
because the city relies heavily on a local<br />
income tax.<br />
Historically, local governments<br />
haven’t consistently used reserves to<br />
offset revenue losses from a recession. 1<br />
This might be because of state and federal<br />
government support during the last<br />
two recessions, through the American<br />
Recovery and Reinvestment Act of 2009<br />
and the American Rescue Plan Act of<br />
2021. While these pieces of legislation<br />
were a major help to local government<br />
fiscal health, local governments should<br />
not expect similar support in future<br />
recessions. Recovery funds require<br />
Congress to pass major legislation, and<br />
the rise of political polarization and<br />
gridlock makes this far from guaranteed.<br />
And even if the federal government<br />
offers relief, future funding might have<br />
restrictions, and it will be impossible<br />
for local governments to predict how<br />
much money they might receive. Local<br />
governments should therefore prepare to<br />
handle the impacts of recession on their<br />
own. Reserves provide another option<br />
than spending cuts.<br />
Another major risk category is natural<br />
disasters like earthquakes, wildfires,<br />
floods, and hurricanes, which can<br />
result in urgent needs like overtime for<br />
first responders or shelter, food, and<br />
supplies for displaced families. And<br />
disaster recovery includes unforeseen<br />
expenditures like the cleanup that<br />
follows the initial devastation.<br />
Sometimes, a local government will<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
18
Rethinking is Local<br />
Each local government will need to decide how to best<br />
apply the ideas in this article to their circumstances.<br />
For example, a local government’s “reserves” are<br />
commonly associated with the general fund. Yet,<br />
many of the same ideas presented in this article could<br />
apply to other funds, like enterprise funds.<br />
have some of its costs reimbursed by<br />
the Federal Emergency Management<br />
Agency (FEMA) and/or state agencies.<br />
If this is the case, reserves are still<br />
important to cover the non-reimbursable<br />
costs—including lost revenue, fees, and<br />
increased operating costs—while also<br />
fronting the costs until reimbursement<br />
arrives. FEMA reimbursement for natural<br />
disasters takes an average of 18 months,<br />
in GFOA’s experience.<br />
Some extreme weather events might<br />
not be declared an “emergency” by<br />
national or state government, in which<br />
case the local government may be on its<br />
own. A common example of this is an<br />
extreme snow season that causes the<br />
local government to dramatically exceed<br />
its snow removal budget. Reserves could<br />
be used to fund the overage, and the<br />
money might be replenished by surpluses<br />
in times of light snow.<br />
Man-made disasters are also a risk.<br />
The possibility of hazardous material<br />
spills that cost a lot to clean up, for<br />
example, can have a material impact<br />
on local finances. Cyberattacks are<br />
another example of a man-made risk that<br />
might have implications for reserves.<br />
Cyber insurance policies are becoming<br />
more expensive or totally unavailable<br />
to some governments, so a government<br />
might need to raise the deductible on<br />
a commercial policy or forgo a policy<br />
altogether. In this case, the government<br />
is either partially or fully self-insuring<br />
against cyberattacks, and reserves<br />
provide the financial backing. Capital<br />
infrastructure also presents risks that<br />
reserves can help mitigate. Debt is a<br />
powerful tool for local governments to<br />
finance infrastructure acquisitions,<br />
and reserves provide assurances to<br />
creditors that the government is not at<br />
unacceptable risk of default. Reserves<br />
can also be used to pay for capital<br />
assets directly (such as pay-as-you-go<br />
funding strategies).<br />
Other risks not covered here might fall<br />
into categories of financial/economic,<br />
health crises, security, reputational,<br />
and more. Here are a few examples from<br />
governments GFOA has worked with to<br />
analyze their risk exposure. You might<br />
think of others that are relevant to your<br />
jurisdiction.<br />
• Financial/economic. For governments<br />
with large pension liabilities, a<br />
reduction in the rate of return on<br />
pension investments could increase the<br />
annually required pension payment. 2<br />
Reserves could be used to cushion<br />
the initial shock from a reduced rate<br />
of return and consequent increase<br />
in required annual contributions,<br />
but a government will, at some point,<br />
need to realign its annual spending to<br />
accommodate increased pension costs.<br />
• Public health. The COVID-19 pandemic<br />
is an extreme example of the potential<br />
financial impact of a health event.<br />
Less extreme outbreaks could still<br />
have financial impacts. For example,<br />
local governments with public health<br />
responsibilities in urban areas could<br />
face large costs from local outbreaks of<br />
serious diseases like hepatitis.<br />
• Public safety. Terrorism and civil<br />
disorder can cause a spike in public<br />
safety costs. Civil disorder events<br />
could become more difficult to insure<br />
against because social media can<br />
spread civil disorder beyond a local<br />
phenomenon. 3 In other words, civil<br />
disorder in one community can easily<br />
spread to others. Insurance companies<br />
try to avoid insuring risks where this<br />
kind of “domino effect” is in play.<br />
Recognizing that reserves are essentially<br />
a tool for risk management leads to our<br />
next point on how to rethink reserves:<br />
adjust your mental model.<br />
Adjusting your mental model: savings<br />
versus insurance<br />
Mental models are the ways in which we<br />
see the world, and they guide how we<br />
make decisions. If public finance officers<br />
can give decision-makers a better mental<br />
model, they will make better decisions.<br />
The traditional mental model for reserves<br />
is a savings account, and this does have<br />
advantages. First, it’s easily understood<br />
by people who are not public finance<br />
experts. Second, it has a seemingly<br />
obvious parallel to the personal lives<br />
of local governments’ stakeholders.<br />
This is particularly true for the “sinking<br />
fund” function of reserves, as most<br />
people have experience with building<br />
up their personal savings to pay for<br />
some consumer expenditure or personal<br />
investment (for example, education,<br />
house, and car).<br />
But this model has disadvantages<br />
as well. First, the analogy to personal<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 19
SPECIAL SECTION | RETHINKING RESERVES<br />
savings as a buffer against risk might<br />
not be as powerful as it seems. Personal<br />
savings rates have been in long-term<br />
decline. 4 Most consumers also start<br />
saving reactively, after an adverse event<br />
has occurred (such as a recession or<br />
pandemic). Obviously, this is not a viable<br />
strategy for local government reserves. 5<br />
Given the reactive strategy that most<br />
savers adopt, it is not surprising that<br />
most Americans are well short of<br />
the amount of personal savings that<br />
personal finance experts recommend<br />
keeping for an emergency. Given the lack<br />
of emphasis on saving for an emergency,<br />
many people may now see personal<br />
savings more as a vehicle for saving up<br />
for future purchases than as a way to<br />
manage risk. 6 There is evidence that<br />
financial managers are more likely than<br />
the average person to view their own<br />
personal savings as a tool for managing<br />
risk. This means that the “savings<br />
account” metaphor for reserves may be<br />
more powerful in the minds of financial<br />
managers than it is for other people.<br />
Second, the savings account mental<br />
model implies that having more in your<br />
account is better, but this is not always<br />
true of local government reserves.<br />
Local governments face opportunity<br />
costs that are different from those faced<br />
by private individuals. Reserves are<br />
resources that are removed from the<br />
private economy. It can be argued that<br />
excess reserves could do better for the<br />
community if those resources were put<br />
to work in the private economy. Even<br />
if excess reserves weren’t returned to<br />
the private economy, one could make a<br />
good argument that the excess amounts<br />
should be used by the government<br />
to benefit the current generation of<br />
taxpayers (the ones who provided the<br />
money to create the reserve). Further,<br />
putting aside money to offset risk<br />
creates diminishing returns.<br />
As a simple thought experiment,<br />
imagine a person had $10,000 in their<br />
savings account to offset personal risk.<br />
This is a healthy amount, but it is not<br />
hard to imagine circumstances where it<br />
would prove insufficient. Now imagine<br />
that a similar person had $1 million in<br />
their savings account. It is much harder<br />
to imagine the circumstances where<br />
this would be insufficient. Finally,<br />
imagine that each person was given<br />
an additional $10,000. It’s easy to see<br />
how the additional money would be a<br />
big help for the first person, but it would<br />
be hard to argue that the second person<br />
would experience an equal gain in risk<br />
mitigation from building their savings<br />
further. The $10,000 creates greater<br />
marginal benefit for the first person<br />
than the second. The same logic applies<br />
to government.<br />
If the savings account mental model<br />
has important limitations, what is the<br />
alternative? We propose insurance<br />
as a new mental model. This does<br />
not necessarily replace the savings<br />
account model but does supplement it by<br />
providing a new and better perspective<br />
on some of the most important purposes<br />
of a reserve.<br />
Insurance has an obvious parallel<br />
to people’s personal lives. Given that<br />
local governments hold reserves to<br />
manage risk, insurance is an accurate<br />
analogy for reserves. Further, insurance<br />
is purchased before an adverse event<br />
occurs, much like reserves must be<br />
built up ahead of time to prepare for<br />
unpredictable adverse events.<br />
Another advantage of insurance as<br />
a mental model is that it invites local<br />
governments to think about ways in<br />
which commercial insurance and selfinsurance<br />
can work together to create<br />
an optimized risk financing strategy.<br />
Reserves are a self-insurance strategy,<br />
but commercial insurance policies<br />
(those purchased from a broker) can<br />
supplement reserves. For example,<br />
commercial insurance could be useful<br />
for protecting against low-probability<br />
but extreme-consequence events.<br />
Using insurance as a mental model<br />
also implies that there is an optimal<br />
amount to have on hand. Non-experts<br />
can appreciate that it is possible to<br />
either over or under-insure the risks<br />
you face. Insurance also implies a<br />
point at which the “policy” should<br />
be used. Let’s consider recessions as<br />
Reserves as Insurance and the Elected Board<br />
In a discussion with a city council about reserve strategy, one council member asked about the practical<br />
implications of spending the reserve. Using the “reserves as insurance” mental model, you would point<br />
out that lower reserves would be the equivalent of taking a lower limit (or higher deductible) on your<br />
insurance policy. The “reserves as savings account” mental model struggles with this question because<br />
of an increasingly prevalent view that savings exist to be spent.<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
20
The savings account mental<br />
model implies that having<br />
more in your account is better,<br />
but this is not always true of<br />
local government reserves.<br />
an example. Recessions are the most<br />
important source of financial instability<br />
for local governments, so reserves can<br />
play a crucial role in counteracting<br />
downturns in economic cycles. But there<br />
is little evidence that local governments<br />
use reserves during times of economic<br />
recessions. In the Great Recession, the 30<br />
largest U.S. cities used their fiscal reserves,<br />
but only 25 percent of the 600 smaller<br />
cities studied drew down their reserves<br />
(the remaining cities cut spending). 7<br />
Failure to use reserves likely caused<br />
distress to the community in the form of<br />
interruption to public services. While local<br />
governments should consider spending<br />
cuts during a revenue downturn, a<br />
strong reserve can help avoid the most<br />
damaging spending cuts.<br />
The insurance mental model is not<br />
without its disadvantages. Insurance<br />
can be an abstract and difficult concept<br />
to grasp, even in our personal lives.<br />
This means that people sometimes<br />
don’t make optimal personal decisions<br />
about insurance, just as they make<br />
suboptimal decisions about personal<br />
savings. Another disadvantage is that<br />
the analogy becomes more complicated<br />
when considering commercial<br />
insurance and intergovernmental aid.<br />
Taking these other risk management<br />
tools into account is necessary for an<br />
optimal risk management strategy, but<br />
the trade-off is additional complexity.<br />
Developing a more comprehensive<br />
perspective<br />
The reserves as insurance mental model<br />
addresses the risk management function<br />
of reserves well. The reserves as savings<br />
account mental model addresses the<br />
“sinking fund” function of reserves, so<br />
we do not suggest discarding the savings<br />
account mental model entirely. Rather,<br />
putting these two models together offers<br />
a more comprehensive perspective on<br />
the role of reserves (see Exhibit 1).<br />
With better mental models in place,<br />
we are positioned to think about the<br />
actions we can take.<br />
1<br />
See, for example, the following journal articles empirically<br />
examining local government expenditure stabilization:<br />
Justin Marlowe, “Fiscal slack and counter-cyclical<br />
expenditure stabilization: A first look at the local level,”<br />
Public Budgeting & Finance, 25(3), 2005; and Win Wang<br />
and Yilin Hou, “Do local governments save and spend<br />
across budget cycles? Evidence from North Carolina,”<br />
American Review of Public Administration, 42(2), 2012.<br />
2<br />
For research examining the relationship between public<br />
pensions and reserves retained in budget stabilization<br />
funds, see Travis St. Clair, “The impact of budget<br />
stabilization funds on state pension contributions,”<br />
Public Budgeting & Finance, 33(3), 2013.<br />
3<br />
This was the view an insurance industry expert expressed<br />
at an educational event hosted by GFOA in 2022.<br />
4<br />
From 1960 to the early 1990s, personal savings rates were<br />
around or above 10 percent but then sharply dropped,<br />
reaching a low of around 3 to 4 percent in 2005 to 2008.<br />
Savings increased after the 2008 Great Recession,<br />
averaging around 7.5 percent until the COVID-19<br />
pandemic, when it jumped to historically high levels.<br />
After the pandemic, savings rates dropped dramatically,<br />
plummeting to the all-time lows of 2005 to 2008.<br />
5<br />
For a few more recent examples of research analyzing<br />
government savings patterns over time, and in relation<br />
to the business cycle, see: Nathan Barrett, Jacob Fowles<br />
Peter Jones, and Vincent Reitano, “Forecast bias and<br />
fiscal slack accumulation in school districts,” American<br />
Review of Public Administration, 49(5), 2019; and<br />
LaShonda M. Stewart, John A. Hamman, and Stephanie<br />
A. Pink-Harper, “The stabilization effect of local<br />
government savings: The case of Illinois counties,” Public<br />
Budgeting & Finance, 38(2), 2017.<br />
6<br />
For example, according to a survey conducted by<br />
Bankrate in 2021, 46 percent of Americans are saving<br />
for a specific financial goal such as a home purchase,<br />
vacation, or education, while only 28 percent are saving<br />
for an emergency fund.<br />
7<br />
For examples of how to empirically analyze reserves,<br />
see: Marlowe and Wang and Hou. For a study of the 30<br />
largest U.S. cities: “America’s big cities in volatile times:<br />
Meeting fiscal challenges and preparing for the future,”<br />
The Pew Charitable Trusts, 2013. For a study of 600<br />
municipalities, see the “Fiscal slack, reserves, and rainy-day<br />
funds” chapter (by Justin Marlowe) of Handbook of Local<br />
Government Fiscal Health (Jones & Bartlett Learning: 2014).<br />
EXHIBIT 1 | COMBINING THE RESERVES MODELS<br />
Reserves as Insurance<br />
Reserves as Savings Account<br />
Addresses reserve’s role in guarding<br />
against risks like revenue instability,<br />
catastrophic events, and cashflow instability.<br />
+<br />
Addresses reserve’s role in accumulating<br />
cash to pay for future costs that would not<br />
be affordable within a single year’s revenue.<br />
A capital asset is an example of such a cost.<br />
=<br />
Savvy<br />
Financial Strategy<br />
Provides a lens that encourages new<br />
and savvy ways to manage risk across<br />
the government.<br />
Provides a lens that encourages multiyear<br />
financing strategies for large costs.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 21
SPECIAL SECTION | RETHINKING RESERVES<br />
Actions We Can Take to Rethink Reserves<br />
Local government finance officials<br />
have a number of strategies to<br />
help them rethink reserves. In<br />
rough order of importance, they<br />
are: risk-based reserve analysis,<br />
comprehensive reserve policies,<br />
optimizing the combination of<br />
commercial insurance and selfinsurance,<br />
optimizing investment<br />
strategies, pooling risk, and<br />
understanding bond ratings and<br />
reserves.<br />
Risk-based reserve analysis<br />
GFOA strongly recommends that local<br />
governments adopt a formal policy<br />
describing how much they will strive<br />
to maintain in their reserve fund. The<br />
question, of course, is “how much is<br />
enough?” The reserves as insurance<br />
model would say it depends on what<br />
your risks are.<br />
The first step toward a risk-aware<br />
reserve target is to think of it as a range<br />
instead of a single point. For example,<br />
a government might decide its policy is<br />
to maintain reserves between 15 and 25<br />
percent of annual revenue, rather than<br />
equal to 20 percent of annual revenue.<br />
A range has several advantages over a<br />
single point:<br />
• Risks are difficult or often impossible<br />
to estimate exactly. A range expresses<br />
that a government requires a margin<br />
of error to operate within. Conversely,<br />
a single point leaves ambiguity over<br />
whether actual reserves are too high<br />
or too low. To take our example: if the<br />
government’s policy was based on<br />
a single point (20 percent) and the<br />
actual reserves were at 17 percent of<br />
revenue, would that be acceptable?<br />
What if reserves were 27 percent?<br />
Would that be too high? The singlepoint<br />
policy is not clear about<br />
boundaries the government should<br />
stay within. 1 If the policy were based<br />
on a range, we’d know 17 percent was<br />
acceptable, but 27 percent was too<br />
much. This feature of ranges not only<br />
helps decision-makers discuss reserve<br />
strategies, but it might also help with<br />
explaining reserve strategy to the<br />
public.<br />
• A range accommodates different risk<br />
appetites. The “right” level in reserves<br />
will be a function of the risks a<br />
government faces and of local officials’<br />
willingness to bear those risks.<br />
A range can accommodate the views<br />
of risk-averse elected officials and less<br />
risk-averse officials. They can find<br />
grounds for compromise by negotiating<br />
a floor and ceiling that accommodates<br />
different appetites for risk.<br />
• A range better supports the ongoing<br />
management of reserves. Reserves<br />
fluctuate from year to year. If the reserve<br />
stays in range, there is little need to<br />
revisit it, whether the actual reserve<br />
is too high or low relative to the policy.<br />
If the reserve falls outside the range, it<br />
suggests a clear course of action (as in,<br />
do something to get it back in range).<br />
This helps make sure that reserves stay<br />
where they need to be to manage risks.<br />
• A range includes a lower limit,<br />
communicating that being a good<br />
steward of the community requires a<br />
minimum amount of reserves. It also<br />
communicates that there is an upper<br />
limit on the usefulness of reserves and<br />
a point at which excess resources<br />
should be devoted to some other purpose.<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
22
The next step in developing a risk-aware<br />
reserves policy is to analyze the risks<br />
the local government is subject to. A risk<br />
analysis can take place at varying levels<br />
of sophistication, but a qualitative or<br />
subjective risk assessment is the most<br />
accessible approach. A local government<br />
can review categories of risks, like<br />
those described earlier in this section,<br />
and then assess their exposure in each<br />
category and consider if their reserve<br />
target accommodates that exposure.<br />
GFOA has developed a simple template<br />
to facilitate this kind of review. 2<br />
The City of Berkeley, California,<br />
illustrates how the template can be<br />
used. The city’s budget staff led its risk<br />
assessment and included participation<br />
from the Public Works, Police, and Fire<br />
departments. The city determined that<br />
the greatest exposure was “extreme<br />
events and public safety concerns,”<br />
particularly earthquakes, fires,<br />
landslides, floods, hazardous material<br />
spills, and terrorism. Other important<br />
exposures included “expenditure<br />
volatility,” due to upcoming large<br />
expenditure obligations that did not<br />
have a funding source, and “other funds’<br />
dependency on the general fund.” The<br />
city’s general fund was a backstop for<br />
other city operations funded by other<br />
sources, so the city would rely on the<br />
general fund if these operations were<br />
to encounter unplanned, unavoidable<br />
expenditures or revenue interruptions.<br />
By reviewing all the risks on GFOA’s<br />
template, Berkeley determined that it<br />
faced a moderate to high level of risk,<br />
and that 25 to 35 percent of annual<br />
revenues would be reasonable to buttress<br />
the effect of routine downturns in the<br />
economy and respond quickly and<br />
decisively to major emergencies.<br />
The advantage of a qualitative risk<br />
analysis is accessibility. Berkeley<br />
(and many other governments) have<br />
completed such an analysis within their<br />
own resources. A qualitative analysis<br />
also can be effective for acclimating<br />
the government to awareness of risk<br />
as part of its reserve strategy. Berkeley<br />
performed this analysis in 2016 to<br />
2017, and it helped convince the city to<br />
commit to reexamining its risk exposure<br />
five years later—which the city is doing<br />
this year (using the more sophisticated<br />
chance-based approach that we’ll<br />
describe later).<br />
The disadvantage of a qualitative<br />
risk assessment is that the results are<br />
subjective. This means there is likely<br />
to be a gap between the reserve target<br />
suggested by the assessment and the<br />
optimal reserve amount, given the risks.<br />
There is no way to tell how accurate or<br />
inaccurate the subjective estimate might<br />
be, relative to the optimal amount.<br />
The level of sophistication is to<br />
quantify risks to reach a more objective<br />
estimate. This involves looking at<br />
historical experiences, the analogous<br />
experiences of other governments, and<br />
other sources of data to estimate the<br />
potential cost of the risks the government<br />
is subject to. A quantified approach might<br />
be needed when there is controversy<br />
about the right amount in reserves.<br />
The easiest quantified approach to<br />
risk analysis is to build a model using<br />
single numbers to represent the potential<br />
impact of risks. To estimate the risk<br />
posed by recessions, for example, we<br />
might look back at past recessions to see<br />
the losses incurred. We would see that<br />
the 2008 Great Recession represents<br />
a particularly bad recession. Let’s say<br />
revenues decreased by $5 million,<br />
which would suggest that we might<br />
need a $5 million reserve to be prepared<br />
for most future recessions. Outside<br />
studies and the experiences of other<br />
local governments can also help. The<br />
The Problem of Unknown Unknowns<br />
A limit of any risk analysis is that you can only analyze the risks you know about, or the “known unknowns.”<br />
But there’s always a chance of experiencing a loss from a totally unexpected source, or the “unknown<br />
unknowns.” For instance, five years ago, not many governments would have anticipated the current<br />
tightening of the cyber insurance market, which might place pressure on local governments to partially<br />
or fully self-insure cyber risks. The COVID-19 pandemic is another example of an unknown unknown.<br />
Both examples illustrate how to deal with unknown unknowns. First, a local government should<br />
periodically update the risk analysis. Cyber risk losses have been steadily increasing across all local<br />
governments for several years, so cyber risk should have been on the radar of local governments<br />
before the current tightening of the insurance market. Second, a local government should use reserves<br />
to cover multiple purposes. Though pandemics were not considered a high risk by most local<br />
governments prior to 2019, recessions certainly were. The economic slowdown caused by the COVID-19<br />
pandemic could be considered a kind of recession. By grouping multiple risks together into the reserve,<br />
the reserve will be more likely to withstand the addition of previously unknown risks.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 23
SPECIAL SECTION | RETHINKING RESERVES<br />
Town of Bluffton, South Carolina, used<br />
a publicly available university study<br />
that calculated the per capita cost of<br />
recovering from hurricanes at different<br />
storm category levels. 3 The town applied<br />
these numbers and adjusted for inflation<br />
after the study was completed to derive a<br />
figure that it used as the target number for<br />
its emergency recovery reserves.<br />
The GFOA report, “A Risk-Based Analysis<br />
of General Fund Reserve Requirements,”<br />
describes how to perform this analysis,<br />
including how to account for the<br />
possibility of historically unprecedented<br />
events. 4 The advantage of this “singlenumber”<br />
approach is that many<br />
governments should be able to perform<br />
the analysis using their own resources.<br />
The single-number approach has an<br />
important disadvantage, though. Risks, by<br />
definition, are uncertain quantities. This<br />
approach represents these uncertainties<br />
as single numbers, which obscures the full<br />
range of risk that the government faces.<br />
One of the most important<br />
consequences of obscuring the full range<br />
of risk is revealed in the way a total reserve<br />
goal is determined. A total reserve target<br />
is the sum of potential losses from each<br />
risk a government is subject to. But<br />
because risks are uncertain numbers, the<br />
sum is not as straightforward as adding<br />
the single-number estimates of risk<br />
together. The most important potential<br />
error is dramatically overestimating the<br />
size of reserve the government needs.<br />
An explanation is best provided with a<br />
GFOA video, “Adding Risks Together:<br />
The Surprising Truth.” 5 For example,<br />
imagine that a local government is<br />
subject to three types of extreme events,<br />
where there is a 5 percent chance of each<br />
occurring in a three-year period. A simple<br />
summation would lead a government<br />
to prepare for a 5 percent chance of<br />
each occurring (5 percent + 5 percent<br />
+ 5 percent). But since reserves can be<br />
used to respond to any extreme event,<br />
the optimal strategy is to think about<br />
the total risk from all extreme events at<br />
once. There is a small chance (less than<br />
1 percent) of all three events occurring<br />
within a single three-year period<br />
(5 percent x 5 percent x 5 percent).<br />
The town of Bluffton, South Carolina arrived at a target number for its emergency recovery reserves<br />
by using a publicly available university study that calculated the per capita cost of recovering from<br />
hurricanes at different category levels.<br />
Because risks are<br />
uncertain numbers,<br />
the sum is not as<br />
straightforward as<br />
adding the singlenumber<br />
estimates of<br />
risk together. The most<br />
important potential<br />
error is dramatically<br />
overestimating the<br />
size of reserve the<br />
government needs.<br />
The way to overcome the disadvantages<br />
of the single method is to evaluate the<br />
full range of risk, rather than condensing<br />
risk down to a single number. We will call<br />
this approach “chance-based” because we<br />
can use the full range of risk to determine<br />
the chance that any given reserve level<br />
will be adequate to protect against the<br />
risks in question. GFOA has worked with<br />
several local governments to develop<br />
chance-based reserve models, also<br />
known as probabilistic (or chance-based)<br />
simulations, using Microsoft Excel and<br />
open standards for computer simulation<br />
from ProbabilityManagement.org.<br />
These projects included working with<br />
elected officials to bring the results of<br />
the simulation into policy decisions. A<br />
full explanation of what chance-based<br />
simulation is and what it looks like is best<br />
accomplished with a video from GFOA’s<br />
“Risk-Savvy Thinking about Reserves”<br />
series. 6 The advantages of simulation are<br />
many, including:<br />
• It is the best way to estimate the<br />
potential of pooling risks inside of local<br />
government. (More on this later, but<br />
suffice to say, for now that risk pooling is<br />
a time-honored and powerful strategy for<br />
reducing the cost of risk.) 7<br />
• It will provide the best estimate of<br />
the range of optimal reserves for<br />
addressing the risks that are included<br />
in the analysis. It also provides a clear<br />
illustration of the decreasing marginal<br />
24
enefit of accumulating too much in<br />
reserves and shows the point at which<br />
the marginal benefit decreases. 8<br />
• The simulation can address a multiyear<br />
timeframe. This is important because<br />
it isn’t easy to increase reserve levels<br />
quickly. 9<br />
• A simulation can include forces that<br />
influence reserves outside of risk<br />
factors. For example, the simulation<br />
could include a local government’s<br />
willingness to cut its expenditures<br />
instead of using reserves. Or the<br />
simulation could address how likely it<br />
is that a local government will generate<br />
budget surpluses that build up reserves<br />
and offset losses. 10<br />
• Simulations can highlight the full range<br />
of risk a local government is exposed<br />
to—from risks that could be easily<br />
self-insured all the way to catastrophic<br />
risks that are impossible to fully selfinsure.<br />
This helps highlight the need for<br />
strategies like preventative investments<br />
and a robust disaster response strategy.<br />
RETHINKING RESERVE CHECKPOINTS<br />
Develop a risk-aware reserves policy<br />
• Chance-based simulation is the<br />
method insurance companies use to<br />
develop policies, so it has proven to be<br />
best-suited to problems of insurance.<br />
The major disadvantage of chance-based<br />
simulation is that it is more complex than<br />
the single-number analysis method.<br />
Though chance-based simulations can<br />
be conducted in Microsoft Excel, 11 GFOA<br />
isn’t aware of any local government that<br />
has conducted a simulation of reserves<br />
without outside consulting support.<br />
Also, the results are often expressed in<br />
odds and probabilities, and though odds<br />
and probabilities are essential for the<br />
best understanding of risk, they are not<br />
the first language of many people. Thus,<br />
explaining the result of the simulation can<br />
be more difficult than a single-number<br />
analysis. That said, GFOA’s experience is<br />
that it can be done—especially with the<br />
help of interactive models, like those<br />
you can see in the videos cited. In fact,<br />
we have yet to meet an elected official<br />
who could not grasp the essential ideas<br />
of a chance-based analysis.<br />
Express your reserves policy as a range of desired reserves, with a<br />
floor and a ceiling.<br />
Conduct a risk analysis to get a sense of how the risks you face affect<br />
the reserves you should hold. Any of the three methods presented<br />
would provide a reasonable basis for a more informed discussion<br />
with policymakers about why reserves are necessary and how much<br />
should be kept in reserves.<br />
Quantification of risk offers important advantages over subjective<br />
approaches—we described both “single-number analysis” and<br />
“chance-based simulation” methods of quantification. A quantified<br />
approach might be particularly useful when there is a strong sense<br />
among decision-makers that existing reserves are too high or too low.<br />
The single-number analysis is more accessible to local governments<br />
than a chance-based simulation; however, a chance-based<br />
simulation is better (and how insurance companies conduct their<br />
analysis). The choice between the two depends on factors such as a<br />
government’s ability to pay for outside consulting support, a need for<br />
a more rigorous analysis, and the number of risks and size of reserves<br />
in question (more/bigger risks and reserves means more potential to<br />
make the best use of funds by optimizing the size of the reserve).<br />
Develop a comprehensive<br />
reserves policy<br />
A reserves policy is a method to “precommit”<br />
the organization to wise<br />
decisions about reserves. Rather than<br />
deciding on reserves strategies in the<br />
heat of a moment when a tough decision<br />
is required, a policy can be developed<br />
when the pressure is off. That policy then<br />
provides the boundaries for decisionmaking<br />
when difficult decisions need<br />
to be made about reserves. A policy<br />
should address the following: 1) why<br />
reserves should be accumulated;<br />
2) how much should be accumulated;<br />
3) what strategies should be used for<br />
accumulation; and 4) when and for<br />
what purpose reserves can be used.<br />
Why? To protect the local government<br />
against risks ranging from weather<br />
events like flooding, earthquakes,<br />
wildfires, and snowstorms to manmade<br />
problems like lawsuits. Citing<br />
locally relevant risks and the notion of<br />
self-insurance as part of a policy can<br />
help answer the question of why<br />
reserves are needed.<br />
A policy should also address the<br />
“savings account” role of reserves<br />
in saving up for larger projects.<br />
Differentiating the “insurance policy”<br />
role of reserves from the “savings<br />
account” function could help decisionmakers<br />
be savvier with their reserve<br />
strategies.<br />
A policy can also discuss strategies<br />
to use for accumulation. This could<br />
be as formal as formulas tied to any<br />
yearly surplus or even a formal budget<br />
allocation to hold back some amount of<br />
a year’s revenue for building a reserve.<br />
A policy could also allow for a less<br />
structured approach by encouraging<br />
surpluses and one-time revenue to<br />
be used to build the reserve if the<br />
government is below its target range.<br />
In fact, a government could apply<br />
some of the same risk savviness we’ve<br />
been discussing in these articles to its<br />
forecasting in order to estimate the size<br />
of surpluses that could be produced by a<br />
given spending plan. 12<br />
A policy should also address how<br />
reserves can be used—most importantly,<br />
discouraging the government from using<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 25
SPECIAL SECTION | RETHINKING RESERVES<br />
reserves for ongoing expenditures (such<br />
as hiring more employees). Reserves are<br />
not an ongoing resource. An exception<br />
might be made for supporting continuity<br />
of public services in the face of a<br />
revenue interruption like a recession.<br />
This would be temporary, until revenues<br />
recover or until expenditures can be<br />
restructured to be affordable under the<br />
revenues that are available.<br />
A policy that addresses these<br />
points helps foster a better and shared<br />
understanding of reserves in relation<br />
to the maintenance of public services<br />
amid the risks the government faces.<br />
Finance officers will also have to<br />
consider how to describe the reserve<br />
relative to the “fund balance” figures<br />
that are included in the annual financial<br />
report. Governmental Accounting<br />
Standards Board (GASB) Statement<br />
No. 54, Fund Balance Reporting and<br />
Governmental Fund Type Definitions,<br />
provides a series of categories of fund<br />
balance that must be reported. The<br />
finance officer can make the link<br />
between the reserve (as in, a budgetary/<br />
financial planning strategy) and<br />
fund balances (as in, an accounting<br />
mechanism). Reserves can be shown<br />
as part of the “assigned” or “committed”<br />
categories of fund balance. In this<br />
way, decision-makers can see the<br />
reserve in the financial statements<br />
and differentiate it from other forms<br />
of fund balance, especially forms<br />
that are unavailable for use as selfinsurance.<br />
This might be the case with<br />
RETHINKING RESERVE CHECKPOINTS<br />
Develop a comprehensive reserves policy<br />
fund balances that are being put aside<br />
for spending on a future project, for<br />
example.<br />
Finance officers could positively<br />
influence how stakeholders think about<br />
reserves by developing a comprehensive<br />
policy that describes why reserves<br />
are important to the community<br />
amid a budgetary shortfall or other<br />
contingency, the range of reserves it is<br />
prudent to maintain, and transparency<br />
on how reserves (a budgetary strategy)<br />
connect to the total fund balance<br />
available in financial reports. 13<br />
A reserves policy is a way to “pre-commit” the organization to wise<br />
decisions about reserves.<br />
A policy should address why reserves should be accumulated, how<br />
much should be accumulated, what strategies should be used for<br />
accumulation, and when and for what purpose reserves can be used.<br />
The finance officer should strive for transparency in how reserves<br />
(a budgetary policy) are reflected in the reporting of fund balances<br />
in the annual financial report (an accounting mechanism).<br />
Optimize the combination<br />
of commercial insurance and<br />
self-insurance<br />
Commercial insurance is a valuable<br />
complement to reserves. A useful<br />
analogue is self-insurance programs for<br />
employee healthcare, which have been<br />
shown to provide potential savings for<br />
employers, compared to commercial<br />
insurance. 14 But few governments would<br />
self-insure every last dollar of potential<br />
loss. Instead, self-insured governments<br />
often purchase “stop loss coverage,” where<br />
a commercial insurance policy kicks<br />
in after a certain size of loss is reached.<br />
This spares the government the cost of<br />
covering extremely large losses and the<br />
cost of the more expensive premiums<br />
that would come with using commercial<br />
coverage for more routine losses.<br />
A similar concept can be applied to the<br />
risks a reserve is “self-insuring” against.<br />
Reserves will be most useful for lower<br />
magnitude, higher frequency risks.<br />
Commercial insurance is most valuable<br />
when the losses from a catastrophic risk<br />
would be unaffordable.<br />
The most straightforward example<br />
is purchasing higher-deductible<br />
insurance policies for liabilities that are<br />
commercially insured. This strategy is<br />
useful for insurance policies that have<br />
become more expensive because of<br />
market conditions. Insurance against<br />
cyberattacks is a prime example, with<br />
some governments experiencing 100<br />
percent year-over-year increases in<br />
prices, as of mid-<strong>2023</strong>. For example,<br />
increasing costs increased the $1<br />
million deductible with $15 million in<br />
coverage paid by Mecklenburg County,<br />
North Carolina (covering Charlotte<br />
and surrounding areas), to a $5 million<br />
deductible with $10 million in coverage. 15<br />
The county has substantial general fund<br />
reserves, so it can “self-insure” the larger<br />
deductible and the lower limit.<br />
Another application might be<br />
“parametric insurance.” Parametric<br />
insurance policies pay out a set sum of<br />
money when a given condition comes to<br />
pass. For instance, a policy might pay out<br />
$10 million if hurricane wind speeds in<br />
the community reach 120 miles per hour.<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
26
Market conditions increased the deductible and decreased the coverage of the insurance policy<br />
held by Mecklenburg County, North Carolina, to protect against cyberattacks. Due to the county’s<br />
substantial general fund reserves, it can “self-insure” the larger deductible and lower limit.<br />
Parametric policies are in wide use in<br />
many other sectors but are a relatively<br />
new instrument for local governments.<br />
Parametric policies might be most useful<br />
for catastrophic events where a local<br />
government’s reserve would be stretched<br />
to respond. Of course, federal and/or state<br />
assistance is often available for these<br />
kinds of events, but the reimbursement<br />
often takes more than a year to arrive. 16<br />
Further, some costs of a catastrophic<br />
event may not be reimbursable by<br />
the state or federal government. For<br />
instance, if the tax base is so damaged<br />
that tax revenues do not recover quickly,<br />
the funds from a parametric policy<br />
could help fill the gap. Also, parametric<br />
policies provide full coverage as soon<br />
as the policy goes into effect, while it<br />
could take years to build up enough in<br />
reserves to cover the full impact of a<br />
catastrophic event. Parametric policies<br />
can also be designed around a specific<br />
geographic area. For example, perhaps<br />
a specific area of a city is particularly<br />
vulnerable to a certain kind of hazard.<br />
A policy could be developed to provide<br />
a payout for an occurrence of that<br />
hazard in that area, allowing the local<br />
government to provide additional<br />
support to the people who live there. 17<br />
You can read more about parametric<br />
insurance in the GFOA report<br />
“Parametric Insurance: An Emerging<br />
Tool for Financial Risk Management.” 18<br />
The report includes case studies<br />
of local governments that have<br />
purchased parametric policies and<br />
how insurance policies complement<br />
FEMA reimbursement.<br />
RETHINKING RESERVE CHECKPOINTS<br />
Optimize commercial insurance combined with reserves<br />
Consider if you have commercial insurance policies with a higher<br />
deductible that could be self-insured by reserves. The highest<br />
potential will usually be with policies where premium prices are<br />
going up substantially.<br />
Consider if a parametric insurance policy could supplement<br />
reserves. Parametric insurance might be particularly useful when a<br />
government finds that it is underinsured for a catastrophic risk. This<br />
is because parametric insurance can provide additional coverage<br />
immediately, while it could take years to build an equivalent reserve.<br />
Optimize investment strategies<br />
Insurance companies invest the monies<br />
collected from premiums to make<br />
substantial profits. 19 A government’s<br />
reserves are basically premiums<br />
collected from the community to<br />
stabilize their government services<br />
against risk. The money held in<br />
reserves will be idle most of the time,<br />
so governments can adopt savvy<br />
investment strategies for it.<br />
A risk analysis is essential for a savvy<br />
investment strategy. A government can<br />
divide its idle funds into tranches, with<br />
each tranche representing a different<br />
likelihood of the government needing<br />
to access the money for emergency<br />
purposes. As a simple example, let’s<br />
assume a government has only two<br />
investment options: 1) short-term,<br />
lower earning; and 2) long-term,<br />
higher earning, where the term of the<br />
investment is three years. Let’s assume<br />
a government does a risk analysis<br />
that suggests $10 million is a good<br />
ceiling amount for its reserve, and<br />
the government has $10 million in its<br />
reserve. The risk analysis also suggests<br />
there is only a 10 percent chance that<br />
the government would need to use more<br />
than $9 million of its reserve in the next<br />
three years. Decision-makers might<br />
conclude that putting $1 million in the<br />
second investment option is worth the<br />
risk. This leaves $9 million in the shorterterm,<br />
lower-earning investments, that<br />
provides greater ability to access the<br />
cash if the need arises. Research by one<br />
financial technology firm that helps local<br />
governments determine their investable<br />
resources suggests that large gains in<br />
investment returns are possible with a<br />
more risk-savvy investment strategy like<br />
the one described above. According to<br />
data provided by the firm, returns could<br />
improve by much as 35 to 40 percent<br />
more than what most governments<br />
get currently from the resources that<br />
comprise their reserves. 20<br />
Our example assumes a probabilistic<br />
risk analysis, but a less rigorous risk<br />
analysis could still help reach a similar<br />
conclusion. For example, if a less rigorous<br />
analysis suggests that $10 million is<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 27
SPECIAL SECTION | RETHINKING RESERVES<br />
A risk analysis is essential for a savvy investment strategy.<br />
A government can divide idle funds into tranches, with each<br />
one representing a different likelihood of the government<br />
needing to access the money for emergency purposes.<br />
the ceiling amount for reserves, then we<br />
know that amounts closer to the ceiling<br />
are far less likely to be used than the “first<br />
dollar” that comprises the reserve. Thus,<br />
a government would still have the bulk of<br />
the $10 million invested in more liquid<br />
assets, while placing a smaller amount in<br />
a less liquid, higher return asset.<br />
Our example also reveals a potentially<br />
sticky question. The decision to invest in<br />
any combination of assets with different<br />
risk/reward profiles will, at some point,<br />
depend on the subjective appetite for risk<br />
of the decision-maker. Going back to our<br />
example, who is to say that a 10 percent<br />
chance of needing more than $9 million<br />
is the objectively correct threshold for<br />
RETHINKING RESERVE CHECKPOINTS<br />
Optimize investment of reserve funds<br />
investing the remaining $1 million in<br />
longer-term securities? Perhaps some<br />
people would be comfortable with a 15 or<br />
20 percent chance, while others may be<br />
uncomfortable with as high as 10 percent.<br />
These decisions will have to be discussed<br />
with the relevant decision-makers to<br />
come to a consensus. GFOA’s experience<br />
has been that reaching an agreement is<br />
easier when the discussion is based on an<br />
objective analysis like a risk assessment.<br />
GFOA has done this kind of analysis with<br />
its own finances and found that reaching<br />
agreement on the preferred investment<br />
strategy was not that difficult, as the risk<br />
analysis provided objective criteria and<br />
data for decision-makers.<br />
Use a risk analysis to identify tranches of funding ranging from more<br />
likely to be needed to cover unplanned, unavoidable needs to less<br />
likely. The less likely tranches may be candidates for less liquid,<br />
higher-return investments.<br />
Convene a discussion with the relevant decision-makers to determine<br />
the level of risk the government is willing to take on with respect to<br />
investment liquidity versus the potential need to draw on reserves.<br />
Pool risk<br />
Risk pooling is widely recognized and<br />
a time-honored strategy for reducing<br />
the cost of risk, and it works because of<br />
diversification. Put simply, it is unlikely<br />
that a loss event will happen to all the<br />
pool participants at the same time. For a<br />
more in-depth explanation, see GFOA’s<br />
Rethinking Revenues series video,<br />
“Why Pooling Reduces the Cost of Risk.” 21<br />
Local governments often pool risk across<br />
multiple local governments (regional<br />
insurance pools). Local governments also<br />
pool risk inside their own organizations.<br />
Let’s return to our example of employee<br />
self-insurance. Local governments do not<br />
set up separate self-insurance pools for<br />
each department or for each accounting<br />
fund. All employees fall under the same<br />
self-insurance program. This saves<br />
money because the total amount needed<br />
to insure the entire organization is less<br />
than you would need if you insured each<br />
department separately. This is an example<br />
of risk not adding up the way you might<br />
think. We also explain the concept in more<br />
detail in GFOA’s Rethinking Reserves<br />
series video, “Adding Risks Together:<br />
The Surprising Truth.” 22<br />
Similarly, local governments could<br />
realize some advantages from pooling<br />
reserves. There are many opportunities to<br />
apply pooling, though these opportunities<br />
entail varying degrees of difficulty.<br />
The first and easiest way is to make<br />
sure there are no unrealized opportunities<br />
for pooling within the general fund. For<br />
example, some governments set up one<br />
reserve for economic uncertainty (such<br />
as recessions) and another for extreme<br />
events (such as natural disasters). These<br />
two reserves could be pooled because<br />
recessions and natural disasters are<br />
unlikely to occur at the same time, so a<br />
combined reserve should be more costeffective.<br />
The combined reserve could<br />
still be labeled as a reserve for extreme<br />
events and economic uncertainty, to make<br />
the intent clear without keeping the two<br />
reserves separate. The most accurate<br />
way to judge the potential savings is a<br />
probabilistic risk analysis. Combining<br />
reserves to make the money in the reserves<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
28
Risk pooling is widely recognized and a time-honored strategy for<br />
reducing the cost of risk, and it works because of diversification.<br />
more fungible could improve costeffectiveness<br />
for the same reasons we<br />
described in our employee health plan<br />
self-insurance example.<br />
Another possibility is to define<br />
policies for emergency interfund<br />
borrowing. The idea is that the total<br />
amount reserved across the entire<br />
government could be less if each fund<br />
did not have to prepare for the most<br />
extreme circumstance but could rely<br />
on financial backup from other funds in<br />
extreme cases. 23<br />
An option that could present some<br />
challenges also presents large potential<br />
payoffs: pooling reserves across funds.<br />
This has a large potential payoff because<br />
the amounts involved will be large.<br />
It can be challenging because monies<br />
may be segregated into different funds<br />
for legal reasons, creating practical<br />
barriers to operating such a pool. Pooling<br />
funds will be most effective when two<br />
conditions are met: 1) the funds involved<br />
do not have legal restrictions that make<br />
pooling impractical; and 2) the risks<br />
faced by funds are not overly similar.<br />
If the risk profiles of the funds are<br />
similar, then pooling will not be of great<br />
benefit because each fund will receive a<br />
shock when a given risk happens. But if<br />
the funds have substantial differences<br />
in their risk profiles, then pooling could<br />
be quite valuable. A given risk may give a<br />
shock to one fund but not the other,<br />
and the fund that was not shocked can<br />
support the fund that was.<br />
Many local governments may be<br />
unwittingly pooling the reserve risks<br />
of several funds. In our work with<br />
local governments, we found that an<br />
important risk for the general fund is<br />
that it is often a de facto “backstop” for<br />
other funds. If those funds run into<br />
unplanned, unavoidable emergency<br />
financial needs, then the general fund<br />
is on the hook. Rather than building up<br />
separate reserves in each fund, it may<br />
be better to formalize the current state of<br />
affairs and enhance the pooled approach<br />
by pulling in the pool of other funds that<br />
have their own reserves.<br />
GFOA is not the only entity to<br />
advocate for the potential of pooling<br />
reserves. In Moody’s November 2022<br />
“U.S. Cities and Counties [Bond Rating]<br />
Methodology,” the company introduced<br />
a government-wide evaluation of fund<br />
balance into its rating methodology.<br />
The strength of fund balances and held<br />
cash combined across all funds is worth<br />
30 percent of the foundational score<br />
when Moody’s evaluates a government’s<br />
creditworthiness. 24 Moody’s found<br />
that the fund balances in different<br />
funds are often flexible enough that<br />
the funds can support each other. The<br />
company believes that there is enough<br />
potential for interfund support to justify<br />
evaluating across the entire government<br />
instead of fund by fund. This marks an<br />
evolution of Moody’s approach, which<br />
was focused on specific funds.<br />
Finally, let’s address regional pooling.<br />
Local governments often participate<br />
in regional insurance pools, so why not<br />
regional arrangements for the risks the<br />
reserves guard against? The reason this<br />
may not provide as much benefit as one<br />
might expect is that the types of risks<br />
the reserves guard against (for example,<br />
RETHINKING RESERVE CHECKPOINTS<br />
Apply risk pooling to reserves<br />
natural catastrophes, recessions) affect<br />
the entire region. If all members of a pool<br />
are impacted at the same time by the<br />
same risk, then a pool loses its value.<br />
Another way to think about it is that a pool<br />
within government brings together funds<br />
that might have different exposures.<br />
A pool between governments brings<br />
together funds (such as, multiple general<br />
funds) that have the same exposures.<br />
If you have separate reserves in the general fund for different risks,<br />
combine those reserves.<br />
Develop a policy for emergency interfund borrowing.<br />
Consider pooling reserves across funds within your government. In<br />
some cases, you may already be de facto pooling the general fund with<br />
financially weaker funds. Improve your risk portfolio by adding other<br />
strong funds to the pool.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 29
SPECIAL SECTION | RETHINKING RESERVES<br />
Understand bond ratings<br />
and reserves<br />
A rationale for holding a greater amount<br />
in reserves is that it will support a<br />
strong bond rating, which will translate<br />
to lower interest costs on the money a<br />
government borrows. Reserves play an<br />
important role in the ratings process.<br />
According to Moody’s Investors Service’s<br />
rating methodology, available fund<br />
balance ratio 25 is worth 20 percent of the<br />
rating. Moody’s also examines liquidity<br />
ratio 26 because fund balance is an<br />
accounting term that can include assets<br />
not available for current spending. The<br />
liquidity ratio constitutes an additional<br />
10 percent of the rating methodology.<br />
Thus, fund balance and cash together<br />
comprise 30 percent of the total ratings<br />
methodology.<br />
First, remember that “fund balance”<br />
and “reserves” aren’t the same, though<br />
they are related. Fund balance includes<br />
a wider scope of resources, so it will be a<br />
larger number than reserves. With this in<br />
mind, we can see that fund balance/cash<br />
plays an important role in the ratings<br />
method. But what is considered a good<br />
level of fund balance? Moody’s “AAA”<br />
rating (the highest) is associated with<br />
fund balances exceeding 35 percent of<br />
revenues. The “AA” rating is associated<br />
with fund balances between 35 and 25<br />
percent, and the “A” rating with 25 to 15<br />
percent. That said, while 30 percent of<br />
ratings evaluation is made up of fund<br />
balances and cash, 70 percent is not.<br />
Further, the Moody’s documentation is<br />
clear that ratings analysts will consider<br />
local factors and other idiosyncrasies to<br />
arrive at the final rating—so it is possible<br />
to have fund balances/cash below the<br />
range for a given rating yet still achieve<br />
that rating, or even a better one.<br />
We also examined rating methodology<br />
documentation from S&P Global. Though<br />
the specifics of their method are different,<br />
the general conclusion is the same: fund<br />
balances play an important, but not<br />
decisive, role in arriving at a final rating.<br />
A greater fund balance will contribute to a<br />
higher rating, but it may not be sufficient<br />
to guarantee a higher rating. Similarly,<br />
a lower fund balance is not guaranteed<br />
to consign a local government to a lower<br />
rating. Other factors weigh more heavily,<br />
and ratings analysts have some discretion<br />
in assigning ratings based on local context.<br />
The next question to ask is if a higher<br />
bond rating is worth the cost to obtain it?<br />
A bond rating has a quantifiable benefit,<br />
which is the interest savings available at<br />
the next-highest bond rating. To the extent<br />
that greater fund balance (and greater<br />
reserves) can move a local government<br />
from one bond rating to the next, then it is<br />
possible to measure the benefit.<br />
Let’s get a sense of the interest rate<br />
differences between bond ratings. Exhibit<br />
1 shows the differences between interest<br />
rates (percentage points) at different bond<br />
ratings from 1993 to 2022. 27 This shows a<br />
90 percent confidence range, which omits<br />
outliers on both the high and low side. It<br />
is notable that the midpoint (median) is<br />
closer to the low side of the range, which<br />
EXHIBIT 2 | HISTORY OF INTEREST RATE DIFFERENCES BETWEEN BOND RATINGS, 1993-2022<br />
Percentage point<br />
differences from going from<br />
a higher to lower rating<br />
90% of the time,<br />
the difference is<br />
between these<br />
points.<br />
AAA AA AA A A BAA<br />
Low 0.09% 0.10% 0.12%<br />
Mid 0.11% 0.20% 0.38%<br />
High 0.25% 0.62% 0.97%<br />
<br />
Notice that the midpoint is<br />
closer to the low side of the<br />
range. This means most of the<br />
time the differences between<br />
ratings are closer to the low<br />
value than the high value.<br />
usually means the differences between<br />
ratings are closer to the low value than to<br />
the high value.<br />
What are the implications of the<br />
differences in interest rates? First, let’s<br />
get a sense of the differences in the total<br />
cost of bond issue due to an interest<br />
rate difference. Imagine a 30-year,<br />
$200-million bond issue at 3 percent<br />
annual interest with a rating of A. The<br />
total cost of interest over the life of the<br />
bond issue would be about $106 million.<br />
If the same bond were to be issued with a<br />
rating of AA, let’s assume it would enjoy an<br />
interest rate that is better by 0.20 percent<br />
(the midpoint on our table). In that case,<br />
the total interest rate paid over the life<br />
of the bond would be about $98 million,<br />
or a difference of about $8 million. This<br />
equates to an average of about $260,000<br />
per year. Conveniently, the midpoint for<br />
changes between ratings in the other<br />
columns on our table is roughly half or<br />
double the midpoint in Exhibit 1, so it is<br />
easy to imagine the financial benefit at<br />
other bond rating levels.<br />
The question of whether these benefits<br />
are worth the cost of accumulating more<br />
fund balance depends on several factors,<br />
such as:<br />
• How much debt a government issues.<br />
If a government issues more debt, it will<br />
get more benefit from a lower interest<br />
rate (assuming it will issue the same<br />
amount of debt no matter its rating).<br />
• The duration of the payback period for<br />
the debt. A longer payback period will<br />
result in the government paying more<br />
total interest over the life of the bond,<br />
giving a lower interest rate more impact.<br />
• How high a bond rating would be<br />
without accumulating a large amount<br />
in reserves. For example, Exhibit 1<br />
shows that the interest rate benefit<br />
between AAA and AA is much smaller<br />
than A and BAA. This means that, all<br />
else being equal, a government that can<br />
improve from BAA to A by accumulating<br />
fund balance would benefit more than a<br />
government that can go from AA to AAA.<br />
• The opportunity costs of holding<br />
fund balances and reserves. Fund<br />
balances/reserves are not without<br />
30
cost. Money held by the government is<br />
money taken out of the private economy.<br />
A less abstract opportunity cost is the<br />
public service forgone because this<br />
money isn’t being spent. In a private<br />
firm, the opportunity cost of idle funds<br />
is, essentially, the rate of profit that<br />
could be made by directing the funds to<br />
a business opportunity. Unfortunately,<br />
there is not yet a widely accepted, useful<br />
way to measure the opportunity costs<br />
of idle funds in local government, so<br />
the cost of holding idle funds in local<br />
government is often underestimated.<br />
• Secondary benefits of a higher bond<br />
rating. A higher bond rating might confer<br />
prestige to the local government, perhaps<br />
RETHINKING RESERVE CHECKPOINTS<br />
Understand bond ratings and reserves<br />
resulting in more trust and confidence<br />
from the public or making the locality<br />
more attractive to businesses.<br />
• How much additional risk coverage<br />
more reserves will buy. This speaks<br />
to the marginal value accrued from<br />
accumulating more reserves. If the<br />
additional reserves are unlikely to be<br />
used, then the potential benefit from<br />
the standpoint of risk mitigation is<br />
low. That said, rating agencies are<br />
measuring fund balance and cash. A<br />
local government could also accumulate<br />
reserves as part of a sinking fund to<br />
pay for a special project. The monies in<br />
the sinking fund would count positively<br />
in the rating agency evaluation.<br />
Fund balances and cash are an important but not overwhelming<br />
determinant of bond ratings.<br />
Because accumulating and holding fund balances/cash is not without<br />
cost, governments should ask if a higher bond rating is worth the cost<br />
of holding. The cost versus benefit of a higher bond rating is a function<br />
of the amount and duration of debt the government issues, the likely<br />
improvement in interest rates available from a rating increase, the<br />
marginal improvement in risk management available from holding more<br />
reserves, and the opportunity cost of holding fund balance/cash.<br />
Conclusion<br />
Reserves help local governments<br />
manage risks by making resources<br />
available for unplanned, unavoidable<br />
expenditures and revenue<br />
interruptions. This makes reserves<br />
a form of self-insurance. We have<br />
advocated for local governments to<br />
treat reserves more like self-insurance,<br />
including using insurance metaphors<br />
to discuss and plan reserve strategies,<br />
using risk analysis to determine the<br />
size of the reserve, complementing<br />
reserves with commercial insurance<br />
strategies, pooling risks that reserves<br />
are used to cover, and more. This<br />
will help local governments make<br />
savvier financial decisions about<br />
how to manage risk and make their<br />
communities more prepared for a<br />
volatile and uncertain world.<br />
Shayne Kavanagh is senior manager<br />
of research for GFOA’s Research and<br />
Consulting Center. Vincent Reitano<br />
is an associate professor at Western<br />
Michigan University’s School of Public<br />
Affairs and Administration. Peter A.<br />
Jones is an associate professor at The<br />
University of Alabama at Birmingham’s<br />
Department of Political Science and<br />
Public Administration.<br />
1<br />
Defining boundaries is essential to good<br />
financial public finance. See Financial<br />
Foundations for Thriving Communities, GFOA,<br />
May 2019.<br />
2<br />
GFOA’s general fund reserve calculation<br />
worksheet is available at gfoa.org/materials/<br />
general-fund-reserve-calculation-worksheet.<br />
3<br />
Michael R. Boswell, Robert E. Deyle, Richard<br />
A. Smith, and E. Jay Baker, “A quantitative<br />
method for estimating probable public costs of<br />
hurricanes,” Environmental Management, 23(3),<br />
April 1999.<br />
4<br />
Shayne Kavanagh, “A Risk-Based Analysis of<br />
General Fund Reserve Requirements,” GFOA,<br />
January 2013.<br />
5<br />
See “Adding Risks Together: The Surprising<br />
Truth” at youtube.com/watch?v=soLvUKp8C4k.<br />
All the videos in this series are available at gfoa.<br />
org/risk-savvy-thinking-about-reserves-videos.<br />
6<br />
See “About Chance Based (Probabilistic)<br />
Reserve Models” at youtube.com/<br />
watch?v=QDI2bYZ1dR4&t=25s. A series of<br />
videos about simulation is available at gfoa.org/<br />
risk-savvy-thinking-about-reserves-videos.<br />
7<br />
See GFOA’s Rethinking Reserves series video,<br />
“Why Pooling Reduces the Cost of Risk,” at<br />
youtube.com/watch?v=IHEA9m0uoaU.<br />
8<br />
To see how, watch GFOA’s Rethinking<br />
Reserves video, “The Decreasing Marginal<br />
Benefit of Reserves” at youtube.com/<br />
watch?v=xjTJtP-yV5s.<br />
9<br />
Watch GFOA’s Rethinking Reserves video,<br />
“Multi-Year Analysis of Reserves,” at<br />
youtube.com/watch?v=uZJftwcCods.<br />
10<br />
The video on analyzing a multiyear time<br />
frame provides an illustration of how<br />
willingness to cut expenditures can be<br />
integrated into a simulation.<br />
11<br />
Visit probabilitymanagement.org for<br />
resources on how to do this.<br />
12<br />
See Shayne Kavanagh and Elizabeth<br />
Fu, “Speaking Uncertainty to Power:<br />
Risk-Aware Forecasting and Budgeting,”<br />
Government Finance Review, April 2016,<br />
to see how one government did just that<br />
and use our mini stress test demonstration,<br />
available at gfoa.org/materials/mini-stresstest-demonstration,<br />
to conduct the same<br />
analysis featured in the article.<br />
13<br />
Find GFOA’s reserve policy template at<br />
gfoa.org/materials/reserve-policy-template.<br />
14<br />
Shayne Kavanagh, “Smart practices for<br />
self-funded employee health insurance,”<br />
Government Finance Review, October 2018.<br />
15<br />
The county also negotiated several<br />
exclusions and limitations to the policy, which<br />
means the final price of the new policy isn’t<br />
comparable to the old one.<br />
16<br />
According to a sample of data obtained by<br />
GFOA, it takes 18 months, on average, for a local<br />
government to obtain FEMA reimbursement.<br />
17<br />
Carolyn Kousky and Helen Wiley, “Improving<br />
the post-flood financial resilience of lowerincome<br />
households through insurance,”<br />
Wharton Risk Management and Decision<br />
Process Center Issue Brief, January 2021.<br />
18<br />
Shayne Kavanagh and Elizabeth Fu,<br />
“Parametric Insurance: An Emerging Tool<br />
for Financial Risk Management,” GFOA,<br />
January 2020.<br />
19<br />
OpenAI’s GPT 4.0 replied to an inquiry by<br />
saying “investment income accounts for<br />
about 25 to 30 percent of the profits of a<br />
typical property and casualty insurance<br />
company.” Further, GPT showed that some<br />
insurance companies even derive most of<br />
their revenue from investments.<br />
20<br />
Data obtained by GFOA from the firm<br />
three+one (which sells a software service<br />
that helps local governments optimize the<br />
amount of money invested in higher return<br />
instruments).<br />
21<br />
The video is available at youtube.com/<br />
watch?v=IHEA9m0uoaU.<br />
22<br />
The video is available at youtube.com/<br />
watch?v=soLvUKp8C4k.<br />
23<br />
For more on how to develop a policy,<br />
see Shayne Kavanagh and Elizabeth<br />
Fu, “The Last Line of Financial<br />
Defense? Internal Loans in Emergency<br />
Situations,” Government Finance<br />
Review, December 2019.<br />
24<br />
Moody’s separates “fund balance ratio”<br />
and “liquidity ratio,” but both cover all<br />
funds. Also, the base score is a starting<br />
point, and Moody’s analysts may adjust<br />
a final rating up or down based on<br />
contextual factors particular to the local<br />
government being evaluated.<br />
25<br />
The formula is: Available Fund Balance<br />
+ Net Current Assets/Revenue.<br />
26<br />
The formula is: Unrestricted cash/<br />
revenue.<br />
27<br />
Data sourced from SDC All Municipals,<br />
an online data portal from Refinitiv.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 31
32
FISCAL FLUENCY MADE EASY<br />
Fiscal Fluency<br />
Made Easy<br />
Communicating Numbers Using Insights from Behavioral Science<br />
BY SHAYNE KAVANAGH<br />
©<strong>2023</strong> SHAW NIELSEN C/O THEISPOT.COM<br />
Numbers are at the core of<br />
a public finance officer’s<br />
job, and a big part of that<br />
is communicating those<br />
numbers to other people.<br />
The challenge is that<br />
numbers are not a first language for<br />
many people in the finance officer’s<br />
audience. In fact, the average American<br />
has only “basic” number skills (defined<br />
as the ability to do simple calculations<br />
and interpret simple tables and<br />
graphs), according to the Program for<br />
the International Assessment of Adult<br />
Competencies. 1 Even so, there are<br />
opportunities for finance officers to<br />
communicate numbers better and, in<br />
doing so, generate a better understanding<br />
of and enthusiasm for savvy financial<br />
decision-making.<br />
For a glimpse into the possibilities,<br />
consider sports fandom. You have<br />
probably met someone who does not<br />
have exceptional math skills yet has<br />
considerable interest in the statistics for<br />
their favorite player or team. They have<br />
taken an interest in the numbers because<br />
of how the numbers are presented and<br />
the context in which they are presented.<br />
Though local government finance will<br />
likely never garner the same enthusiasm<br />
as spectator sports, public finance<br />
officers can harness at least some of the<br />
same potential.<br />
Psychological science provides some<br />
insights into how this is possible. The<br />
book Making Numbers Count 2 by Chip<br />
Heath and Karla Starr provides principles<br />
for communicating numbers in a way<br />
that anyone can grasp. GFOA’s Rethinking<br />
Budgeting (gfoa.org/rethinkingbudgeting)<br />
initiative examined this book<br />
to identify the techniques with the most<br />
potential for public finance.<br />
WE ARE OF TWO MINDS:<br />
THE LIMITS OF RATIONALITY<br />
There have been important advances in<br />
our understanding of how the human<br />
mind processes information in recent<br />
decades. Researchers have identified<br />
two modes of thinking that people<br />
engage in. 3 The first is “automatic”<br />
thinking, which is fast, unconscious,<br />
and/or emotional. The second is<br />
“controlled” thinking, which is slow,<br />
conscious, effortful, and/or logical.<br />
Most of our thinking falls in the first<br />
category, “automatic,” for simple reasons<br />
of biology: “controlled” thinking takes<br />
Can you make<br />
numbers count?<br />
Let us know and win a trip to<br />
the GFOA annual conference.<br />
We want to see if public finance<br />
officers can make numbers count<br />
in their own governments. Share<br />
your presentation with us, and<br />
you might win a trip to the GFOA<br />
Annual Conference. Check out<br />
gfoa.org/fiscalfluency for details.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 33
FISCAL FLUENCY MADE EASY<br />
a lot of energy. Relying on automatic<br />
thinking conserves energy—a useful<br />
feature from times in human history when<br />
food was much scarcer than it is today.<br />
However, Western culture prizes<br />
rationality, which can lead us to<br />
overestimate its place in human cognition.<br />
This can lead us to overestimate people’s<br />
ability to grasp numbers. This does not<br />
mean we should give up on rationality;<br />
it just means that our efforts to present<br />
numbers must be mindful of the limits of<br />
rationality and work within those limits.<br />
THE FOUR BUILDING BLOCKS OF<br />
BETTER COMMUNICATION<br />
We, as people, are inherently limited in<br />
our ability to grasp numbers. Numbers,<br />
by themselves, are abstract concepts.<br />
Abstractions require effortful thinking.<br />
This is why young children are taught to<br />
count objects, like fingers and toes. This<br />
makes the numbers more concrete. The<br />
numbers that public finance officers need<br />
to communicate often go well beyond what<br />
can be accommodated by fingers and toes.<br />
Large numbers can become abstract, so<br />
their full meaning is not well understood.<br />
To take one example, consider the<br />
phenomena of “psychological numbing.”<br />
This means that the higher a number gets,<br />
the less sensitive we get to that number.<br />
To illustrate, someone might drive from<br />
one appliance store to another store across<br />
town if they discover the other store<br />
offers a sale of $10 off on a $40 toaster.<br />
But that same person would be less likely<br />
to make the trip if they discovered they<br />
could save $15 on a $1,400 television.<br />
Logically, they should make the trip. If<br />
the trip is worth $10, then it is also worth<br />
$15. But due to psychological numbing,<br />
the difference between the sale price<br />
and the full price doesn’t feel as great<br />
for the television. Many public finance<br />
officers have witnessed a similar<br />
situation when an elected body spends a<br />
lot of energy debating a small change in<br />
a minor budget line item but soon after<br />
approves a multimillion-dollar capital<br />
project with minimal discussion.<br />
The essence of dealing with<br />
psychological numbing and other<br />
impediments to understanding<br />
numbers (especially large numbers)<br />
is to take a cue from our childhoods<br />
and transform numbers into a human<br />
experience. We can do better than<br />
fingers and toes, though. Making<br />
Numbers Count suggests four basic<br />
building blocks for transforming<br />
numbers into a human experience:<br />
• Translate numbers to human scale<br />
• Help people grasp your numbers<br />
• Catalyze action with emotional<br />
numbers<br />
• Build a scale model.<br />
Translating numbers to human scale<br />
Returning to sports statistics, one<br />
of the reasons these statistics are<br />
understandable is that they typically<br />
focus on individuals. For example, we<br />
might look at the individual player’s<br />
performance over the course of a game,<br />
like how many points a basketball player<br />
typically scores in a game, or how many<br />
yards a football running back gains. Some<br />
statistics even focus on individual plays<br />
by individual players, like a basketball<br />
player’s free throw shooting percentage or<br />
a running back’s yards per carry.<br />
The authors of Making Numbers Count<br />
refer to this strategy as “focusing on one<br />
at a time.” This helps make large and<br />
otherwise abstract numbers more<br />
concrete. Research has shown that<br />
adding even basic context can reduce<br />
error rates substantially when people<br />
need to recall facts. 4 A simple example<br />
in public finance would be to use percapita<br />
figures in place of grand totals. For<br />
example, what is the cost per resident<br />
to add a new public service? Another<br />
example would be showing the impact on<br />
the average household. For instance, if<br />
we were to increase property taxes, what<br />
would the impact be on the tax bill for an<br />
average home?<br />
Another strategy for translating<br />
numbers to human scale is to “favor<br />
Most of our thinking falls in the first category, “automatic,”<br />
for simple reasons of biology: “controlled” thinking takes<br />
a lot of energy.<br />
The sparse historical track<br />
record of large numbers<br />
The authors of Making Numbers Count<br />
point out that “most languages in the<br />
world and throughout history have names<br />
for the numbers 1, 2, 3, 4, and 5. But after<br />
that, the supply of numbers with names<br />
runs dry, and the language is forced to<br />
resort to a generic word such as ‘lots’ for<br />
all the other numbers—from 6 and 7 on<br />
up….” This shows that large numbers are<br />
not instinctive to the human mind.<br />
©<strong>2023</strong> SHAW NIELSEN; DAN PAGE C/O THEISPOT.COM<br />
34
©<strong>2023</strong> CHRIS GASH C/O THEISPOT.COM<br />
user-friendly numbers.” Research has<br />
shown that the human working memory<br />
can hold around five to nine pieces of<br />
information. 5 A single numerical digit<br />
(such as “2”) would be one piece of<br />
information. This is why, for example,<br />
telephone numbers were originally<br />
designed to be seven digits long (seven<br />
is in the middle of five to nine digits).<br />
The implication for public finance is<br />
that numbers with many digits take up<br />
more space in the audience’s working<br />
memory, making it difficult for them to<br />
follow the larger message.<br />
The authors of Making Numbers Count<br />
advocate “rounding with enthusiasm”<br />
to reduce the number of digits. For<br />
example, $3,405,892 should become<br />
$3.4 million. This reduces a seven-digit<br />
number to two, leaving more room in<br />
working memory for other information.<br />
Though numbers of less than “1” are<br />
not as common in public finance, the<br />
same rule applies. Percentages, for<br />
example, are numbers of less than “1,”<br />
and the authors of Making Numbers<br />
Count recommend using whole numbers<br />
to describe fractions, portions, and<br />
percentages. Exhibit 1 illustrates this<br />
concept by comparing the percentage of<br />
total spending to the number of dollars<br />
spent by each department for every<br />
$10 in the budget. The second column,<br />
expressed in whole numbers, gives a<br />
clearer and memorable sense of the<br />
proportion of the spending undertaken<br />
by each department. It is true that<br />
some precision is lost, and it would be<br />
up to the finance officer to determine,<br />
in each case, if the loss in precision is<br />
counterbalanced by the increase in<br />
comprehension for a wider audience. If<br />
the precision is important, the finance<br />
officer could still use whole numbers<br />
by showing how much each department<br />
spends per $100 in the budget. It would<br />
be the same figures in both cases (for<br />
example, 36 percent for police versus<br />
$36), but the whole numbers put the<br />
figures in a more understandable<br />
context: percentages are an abstract<br />
concept, but an audience can readily<br />
imagine having $100 and dividing it<br />
among the departments.<br />
Help people grasp your numbers<br />
When we say “grasp” numbers, the use<br />
of a physical metaphor is not a mere<br />
EXHIBIT 1 | USING WHOLE NUMBERS TO DESCRIBE FRACTIONS<br />
Department Percent of spending For every $10 in the budget…<br />
Police 36% $4<br />
Fire 31% $3<br />
Public Works 22% $2<br />
Administration 11% $1<br />
Percentages are an abstract<br />
concept, but an audience<br />
can readily imagine having<br />
$100 and dividing it among<br />
the departments.<br />
coincidence. Tactile sensations and<br />
involving the body in learning can<br />
greatly boost understanding. 6 The<br />
authors of Making Numbers Count<br />
cite a survey showing that among 84<br />
cultures, most related their units of<br />
measurement to part of the body. 7 For<br />
example, about half of the cultures<br />
have a unit of measurement based on<br />
the length of outstretched arms (called<br />
a “fathom” in English).<br />
The lesson for public finance officers<br />
is to use simple, familiar comparisons<br />
to help people understand numbers. For<br />
example, local government financial<br />
concepts can be related to everyday<br />
personal or consumer finance. You could<br />
compare the average taxes paid per<br />
person to a common household expense<br />
like cable and streaming bills. Or you<br />
could compare the price of 16 ounces<br />
of tap water to the cost of 16 ounces of<br />
store-bought bottled water.<br />
Another readily understood basis<br />
of comparison is time. The authors of<br />
Making Numbers Count point out that we<br />
may not know how far away our favorite<br />
coffee shop is in miles, but we know how<br />
long it takes to get there in minutes. In<br />
a local government finance context,<br />
figures could be compared to the amount<br />
of staff time a given amount of money<br />
would buy: “That amount of money<br />
would be enough to pay for two full-time<br />
patrol officers for a full year.”<br />
The common theme of these examples<br />
is to relate numbers to common things<br />
and experiences in everyday life.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 35
FISCAL FLUENCY MADE EASY<br />
Catalyzing action with emotional<br />
numbers<br />
Sometimes a finance officer needs to<br />
inspire action in others, and they may<br />
need to use numbers to make the case—<br />
but actions are more likely to be spurred<br />
by emotion than logic. The finance<br />
officer can fuse the logic of numbers<br />
with a presentation that engages the<br />
emotional (“automatic”) part of our<br />
thinking. Making Numbers Count<br />
provides many potential techniques,<br />
but before we review some of them, we<br />
should recognize that catalyzing action<br />
with emotional numbers poses a risk of<br />
treading into ethical gray areas. This is<br />
because using emotion in a presentation<br />
could be perceived as manipulative if<br />
emotion is used inappropriately.<br />
The foundational technique for<br />
catalyzing action with emotional<br />
numbers is to use a vivid comparison<br />
to relate the number to some other<br />
experience that looms large in the<br />
minds of the audience. After the<br />
2008 Great Recession, some creative<br />
public finance officers would compare<br />
potential new revenue problems to<br />
what the local government experienced<br />
during the Great Recession. This<br />
provided a visceral sense of the scale of<br />
response that might be required.<br />
Another foundational technique is<br />
to subvert the audience’s expectations<br />
by introducing an element of the<br />
unexpected. Making Numbers Count<br />
suggests “category jumping,” which<br />
means to pull the number out of the<br />
category the audience normally<br />
associates it with and put it in a new,<br />
unexpected context. Imagine a city<br />
government that runs a water and sewer<br />
utility. The utility is quite large and has<br />
a budget that is comparable in size to<br />
the government’s general fund, but the<br />
utility tends to fade into the background<br />
during budget discussions. The finance<br />
officer believes that the elected leaders<br />
should exercise greater oversight of<br />
the utilities’ financial performance<br />
to ensure their ongoing viability. The<br />
finance officer could point out that if<br />
the utilities were (in theory) their own<br />
government, they would have a budget<br />
equal to the city’s general fund. This<br />
unexpected way of thinking about the<br />
utilities would help highlight their<br />
considerable budget.<br />
Another way to subvert expectations<br />
is to establish a pattern and then break<br />
it. Imagine that a survey shows that<br />
around 40 percent of a city’s residents<br />
think they are getting good value for<br />
their tax dollars from city government.<br />
By itself, that might not mean much<br />
and could be dismissed with a bromide<br />
like: “Well, people just don’t like paying<br />
taxes.” However, real-life surveys show<br />
that cities often have higher levels of<br />
satisfaction, which doesn’t bode well<br />
for our hypothetical city’s ongoing<br />
relationship with its taxpayers. 8 To help<br />
drive the point home, the finance officer<br />
could share the results from nearby cities<br />
with more average levels of resident<br />
satisfaction and then highlight their<br />
own city’s score: “Six of ten residents in<br />
the City of X are satisfied with the value<br />
they get for the taxes they pay to the<br />
municipal government. For the City of Y,<br />
it is about seven of ten residents. In the<br />
City of Z, it is also seven of ten residents.<br />
But in our city, only four of ten residents<br />
are satisfied with the value of their tax<br />
dollars…or less than half.” A pattern of<br />
about 60 to 70 percent satisfaction is<br />
established with the first three cities,<br />
and then our hypothetical city’s more<br />
concerning score breaks the pattern.<br />
A related technique is to highlight<br />
“incomparables,” or to show how<br />
the number of interest is radically<br />
different from what could be reasonable<br />
comparisons. An example in public<br />
finance could be the rate of increase in<br />
expenditures. A high rate of increase<br />
could make an object of expenditures of<br />
moderate size grow to an unmanageable<br />
size quickly. Imagine the elected board is<br />
looking at several expenditure categories<br />
of comparable size. One of them has been<br />
growing so quickly over the past number<br />
of years that, if the trend persists, that<br />
expenditure category will become much<br />
larger and stress the budget. The finance<br />
officer could shift the focus away<br />
from the absolute size of the spending<br />
categories (which is comparable) and<br />
put the focus toward the rate of growth<br />
(which is incomparable).<br />
An important technique is to make<br />
the number personal to the audience.<br />
Imagine a recession is coming and<br />
the finance officer is forecasting a<br />
decline in revenue. The finance officer<br />
recommends slowing down hiring<br />
and freezing hiring for nonessential<br />
positions to prepare for a time of lower<br />
revenues. Because there hasn’t been a<br />
conventional recession in some time, 9<br />
The foundational technique for catalyzing action with<br />
emotional numbers is to use a vivid comparison to<br />
relate the number to some other experience that looms<br />
large in the minds of the audience.<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
36
department heads can’t appreciate the<br />
gravity of the situation and don’t want<br />
to change hiring practices. The finance<br />
officer could point out the number of<br />
employees each department would have<br />
to lay off if they continued hiring as<br />
they have been and if revenues decline<br />
as much as the finance officer thinks<br />
they might. The finance officer could<br />
then ask each department head to think<br />
about who they would lay off. Thus,<br />
an abstract problem (future revenue<br />
decline) becomes a personal concern for<br />
the department heads.<br />
Another way to make the number<br />
personal would be to help people touch<br />
and feel the things that public money<br />
accomplishes. For example, the City of<br />
Decatur, Georgia, held an event where<br />
people could visit a fire station and see<br />
the equipment; and the city also included<br />
information about how the public’s tax<br />
money paid for the equipment.<br />
Finally, numbers can be shown as<br />
a process that evolves over time. For<br />
example, imagine that a large school<br />
district has not been keeping up on the<br />
maintenance of its school buildings,<br />
resulting in emergency repair costs. At<br />
a monthly management meeting, the<br />
finance officer could point out the cost<br />
of the unscheduled repairs that will be<br />
incurred, if past trends hold, between<br />
now and the next meeting. A similar<br />
example is to highlight the cost of the<br />
unnecessary/unproductive meeting by<br />
adding up the cost of the staff time spent<br />
in the meeting.<br />
Build a scale model<br />
EXHIBIT 2 | PROPERTY TAX PER ACRE FOR DURANGO, COLORADO<br />
Downtown Durango<br />
If you were told a house is 1,600 square<br />
feet, you might have trouble envisioning<br />
how large that is. However, if you<br />
were shown a floor plan, it would be<br />
much easier. Not only do scale models<br />
communicate well, but people also find<br />
them inherently interesting. Consider<br />
that maps and globes are often used as<br />
decoration, without any use for real-life<br />
navigation.<br />
Maybe the best example of scale<br />
models in public finance is combining<br />
financial information with geospatial<br />
information. Unlike most private<br />
firms or nonprofit organizations,<br />
local governments are firmly rooted<br />
to a defined geographical area.<br />
This means some aspects of local<br />
government finance are best understood<br />
geospatially. The GFOA report, The Root<br />
of Local Government Revenue, provides<br />
several examples. 10 To take one example,<br />
Exhibit 2 shows property tax per acre in<br />
neighborhoods of the City of Durango,<br />
Colorado. Much like a bar chart, the<br />
higher an area is raised on the map, the<br />
more revenue per acre it produces. We<br />
see on this map that the downtown area<br />
produces more property tax per acre<br />
than other areas of Durango. This is due<br />
to the density and quality of buildings<br />
found in the downtown area. It makes<br />
the point that the local governments of<br />
Durango should be mindful of how land<br />
is used, as it has important implications<br />
for the local government’s ability to<br />
fund public services.<br />
MAKING NUMBERS COUNT IN<br />
PUBLIC FINANCE<br />
In this section, we will show how the<br />
building blocks of Making Numbers<br />
Count could be applied to common<br />
communication challenges faced by<br />
public finance officers. Before we jump<br />
into the examples, we will note that<br />
applying the ideas of Making Numbers<br />
Count will require more effort and<br />
creativity than conventional tables<br />
and graphs. Therefore, we are not<br />
suggesting that you apply these ideas<br />
to every number you present. Rather,<br />
these ideas can be applied to situations<br />
where the juice is worth the squeeze,<br />
like high-profile, weighty issues the<br />
audience especially needs to grasp.<br />
Challenge:<br />
Describing the value of government<br />
North Durango<br />
Graphic courtesy of Urban3<br />
South Durango<br />
Government services have peculiar<br />
characteristics that make it difficult<br />
for individuals to appreciate the value<br />
they are getting from the service. 11<br />
For instance, it is easy to appreciate<br />
the value one would get from buying<br />
groceries but more difficult to<br />
appreciate the value of paying for<br />
police, fire, and emergency medical<br />
services for community safety.<br />
A solution could be to compare the<br />
value of government to the value of a<br />
consumer good. For example, the City of<br />
San Mateo, California, provides public<br />
safety, public works, library, parks and<br />
recreation, and city administration<br />
services. (See Exhibit 3.) The general<br />
government operating budget is about<br />
$170 million. The city serves 103,779<br />
people living in 40,233 households,<br />
and it also has sizable non-residential<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 37
FISCAL FLUENCY MADE EASY<br />
EXHIBIT 3 | (RE)CONSIDERING THE OPERATING BUDGET<br />
Consider the City of San Mateo’s General Governmental Operating Budget<br />
$170<br />
MILLION ANNUAL<br />
OPERATING BUDGET<br />
$260<br />
constituency, equal to about 25 percent<br />
of the property tax base. So, a single<br />
household’s share of the operating budget,<br />
after deducting the share of commercial<br />
properties, comes to around $3,200<br />
annually, or about $260 per month. This<br />
figure includes more than property taxes<br />
and sales taxes; it includes all financial<br />
contributions that households make<br />
to the city government (for example,<br />
taxes, fees, and more). We could then<br />
compare this to other kinds of “operating<br />
expenditures” that households make.<br />
Let’s take entertainment. According<br />
to the U.S. Bureau of Labor Statistics,<br />
households spend about $300 per month<br />
on entertainment. So, the total financial<br />
contribution for essential services like<br />
public safety, transportation system<br />
maintenance, parks, and building safety<br />
regulations is less than what is typically<br />
spent on television/streaming, video<br />
games, movie/concert tickets, and related<br />
expenditures.<br />
Sometimes the value of government is<br />
harder to measure because the benefits<br />
seem less tangible than the benefits a<br />
consumer gets from buying a private good.<br />
Fortunately, there are many strategies to<br />
help with this problem. 12 First, check to<br />
see who has tried to measure the value<br />
$260 40K<br />
IN SAN MATEO PER MONTH<br />
HOUSEHOLDS<br />
PER HOUSEHOLD<br />
PAYS FOR PUBLIC<br />
SAFETY, PUBLIC WORKS,<br />
LIBRARY, PARKS/<br />
RECREATION, AND MORE<br />
VS TO<br />
MAKE THIS NUMBER CONCRETE,<br />
WE CAN COMPARE IT TO COMMON<br />
HOUSEHOLD EXPENDITURES...<br />
$300<br />
SUCH AS THE AVERAGE<br />
HOUSEHOLD MONTHLY<br />
ENTERTAINMENT BILL<br />
of that public service before. Especially<br />
with the availability of large language<br />
model artificial intelligence (such as<br />
ChatGPT), it should be easy to find out<br />
how other people have defined the value<br />
of public services in the past. Next, you<br />
might imagine what life would be like<br />
without public service. What would the<br />
observable differences be in the world?<br />
If there is any observable difference,<br />
then it is potentially measurable.<br />
Finally, it can help to break down the<br />
problem into component parts and think<br />
about the smaller components rather<br />
than everything at once.<br />
Let’s apply these ideas to the problem<br />
of central sewer services. It might be<br />
difficult to communicate the monetary<br />
value of sewers because there is no<br />
obvious private-sector analogue. For<br />
example, one does not have to make much<br />
of a conceptual leap to compare tap water<br />
purchased from a water utility to bottled<br />
water from a grocery store. With sewer, it<br />
is not so easy.<br />
We could start with a query to ChatGPT<br />
to nail down some of the benefits of<br />
central sewerage. ChatGPT returned nine<br />
and, following our principle of breaking a<br />
problem into component parts, we’ll focus<br />
on just one: public health/sanitation.<br />
It is not hard to imagine life without<br />
central sewers; that’s how life was<br />
in the United States until the early<br />
1900s. We can also look to see who<br />
else has measured the impact of<br />
sewers on public health. ChatGPT<br />
points us to a 2006 study show that the<br />
implementation of central sewers in the<br />
United States resulted in an increase in<br />
life expectancy of about 30 percent—or<br />
about 10 years. Living 10 years longer is<br />
something that might be easy for people<br />
to appreciate.<br />
We might be able to make the example<br />
even better by comparing the cost of<br />
sewer to another source of increased<br />
life expectancy: modern medicine.<br />
According to ChatGPT, a study from<br />
the Journal of American Medicine<br />
showed that medical advancements<br />
such as antibiotics, vaccinations,<br />
and improvements in cardiovascular<br />
disease treatment accounted for<br />
approximately a five-year increase in<br />
life expectancy in the United States<br />
between 1960 and 2010. ChatGPT tells<br />
us that the average monthly premium<br />
for an individual health insurance<br />
plan was $456 in 2020. This could be<br />
compared to the typical bill for sewer<br />
utilities (which was around $70 on<br />
average across the United States). That’s<br />
a pretty good deal! Ten years of extra life<br />
for $70 compared to five years for $450!<br />
There are many possibilities. For<br />
example, many sewer utilities convert<br />
used water supplies into fertilizer that is<br />
sold to commercial users in the region.<br />
Perhaps those sales could be translated<br />
to per ratepayer revenue and consequent<br />
reduction in sewer bills. This could then<br />
be compared to dividends available by<br />
investing in a private company.<br />
Challenge:<br />
Justifying growth in the budget<br />
Stakeholders may have difficulty<br />
understanding why costs are going up—<br />
and the need to pay for those costs.<br />
This challenge could be particularly<br />
germane to rapidly growing<br />
communities, but inflation also puts<br />
upward pressures on the budget that<br />
might need an explanation.<br />
One strategy would be to show how<br />
failing to accommodate growth in<br />
ILLUSTRATIONS BY JUSTIN CARMIEN<br />
38
The essence of dealing with psychological numbing and<br />
other impediments to understanding numbers is to take<br />
a cue from our childhoods and transform numbers into<br />
a human experience.<br />
Challenge:<br />
Describing the absolute size of the budget<br />
Challenge:<br />
Encouraging efficiency and cost avoidance<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
the budget would lead to diminished<br />
public services. An easily understood<br />
example is class sizes in public schools.<br />
For example: “If we don’t increase the<br />
budget to account for a growing schoolage<br />
population, class sizes will rise from<br />
25 kids per classroom to 30. Put another<br />
way, for every five kids that were in a<br />
class before, there would be six.” Perhaps<br />
a city government could explain the<br />
need to expand roadways in a growing<br />
community this way: “Nowadays, there<br />
are three cars on our roads for every<br />
two there were before. As a result, the<br />
average commute time has increased<br />
by 15 minutes one way. That is equal to<br />
spending 2.5 more hours commuting a<br />
week, if you work a five-day work week.”<br />
Inflationary pressures could be<br />
illustrated in a similar way but might<br />
focus on areas of the budget that are<br />
susceptible to inflation—the cost of fuel,<br />
for instance. A county’s finance officer<br />
might point out that an annualized ten<br />
percent increase in fuel costs means<br />
the county would lose the ability to put<br />
one out of every ten sheriffs’ cars on the<br />
road unless the budget is increased to<br />
compensate.<br />
Budget growth needs to be paid for<br />
somehow. If tax or rate increases are<br />
being considered, the finance officer<br />
could take inspiration from our<br />
discussion of value and compare<br />
the increased cost per household for<br />
government services and what that is<br />
paying for, and the increased cost per<br />
household for common consumer items.<br />
For example, perhaps if the audience<br />
appreciates that the cost of a gallon of gas<br />
at the pump is going up, it will be easier<br />
for them to understand that the cost of<br />
busing children to school is also going up.<br />
Regardless of any increases, the local<br />
government budget commands a<br />
significant amount of money. People<br />
may have difficulty understanding<br />
how large of an operation the local<br />
government is. One possibility might<br />
be to compare the total revenue of local<br />
government to that of notable local<br />
businesses: “If our local government<br />
were a private company with the same<br />
revenues we have today, we’d be a bigger<br />
business than firms X, Y, or Z.” Another<br />
possibility might be comparing it to<br />
multiples of a single firm that people<br />
know well: “If our local government<br />
were a private business with the<br />
same revenues we have today, we’d<br />
be the equivalent of three Firm Xs.”<br />
Another common problem is<br />
describing the relative spending on<br />
different departments within the<br />
government. A common solution is the<br />
classic pie chart. Pie charts are subject<br />
to a surprising amount of criticism from<br />
graphic design experts, 13 though we<br />
might take inspiration from pie charts to<br />
come up with a better solution. Imagine<br />
the audience is the city council. They<br />
are likely familiar with the layout of<br />
city hall. The finance officer could<br />
ask them to imagine the floor plan of<br />
city hall as the equivalent of the entire<br />
budget and then apportion (imaginary)<br />
floor space to each area of spending<br />
according to the number of dollars<br />
spent. The same idea could be applied<br />
to the council chambers, with floor<br />
space in the chambers apportioned to<br />
spending areas. This might even allow<br />
the audience to physically walk through<br />
the spending proportions. Or council<br />
members could be given actual coins,<br />
and they would physically categorize<br />
the coins into the departments.<br />
Efficiency and cost avoidance are<br />
generally good things but often not<br />
very exciting. Imagine the local<br />
government has the opportunity to<br />
take some cost-saving measures, and<br />
the finance officer wishes to raise<br />
the profile of the opportunity.<br />
They could express the potential<br />
savings in person hours made available.<br />
The presentation would be more effective<br />
if the person’s hours could be translated<br />
into some other activity that the audience<br />
would find valuable. For example: “This<br />
project is estimated to save $30,000 a<br />
year in the public works department,<br />
which is the equivalent of 20 hours a week<br />
for a public works maintenance worker.<br />
Those are hours that could be used, for<br />
example, by the graffiti removal program<br />
to improve our response to graffiti to two<br />
days instead of three.” This example<br />
also reminds us to be mindful of the<br />
risks and ethical gray areas of Making<br />
Numbers Count. For example, if it is not<br />
realistic that the saved hours could be<br />
used to accomplish graffiti removal (or<br />
whatever task is of interest), then it would<br />
be unethical to imply that they could.<br />
Challenge:<br />
Communicating the burden of debt<br />
Capital asset financing poses not just<br />
the communication problem of the big<br />
dollar amounts involved but also the long<br />
timeframe over which the debt used to<br />
purchase the asset is paid back (30 years<br />
is not uncommon).<br />
One common communication challenge<br />
is the cost of a new asset to taxpayers.<br />
A communication strategy might be<br />
one that brings costs to the individual<br />
level and to a near-term time scale. For<br />
example, what might the equivalent costs<br />
on a daily or monthly basis be? Could that<br />
be compared to some other relevant cost?<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 39
FISCAL FLUENCY MADE EASY<br />
Let’s take an example from the City<br />
of San Mateo. The city issued a general<br />
obligation bond to finance the cost of<br />
its main library. The total principal and<br />
interest is $2 million per year, or about<br />
$37 per year per household, or $15 per<br />
year per person in San Mateo, after<br />
considering the tax contributions from<br />
non-residential properties in the city.<br />
These figures could then be compared<br />
to other costs that citizens incur for<br />
reading. (See Exhibit 4.) For example,<br />
according to the Bureau of Labor<br />
Statistics, households spend about<br />
$110 per year on reading materials,<br />
and a library seems like a reasonable<br />
investment by that measure. However,<br />
“amount spent on reading materials”<br />
may still be rather abstract. We could<br />
break the costs down to per-month<br />
spending for the library bond, which is<br />
$3.10 per household, or about $1.20 per<br />
person. This could then be compared<br />
to the cost of buying the latest New<br />
York Times best-seller or some other<br />
popular book. For example, The DaVinci<br />
Code is one of the best-selling books<br />
in the last 20 years, and you can buy a<br />
copy for about $7. Let’s assume it would<br />
take a month to read The DaVinci Code.<br />
For a fraction of the cost of the book,<br />
you could build a library that would<br />
give you access to every novel written<br />
by the author of The DaVinci Code. Of<br />
course, this says nothing of the many<br />
other services the San Mateo library<br />
offers, from technology services (for<br />
example, borrowing a tablet computer)<br />
to assistance with filing federal<br />
income taxes. And our example could<br />
incorporate these services as well.<br />
In another example, the annual<br />
debt service for school buildings at<br />
Palm Beach County Public Schools<br />
is $177 million (see Exhibit 5.) The<br />
adult population in the public school<br />
boundaries is 1.2 million. This equates<br />
to $98 per adult, or about $8 per month.<br />
Most adult Americans consume at least<br />
some coffee, and most consume two or<br />
more cups each day. Whether buying<br />
from coffee shops or making coffee at<br />
home, most Americans spend at least<br />
$10 a month on coffee. 14 Therefore,<br />
the cost of the average adult’s monthly<br />
coffee (at least $10) is more than enough<br />
to pay for their monthly share of local<br />
school building construction.<br />
EXHIBIT 4 | COMPARISONS THAT HELP EXPLAIN THE COST OF A LIBRARY<br />
Consider San Mateo’s General Obligation Bond to Finance the Cost of its Main Library<br />
$2<br />
MILLION<br />
Or Consider it By Month<br />
Another option would be to show what<br />
a debt repayment stream would add to the<br />
average tax bill—or to compare the added<br />
cost to the typical monthly mortgage<br />
or rent, with the idea that housing and<br />
public assets are both kinds of “capital<br />
spending” a community requires.<br />
Challenge:<br />
Communicating insignificance<br />
PER YEAR<br />
TOTAL PRINCIPAL $37<br />
WITH INTEREST PER HOUSEHOLD<br />
PER YEAR<br />
$7<br />
A BEST-SELLING PAPERBACK<br />
MIGHT COST AROUND $7 AND<br />
TAKE ABOUT A MONTH TO READ<br />
VS<br />
Up to now, we have considered the<br />
challenges of communicating important<br />
issues. But sometimes, public finance<br />
officers have the opposite problem,<br />
in which a small, insignificant issue<br />
becomes a distraction. Of course,<br />
sometimes issues that don’t have big<br />
financial implications do have big<br />
cultural, moral, or other implications<br />
that are not easily quantified—we are<br />
not suggesting that the finance officer<br />
dismiss these issues as a distraction.<br />
But there are cases where an issue that is<br />
truly insignificant consumes time and<br />
attention for no good reason. For example,<br />
at one city, which has a $250 million<br />
operating budget, the council would<br />
spend an inordinate amount of their (and<br />
the staff’s) time each year debating a<br />
$10,000 contribution to a local nonprofit.<br />
In cases like this, the finance officer has<br />
VS $110<br />
PER HOUSEHOLD<br />
PER YEAR<br />
good cause to redirect the conversation to<br />
something more important.<br />
This is a good opportunity to translate<br />
money to time: “The amount we are<br />
discussing is the equivalent to two months<br />
of a single patrol officer’s time. In the<br />
meantime, we have another issue on the<br />
agenda that is the equivalent of the time of<br />
six patrol officers—for an entire year each.”<br />
THE ETHICS OF MAKING<br />
NUMBERS COUNT<br />
COMPARE THE $37 TO THE<br />
AVERAGE HOUSEHOLD<br />
ANNUAL SPENDING ON<br />
READING MATERIALS!<br />
$3<br />
PER HOUSEHOLD<br />
PER MONTH<br />
HOWEVER, THE MONTHLY HOUSEHOLD<br />
COST TO BUILD THE PUBLIC LIBRARY<br />
IS A FRACTION OF THAT AMOUNT<br />
Using more “creative” presentations of<br />
numbers does expose the finance officer<br />
to risk, especially if the presentation is<br />
designed to have an emotional impact. For<br />
example, a presentation could be seen as<br />
misleading or manipulative. These risks<br />
can be managed, though.<br />
The first point is to avoid misrepresentation.<br />
Intentional misrepresentation is<br />
obviously unethical, but numbers can<br />
be presented in ways that introduce<br />
unintentional misrepresentation. For<br />
example, imagine a government has a<br />
large, unfunded, accumulated sick leave<br />
liability, and employees are paid their<br />
unused balance when they retire. To<br />
communicate the size of the liability, a<br />
well-meaning finance officer compares<br />
the size of the liability to the number<br />
of additional teachers, police officers,<br />
ILLUSTRATIONS BY JUSTIN CARMIEN<br />
40
firefighters, and more, who could be hired<br />
with that money (as in, total size of liability<br />
divided by average salary of a teacher).<br />
There are a few problems with this<br />
demonstration. First, if the liability were<br />
wiped away tomorrow, the government<br />
would not then have access to new funds to<br />
hire the additional staff. Second, a liability<br />
like accumulated sick leave is paid out over<br />
time (not everyone will retire this year).<br />
This means the time value of money must<br />
be considered. 15 So, the current burden<br />
the liability places on the budget is less<br />
than simply adding up the value of the<br />
current amount of unused time. Finance<br />
officers can test presentations with trusted<br />
colleagues and ask them to play devil’s<br />
advocate and look for ways in which a<br />
creative presentation could be misleading.<br />
For the second point, we turn to the role<br />
of emotion in presentations. The finance<br />
officer relies primarily on logical reasoning<br />
and a reputation for trustworthy analysis<br />
to get their message across. Emotion,<br />
though, is a tool that a finance officer<br />
may need to use at times. Emotion is an<br />
important part of how people understand<br />
the world around them. The finance officer<br />
can evaluate the ethics of an opportunity<br />
to use emotional communication by<br />
considering the following questions: 16<br />
• Does the communication make a useful<br />
contribution to the discussion about<br />
public finance? For example, does it help<br />
illustrate the gravity of a decision? Or<br />
does it help people better understand<br />
issues of sound public finance?<br />
• Does the communication help move the<br />
decision process forward? For example,<br />
does it help highlight trade-offs or better<br />
engage people in the discussion?<br />
• Is the communication consistent with<br />
a fair and accurate presentation of the<br />
underlying data? Is it consistent with<br />
the finance officer’s own code of ethics?<br />
(See gfoa.org/ethics.)<br />
For example, WaterOne, a water utility near<br />
Kansas City, Kansas, was concerned about<br />
the affordability of water for low-income<br />
households. To better emphasize what the<br />
cost of water means to the individual, they<br />
began showing their board what portion<br />
of an individual’s disposable income is<br />
consumed by water charges. This helped<br />
better illustrate the importance of the<br />
issue for low-income households as well<br />
as provided a better basis for discussing<br />
options WaterOne might have to help<br />
low-income households. It was also an<br />
accurate representation of WaterOne’s fee<br />
structures.<br />
EXHIBIT 5 | COMPARISONS THAT HELP EXPLAIN THE COST OF SCHOOLS<br />
Consider the Debt Service for School Buildings at Palm Beach Public County Public Schools<br />
$117<br />
MILLION ANNUAL<br />
DEBT SERVICE COSTS<br />
1.2<br />
MILLION ADULT<br />
RESIDENTS<br />
$8<br />
PER PERSON<br />
PER MONTH<br />
THEN COMPARE THE $8 TO THE AVERAGE ADULT’S MONTHLY COFFEE EXPENDITURE:<br />
$10<br />
PER<br />
PERSON<br />
PER MONTH<br />
CONCLUSION<br />
Numbers and the communication of<br />
numbers are essential to the role of the<br />
public finance officer. Ultimately, though,<br />
the finance officer’s role is to help other<br />
public officials make better decisions<br />
and to provide assurances to the public<br />
that tax money is being used wisely.<br />
But if public officials or citizens can’t<br />
understand the numbers, the finance<br />
officer will not succeed. The strategies<br />
presented in this article can help<br />
finance officers create the fiscal fluency<br />
necessary for good conversations about<br />
public finance and good decisions.<br />
Shayne Kavanagh is the senior manager<br />
of research for GFOA’s Research and<br />
Consulting Center.<br />
1<br />
Madeline Goodman, Robert Finnegan, R., Layla Mohadjer,<br />
Tom Krenzke, and Jacquie Hogan, Literacy, numeracy, and<br />
problem solving in technology-rich environments among<br />
U.S. adults: Results from the Program for the International<br />
Assessment of Adult Competencies 2012: First Look (NCES<br />
2014-008). U.S. Department of Education, National Center for<br />
Education Statistics, 2013.<br />
2<br />
Chip Heath and Karla Starr, Making Numbers Count (Avid<br />
Reader Press/Simon & Schuster: 2022).<br />
3<br />
The best-known publication on this topic is: Daniel Kahneman,<br />
Thinking, Fast and Slow (Farrar, Straus and Giroux: 2011).<br />
4<br />
The authors of Making Numbers Count cite research<br />
conducted by Microsoft as part of search engine<br />
development.<br />
5<br />
George Armitage Miller, “The magical number seven, plus<br />
or minus two: Some limits on our capacity for processing<br />
information,” Psychological Review, 63(2), 1956.<br />
6<br />
Annie Murphy Paul, The Extended Mind: The Power of<br />
Thinking Outside the Brain (Mariner Books: 2021).<br />
7<br />
Kensy Cooperrider and Dedre Gentner, “The career of<br />
measurement,” Cognition, 191, October 2019; and Heath,<br />
C., & Starr, Making Numbers Count: The Art and Science<br />
of Communicating Numbers (Avid Reader Press/Simon &<br />
Schuster:2022).<br />
8<br />
Michelle Kobayashi at Polco provided insights on typical<br />
scores cities might receive on such surveys.<br />
9<br />
One could argue that the economic decline associated with<br />
COVID-19 was unconventional because of the cause, length,<br />
and unprecedented federal government response.<br />
10<br />
Joseph Minicozzi and Shayne Kavanagh, The Root of Local<br />
Government Revenues, GFOA, April 2022.<br />
11<br />
In economics, these characteristics are known as nonexclusionary<br />
and non-rivalrous. The former means that it is<br />
not possible to exclude someone who doesn’t pay for the<br />
good from receiving the benefit. For instance, a visitor to a<br />
town who hasn’t paid any taxes can’t be excluded from a<br />
public work service that keeps sidewalks well maintained and<br />
cleaned. Non-rivalrous means that one person’s use of the<br />
service does not diminish the service for others. If I eat a meal<br />
at a restaurant, you can’t also eat that meal, but we can both<br />
walk the same sidewalk to get to the restaurant.<br />
12<br />
The strategies here are inspired by: Douglas W. Hubbard,<br />
How to Measure Anything: Finding the Value of Intangibles in<br />
Business, 3rd Ed. (Wiley: 2014).<br />
13<br />
You can read more about this in: Shayne Kavanagh and Daniel<br />
W. Williams, Informed Decision-Making Through Forecasting:<br />
A Practitioner’s Guide, GFOA, January 2017.<br />
14<br />
Lark Allen, “2022 coffee statistics: Consumption, purchases,<br />
and preferences,” Drive Research, July 27, 2022.<br />
15<br />
The time value of money refers to the idea that a dollar<br />
received a year from now is worth less than a dollar received<br />
today. This is because of factors like inflation and opportunity<br />
costs.<br />
16<br />
Robert Bloomfield of Cornell University’s Johnson School<br />
of Management and ethicalsystems.org made significant<br />
contributions to this section.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 41
AIN’T<br />
IT GRAND?<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
42
HOW AI WILL AFFECT YOUR WORK<br />
HOW<br />
AI<br />
WILL AFFECT<br />
YOUR WORK<br />
BY ROB ROQUE AND ANDREW SOSWA<br />
Artificial Intelligence<br />
(AI) has been around<br />
for decades as another<br />
name for automation.<br />
It has aided the<br />
medical industry, the<br />
vehicle industry, and<br />
aviation industry,<br />
just to name a few. Largely based on<br />
complex algorithms, the technology was<br />
usually piloted by those in science and<br />
academics and used in their research.<br />
This evolved into the Internet of Things<br />
(IoT), which showed most of the world<br />
how AI can be used in the common<br />
household and workplace. The advent<br />
of technologies such as ChatGPT has<br />
brought on a new generation of AI tools<br />
that have enabled non-programmers<br />
to harness the technology and open<br />
opportunities never thought of before.<br />
This article presents a condensed<br />
history of AI and how it has evolved into<br />
the everyday practices of our society.<br />
After an overview of how AI works, we will<br />
suggest ways in which it can be leveraged<br />
in local government and highlight<br />
governments that are exploring this<br />
realm. We’ll also address tough questions<br />
like, “Will I lose my job to AI?” Finally, we<br />
will conclude with policy implications.<br />
A BRIEF HISTORY<br />
Whether you like it or not, AI is<br />
everywhere. How does your social media<br />
feed know to include vacation posts?<br />
AI. How do popular shopping sites know<br />
what enticing products to present?<br />
That’s right—AI. And did you assume<br />
that a human was on the other end of<br />
the keyboard last time you used a chat<br />
tool at your bank or ticket consolidator<br />
site? It was probably AI, until it got stuck<br />
and typed back, “Hold on. I must get my<br />
supervisor.”<br />
For more than a millennium,<br />
humans have been dreaming up ways<br />
to automate human tasks. Since at least<br />
1 BCE, humans have reflected on how<br />
human tasks could be automated. 1 A few<br />
centuries back, Leonardo DaVinci and<br />
others proposed machines to calculate<br />
data. Ada Lovelace is considered the<br />
world’s first computer programmer<br />
because she wrote an algorithm to<br />
program Charles Babbage’s Analytical<br />
Engine in the 1840s.<br />
In the 1930s, Alan Turing asked the<br />
question, “Can machines think?” He<br />
developed a thought experiment in<br />
which an interrogator sought answers<br />
from two participants, a human and a<br />
computer. The participants were only<br />
allowed to type their answers to hide<br />
the thinking machine in “artificial<br />
flesh.” The interrogator asked a series of<br />
questions and tried to determine whether<br />
the response came from a human or<br />
a “thinking machine.” Turing posed<br />
questions that can easily be handled<br />
today by OpenAI’s ChatGPT. For example,<br />
Turing prepared several illustration<br />
questions such as, “Please write me a<br />
sonnet on the subject of the Forth Bridge”<br />
(which he assumed future AI would<br />
demure—as most humans would). 2 The<br />
modern application of this challenge is<br />
known as the “Turing Test” (and ChatGPT<br />
was able to churn one out just fine). 3<br />
John McCarthy, a mathematics professor<br />
at Dartmouth College, is credited with<br />
creating the term “artificial intelligence.”<br />
AI as a field was born at a conference he<br />
facilitated (along with Marvin Minsky,<br />
Claude Shannon, and Nathaniel Rochester)<br />
for leading computer scientists. The vision<br />
established at the Dartmouth Conference<br />
was “that computers can be made to<br />
perform intelligent tasks.” 4 Although the<br />
conference failed to establish a common<br />
approach, participants went home and<br />
started forming AI trajectories under a<br />
common vision.<br />
AI has taken various paths since the<br />
Dartmouth Conference. Most are based on<br />
models that are based on psychological<br />
or logistic algorithms. Although it’s too<br />
technical and lengthy to address in this<br />
article, psychological methods focus on<br />
human reason or behavior (think shopping<br />
recommendations), while logistic<br />
methods are used more for processes<br />
such as language translation and work<br />
processing. But either method can be<br />
used interchangeably. In short, there is no<br />
agreed-upon approach to AI—but one truth<br />
universally acknowledged is that AI relies<br />
on data—lots of it.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 43
HOW AI WILL AFFECT YOUR WORK<br />
The evolution of AI since Dartmouth<br />
can be represented by a series of tiers 5<br />
described below:<br />
LEVEL 1: Reactive machines. Provide<br />
predetermined responses based on<br />
specific input and cannot recognize<br />
patterns or past experiences.<br />
LEVEL 2: Limited memory. AI begins to<br />
store memory and apply experience to<br />
responses to user input.<br />
LEVEL 3: Theory of mind. AI gains social<br />
intelligence, enabling it to personalize<br />
responses to user inquiries.<br />
LEVEL 4: Self-awareness. AI has selfawareness.<br />
Its responses can be adjusted<br />
based on the limitations it recognizes due<br />
to its perceived environment.<br />
LEVEL 5: Automation. AI machines begin<br />
self-learning without user direction.<br />
LEVEL 6: Large language models.<br />
AI uses natural language and neural<br />
networks (imitating the human brain)<br />
to consume large amounts of data,<br />
learn from it, and summarize for user<br />
inquiries. This level is commonly known<br />
as generative AI, or “text to X.”<br />
Underlying the AI technologies are the<br />
large sets of data, mostly commercialized<br />
(for example, Amazon, Google, IBM,<br />
and Microsoft), and the data is collected<br />
instantaneously from your electronic<br />
footprint. (More about this later.)<br />
The way AI works (in short) is by<br />
“training” itself from a set of data (such<br />
as, text, data, and pictures) to formulate<br />
patterns and predictions. 6 The machine<br />
uses an algorithm to provide an answer<br />
based on one of the following functions:<br />
descriptive (uses input data to explain<br />
what happened); predictive (uses input<br />
data to explain what could happen);<br />
or prescriptive (uses input data to<br />
recommend actions to take). The quality<br />
of the data input affects the quality of<br />
the results/output. If the source data<br />
is biased or stale, the results will also<br />
probably reflect bias or be out of date.<br />
ChatGPT, for instance, is based on data<br />
through September 2021. OpenAI, the<br />
owners of ChatGPT, decided to baseline<br />
their data set through September 2021<br />
to improve their algorithms. Interacting<br />
with ChatGPT will therefore yield results<br />
based on two-year-old data.<br />
THE BENEFITS OF AI<br />
It is a misnomer that AI is ChatGPT.<br />
It is more than that. AI is actually an<br />
entire field of technology, and ChatGPT<br />
is a conglomeration of multiple AI<br />
disciplines. When viewed from this<br />
perspective, it’s easier to understand that<br />
AI technology can be used for purposes<br />
other than chatbots. The following are<br />
examples of how AI is being used in the<br />
public sector.<br />
State of Massachusetts. The state uses<br />
chat functions to allow internal users<br />
to interact with some business systems<br />
using natural language. The government<br />
is also using chat to field queries from<br />
its public-facing website. In both cases,<br />
the state controls the chat function and<br />
recognizes that more can be done with AI,<br />
which it may explore in the future. 7<br />
City of Surrey, British Columbia. The<br />
city offers its citizens an app based on<br />
IBM Watson to field public inquiries.<br />
Residents can use the MySurrey app to<br />
submit queries using natural language<br />
and receive answers that are more<br />
informative than scraping the internet. 8<br />
Spokane Public Schools, Washington.<br />
The district uses AI to help teachers<br />
improve their classroom practices.<br />
Teachers upload videos of their classroom<br />
instruction, answer a series of questions,<br />
and an AI coach works alongside them<br />
to adjust their curriculum and teaching<br />
style. The process is purely voluntary and<br />
is in its infancy. 9<br />
City of Columbus, Ohio. The city has<br />
implemented several technology<br />
platforms based on AI, which it<br />
highlighted at GFOA’s <strong>2023</strong> annual<br />
conference. Columbus uses AI to generate<br />
form letters, conduct data analysis, and<br />
assist with audits.<br />
U.S. Census Bureau. U.S. Census chat<br />
users can make inquiries using natural<br />
language. Data is only available for a<br />
few elements such as demographics<br />
and crime, but additional data will be<br />
available in the future.<br />
Intentional use of AI by the public sector<br />
in the U.S. and Canada is still in its<br />
infancy. It’s being used in other parts<br />
of the world to monitor commuters and<br />
other transactions, although these are<br />
mostly in countries where personal<br />
information is not heavily regulated.<br />
Unintentional use of AI happens all of<br />
the time, however, since most public<br />
sector data is in the public domain. Public<br />
domain data is used, particularly by the<br />
private sector, to build data to train their<br />
own AI applications.<br />
Although AI still isn’t prevalent in the<br />
public sector, most people in the industry<br />
recognize that it is a rapidly evolving<br />
and expanding field of increased<br />
productivity. Local governments are<br />
beginning to experiment with ways in<br />
which AI can augment their operations,<br />
particularly when it is difficult to hire<br />
new employees. Other institutions are<br />
learning, through AI methods, why they<br />
need to collect data for AI purposes.<br />
For example, the founders of Recidiviz<br />
worked with prison systems to collect<br />
and consolidate data so AI would be able<br />
to identify prisoners who were eligible for<br />
release from prison or parole. In the past,<br />
some inmates and parolees had been<br />
held past their release eligibility dates<br />
because the prisons didn’t have enough<br />
data. 10 AI tools were used to identify<br />
individuals who had been incarcerated<br />
beyond their sentencing guidelines.<br />
HOW WILL AI AFFECT MY JOB?<br />
Most people fear that AI will replace<br />
their jobs—and that includes the<br />
current AI technologists responsible<br />
for programming AI. It is predicted that<br />
more than 80 percent of the workforce<br />
will be affected by AI technologies. In<br />
part, the concern is warranted. A study<br />
commissioned by the World Economic<br />
Forum suggests that AI will affect up to<br />
40 percent of the world’s working hours.<br />
(These are the jobs most likely to be lost—<br />
and created—because of AI.) 11 Recent<br />
studies suggest that AI will replace<br />
certain employees, but they also suggest<br />
that AI will open up opportunities for<br />
displaced workers. In short, the studies<br />
theorize that the success of future<br />
workers will be defined by how well<br />
individuals can adapt and leverage AI in<br />
the future.<br />
Nonetheless, nearly all AI experts<br />
agree that AI won’t replace human beings<br />
or human workers in the foreseeable<br />
future. Instead, they foresee a whole new<br />
workforce specializing in AI-infused<br />
processes. They also believe that AI will<br />
create net new growth in jobs. One of<br />
44
these, for example, is the job of “prompt<br />
engineer,” who is responsible for asking<br />
AI the right questions to elicit the best<br />
response. Gone are the days where an<br />
employee’s job safety could be based on<br />
hoarding information. The future is more<br />
likely to embrace individuals who can use<br />
AI to augment their duties.<br />
WHAT ARE THE RISKS?<br />
General use of AI tools should be<br />
approached with caution at this stage.<br />
Users should be fully aware that the<br />
current generation of AI is based on the<br />
quality of the data sources. The potential<br />
for introducing biased data, fake data, and<br />
even harmful data into the environments<br />
that are used to train AI tools is a real<br />
concern. As a result of one famous study,<br />
IBM stopped developing facial recognition<br />
software. A combination of biased data<br />
and subsequent algorithms led to AI<br />
computers misclassifying gender based<br />
on darker complexions. 12 The study<br />
stressed the need for more representative<br />
datasets and the reporting of algorithmic<br />
performance (as in, no more black box<br />
calculations).<br />
Those who fail to learn from history<br />
are doomed to repeat it. Big Tech leaders<br />
are already calling for some form of<br />
regulation before AI truly morphs into an<br />
autonomous machine. In an open letter<br />
to the world, Elon Musk, Steve Wozniak,<br />
It is predicted<br />
that more than<br />
80 percent of the<br />
workforce will be<br />
affected by AI<br />
technologies.<br />
Yuval Noah Harari, and others called on<br />
AI developers to pause progress for six<br />
months to allow regulatory agencies to<br />
catch up. 13 Their concerns are not only<br />
rooted in the issues we face now because<br />
of the mishandling of social media, but<br />
also how AI will be used in the future<br />
and the need for transparency. This is<br />
popularly known as “establishing the AI<br />
guardrails.”<br />
Local governments that implement AI<br />
will need to consider many factors. For<br />
example, if a government is providing<br />
information through a chatbot, and the<br />
bot provides authoritative but incorrect<br />
information, who is liable if the answer<br />
results in harm? Policies will need to be<br />
developed to test AI and to ensure that<br />
the data local government AI tools are<br />
training on is reliable, safe, and unbiased.<br />
And government agencies are already<br />
working on it; the National Institute of<br />
Standards and Technology (NIST)—<br />
which is a part of the U.S. Department of<br />
Commerce—is working on guidelines for<br />
minimizing bias in AI. 14<br />
CONCLUSION<br />
We are in an exciting evolution of AI<br />
technology, and where it will take us is<br />
anybody’s guess. Who knew, for example,<br />
that networked computers developed at<br />
the U.S. Department of Defense would lead<br />
to Internet commerce? No doubt, there<br />
will be changes in the workforce because<br />
of AI—but local governments shouldn’t be<br />
hampered by the notion that jobs could<br />
be lost. Instead, they should focus on<br />
how services can be improved by using<br />
AI. Those who are willing to explore the<br />
potential uses of AI should proceed with<br />
some caution, however, and recognize<br />
the shortcomings of AI training data and<br />
potential flaws in the AI algorithms. The<br />
Internet has created some problems, but<br />
it has also created many benefits. The<br />
same should be expected from AI.<br />
And in the words of ChatGPT (May 3,<br />
<strong>2023</strong> version) itself, “AI has the potential<br />
to improve efficiency, accuracy, and<br />
decision-making in various industries,<br />
leading to advancements in healthcare,<br />
education, transportation, and more.”<br />
Rob Roque is the technology services<br />
manager in GFOA’s Research and<br />
Consulting Center. Andrew Soswa is a<br />
client delivery/engagement manager at<br />
NTT DATA, a global consulting firm; he is<br />
also chief executive officer and founder of<br />
Agile Project Advisors.<br />
1<br />
Dario Guarascio, Lucrezia Fanti, and Massimo Moggi, “From<br />
Heron of Alexandria to Amazon’s Alexa: a stylized history<br />
of AI and its impact on business models, organization and<br />
work,” Economia e Politica Industriale, <strong>August</strong> 2022.<br />
2<br />
Alan Turing, “Computing Machinery and Intelligence,” Mind,<br />
1950.<br />
3<br />
Seth Perlow, “AI is better at writing poems than you’d<br />
expect. But that’s fine,” Washington Post, February 13, <strong>2023</strong>.<br />
4<br />
James Moor, “The Dartmouth College Artificial Intelligence<br />
Conference: The Next Fifty Years, AI Magazine, 2006.<br />
5<br />
Andrew Soswa, “AI as a Source of Truth: How Reliable is AI<br />
Information?” ResearchGate, May <strong>2023</strong> (researchgate.net).<br />
6<br />
Machine learning can be supervised (requiring humans<br />
to label data) or unsupervised (the machine learns from<br />
unstructured or unlabeled data), or it can be achieved<br />
through reinforcement (award-based analysis such as game<br />
theory). See: Sara Brown, “Machine learning, explained,” MIT<br />
Management-Sloan School, April 21, 2021 (mitsloan.mit.edu/).<br />
7<br />
Lauren Harrison and Noelle Knell, “Massachusetts Dabbles<br />
in Generative AI: ‘ChatGPT With Controls,’” Government<br />
Technology, May 12, <strong>2023</strong> (govtech.com).<br />
8<br />
Surrey Uses AI to Deliver Services to Its Residents, University<br />
of Canada West, 2022 (ucanwest.ca).<br />
9<br />
Lauraine Langreo, Can AI Conduct Teacher Evaluations in<br />
Schools? Government Technology, May 15, <strong>2023</strong> (govtech.<br />
com).<br />
10<br />
Clementine Jacoby, The Future of Corrections is<br />
Data-Informed, Correctional News, December 8, 2022<br />
(correctionalnews.com).<br />
11<br />
These are the jobs most likely to be lost—and created—<br />
because of AI, World Economic Forum, May 4, <strong>2023</strong><br />
(weforum.org).<br />
12<br />
Joy Buolamwini and Timnit Gebru, “Gender Shades:<br />
Intersectional Accuracy Disparities in Commercial Gender<br />
Classification,” presented at Conference on Fairness,<br />
Accountability, and Transparency: Proceedings of Machine<br />
Learning Research 81:1–15, 2018.<br />
13<br />
Daniel Van Boon, Elon Musk Is Right: We Need to Regulate<br />
AI Now, CNET, May 17, <strong>2023</strong> (cnet.com).<br />
14<br />
Reva Schwartz, Apostol Vassilev, Kristen Greene, Lori Perine,<br />
Andrew Burt, Patrick Hall, “Toward a Standard for Identifying<br />
and Managing Bias in Artificial Intelligence,” National<br />
Institute of Standards and Technology-U.S. Department of<br />
Commerce, 2022.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 45
46
LOCAL GOVERNMENT 2030<br />
Local Government<br />
2030<br />
TO<br />
TACKLING APPROACHES<br />
BUDGETING<br />
BY HENRIETTA WEAVER, YURI HATTERSLEY,<br />
KEVIN FITZGERALD, AND TAYLOR GALUSHA<br />
©<strong>2023</strong> JAMES FRYER C/O THEISPOT.COM<br />
Local Government 2030—an<br />
initiative organized to address<br />
the 12 “Grand Challenges<br />
in Public Administration”<br />
identified four years ago by the<br />
National Academy of Public<br />
Administration—is working on three<br />
important projects, with plans to convene<br />
again in Phoenix, Arizona, in January<br />
2024 to assess progress and to make<br />
plans to continue this work in the years<br />
to come. These projects are:<br />
• G.R.O.W. a Resilient Workforce.<br />
This initiative reexamines pipelines<br />
of recruitment, retention, and<br />
development in local government<br />
to ensure that the workforce is<br />
supported and prepared to address<br />
the Grand Challenges and more.<br />
• The Art of Public Service:<br />
The Communication Continuum.<br />
This initiative seeks to develop a<br />
toolkit for new strategies of emotionally<br />
intelligent communications from<br />
governments to their residents, visitors,<br />
and employees, revolutionizing the<br />
way public servants convey information<br />
and deliver services across disciplines.<br />
• Promised Pathways. This initiative<br />
recognizes the role that governments<br />
have played in causing harm through<br />
the criminal justice system, seeking<br />
to connect people who have had such<br />
experiences—along with their families—<br />
with skills training and resources to<br />
prepare them to fill vacancies in the<br />
public service workforce.<br />
Throughout the Local Government 2030<br />
experience, delegates continued to fall<br />
back on a key theme—that the challenges<br />
facing our profession require us to break<br />
down the silos among our disciplines and<br />
geographies. In addition to continuing<br />
the work of the three strategic initiatives,<br />
delegates are bringing back the lessons to<br />
their jurisdictions and exploring ways of<br />
carrying the spirit of the convening into<br />
everything they do.<br />
MEETING THE MOMENT<br />
At a 2019 meeting, The National Academy<br />
of Public Administration (NAPA) called<br />
public servants to come together to address<br />
the pressing issues of our time. These<br />
challenges highlight the complex realities<br />
facing governments today, and in their<br />
call to action, NAPA argued that new ideas<br />
and enhanced collaboration among all<br />
sectors will be critical in meeting the<br />
moment. This argument inspired Wally<br />
Bobkiewicz, the city administrator<br />
for the City of Issaquah, Washington,<br />
and others to help meet the call. These<br />
conversations led to partnerships with<br />
more than 25 professional associations<br />
to create an initiative called Local<br />
Government 2030 (at localgov2030.<br />
com), which brought together 51<br />
delegates, all under the age of 40, from<br />
across the nation to review the Grand<br />
Challenges and propose targeted ways<br />
for local governments to address them.<br />
The work of Local Government<br />
2030 began soon after delegates were<br />
notified of their selection. Delegates<br />
were sorted into one of seven groups<br />
based on discipline, including general<br />
On November 4-5, 2022, the Local Government 2030 convening brought together 51 practitioners<br />
under the age of 40 from cities, counties and regional councils around the United States on the<br />
campus of the University of Nebraska, Omaha.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 47
LOCAL GOVERNMENT 2030<br />
administration, finance, public works,<br />
administrative services, community<br />
services, public safety, and planning<br />
and development services. These<br />
groups, in collaboration with the 16<br />
superdelegates who served as mentors<br />
to the delegates, analyzed the Grand<br />
Challenges and wrote papers exploring<br />
the challenges in the context of our work<br />
in preparation for a national meeting<br />
hosted by the University of Nebraska-<br />
Omaha (UNO). The diversity of roles<br />
within each discipline group highlighted<br />
an important lesson as delegates saw<br />
that our individual challenges were<br />
shared by others, regardless of role or<br />
geographic location.<br />
Upon arriving in Omaha in November<br />
2022, the delegates, superdelegates, and<br />
professional organization representatives<br />
convened on the UNO campus to discuss<br />
the discipline papers and develop ideas<br />
to address the identified challenges,<br />
modeled after the Minnowbrook<br />
Conference of 1968. 1 Using the Pecha<br />
Kucha format of presenting, 2 each of<br />
the seven discipline groups shared<br />
information about how the NAPA Grand<br />
Challenges were affecting their fields<br />
of work, while presenting arguments<br />
about which of the challenges should be<br />
prioritized as a focal point throughout the<br />
meeting. Consultants helped with multiday<br />
conversations about the challenges,<br />
reorganizing the delegates into groups<br />
based on geographic region. Each group<br />
developed nine potential initiatives to<br />
address the Grand Challenges before<br />
ultimately pitching three initiatives to<br />
the broader body of delegates. After a few<br />
rounds of voting, the body of delegates<br />
and superdelegates identified three<br />
initiatives that combine the shared<br />
experiences of the delegation with<br />
areas of public service the group felt<br />
passionate about (G.R.O.W. a Resilient<br />
Workforce, The Art of Public Service:<br />
The Communication Continuum, and<br />
Promised Pathways).<br />
BREAKING DOWN THE SILOS OF<br />
FINANCE—TOMORROW IS NOW<br />
The federal government’s response to<br />
economic and social disruption caused by<br />
the COVID-19 pandemic has been largely<br />
anchored by the concept of “Build Back<br />
Better,” a public reinvestment framework<br />
focused on stabilizing the American<br />
economy with a series of historic<br />
stimulus packages aimed at financing<br />
sustainability initiatives, workforce<br />
development efforts, infrastructure<br />
improvements, and opportunities to<br />
improve the quality of life for lowerincome<br />
and middle-class families.<br />
A keystone program of this endeavor<br />
is the American Rescue Plan’s State and<br />
Local Fiscal Recovery Funds (SLFRF),<br />
which provides local governments with<br />
a historic infusion of stimulus relief<br />
funding and a broad directive to address<br />
the broad disruptions caused by the<br />
COVID-19 pandemic. While presented<br />
with a unique opportunity to invest in<br />
transformative services and capital<br />
improvements, many municipalities<br />
have taken a narrow definition for their<br />
community, limited to their current<br />
residents. While each local government<br />
is accountable for addressing their<br />
residents’ unique pandemic challenges<br />
and ensuring compliance with the U.S.<br />
Treasury’s guidelines, the funding from<br />
the American Rescue Plan Act presents<br />
local government leaders with a historic<br />
infusion of federal funds that have<br />
flexible guidelines to shift resources<br />
toward their community’s unique<br />
pandemic pain points. This directive<br />
is accompanied by the challenge for<br />
public officials to dig deeper and to think<br />
entrepreneurially about strategies that<br />
target entrenched economic and social<br />
inequities and set the stage to unlock<br />
new opportunities for public and private<br />
investment.<br />
The Build Back Better agenda’s<br />
commitments to transform<br />
America’s social, infrastructure, and<br />
environmental conditions through<br />
enormous public investments are<br />
frequently compared to the Great<br />
Depression-era programs of the New<br />
Deal. This comparison sets the scene for<br />
the long-term impact that present-day<br />
local government officials can unlock<br />
through bold policy initiatives that take<br />
accountability for improving conditions<br />
for current residents and acknowledge<br />
the public servant’s obligation to<br />
build a more equitable, resilient, and<br />
technologically advanced society.<br />
To execute that pivot and unlock<br />
the potential of public investments as<br />
the catalysts of long-term community<br />
growth, government finance officers<br />
need to break the silos that exist among<br />
the fields of public finance, urban<br />
planning, public works, human services,<br />
and general administration to take on a<br />
more multidisciplinary approach to local<br />
government. To reignite the public’s faith<br />
in municipal officials as the stewards of<br />
the public’s investments, government<br />
finance professionals must acknowledge<br />
their obligations to a broader pool of<br />
stakeholders by expanding their definition<br />
of community to include future residents<br />
and people that live in neighboring<br />
municipalities. Expanding the definition<br />
of stakeholders to embrace these groups<br />
can position local government officials<br />
with new opportunities to build a more<br />
equitable, resilient, and technologically<br />
advanced society.<br />
Below are four examples of breaking<br />
down silos to achieve success across many<br />
facets of the work of government finance<br />
professionals.<br />
PLANNING FOR THE FUTURE<br />
The established method for measuring<br />
the fiscal impact of a public investment<br />
proposal takes an overly technical<br />
approach that standardizes results to<br />
key performance indicators and shortterm<br />
time horizons. As an early effort<br />
to transform the public investment and<br />
budgeting processes, GFOA partnered with<br />
seven other state and local government<br />
organizations approximately 25 years ago<br />
to develop the National Advisory Council<br />
on State and Local Budgeting (NACSLB)<br />
as a guiding framework for informed and<br />
stakeholder-driven budgeting. One of the<br />
key characteristics of the NACSLB budget<br />
process is the importance of incorporating<br />
a long-term perspective in a way that<br />
evaluates community conditions and<br />
outlines options for responding to a range<br />
of economic, political, and environmental<br />
scenarios.<br />
While the NACSLB’s contributions to the<br />
public finance field provided a framework<br />
for distilling a universe of information into<br />
organized options that inform present-day<br />
decision-makers, the collection of best<br />
practices overlooks the government finance<br />
officer’s obligation to advance bold and<br />
entrepreneurial initiatives that address the<br />
interests of future residents. In the quarter<br />
century since the seven organizations<br />
formally endorsed NACSLB, the quality of<br />
life and economic stability of American<br />
48
12 GRAND CHALLENGES IN PUBLIC ADMINISTRATION<br />
Protect Electoral Integrity and<br />
Enhance Voter Participation<br />
Modernize and Reinvigorate<br />
the Public Service<br />
Develop New Approaches to<br />
Public Governance and Engagement<br />
Advance National Interests<br />
in a Changing Global Context<br />
Foster Social Equity<br />
Connect Individuals to<br />
Meaningful Work<br />
Build Resilient<br />
Communities<br />
Advance the Nation’s<br />
Long-Term Fiscal Health<br />
Steward Natural Resources<br />
and Address Climate Change<br />
Create Modern Water Systems<br />
for Safe and Sustainable Use<br />
Ensure Data Security and<br />
Privacy Rights of Individuals<br />
Make Government<br />
AI Ready<br />
Graphics courtesy of National Academy of Public Administration<br />
communities has significantly degraded<br />
because of overly cautious policymaking<br />
and the entrenchment of austerity as<br />
virtues of the public finance field.<br />
Evidence of this failure to proactively<br />
advance policies that address the<br />
interests of future residents is<br />
documented in measures of America’s<br />
quality of life from the U.S. Census,<br />
Government Accountability Office, and<br />
the Federal Reserve’s annual analysis<br />
of the Economic Well-Being of U.S.<br />
Households. While the government is<br />
charged with an array of competing<br />
priorities for investing scarce resources,<br />
and public officials are obligated to<br />
minimize risk by carefully studying<br />
every policy design option, the tradeoff<br />
is a cumbersome and frustrating process<br />
that undermines the public’s trust.<br />
The critique that transformative<br />
policies employed 25 years ago could<br />
have offered a silver bullet for local<br />
governments to preemptively address<br />
Americans’ present-day economic and<br />
quality of life concerns should be seen as<br />
an overly simplified and potentially offputting<br />
sentiment. But the opportunity<br />
to invest in real solutions for the Grand<br />
Challenges of the 21st century presents<br />
the call to action for government<br />
finance officers to embrace a bolder<br />
and more fluid approach to budgeting<br />
that acknowledges the cascading<br />
risks from failing to act. This principle<br />
represents a significant pivot away<br />
from the established approach to public<br />
financing by balancing predictability<br />
with the flexibility to deliver results.<br />
COLLABORATION IN FINANCE—<br />
NEW APPROACHES TO BUDGETING<br />
In a common scenario, a city council<br />
has identified a strategic initiative<br />
to “improve the quality of life for<br />
all residents.” This is hopeful and<br />
aspirational, but not very specific.<br />
After this lofty goal has been shared<br />
with the public, now it is up to the local<br />
government departments to determine<br />
what role they play in accomplishing it.<br />
Parks and Recreation decides they must<br />
build a new park. Public Works believes<br />
new roads and sidewalks will be more<br />
useful. Economic Development staff set<br />
their sights on finding a large company<br />
that will offer higher-paying jobs. Every<br />
department across the organization takes<br />
up the mantle and they all independently<br />
determine the best course of action and<br />
proceed to request the required funding<br />
in the upcoming budget.<br />
This scenario is all too common in<br />
local government. Departments often<br />
work independently of each other and<br />
end up competing for limited resources to<br />
accomplish the same goals. What’s more,<br />
the functions don’t usually collaborate<br />
with the budget office in developing<br />
plans for future spending to ensure<br />
that all cost elements and variables<br />
are considered, and efforts are not<br />
duplicated across departments. Without<br />
collaboration, it is not usually apparent<br />
through the traditional budget process<br />
that increased requests for funding are<br />
even related to a new initiative.<br />
The traditional approach to budgeting<br />
is centered on line-item spending for<br />
operations. This approach invites and<br />
encourages silos across the organization<br />
because the link between functions<br />
performed and services provided is<br />
unknown or disjointed. Each department<br />
functions as if it works independently<br />
of the overall mission and goals of the<br />
organization. The budget process and<br />
structure reinforce this misguided idea<br />
and encourage each unit to make less<br />
informed decisions that ultimately result<br />
in wasted resources—making it even<br />
more difficult to develop an organizationwide<br />
approach to accomplish strategic<br />
initiatives and to allocate resources in<br />
the most efficient manner. A GFOA report,<br />
“Why Do We Need to Rethink Budgeting?”<br />
(January 2022), discusses the idea that<br />
traditional budgeting is a zero-sum game<br />
in which one party wins and another<br />
loses. It goes on to say that “zero-sum<br />
thinking makes it difficult to address<br />
problems that require collaboration<br />
across participants in the budget.”<br />
Much more can be said about the<br />
inefficiency of silos in developing<br />
an efficient, effective budget that<br />
represents the strategic priorities of<br />
local government leadership, but it<br />
should be noted that silos disappeared<br />
during the Local Government 2030<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 49
LOCAL GOVERNMENT 2030<br />
The opportunity to invest in real solutions for the<br />
Grand Challenges of the 21st century presents the call<br />
to action for government finance officers to embrace<br />
a bolder and more fluid approach to budgeting that<br />
acknowledges the cascading risks from failing to act.<br />
Convening (LG2030). At LG2030, local<br />
government professionals representing<br />
all disciplines from across the U.S.<br />
gathered to discuss today’s issues and<br />
to develop solutions addressing some<br />
of them. An individual’s department<br />
mattered less than their knowledge<br />
and passion as it related to the final<br />
three initiatives chosen by the larger<br />
group. This approach can be applied to<br />
local governments by building special<br />
project teams across departments<br />
that collaborate to discuss ways of<br />
implementing strategic initiatives and<br />
developing the corresponding budget.<br />
The teams could even help formulate<br />
these initiatives with leadership.<br />
A cohesive, collaborative work<br />
environment that functions across<br />
department lines is built from the top<br />
down. Departments do need to work<br />
somewhat independently to perform<br />
their unique functions, but the walls<br />
must come down to foster more<br />
cooperation around the use of limited<br />
resources throughout the organization.<br />
Management must set the precedent and<br />
institute measures to encourage and<br />
enforce these standards.<br />
ENGAGING THE WHOLE<br />
COMMUNITY—COMMUNICATION<br />
INNOVATION<br />
Communication and collaboration with<br />
the community are essential to building<br />
trust and transparency, especially<br />
within the local budgeting process. We<br />
now have access to information we never<br />
had before, along with the much greater<br />
speed with which information can<br />
travel. This is a powerful tool that local<br />
governments need to channel and adapt<br />
in order to help build better connections<br />
with residents through engagement and,<br />
in turn, build trust and transparency<br />
with the community as a whole. Gaps in<br />
information and information-sharing<br />
can lead to mistrust in government.<br />
The need on the end of the government<br />
is to make information accessible and<br />
available to residents, whether online<br />
or in print. When it comes to where tax<br />
dollars are allocated and spent, reaching<br />
the whole community helps us build<br />
stronger relationships.<br />
To channel the power of<br />
communications, local governments<br />
need to be “trendy.” Local governments<br />
have historically struggled with building<br />
strong communications connections<br />
with residents, especially after the death<br />
of the daily local newspaper. Previously,<br />
a municipality could place an ad in a<br />
local newspaper for a budget hearing and<br />
consider their outreach and engagement<br />
complete. This is not enough in the 21st<br />
century. Local governments must harness<br />
the power of social media and the Internet,<br />
while also building and improving on print<br />
materials, to reach the whole community.<br />
Communications must be multifaceted<br />
and accessible to be effective in building<br />
trust, transparency, and credibility with<br />
the community.<br />
Adaptation in action. Each month, the<br />
Town of Shrewsbury, Massachusetts,<br />
produced an online newsletter that it made<br />
available on the town website and via<br />
social media, summarizing the key actions<br />
taken by the select board for residents to<br />
view. But the community still felt that<br />
information on the board’s actions wasn’t<br />
transparent enough. In addition to the<br />
newsletter, each meeting is live streamed<br />
on Facebook and cable television, and it is<br />
posted to the town’s YouTube channel the<br />
following day.<br />
But a multi-page, online newsletter<br />
wasn’t meeting the needs of effectively<br />
communicating with the community<br />
or meeting the public’s expectations of<br />
transparency for their elected public body.<br />
Since then, the town has started producing<br />
30-second videos the morning after the<br />
meeting that summarize the board’s<br />
actions and direct people to resources<br />
that will provide more information. It also<br />
transcribes the information from the video<br />
for those who don’t want to consume the<br />
information in a video format.<br />
This multifaceted approach has been<br />
well-received, and it aligns more closely<br />
with communications efforts in the<br />
private sector. This strategy can be applied<br />
to outreach related to local budgeting<br />
processes or project allocation. Local<br />
governments must modernize and have<br />
access to resources and tools to present and<br />
distribute information in a multifaceted<br />
way to meet the needs and expectations<br />
of the community in today’s world.<br />
Building trust and transparency through<br />
communications makes us more effective<br />
and successful as public leaders, as well as<br />
builds trust within budgeting processes.<br />
Our job as local government leaders is<br />
to make accessing information as easy<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
50
and streamlined as possible for our<br />
communities. It is not the residents’<br />
full-time job to be an expert on the<br />
community or the budget—it is ours. By<br />
enhancing communications, we are able<br />
to work more efficiently and effectively<br />
as an organization to build trust and<br />
transparency around the budgeting<br />
process in general, and not just through<br />
segmented factions of departments or<br />
the community at large.<br />
CONTINUOUS IMPROVEMENT<br />
MOVING FORWARD<br />
The Finance and Asset Management<br />
Department at the City of Bellevue,<br />
Washington, seeks to break down silos<br />
within the department and across the<br />
organization through its continuous<br />
improvement program, which is rooted in<br />
a Lean management system.<br />
At the core of the program and<br />
management system are two principles:<br />
respect for people (emphasizing those<br />
who do the work in a process) and<br />
continuous improvement of customer<br />
value. These principles shape the<br />
department’s strategy for collaborating<br />
with other departments to deliver on the<br />
mission and vision of the organization.<br />
The success of continuous<br />
improvement initiatives in public finance<br />
hinges on putting ourselves in our<br />
customers’ shoes and recognizing who<br />
requires goods, services, or information,<br />
and how. While many public servants<br />
would be quick to recognize a resident<br />
as a customer, most of us interact<br />
with other customers as well. Public<br />
finance professionals tend to serve as<br />
internal service providers, ensuring<br />
that other departments have visibility<br />
into budgets, processing invoices to<br />
pay vendors, or producing and routing<br />
contracts that support service delivery<br />
across a community. This means that<br />
the transportation project manager, the<br />
administrative assistant to the executive,<br />
and the recreation program manager<br />
are all customers too, and we should<br />
collaborate with each of them to deliver<br />
higher quality service in support of all<br />
who live, work, or play in your community.<br />
We will explore this through one of<br />
Bellevue’s largest process improvement<br />
efforts—currently underway—which<br />
involves changes to the procurement<br />
process through a Lean model line.<br />
Reimagining procurement with<br />
a lean model line. During the first<br />
convening of the Local Government<br />
2030 initiative, five priorities were<br />
identified, including a revamping of our<br />
public procurement system to promote<br />
equitable, community-driven outcomes<br />
and support. Nine months before that<br />
conversation occurred, staff within<br />
Bellevue’s Procurement team embarked<br />
on the journey to establish a Lean model<br />
line that, once built, would better equip<br />
the team as they work to deliver the very<br />
goal outlined in LG2030. A Lean model<br />
line is a closely connected series of<br />
processes that are the target of focused<br />
implementation of Lean principles, built<br />
so others can see a Lean implementation<br />
in real time and model their own efforts<br />
after something already built in an<br />
organization. This effort, which is still<br />
underway today, continues to highlight<br />
the importance of breaking down silos<br />
so we can deliver much-needed change<br />
to a process that very few people find<br />
easy or enjoyable.<br />
The challenges associated with the<br />
procurement process are not unique<br />
to Bellevue, but they do provide an<br />
interesting case study about the role<br />
silos can play in limiting our ability to<br />
innovate. Customers hold conflicting<br />
perceptions of the procurement<br />
process: on one hand, they view it as<br />
being complicated and ever-changing,<br />
making it hard to keep up with what<br />
is necessary to successfully procure<br />
goods or services; but on the other<br />
hand, they view the process as fixed<br />
and immovable, and will navigate<br />
the process using the same rules they<br />
followed for procurements a decade ago.<br />
These seemingly polarizing views of the<br />
same process are exacerbated by the fact<br />
that, until recently, the average length<br />
of tenure for employees skewed longer<br />
than the average organization, with<br />
many staff members having a decade or<br />
more of experience working for the city.<br />
To simplify these processes, Bellevue<br />
procurement staff are applying a Lean<br />
lens to their process improvement<br />
efforts. After mapping out a new future<br />
state for the process that we hope to grow<br />
into, the team has divided into small<br />
groups that work with customers across<br />
the organization to identify gaps in the<br />
current state, to brainstorm new ways<br />
of achieving success, and to prototype<br />
new processes to identify the best way of<br />
doing things. This work is still very much<br />
underway, but a key lesson that everyone<br />
involved in this effort has learned is the<br />
same lesson that delegates to LG2030<br />
took away: More often than not, we are<br />
all experiencing the same problems in<br />
our very different roles, and any path<br />
to successfully address and resolve<br />
those problems will require breaking<br />
down silos and collaborating to develop<br />
innovative solutions.<br />
BUDGETING INTO THE FUTURE<br />
As we move toward a more modern<br />
local government, we, as leaders in<br />
our communities, must continue to<br />
challenge norms and to find new and<br />
innovative ways to tackle challenges our<br />
ever-changing world presents to us. We<br />
must tackle these challenges through<br />
collaboration, continuous improvement,<br />
communication, and engagement with<br />
our local communities. This multifaceted<br />
approach lends itself to every area<br />
of local government, whether that is<br />
budget development, asset management<br />
and procurement, or building trust<br />
and transparency in the fabric of<br />
our communities. We must strive to<br />
collaborate and solve the challenges<br />
we face now and in the future.<br />
Henrietta Weaver is the director of<br />
budget for the City of Danville, Virginia.<br />
Yuri Hattersley oversees a Lean<br />
continuous improvement pilot program<br />
within the City of Bellevue, Washington’s<br />
Finance and Asset Management<br />
department. Kevin Fitzgerald is the<br />
American Rescue Plan coordinator<br />
for the Town of Groton, Connecticut.<br />
Taylor Galusha is the assistant to town<br />
manager—communications coordinator for<br />
the Town of Shrewsbury, Massachusetts.<br />
1<br />
The Minnowbrook Conference, held every 20 years, is one<br />
of the most significant academic conferences in public<br />
administration in the United States. Minnowbrook I, which<br />
took place in 1968 at Minnowbrook, the Syracuse University<br />
conference center, marked the beginning of the “New Public<br />
Administration.” Minnowbrook II, which took place in 1988,<br />
reflected on the impact of the New Public Administration.<br />
Both Minnowbrook I and Minnowbrook II resulted in<br />
significant, historic publications. You can read the best of<br />
Minnowbrook III, held in late 2008, at esadepublic.esade.<br />
edu/posts/post/the-future-of-public-administration-aroundthe-world-the-minnowbrook-perspective,<br />
Esade business<br />
school at Ramon Llull University.<br />
2<br />
The PechaKucha 20x20 presentation format is a slide show<br />
of 20 images, each auto-advancing after 20 seconds. It’s<br />
nonstop and you have 400 seconds to tell your story, with<br />
visuals guiding the way. PechaKucha was created in Japan in<br />
2003 by architects Astrid Klein and Mark Dytham. The word<br />
“PechaKucha” is Japanese for “chit chat.”<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 51
In Practice<br />
FINANCE | ACCOUNTING | PERSPECTIVES | INTERVIEWS<br />
FINANCE<br />
THE CITY OF DUBUQUE, IOWA<br />
Addressing the Hiring Crisis for the<br />
City of Dubuque through Collaboration<br />
BY CONNOR GOLDEN AND SAMUEL MANN<br />
As is the case for many<br />
local governments, the<br />
City of Dubuque, Iowa,<br />
has faced serious staffing<br />
challenges over the last<br />
three years. The combination of a yearlong<br />
COVID-19 hiring freeze, increased<br />
attrition, and a particularly tight labor<br />
market have forced city officials to get<br />
creative as they try to work their way<br />
back to pre-pandemic staffing levels<br />
without decreasing the quality of<br />
their services. Thankfully, Dubuque’s<br />
city leaders understand the power of<br />
collaboration and are up to the task.<br />
Mike Van Milligen has been Dubuque’s<br />
city manager for 30 years. He started his<br />
career as a police officer for the City of<br />
Carbondale, Illinois, and later became<br />
assistant village manager for the Village<br />
of Skokie, Illinois, before stepping into<br />
his role with the City of Dubuque, where<br />
he oversees nearly 30 departments with<br />
a total of 750 full-time equivalents or<br />
1,100 employees.<br />
Jenny Larson is the chief financial<br />
officer in the city’s Finance Department.<br />
With approximately 20 employees, the<br />
Finance Department oversees Budget,<br />
Payroll, Accounts Payable, Accounts<br />
Receivable, miscellaneous billing,<br />
and utility billing for Sewer, Water,<br />
Stormwater, and Refuse. Jenny has been<br />
with the city for 17 years. In March 2019,<br />
the Budget and Finance departments<br />
were combined, and she was promoted to<br />
manage the newly merged department.<br />
Amy Scheller was hired as Dubuque’s<br />
fire chief in 2021, and she directs six fire<br />
stations and 103 full-time employees.<br />
She has been in the fire service for<br />
almost 30 years. Starting as a volunteer<br />
firefighter, she worked her way up to<br />
paid on-call status while in college. She<br />
then worked full-time at a municipal<br />
fire department in Illinois, moving<br />
through the ranks from firefighter<br />
paramedic to company officer.<br />
Jeremy Jensen has been the city’s<br />
chief of police for a little more than<br />
one year, leading a department of<br />
115 authorized and sworn officers,<br />
along with eight civilian employees<br />
and eight interns. He has more than 30<br />
years of experience in law enforcement<br />
and spent most of his career with the<br />
City of Dubuque as he made his way<br />
through the ranks.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 53
IN PRACTICE | FINANCE<br />
City Manager’s Office<br />
Dubuque has shown remarkable<br />
resilience by embracing innovative<br />
solutions and fostering collaboration<br />
among stakeholders. Van Milligan<br />
sheds light on the proactive measures<br />
taken to address the challenges he<br />
faced during the pandemic to ensure<br />
a sustainable future for the city.<br />
When the pandemic hit in March<br />
2020, the economic outlook seemed<br />
uncertain, prompting a cautious<br />
approach. Instead of resorting to<br />
layoffs, the city implemented a hiring<br />
freeze. Although necessary at the time,<br />
this decision resulted in a backlog of<br />
vacant positions across departments,<br />
particularly in public safety. As the<br />
true impact of the pandemic became<br />
evident, however, the mayor and city<br />
council recognized the need to adapt,<br />
and they identified key priorities during<br />
their annual goal-setting session.<br />
The first priority identified was<br />
retaining existing employees and<br />
acknowledging their invaluable<br />
experience and dedication. The second<br />
was recruiting new employees to fill<br />
the vacant positions and maintain<br />
essential city services. By emphasizing<br />
these goals, Dubuque aimed to ensure<br />
continuity and stability in its workforce.<br />
To demonstrate their commitment,<br />
the mayor and council approved<br />
changes to union contracts and ensured<br />
that all city employees would receive<br />
a pay increase of 5 percent instead of<br />
the 3 percent initially guaranteed. In<br />
recognition of their exceptional service,<br />
the Police, Fire, and 911 Emergency<br />
Communications departments<br />
received a 6 percent pay increase.<br />
It’s important to listen<br />
to staff members<br />
and their needs, as<br />
well as candidates<br />
who are stressing<br />
the importance of<br />
work-life balance.<br />
JENNY LARSON<br />
CHIEF FINANCIAL OFFICER,<br />
CITY OF DUBUQUE<br />
Furthermore, the city took a significant<br />
step by introducing a new policy known<br />
as “recognition leave.” Each employee<br />
was granted 40 hours of recognition<br />
leave, which could be used for time off<br />
or converted into compensation upon<br />
retirement or separation from the city.<br />
Dubuque also recognized Juneteenth as<br />
an additional paid holiday as part of its<br />
commitment to inclusivity and diversity.<br />
Finally, to ensure fair and competitive<br />
compensation, Dubuque authorized a<br />
pay-in-class study, currently underway<br />
and set to conclude in December <strong>2023</strong>.<br />
This study assesses the pay structure<br />
of every position in the city government<br />
and compares it to comparable cities<br />
in the State of Iowa. By conducting this<br />
analysis, Dubuque aims to ensure that<br />
its remuneration aligns with market<br />
standards, allowing the city to attract and<br />
retain talented individuals who contribute<br />
to the city’s growth and development.<br />
Finance Department<br />
The Finance Department has not been<br />
immune to the city’s staffing challenges,<br />
which has led to increased workloads<br />
for staff members and the need for<br />
external support. Larson describes the<br />
journey of filling crucial vacancies and<br />
implementing strategic restructuring<br />
measures to address these challenges.<br />
The Finance Department’s staffing<br />
issues first began during an enterprise<br />
resource planning (ERP) system<br />
implementation, a lengthy project<br />
initiated before the pandemic. Several<br />
employees resigned before the system<br />
went live, and the assistant finance<br />
director resigned just after, resulting<br />
in a total of four vacancies. While<br />
the lower-level positions were filled<br />
relatively quickly, finding a new assistant<br />
finance director proved challenging.<br />
The city initially attempted to fill<br />
this position using existing hiring<br />
processes through the Human Resources<br />
Department. They extended three<br />
offers to candidates, but each time,<br />
the candidates’ current employers<br />
promoted them or offered bonuses to<br />
dissuade the candidate from leaving.<br />
Finally, the city was forced to engage an<br />
external recruiter, and the position was<br />
finally filled after almost 12 months.<br />
During this time, Larson also proposed<br />
restructuring the Finance Department<br />
to address gaps revealed by these<br />
vacancies. In January <strong>2023</strong>, the city<br />
council approved her restructuring<br />
plan, which included creating three new<br />
positions: a finance director, a budget<br />
director, and a purchasing and safety<br />
coordinator. This time the city decided<br />
to use external recruiters from the<br />
Mike Van Milligen<br />
Dubuque City Manager<br />
Jenny Larson<br />
Chief Financial Officer<br />
Amy Scheller<br />
Dubuque Fire Chief<br />
Jeremy Jensen<br />
Dubuque Chief of Police<br />
54
PHOTO COURTESY OF CITY OF DUBUQUE<br />
start, but it still took almost six months<br />
to fill these newly created positions.<br />
These prolonged vacancies and<br />
additional staffing challenges, such as<br />
parental leave for two staff members<br />
and the recent resignation of an<br />
accountant, have placed significant<br />
stress on the department. To relieve<br />
some of this pressure and ensure that<br />
services continue uninterrupted, the<br />
department has increasingly relied<br />
on consulting firms and contracting<br />
temporary employees. Additionally,<br />
the former assistant finance director,<br />
who now works for one of the consulting<br />
firms hired by the Finance Department,<br />
continues to contribute part-time, helping<br />
manage responsibilities previously<br />
handled by the departing accountant.<br />
Through these challenges, the Finance<br />
Department has instituted numerous<br />
changes designed to encourage retention<br />
and boost recruitment. Understanding<br />
that flexible work schedules are an<br />
attractive perk to employees, the<br />
Finance Department adjusted its hours<br />
to allow staff to work a short day on<br />
Fridays. It also started providing the<br />
opportunity for most staff members<br />
to work from home two days a week.<br />
In a creative attempt to increase its<br />
applicant pool, the city also recently<br />
changed its residency requirements.<br />
Before the change, candidates were<br />
required to live in Iowa and within a few<br />
miles of city limits. The new residency<br />
requirements allow candidates to live<br />
in any state if they are within 30 miles<br />
of the city limits. Given Dubuque’s<br />
location across the Mississippi<br />
Creating an environment<br />
where creativity<br />
and collaborative<br />
problem-solving are<br />
encouraged is going to<br />
be a game-changer.<br />
AMY SCHELLER<br />
FIRE CHIEF, CITY OF DUBUQUE<br />
River from the border of the states of<br />
Illinois and Wisconsin, this change<br />
has dramatically increased the area<br />
from which candidates can apply.<br />
Fire Department<br />
Dubuque’s Fire Department has also been<br />
grappling with recruitment challenges in<br />
recent years. Scheller discusses efforts<br />
to enhance diversity, adapt to changing<br />
trends in the profession, and secure a<br />
strong workforce.<br />
Recently, the department has<br />
experienced a decline in the number of<br />
candidates on their recruitment lists<br />
and a significant drop in candidate test<br />
numbers. Despite this, Scheller recognizes<br />
the continuing importance of diversity,<br />
and she actively participates in diverse<br />
workforce and recruitment teams.<br />
To overcome these challenges and<br />
widen its candidate pool, the Fire<br />
Department has embraced innovative<br />
strategies—with the city’s full support. One<br />
notable example involves hiring emergency<br />
medical technicians. Traditionally,<br />
the Dubuque Fire Department has only<br />
hired trained paramedics; however, the<br />
Fire Department has recently begun<br />
allowing EMTs to apply for entry-level<br />
roles alongside paramedics. This switch<br />
expanded the pool of qualified candidates<br />
and has resulted in multiple successful<br />
hires. The collaboration between EMTs<br />
and experienced paramedics within the<br />
department ensures comprehensive<br />
training and support for new recruits.<br />
Another positive development for the<br />
Fire Department’s recruitment involves<br />
‘’over-hiring.” Candidates who made it onto<br />
the recruitment list would often face long<br />
waiting periods because of limited hiring<br />
capacity. As a result, the city often lost<br />
promising recruits to cities that could hire<br />
them sooner. Recognizing an opportunity,<br />
the department was recently granted<br />
approval to “over-hire.” This change allows<br />
more individuals on the list to enter the<br />
profession right away, ensuring that<br />
Dubuque can compete for talented recruits<br />
and provide greater opportunities for<br />
aspiring firefighters.<br />
Scheller highlights the competitive<br />
nature of recruitment within a limited<br />
pool of candidates. With creative<br />
strategies such as signing bonuses and<br />
increased recruitment efforts observed<br />
in other organizations, Dubuque’s Fire<br />
Department is taking proactive steps to<br />
attract and retain talented individuals.<br />
The department is also mindful that<br />
10 to 15 members will retire within<br />
the next few years, so it is preparing to<br />
address the resulting workforce gaps.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 55
IN PRACTICE | FINANCE<br />
Police Department<br />
Although many departments across<br />
the city have experienced staffing<br />
issues, none has felt the same level<br />
of pain as the Police Department.<br />
Jensen describes the events of the<br />
past three years as a “perfect storm”<br />
that has deeply affected his staff.<br />
In 2020, Dubuque’s Police Department<br />
was on the cusp of achieving full staffing<br />
when unforeseen circumstances struck.<br />
The COVID-19 pandemic dramatically<br />
increased the demanding nature of<br />
public safety work, as officers were<br />
often exposed to a deadly virus that<br />
we knew very little about. In addition<br />
to this stress, the nationwide impact<br />
of the Black Lives Matter movement<br />
resulted in officer fatigue and a negative<br />
public perception of policing. The two<br />
forces combined were overwhelming for<br />
many active and prospective officers,<br />
leading to increased officer attrition and<br />
a decreased applicant pool. Finally, the<br />
preference for regular work schedules<br />
and the desire to start in specialized roles<br />
posed challenges in attracting qualified<br />
candidates. As a result, the Police<br />
Department has 15 open positions.<br />
The legal requirements that go along<br />
with the officer recruitment process<br />
also present significant obstacles.<br />
State-sanctioned police academies<br />
have limited seats available, and<br />
of the candidates that Dubuque’s<br />
Police Department is able to send to<br />
the academy, only 30 percent end up<br />
passing the state-mandated written<br />
and physical exams. Additionally,<br />
recruits must undergo a background<br />
check, psychological examination,<br />
physical examination, and 20 weeks<br />
of field training. When all is said and<br />
done, it takes a full year to replace a<br />
retiring officer. The limited capacity<br />
for field training further compounds<br />
this issue, as the department struggles<br />
to train enough new hires due to a<br />
shortage of field training officers.<br />
The department also faces<br />
discontent about pay disparities, as<br />
compared to other agencies such as<br />
the neighboring sheriff’s office. These<br />
disparities have resulted in officers<br />
feeling undervalued and frustrated.<br />
Despite these complex issues,<br />
Dubuque’s Police Department is<br />
actively creating a more stable and<br />
rewarding work environment for law<br />
enforcement professionals. Recently<br />
the department was able to get a city<br />
clerk trained and certified in scoring<br />
candidates’ tests. This allows the<br />
department to evaluate candidates<br />
more often, which not only decreases<br />
the time required to hire a new officer<br />
but also decreases the burden placed<br />
on field training officers by spreading<br />
out when new hires join the force.<br />
Additionally, recognizing the<br />
burden felt by the officers training<br />
new recruits, the Police Department<br />
has prioritized the retention of its<br />
field training officers. On top of the 6<br />
percent raises received by all Dubuque<br />
police officers, the Police Department<br />
recently provided field training<br />
officers with an additional raise.<br />
Advice from Dubuque<br />
Having faced his own fair share of<br />
roadblocks, Jensen knows how crucial<br />
it is to “identify what you actually have<br />
control over and what you don’t have<br />
control over.” Making this distinction<br />
clear can help managers avoid<br />
frustration and focus on recognizing<br />
actions they can take to improve their<br />
situation, no matter how marginally.<br />
Scheller recognizes that her<br />
department is at an inflection point,<br />
saying, “If we continue to do things the<br />
way we have done them in the past,<br />
we are not going to succeed. Creating<br />
an environment where creativity and<br />
collaborative problem-solving are<br />
encouraged is going to be a game-changer.<br />
I’m hoping that the way I manage and<br />
the way I treat people will trickle down<br />
to the other leaders of this department.”<br />
Larson offers advice for other finance<br />
departments that are struggling with<br />
retention and recruitment centers on<br />
listening. “It’s important to listen to<br />
staff members and their needs, as well<br />
as candidates who are stressing the<br />
importance of work-life balance. That is<br />
not going to change, so we need to change<br />
as an organization to meet that need.<br />
Hybrid working, flex schedules, and<br />
vacations are all coming up as I have been<br />
going through interviews in the Finance<br />
Department. You just need to keep an<br />
open mind. What we offer today may<br />
not be what is needed in the future.”<br />
Connor Golden and Samuel Mann<br />
are both graduate student interns with<br />
GFOA’s Research and Consulting Center.<br />
PHOTO COURTESY OF CITY OF DUBUQUE<br />
56
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IN PRACTICE | ACCOUNTING<br />
ACCOUNTING<br />
Just Go with the Flow—Cash Flow Reporting<br />
History of Statement No. 9<br />
BY SUSANNAH FILIPOVIC<br />
When the Berlin<br />
Wall came down<br />
and while people<br />
were singing to<br />
Madonna’s “Like a<br />
Prayer,” the Governmental Accounting<br />
Standard Board (GASB), in its fifth year<br />
of existence, approved Statement No.<br />
9 on cash flow reporting of proprietary<br />
funds and governmental entities that<br />
use proprietary fund accounting. While<br />
much has changed in the international<br />
and social environments, as well as in<br />
the world of governmental accounting,<br />
very little has changed regarding cash<br />
flow reporting. There continues to be<br />
no indications of major changes on the<br />
horizon. The challenge is that minimal<br />
authoritative guidance has been<br />
developed to specifically address newer<br />
transactions, such as how pensions,<br />
asset retirement obligations, and lease<br />
activity fit into the existing structure<br />
of the statement of cash flows. The<br />
consensus appears to be that Statement<br />
No. 9’s guidance stands strong and<br />
sufficient, as is.<br />
Relevant guidance subsequent to 1989<br />
includes an amendment to remove the<br />
indirect method as an allowable method<br />
of reporting the cash flows from operating<br />
activities and periodic implementation to<br />
guide questions and answers to address<br />
specific issues. Overall, guidance on cash<br />
flows reporting has largely remained<br />
intact for over 33 years. The current<br />
standards and implementation guidance<br />
on cash flow reporting is found in GASB’s<br />
current Codification of Governmental<br />
Accounting and Financial Reporting<br />
Standards (Cod.), Section (Sec.) 2450,<br />
“Cash Flows Statements.”<br />
The cash flow statement can help<br />
governments—and users of their<br />
financial statements—understand how<br />
their proprietary funds are meeting their<br />
cash needs in the four categories defined<br />
by GASB Cod. Sec. 2450.112:<br />
OPERATING<br />
NONCAPITAL FINANCING<br />
CAPITAL AND RELATED FINANCING<br />
INVESTING<br />
How to fit in the flows<br />
Asset Retirement Obligations (ARO).<br />
Many enterprise funds were impacted<br />
by Statement No. 83, Asset Retirement<br />
Obligations (as amended, in GASB Cod.<br />
Sec. A10, “Certain Asset Retirement<br />
Obligations”), which resulted in the<br />
reporting of a long-term liability and a<br />
related deferred outflow of resources.<br />
The annual activity for Asset Retirement<br />
Obligations (AROs), as well as for the<br />
similar landfill closure and postclosure<br />
(as amended, in Cod Sec. L10, “Landfill<br />
Closure and Postclosure Care Costs”), will<br />
likely result in both cash and noncash<br />
reporting on the statement of cash flows.<br />
On the statement of cash flows,<br />
the actual cash paid for the ongoing<br />
retirement efforts of an asset (reduction<br />
of the liability) would likely meet the<br />
criteria of a cash outflow from operating<br />
activities and not be specifically<br />
identified as ARO related. While the<br />
annual recognition of the deferred<br />
outflow of resources over the expected<br />
life of an ARO is not directly impacted by<br />
cash activity, the change in this balance<br />
sheet line item should be reported on the<br />
©<strong>2023</strong> JIM FRAZIER C/O THEISPOT.COM<br />
58
econciliation of operating income (loss)<br />
to net cash from (for) operating activities.<br />
Liabilities for Leases and SBITAs. Efforts to<br />
implement leases and subscription-based<br />
information technology arrangements<br />
(SBITAs) (GASB Cod. Sec. L20, “Leases”<br />
and Cod. Sec. S80, “Subscription-Based<br />
Information Technology Arrangements,”<br />
respectively), are well underway.<br />
The initiation of a lease (by a lessee<br />
government) or SBITA, and the resulting<br />
recognition of the intangible right-touse<br />
asset, as well as remeasurement<br />
adjustments throughout the life of the<br />
lease, should be reflected in the schedule<br />
of noncash financing and investing<br />
activities.<br />
Throughout the life of the lease or<br />
SBITA, the cash outflows for principal<br />
and interest payments should be reflected<br />
as a capital and related financing outflow,<br />
consistent with the concept that the<br />
associated intangible right-to-use asset is<br />
a capital asset. The annual amortization<br />
of the intangible right-to-use asset can<br />
be aggregated with depreciation of other<br />
capital assets in the reconciliation of<br />
operating income (loss) to net cash from<br />
(for) operating activities.<br />
Lease receivable and other long-term<br />
notes receivable. As a reminder, when<br />
a government enterprise fund is the<br />
lessor in a lease of a capital asset, the<br />
proprietary fund statement of fund<br />
net position reports a long-term lease<br />
receivable and a related deferred inflow<br />
of resources. The government will<br />
continue to report the capital asset at<br />
historical cost and depreciate annually.<br />
The categorization of the cash receipts<br />
for principal and interest related to this<br />
lease are identified in authoritative<br />
implementation guidance (GASB Cod.<br />
Sec. 2540.707-16) as capital and related<br />
financing. The path to this conclusion<br />
is based on the principle that leases are<br />
financings with the categorization of<br />
proceeds analogized to a sale of capital<br />
assets. This categorization should be<br />
applied even when the ongoing operations<br />
of the government or proprietary fund is<br />
leasing property to third parties.<br />
If a government proprietary fund is<br />
the lessor of an asset that is classified<br />
as an investment on its statement of<br />
fund net position, then the government<br />
should follow recognition, measurement,<br />
and reporting guidance applicable to<br />
the underlying asset (an investment)<br />
in GASB Cod. Secs. 3100, “Fair Value<br />
Measurement” and I50, “Investments”).<br />
Hence, this would not result in a<br />
lease receivable and deferred inflow<br />
of resources. Instead, since the cash<br />
flows receipts for principal and interest<br />
relate to an investment, the lessor<br />
would categorize them as cash flows<br />
from investing activities. This analysis<br />
takes us back to the implementation<br />
of GASB Statement No. 72, Fair Value<br />
Measurement, (GASB Cod. Secs. 3100<br />
and I50) which required governments<br />
to identify assets as investments at the<br />
time of implementation.<br />
Other long-term receivables may<br />
be the result of a sale of capital assets,<br />
such as a note receivable, or the<br />
result of cash lending, such as a loan<br />
receivable. Understanding the origin of<br />
the receivable is paramount to proper<br />
categorization on the statement of cash<br />
flows. For a note receivable, the cash<br />
inflow associated with a sale of a capital<br />
asset should be reported as a capital and<br />
related financing inflow. However, the<br />
cash inflow related to the loan receivable<br />
(principal and interest), would be<br />
reported as an investing activity.<br />
American Rescue Plan Act Funding.<br />
With some governments allocating<br />
American Rescue Plan Act (ARPA)<br />
funding (unrestricted federal revenue)<br />
to proprietary funds for a variety<br />
of purposes, including pursuing<br />
capital projects, understanding the<br />
crosswalk between the governmentwide<br />
statement of activities and<br />
the proprietary funds statements is<br />
important. These federal revenues are<br />
not restricted to a specific purpose. Even<br />
if a government chooses to use ARPA<br />
funds to complete capital projects, the<br />
cash inflow does not meet the criteria to<br />
be reported as a capital related financing<br />
activity. Cash receipts from grants<br />
that are not specifically restricted for<br />
capital purposes should be reported as a<br />
cash inflow from noncapital financing<br />
activities.<br />
Reminders!<br />
Always Double Check NICA—If the cash<br />
flow for principal and interest payments<br />
is reported as a cash flow for capital and<br />
related financing activities, then the<br />
amount of the related debt proceeds that<br />
have been spent on capital assets should<br />
be included in the calculation of the net<br />
investment in capital assets.<br />
Mismatch—While operating revenues<br />
and expenses are defined by each<br />
government for reporting on the<br />
statement of revenues, expenses and<br />
changes in fund net position, cash flows<br />
from operating activities are considered<br />
the catchall group on the statement of<br />
cash flows. As such, the cash flows from<br />
nonoperating revenues and nonoperating<br />
expenses should not automatically be<br />
excluded from cash flows from operating<br />
activities.<br />
Noncash items matter, too!—Capital<br />
contributions reported on the statement<br />
of revenues, expenses and changes<br />
in fund net position can be noncash<br />
(contribution of a capital asset) or cash<br />
(contribution or grant of cash restricted<br />
to fund a capital asset). Cash receipts<br />
from grants restricted for capital<br />
purposes should be reported as part<br />
of cash flows from capital and related<br />
financing activities, while noncash<br />
contributions should be included in<br />
the schedule of noncash financing and<br />
investing activities. The schedule of<br />
noncash activities should also include<br />
donated commodities, donated capital<br />
assets, debt refunding activity when an<br />
escrow agent is used, and issuances of<br />
other liabilities, including loans, leases,<br />
and SBITAs that directly result in a<br />
capital asset.<br />
Keep your eyes on the flow of the<br />
Financial Reporting Model Project<br />
GASB’s major project on the Financial<br />
Reporting Model continues to move<br />
through deliberations. Tentative changes<br />
to the proprietary fund’s statement of<br />
revenues, expenses and changes in fund<br />
net position may impact how operating<br />
revenues and expenses correspond to<br />
cash flows from operating activities<br />
in the statement of cash flows. And to<br />
all those who had their fingers crossed<br />
during this project’s initial deliberations,<br />
there should be no government-wide<br />
statement of cash flows requirement<br />
coming. Stay tuned!<br />
Susannah Filipovic is manager of<br />
technical accounting for GFOA’s Technical<br />
Services Center.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 59
IN PRACTICE | PERSPECTIVE<br />
PERSPECTIVE<br />
Tips for Powerhouse Dashboards<br />
BY KATHERINE BARRETT AND<br />
RICHARD GREENE<br />
Communicating information<br />
about cities to both leaders<br />
and citizens has become<br />
increasingly important as<br />
transparency is seen as a<br />
key to efficiency and the ability to garner<br />
trust. As a 2017 report from the Volcker<br />
Alliance put it, “Legislators, advocacy<br />
groups, executive branch officials, and<br />
citizens are at a huge disadvantage if it<br />
is extremely difficult or even impossible<br />
for them to dig out the data they need.”<br />
One of the most useful ways for cities<br />
to provide just this kind of information<br />
is through dashboards, which can be<br />
graphically appealing ways to give users<br />
information they need in a quick, concise<br />
fashion. Multiple cultures have a saying<br />
similar to “a picture is worth a thousand<br />
words.” The parallel here is “a dashboard<br />
is worth a thousand data points.”<br />
But creating powerful, useful<br />
information that will attract users isn’t<br />
easy, so we’ve turned to experts in the<br />
field to assemble the following list of ten<br />
concrete approaches that cities should<br />
consider when developing or improving<br />
their dashboards.<br />
Knowing your audience is key<br />
“The best piece of advice I have is to<br />
design from the outside in, not the inside<br />
out,” said Don Kettl, co-author (with<br />
William D. Eggers) of BridgeBuilders: How<br />
Government Can Transcend Boundaries<br />
to Solve Big Problems (Harvard Business<br />
Review Press, <strong>2023</strong>). This is particularly<br />
important for city dashboards because<br />
they may be serving two very different<br />
audiences, or sometimes a combination<br />
of both: the government leaders who<br />
want an easy way to understand what’s<br />
happening in the institution they serve,<br />
and residents who want to understand<br />
more about their cities and the value they<br />
are getting from their tax dollars.<br />
Be selective in the data you display<br />
As Mark Funkhouser, founder and<br />
president of Funkhouser and Associates,<br />
said, “Too many dashboards are scattered<br />
with too many concepts, and sometimes<br />
even with a lot of different measures<br />
that don’t get to the core concepts.” One<br />
key to selecting the measures on which<br />
a dashboard focuses is to concentrate on<br />
the missions of the organization, and then<br />
©<strong>2023</strong> PAIGE STAMPATORI C/O THEISPOT.COM<br />
60
give careful thought to the information<br />
that people really want to see. “You can’t<br />
assume you know what the residents care<br />
about,” Funkhouser said. “So, you need<br />
to do the work of finding this out with an<br />
ongoing dialogue with residents,” and<br />
then design a dashboard that shows those<br />
things.<br />
Let people drill down for more detail<br />
Devin LuBean, user experience leader<br />
at Domo, a software company that helps<br />
people create data experiences, said:<br />
“Some people just say to keep it simple,<br />
but you may be dealing with complex<br />
data, so I like to think of it more like a kind<br />
of progressive disclosure. Users see one or<br />
two important things and then click to get<br />
to another part of the dashboard for more<br />
detail, rather than plopping them down to<br />
the destination.”<br />
Refresh the dashboard regularly and<br />
provide the date of the latest refresh<br />
Understaffed governments can easily<br />
allow dashboards to fall out of date—<br />
particularly when there’s a great deal of<br />
manual work involved in updating them<br />
frequently. But this can come at a cost.<br />
“When users see that a dashboard isn’t<br />
updated, they don’t check back,” said<br />
Julian Metcalf, partner of GPP Analytics<br />
Inc., a consulting firm in performance<br />
auditing, internal auditing, co-sourcing,<br />
and data analytics.<br />
Rock Regan, alliance manager for<br />
system integrators at Qlik (a company that<br />
helps organizations turn data into action)<br />
and one-time chief information officer of<br />
Connecticut, said, “Anybody who builds<br />
a dashboard should have an indication of<br />
how fresh the data is.” Places that provide<br />
this kind of information are a step ahead<br />
of the pack. Consider the dashboard the<br />
City of Mesa, Arizona, built. It shows<br />
“computer-aided dispatch events,” or the<br />
calls for service dispatched to Mesa police<br />
patrol officers. A quick glance at the page<br />
shows when the data was last updated—<br />
which is particularly impressive as this<br />
information is typically refreshed daily.<br />
Make your dashboards as dynamic<br />
as possible<br />
Before the Internet, people thought of<br />
dashboards exclusively in the context<br />
of the control panels in automobiles that<br />
showed speed, miles traveled, fuel level,<br />
and so on. But if any of those dials were<br />
stuck in one spot, they’d be worthless<br />
(if the gas gauge was fixed to “full,” the<br />
auto would eventually come to a grinding<br />
stop). The same thing is true with online<br />
performance dashboards, which must<br />
show the trend of performance indicators<br />
over time. “Data without context isn’t<br />
useful, and it’s important to have details<br />
about progress,” said Elizabeth Steward,<br />
vice president of research and marketing<br />
at Envisio, a performance management<br />
software company.<br />
One excellent example is the New<br />
Orleans Library Operational Plan<br />
dashboard, which shows the status of<br />
individual projects like efforts to enhance<br />
opportunities for jobseekers and job<br />
creators. A quick glance at the dashboard<br />
shows the degree to which efforts<br />
like this are “on track,” “experiencing<br />
some disruption,” “experiencing major<br />
disruption,” “completed,” or “upcoming.”<br />
Use colors carefully<br />
Some websites are overloaded with a<br />
rainbow of colors, presumably with<br />
the idea that people will be attracted to<br />
a beautiful array of reds, greens, and<br />
blues. Color can be a powerful device<br />
in dashboards, but it should be used<br />
intentionally. Too many colors can<br />
obscure the message you’re trying to<br />
communicate. David Osborn, cofounder<br />
of ThirdLine, Inc., a company that helps<br />
governments with analytics, said: “You<br />
really want to use shades of black, white,<br />
and gray for most things, and color for the<br />
things you want to stand out. Grays and<br />
blacks with a dash of orange or blue will<br />
help the colored items stand out. I think<br />
for someone who doesn’t understand<br />
design, lots of colors seems fun. They’re<br />
trying to build a piece of art, but that’s not<br />
the goal.”<br />
Consider the type of graphics that<br />
works best<br />
For example, pie charts take up a great<br />
deal of space because they are circular,<br />
and the loss of the area around the pie<br />
can forfeit a lot of valuable real estate on<br />
a dashboard. A bar chart, on the other<br />
hand, takes up less space,” LuBean<br />
explained. And that’s just the beginning.<br />
For example, line charts may not have as<br />
much visual impact as bar charts because<br />
they don’t have as much visual mass,<br />
but “line charts are fantastic when you’re<br />
trying to show things over time,” he added.<br />
Help users translate the dashboard<br />
into different languages<br />
“You want to communicate with all<br />
residents,” said Mike Bell, cofounder and<br />
chief executive officer of Envisio. “The<br />
early adopters are beginning to embrace<br />
this practice.” Bell points to the City of<br />
Denton, Texas, and its Strategic Plan’s<br />
dashboard as a strong example of a city<br />
that makes it easy to see lots of data in<br />
a number of languages, ranging from<br />
Spanish to Hindi to Korean to Arabic. A<br />
simple menu at the top of the home page<br />
offers dropdown options to select any of<br />
the 22 featured languages to make the<br />
translation process effortless.<br />
Use the blur test<br />
This is a recommendation from Domo’s<br />
LuBean, who explains that if a user<br />
squints and takes note of the element<br />
on a computer screen that they see first,<br />
that should be the most important item<br />
in front of them. “In most government<br />
organizations, people don’t have a lot of<br />
time,” he says. “So, the blur test is a pretty<br />
quick way to get a reasonably accurate<br />
idea of what people are going to see first.”<br />
Make the dashboard<br />
comprehensible on a mobile device<br />
According to Exploding Topics, a search<br />
engine optimization detection platform,<br />
55 percent of website traffic comes<br />
from mobile devices, while 92 percent<br />
of users who access the Internet use<br />
a mobile phone. Yet it can be difficult<br />
cramming dashboards onto the tiny<br />
screens available on mobile phones—<br />
which is a problem, according to Mike<br />
Maciag, policy researcher and former data<br />
journalist. “Too often, displaying data on<br />
mobile devices is still an afterthought.<br />
Governments can greatly expand<br />
and broaden their reach by making<br />
dashboards mobile-friendly.”.<br />
Katherine Barrett and Richard Greene are<br />
principals of Barrett and Greene, Inc., at<br />
greenebarrett.com. They are advisors to GFOA,<br />
senior advisors and columnists for Route<br />
Fifty, NAPA Fellows, senior advisors to the<br />
Government Finance Research Center at the<br />
University of Illinois, and senior advisors to the<br />
American Society for Public Administration.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 61
IN PRACTICE | PERSPECTIVE<br />
PERSPECTIVE<br />
Rethinking Revenue Diversification,<br />
Warren Buffett Style<br />
BY JUSTIN MARLOWE<br />
B<br />
illionaire Warren Buffett<br />
is famous for his blunt<br />
commentary on everything<br />
from tax policy to baseball<br />
to ukulele playing. And<br />
of course, his advice on investing has<br />
moved markets and made personal<br />
fortunes. According to some recent<br />
research, his ideas on picking stocks<br />
might also be good advice for managing<br />
local government revenues.<br />
Local government revenue structures<br />
are front and center these days. For<br />
this we can thank GFOA’s pathbreaking<br />
“Rethinking Revenue” initiative.<br />
Rethinking Revenue is a deep dive into<br />
big questions—what local governments<br />
tax, why they tax it, and how they can<br />
build better tax structures for the future.<br />
One of its core principles is that “today<br />
local revenue structures are largely<br />
based on assumptions that no longer<br />
hold true as digitization, globalization,<br />
demography, political changes, and other<br />
trends continue to shift the landscape.”<br />
Many of these assumptions surround<br />
local revenue systems’ ability to generate<br />
the requisite resources for essential<br />
services. Tax policy experts call this<br />
“revenue adequacy.” Rethinking Revenue<br />
points out that adequacy is under<br />
assault for many reasons that local<br />
governments can’t control. Consumers<br />
continue to shift a growing portion of<br />
their spending away from goods that<br />
are subject to local sales taxes. Reliable<br />
revenue sources like charges for services<br />
have been shown to disproportionately<br />
affect the poor—and so on.<br />
But there’s another, often-overlooked<br />
dimension of adequacy: performance<br />
over time. A revenue system that can<br />
produce big annual revenue increases<br />
sounds exciting. And yet, the laws of<br />
financial physics tell us that the system<br />
is also prone to big annual decreases.<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
62
Most local budgeting officials will trade<br />
the chance at a budget windfall for the<br />
certainty of avoiding a budget shortfall.<br />
This lines up well with Buffett’s most<br />
famous investment advice: “The first<br />
rule of an investment is don’t lose<br />
money. And the second rule of an<br />
investment is don’t forget the first rule.”<br />
That leaves us with a challenging<br />
question: how can we ensure that a<br />
local revenue system generates enough<br />
revenue, and minimizes the risk of<br />
large annual declines?<br />
The answer is diversification.<br />
Professional money managers have<br />
espoused the virtues of a diversified<br />
investment portfolio for decades.<br />
Stocks, bonds, real estate, and other<br />
assets tend to move in different<br />
directions as markets improve or<br />
decline. It follows that holding a mix<br />
of otherwise uncorrelated assets can<br />
prevent unexpected losses. Academic<br />
researchers have applied this same<br />
principle to local government revenues.<br />
They have carefully studied how local<br />
governments distribute their revenue<br />
burden across different revenue<br />
sources, and what happens when new<br />
revenue sources are made available.<br />
The problem with this approach is<br />
that broader does not always mean<br />
more predictable. In fact, research has<br />
shown that when revenue systems<br />
increase their dependence on new<br />
but pro-cyclical revenue sources—for<br />
example, those that generate more<br />
revenue when the economy is growing,<br />
and vice versa—such as local sales<br />
taxes, they often become less stable.<br />
Rethinking Revenue calls this out<br />
as a key consideration for the future<br />
of local revenues. It asks, “Does (the<br />
revenue source) contribute to a system<br />
wherein the productivity of the revenue<br />
sources that make up the system are<br />
not correlated with each other? This is<br />
the essence of diversification.’” Here,<br />
Rethinking Revenue once again sounds<br />
a bit like Buffett, who once said, “Wide<br />
diversification is only required when<br />
investors do not understand what they<br />
are doing.”<br />
All this leads us to a different way of<br />
thinking about diversification. Instead<br />
of analyzing dependence on different<br />
revenue sources, we should instead<br />
How can we ensure that<br />
a local revenue system<br />
generates enough<br />
revenue, and minimizes<br />
the risk of large annual<br />
declines?<br />
examine if the sources we use tend to<br />
move together. Professional money<br />
managers have a well-developed set of<br />
tools to that effect. One of those tools<br />
is a measure—known as “portfolio<br />
variance”—of the tendency for an<br />
investment portfolio’s annual gains/<br />
losses to deviate from their long-term<br />
trend. We calculate portfolio variance<br />
by observing whether the prices<br />
of individual assets in a portfolio<br />
increase or decrease in tandem<br />
over time—if they tend to move<br />
independently of each other, if there’s<br />
less variance, and if the portfolio’s<br />
gains and losses are more predictable.<br />
Many investors strive to build a<br />
portfolio that maximizes investment<br />
gains while minimizing variance.<br />
Until now, no one has applied<br />
these concepts to local government<br />
revenues. But in some recent research<br />
at the University of Chicago’s Center<br />
for Municipal Finance, we did just that.<br />
We used the Census of Government’s<br />
data to compute the five-year revenue<br />
portfolio variance for all local<br />
governments with populations greater<br />
than 25,000 from 1970 through 2020.<br />
What did we learn?<br />
First, local revenue systems are<br />
volatile. The average five-year revenue<br />
portfolio volatility—as indicated by<br />
its standard deviation—was around<br />
25 percent. That means if you had to<br />
guess the annual change in a local<br />
government’s total revenues, you’d be<br />
correct at least two-thirds of the time if<br />
you guessed +/- 25 percent. Depending<br />
on the size and type of government,<br />
that volatility can be as little as +/- 10<br />
percent or as much as +/- 48 percent.<br />
Does that mean actual revenue<br />
collections will fluctuate by 25<br />
percent each year? Not necessarily.<br />
In fact, most localities’ actual revenue<br />
collections fluctuate by around +/- 6<br />
percent. Volatility is based on past<br />
fluctuations. Whether that pattern of<br />
fluctuations continues depends on the<br />
condition of the real estate market,<br />
consumer confidence, and many other<br />
factors. In general, those intervening<br />
factors stabilize actual revenue<br />
collections.<br />
Second, we find that volatility is<br />
tightly linked with fluctuations in<br />
actual revenues. This is especially true<br />
for losses. More volatility is almost<br />
always associated with revenues falling<br />
well short of their long-run trend at<br />
some point in the following three to<br />
five years. To put it differently, revenue<br />
structures that are more diversified<br />
in the portfolio management sense<br />
of the word—meaning they have less<br />
correlation across revenue sources and<br />
lower overall volatility—are also more<br />
stable. This reinforces the idea that less<br />
volatility makes for easier budgeting.<br />
Third, and perhaps most important,<br />
diversification as it’s been measured<br />
so far has little to do with volatility. We<br />
find that our revenue portfolio variance<br />
measure and traditional measures of<br />
diversification as distribution barely<br />
correlate. In fact, local governments<br />
that depend on fewer revenue sources<br />
often have lower volatility, so long as<br />
they are “own source” revenues like<br />
property taxes and utility taxes.<br />
When we think about local revenues<br />
the way investors think about<br />
investments, we find that diversification<br />
doesn’t always pay dividends. In fact,<br />
as Warren Buffett reminds us, smart<br />
local finance professionals might prefer<br />
less diversification. These complex<br />
links between diversification and<br />
predictability are an essential part of<br />
rethinking revenue.<br />
Learn more about GFOA’s Rethinking<br />
Revenue initiative:<br />
gfoa.org/rethinking-revenue<br />
Justin Marlowe is a research professor at<br />
the University of Chicago, Harris School of<br />
Public Policy, and a fellow of the National<br />
Academy of Public Administration.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 63
IN PRACTICE | INTERVIEW<br />
Rising to the<br />
Budgeting Challenge<br />
AN INTERVIEW WITH LAURA LARSEN<br />
Jara Kern, writer with Right Angle Studio, spoke with Laura L. Larsen,<br />
budget director for the City of Baltimore, Maryland, about her career<br />
journey in government budgeting, key differences between state and<br />
local government budgeting, and how municipal government leaders<br />
can best navigate labor challenges and uncertainty.<br />
Laura began her career in<br />
government finance as<br />
a budget management<br />
analyst with the City of<br />
Baltimore, Maryland,<br />
before moving to the City<br />
of Madison, Wisconsin, as budget and<br />
program evaluation manager. She<br />
then became capital budget director<br />
for the State of Wisconsin, from 2020<br />
to 2022, before returning to the City<br />
of Baltimore in September 2022 as<br />
budget director. She also serves on<br />
GFOA’s Committee on Governmental<br />
Budgeting and Fiscal Policy.<br />
Blending professional passion with<br />
public service<br />
Laura traces her career arc back to<br />
her undergraduate experience at the<br />
University of Nebraska at Kearney,<br />
where she worked at the front desk for the<br />
Nebraska Game and Parks Commission.<br />
As a staff member, Laura worked with<br />
wildlife and fishery biologists and game<br />
wardens, and she saw firsthand the<br />
power of blending a professional passion<br />
with public service. “I saw up close what<br />
public service looks like and how you<br />
could make a career out of it in a number<br />
of avenues,” Laura recalled. “That’s when<br />
I decided I wanted to pursue my MPA.”<br />
Laura enrolled in the University of<br />
Nebraska at Omaha’s Master of Public<br />
Administration (MPA) program with<br />
the goal of working at the state or federal<br />
level in policy analysis. As she neared<br />
graduation, one of her professors urged<br />
her to cast a broader net. “She explained<br />
that a local government budget office<br />
can be an interesting place to work, with<br />
opportunities to learn a lot, very quickly,”<br />
Laura explained. She applied for a budget<br />
analyst role at the City of Baltimore, a<br />
place she had never even visited.<br />
64
Ultimately, she was energized by<br />
the type of team the budget office was<br />
working to create and the possibilities<br />
for growth in the job. “At the time, they<br />
took a leap of faith with me, and I took<br />
a leap of faith with them. I discovered I<br />
like to be in the place where everything<br />
comes together, where you can really be<br />
involved with different areas of service<br />
delivery.”<br />
Laura reflected on why she needed<br />
a push to consider local government<br />
finance—and why others might,<br />
too. “People may not realize that in<br />
these positions, they could be doing<br />
analysis for big proposals with a major<br />
impact on their community or working<br />
with procurement or on big capital<br />
projects. The field is broad with many<br />
opportunities to do interesting work<br />
with real impact.”<br />
A passion for budgeting<br />
In 2015, Laura left Baltimore for the<br />
City of Madison to advance her career<br />
in a new role as budget and program<br />
manager. She found immediate<br />
similarities between Madison and<br />
Baltimore. Both cities were in the<br />
process of embracing new technology in<br />
the budgeting process. Forward-thinking<br />
leaders in both cities were working to<br />
leverage the budget process to engage<br />
the community and to enable innovation<br />
and improvement in service delivery.<br />
As Laura discovered, though, working<br />
in the budget office in a growing city<br />
like Madison is very different than in<br />
Baltimore, which is grappling with<br />
population loss. She highlighted this<br />
difference by comparing infrastructure<br />
funding. “Madison has relatively new<br />
infrastructure that we were routinely<br />
updating, while Baltimore has aging<br />
infrastructure with high deferred<br />
maintenance. In Madison, we were<br />
borrowing $182 million annually,<br />
backed by our general fund, for capital<br />
investment—and in Baltimore, a city<br />
three times larger, our annual borrowing<br />
for capital investment is $80 million.”<br />
In 2020, Laura took on a new role as<br />
capital budget director for the State<br />
of Wisconsin. This experience, too,<br />
opened her eyes to new differences<br />
and complexities in budgeting. “The<br />
dynamics around facilitating a capital<br />
budget process are much different than<br />
“People may not realize that in these positions, they<br />
could be doing analysis for big proposals with a major<br />
impact on their community or working with procurement<br />
or on big capital projects. The field is broad with many<br />
opportunities to do interesting work with real impact.”<br />
an operating budget.” She described<br />
positives like additional staffing to share<br />
the workload of the budget process, as<br />
well as challenges like additional layers<br />
of approval. “In local government, you<br />
have more autonomy and sometimes<br />
it’s easier to make changes,” she noted.<br />
“And you feel more connected to the<br />
impact of your decisions, as you can see<br />
them more readily in your community.”<br />
This experience, in addition to<br />
Laura’s connection to Baltimore, was<br />
instrumental in bringing her back east<br />
in September 2022 when she was<br />
hired for the budget director position,<br />
where she leads the 15-member team<br />
responsible for the city’s $3.3 billion<br />
operating budget.<br />
As she has built her career, Laura has<br />
learned that her favorite part of budgeting<br />
is the opportunity to solve internal<br />
problems, making better service<br />
delivery possible. She pointed to a<br />
recent example with the Department of<br />
Housing and Community Development<br />
in Baltimore as a powerful breakthrough<br />
during her first year as city budget<br />
director. “Our housing commissioner<br />
was frustrated with how vacancies were<br />
accounted for in her budget. Together<br />
we were able to come up with a new<br />
approach that will ultimately allow the<br />
housing authority to better leverage<br />
their budget, while also getting more<br />
people into critical roles, and that in<br />
turn will enable better service delivery.<br />
In a city of this size, there are so many<br />
opportunities to use the budget process<br />
to help agencies solve real problems.”<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 65
Confronting budget challenges<br />
Like many other communities, Baltimore<br />
is confronting key challenges that<br />
intersect with budget expenditures.<br />
Laura shared two as examples: balancing<br />
the budget amid ongoing uncertainty<br />
and unlocking the promise of evolving<br />
technology. Each presents particular<br />
complexity.<br />
Being ready for the headwinds of<br />
an anticipated recession creates more<br />
questions than answers for the budget<br />
office. “We’re trying to figure out how we<br />
strike the right balance in the budgeting<br />
process, without being overly cautious<br />
or excessively optimistic,” Laura said.<br />
“These are pressures that are outside<br />
our control but would have a significant<br />
fiscal impact on the city.”<br />
Like many other jurisdictions,<br />
Baltimore has been on the journey of<br />
ERP implementation, with a system that<br />
recently went live. “Technology changes<br />
how we can put the budget together and<br />
report on the city’s financials,” Laura<br />
stressed. “It shapes the whole process,<br />
what we can see happening in real time,<br />
and how it affects what comes back<br />
through the budget process.”<br />
Laura has brought experience in<br />
implementing data-driven budgeting<br />
to her new role in Baltimore, as she led<br />
efforts to incorporate performance and<br />
data into the budget planning process for<br />
both the City of Madison and the State of<br />
Wisconsin. With perspective on both the<br />
pitfalls and promise, Laura commented<br />
on the keys to successful implementation.<br />
“The most important step is to find<br />
partners in the work, because if you’re<br />
going it alone as the budget director,<br />
people may think that this is a new<br />
way to try to cut their budgets.” These<br />
partners can include leaders, a planning<br />
department, or a data team.<br />
She also counseled that success can<br />
be found in merging complementary<br />
workstreams. “In Madison, we brought<br />
together our data work and our effort to<br />
rewrite the city’s comprehensive plan.<br />
This helped stakeholders understand<br />
how data was going to inform priorities<br />
and turned the temperature down.”<br />
Laura also emphasized that creating an<br />
environment of trust will make it possible<br />
to collect meaningful metrics, which<br />
ultimately unlock data’s power to help us<br />
“Budgeting is about<br />
making sure operations<br />
and dollars are<br />
connected, and the<br />
budget committee<br />
focuses on tools that<br />
can make this easier<br />
for organizations.”<br />
understand what is happening—and<br />
the reasons why.<br />
Beyond the budgeting process,<br />
technology is also reshaping how the<br />
City of Baltimore approaches public<br />
engagement. Before the pandemic, most<br />
town hall and pop-up events were in<br />
person—and often done on what Laura<br />
described as an annual “drop in” basis.<br />
The city then shifted online through<br />
Zoom and other digital tools, which<br />
opened up new ways of thinking about<br />
public engagement. “Now, we are focused<br />
on how to build a strategy for ongoing<br />
communication with the community,<br />
from the early informational stage<br />
through feedback sessions.” The city<br />
is investing in this effort by hiring for<br />
a new position that will focus full time<br />
on public engagement, providing the<br />
capacity to sustain this effort year-round.<br />
Hiring in a tight labor market<br />
During her first year as budget director,<br />
Laura focused heavily on rebuilding a<br />
team ready to take on the challenges of<br />
navigating the post-pandemic period.<br />
Like many other employers, the City of<br />
Baltimore has struggled with higherthan-normal<br />
vacancy rates over the last<br />
two years. Laura noted that the current<br />
vacancy rate is 20 percent, compared to a<br />
pre-2020 normal of 10 to 15 percent.<br />
A leaner team has created real<br />
challenges. “We went through this budget<br />
process at about a 50 percent staffing<br />
level, and now we’re onboarding a lot of<br />
people,” she explained. “And of course,<br />
it takes a time investment to find good<br />
candidates, hire them, and carve out the<br />
time to put them through a really good<br />
onboarding process so that they have the<br />
tools to be successful in their roles.”<br />
When hiring budget staff, Laura values<br />
curiosity and drive. “There are so many<br />
things that come across our desks that we<br />
just don’t have the perfect answers for—but<br />
people look to our office for those answers.<br />
A high level of curiosity helps you dig in<br />
to find a way to solve the problem. I also<br />
look for someone who has the drive to do<br />
the best work at the standard we expect, to<br />
influence a clean, transparent decisionmaking<br />
process.”<br />
Thinking back to her own entry into<br />
the field, Laura stressed that local<br />
governments could do more to build<br />
a talent pipeline. These efforts could<br />
range from building partnerships with<br />
educational institutions at the high<br />
school and college levels to clearly<br />
communicating the positives to overcome<br />
ingrained perspectives. “Sometimes<br />
people don’t understand that you can<br />
make a solid career out of working in local<br />
government finance, and you’re not going<br />
to have to make a compensation sacrifice<br />
for interesting work.”<br />
Contending with uncertainty<br />
Looking forward, Laura and her team<br />
are focused on improving the efficiency<br />
of how they collect budget proposals<br />
from agencies, streamlining the data<br />
collection that goes into tracking budget<br />
performance, and continuing to advance<br />
public engagement within the community.<br />
In addition to her work in Baltimore,<br />
Laura serves on GFOA’s Committee on<br />
Governmental Budgeting and Fiscal<br />
Policy to update and create new best<br />
practices. “Budgeting is about making sure<br />
operations and dollars are connected, and<br />
the budget committee focuses on tools that<br />
can make this easier for organizations.”<br />
She described the committee’s intense<br />
focus over the last year on the topic of<br />
appropriate fund balance guidelines<br />
for the general fund. “As we go through<br />
uncertain times like these, we’ve learned<br />
how much government leaders rely on<br />
leadership like GFOA’s, particularly<br />
around how fund balance targets are<br />
established and what communities should<br />
aim for. It’s one more way that finance<br />
officers can be problem-solvers for their<br />
communities through budgeting.”<br />
Jara Kern is a marketing strategist at<br />
Right Angle Studio.<br />
66
IN PRACTICE | INTERVIEW<br />
WITH SHAYNE KAVANAGH<br />
BY MIKE MUCHA<br />
Mike Mucha, GFOA’s deputy<br />
executive director, spoke with<br />
Shayne Kavanagh, GFOA’s<br />
senior manager of research<br />
and frequent <strong>GFR</strong> author,<br />
on challenges facing local<br />
government, the future of<br />
public finance, and GFOA’s role<br />
in supporting government and<br />
finance officers as they work<br />
to build thriving communities.<br />
Mike: As senior manager of research<br />
at GFOA, what is your typical day like,<br />
and how does the work you do relate to<br />
GFOA’s mission?<br />
Shayne: What makes my job interesting<br />
is that there is no typical day. My job<br />
includes a wide range of things like<br />
writing books and articles, direct<br />
consulting assistance for GFOA<br />
members, building financial models,<br />
organizing research projects, and much<br />
more. GFOA’s work is broad and covers<br />
many technical areas of finance. It also<br />
goes beyond accounting, budgeting,<br />
treasury, and other areas to make<br />
organizations work more effectively.<br />
Our mission is ultimately about thriving<br />
communities and supporting the<br />
important role that governments play.<br />
I’ve heard members refer to GFOA as the<br />
“research and development” arm for<br />
public finance, so our job is to prepare<br />
finance officers with new and better<br />
ways to help their communities thrive.<br />
Have you always been involved<br />
with research, or were there other<br />
responsibilities you had at GFOA?<br />
Yes, I’ve always been involved with<br />
research at GFOA, which is what<br />
attracted me to the organization. I was<br />
an assistant city manager for a suburb<br />
of Chicago and was working on a PhD<br />
part time. I didn’t have much of an<br />
interest in joining academia, but I did<br />
have a big interest in research. GFOA<br />
seemed like a great opportunity. Back<br />
in my early days at GFOA, I was also<br />
involved in GFOA consulting services<br />
to help local governments select ERP<br />
systems. I negotiated contracts for local<br />
governments. I’ve been told by different<br />
clients that they’d like me to be their<br />
marriage counselor or to come with<br />
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IN PRACTICE | INTERVIEW<br />
them to negotiate next time they buy a<br />
car, which shows the different character<br />
negotiations can take on!<br />
We don’t have an official count, but<br />
unofficially, it seems like you are the<br />
clear leader in the number of <strong>GFR</strong><br />
articles you’ve authored. Is there<br />
anything specific you enjoy about<br />
writing?<br />
I have an interest in many topics within<br />
public finance, but I’ve also heard<br />
members say that one of the best things<br />
that GFOA does is translate learnings and<br />
innovations from other fields into public<br />
finance. So, I enjoy articles that take<br />
important concepts from other fields,<br />
like economics, psychology, and so on,<br />
and then I like finding the application to<br />
public finance.<br />
One example of this is your work to<br />
apply behavioral science. To me, these<br />
concepts are extremely useful to public<br />
finance and the role of a finance officer.<br />
Thanks. When people who don’t know<br />
anything about local government<br />
finance ask me about public finance, I<br />
tell them it isn’t a math problem. Adding<br />
up the numbers is easy. It’s a people<br />
problem—getting people with different<br />
interests to agree on taxing and spending<br />
policies. I characterize GFOA research<br />
as “decision science,” and behavioral<br />
psychology is an emerging and<br />
potentially high-impact part of decisionmaking.<br />
GFOA and Behavioral Science<br />
Behavioral scientists study how we, as human beings, naturally interact with each other<br />
and our environment, in ways that impact our preferences, decisions, and behaviors.<br />
GFOA has developed research reports titled:<br />
• Designing for the Decision-Making Environment<br />
• Of Narratives and Numbers<br />
• The Myth of the Neutral Finance Officer<br />
Learn more about how behavioral science applies to public finance and download reports:<br />
gfoa.org/behavioral-science<br />
With “people problems,” communication<br />
is critical. Are there any strategies you<br />
can share that helped you become a<br />
better writer?<br />
Read Sense of Style by Steven Pinker<br />
(Penguin Books, 2015). Pinker is a<br />
psychologist who is an excellent writer,<br />
so his recommendations are based on<br />
writing in a way that works with how the<br />
reader’s mind works.<br />
Over the past few years, <strong>GFR</strong> readers<br />
have become very familiar with your<br />
work. Can you provide an overview of<br />
what you are working on now and what<br />
they can expect to see in future issues<br />
of <strong>GFR</strong>?<br />
We have three “rethinking” projects,<br />
which are about taking a fresh look at<br />
traditional approaches to public finance<br />
in light of the latest developments in<br />
other fields like psychology, decision<br />
science, technology, and more. We<br />
are “rethinking” budgeting, revenues,<br />
and financial reporting. Budgeting is<br />
the furthest along, and we are going<br />
to bring the project to conclusion this<br />
year. Revenues is making very good<br />
progress, and that should conclude<br />
in 2024. Financial reporting is just<br />
getting started. That means readers of<br />
<strong>GFR</strong> can probably look forward to a lot of<br />
new content about financial reporting,<br />
including topics like the application<br />
of artificial intelligence to financial<br />
reporting, what psychology tells us about<br />
the best way to communicate financial<br />
information, and much more.<br />
Looking back on previous initiatives, is<br />
there a project from your time at GFOA<br />
that stands out as being more memorable<br />
than others?<br />
That would be Financial Foundations for<br />
Thriving Communities. We translated a<br />
Nobel Prize-winning body of economic<br />
research called common pool resource<br />
theory to public finance. It stands out<br />
because I think it marked a transition point<br />
where GFOA research went from being<br />
limited to what I will call adjustments on<br />
the margin of public finance to thinking<br />
bigger about what public finance could do<br />
to prepare local governments to help their<br />
communities thrive. What I mean by that<br />
is before this project, GFOA research was<br />
only about how to make improvement to<br />
68
Timothy Martin interviews Shayne Kavanagh about GFOA’s Rethinking initiatives at the GFOA Hub during the <strong>2023</strong> annual conference in Portland, Oregon.<br />
financial policies and work practices.<br />
While this is important, it misses<br />
underlying forces that make a big<br />
difference in whether public finance<br />
is successful or not, such as power<br />
dynamics, relationships and connections<br />
between people, and the way in which<br />
decision-makers think about public<br />
finance. For example, if they think of it as<br />
a zero-sum game, they are going to make<br />
very different decisions than if they don’t.<br />
Are there any projects you would<br />
do differently if you had the chance to<br />
start over?<br />
A long time ago, I was part of a project to<br />
help a city with budget reform. The team<br />
I was a part of strongly recommended a<br />
very specific budgeting technique that<br />
the team leader was a big fan of, but the<br />
method was simply not a good fit for the<br />
city, so it was like pounding a square<br />
peg into a round hole. Things did not go<br />
well. That project probably does a lot<br />
to explain my aversion to “one size fits<br />
all” recommendations on what is the<br />
best way to do public finance and my<br />
attraction to approaches that provide<br />
room for accommodating the diversity<br />
among local governments.<br />
Speaking of changes, what is one thing<br />
you would change about public finance<br />
if you could?<br />
Understandably, public finance takes a<br />
lot of its cues from private-sector finance.<br />
Financial Foundations Framework<br />
Created by GFOA, the Financial Foundations Framework helps<br />
facilitate collaboration and support for public policies and<br />
programs. Organized into five pillars, the Framework shows<br />
you how to improve your financial position now and create a<br />
strong foundation for a thriving community over the long-term.<br />
Learn more about the Financial Foundations Framework:<br />
gfoa.org/fff<br />
Certainly, there is much that can<br />
be learned from the private sector.<br />
However, the public sector has some<br />
very fundamental differences, even<br />
more than is commonly recognized.<br />
So, I wish the influence of private<br />
finance and its limitations were more<br />
widely recognized and that systems<br />
more appropriate to the distinct<br />
circumstances of the public sector<br />
were available. The good news is<br />
that I don’t just have to wish for it.<br />
GFOA research is actively working<br />
on these types of solutions, with<br />
Financial Foundations for Thriving<br />
Communities being one good example.<br />
“Rethinking” aspects of budgeting<br />
and local government revenue has<br />
been a constant theme. For members<br />
who aren’t familiar with GFOA’s<br />
efforts, can you provide a summary?<br />
Surveys show that large portions of the<br />
public (more than 80 percent!) think<br />
major change is needed to our political<br />
system. GFOA’s corner of the political<br />
system is public finance. So, in short,<br />
the rethinking programs are about<br />
reexamining long-held assumptions<br />
about topics like budgeting, revenue<br />
raising, and financial reporting to find<br />
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IN PRACTICE | INTERVIEW<br />
new and better ways to conduct public<br />
finance that will contribute to thriving<br />
communities.<br />
Where do you see these projects going<br />
in the future?<br />
The most important thing is that these<br />
projects are ultimately about “doing,”<br />
not just “talking.” These projects will<br />
translate into action. For instance,<br />
Rethinking Revenue has resulted in a<br />
large incubator program called Putting<br />
Assets to Work, which is about how<br />
local governments can realize ongoing<br />
revenue streams from assets they own.<br />
We also have a pilot project for segmented<br />
pricing, which personalizes the prices<br />
constituents are charged based on ability<br />
to pay. This could have the unexpected<br />
effect of both raising total revenue and<br />
making prices more affordable because<br />
before, people who couldn’t pay wouldn’t<br />
pay, and government gets nothing. If<br />
they get a price they can pay, then they<br />
are more likely to pay it. So, in the future<br />
we will be continuing to translate the<br />
results from these projects into action.<br />
Before coming to GFOA, you earned an<br />
MPA from Northern Illinois University<br />
and worked in city government. Is there<br />
a reason you would go back and seek a<br />
job in the public sector?<br />
Doing the hands-on work of interacting<br />
with the public was a great part of the<br />
job in city government. The good news<br />
is that I get to do some of that as part of<br />
consulting work, where I often interact<br />
with elected officials about financial<br />
policies and managing financial risk.<br />
Why do you think so many governments<br />
report having trouble hiring qualified<br />
finance officers?<br />
There are probably many causes,<br />
but some likely include: a tight labor<br />
market, low labor market participation<br />
rate, declining trust in government<br />
(and therefore less interest in working<br />
for it), diminishing pipeline of students<br />
going into accounting and public<br />
administration, and a mismatch<br />
between government’s compensation<br />
strategies and current labor market<br />
realities. For example, pensions are<br />
not going to be attractive to people who<br />
don’t see themselves as lifetime public<br />
servants. So, we have a perfect storm of<br />
factors, some structural (compensation<br />
mismatch) and others transitory (labor<br />
market conditions).<br />
If you were hiring a finance officer, what<br />
skills would you prioritize? What do you<br />
think will be most valuable in the future?<br />
I had a chance to ask this very question<br />
to a group of leading recruiters for local<br />
government executives and they agreed<br />
that the skills described in the GFOA<br />
“In a nutshell, a decision<br />
architect is someone who<br />
can design a decisionmaking<br />
environment that<br />
helps decision-makers<br />
reach their full potential<br />
and make their best<br />
decisions.”<br />
Download the report<br />
gfoa.org/materials/budgetofficer-as-decision-architect<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
70
eport, “Budget Officer as a Decision<br />
Architect,” accurately represented the<br />
skills employers are looking for. In a<br />
nutshell, a decision architect is someone<br />
who can design a decision-making<br />
environment that helps decision-makers<br />
reach their full potential and make their<br />
best decisions.<br />
Do you consider staffing shortages the<br />
biggest threat facing local governments<br />
today?<br />
No, I consider the biggest threat to be<br />
declining trust in government. Not only<br />
does it affect the ability to attract staff,<br />
but it also affects the very ability of<br />
government to do its work. A government<br />
that is fully staffed but not trusted will<br />
be ineffective or even a net-negative for<br />
its community. For example, if we take<br />
staffing shortages to an extreme, we can<br />
look to other industries to see how they’ve<br />
responded. We see the responses have<br />
included increased automation and<br />
outsourcing to firms that have more<br />
flexibility to hire people needed to<br />
do the job. There is no reason local<br />
governments couldn’t do the same<br />
thing. However, the prospect of<br />
distrusted local governments run by<br />
algorithms and private contractors<br />
sounds potentially dystopian.<br />
Looking at the future more positively,<br />
what do you consider to be the next<br />
big thing in government? Where do<br />
you see governments succeeding?<br />
It is hard not to answer “artificial<br />
intelligence” as the next big thing.<br />
That said, new technologies are<br />
almost always overhyped at first,<br />
so we will have to remain mindful<br />
of the limits and realistic about<br />
the potential. That said, artificial<br />
intelligence should have a lot of<br />
potential for relieving labor shortages<br />
Others in GFOA’s Research and Consulting Center<br />
can do surveys too. When asked to finish the<br />
sentence, “Shayne is…” GFOA staff members said:<br />
• Always looking for new ideas and approaches<br />
• Passionate<br />
• Hauntingly intelligent<br />
• Always making me think (and “rethink”)<br />
• A mystery<br />
• Not something you can explain in a survey<br />
in public finance. Accounting, for example,<br />
is a series of rules. Artificial intelligence<br />
thrives in environments that have clear<br />
rules. We have a research/pilot program<br />
with Rutgers University to apply robotic<br />
process automation to public finance.<br />
Some local governments have already<br />
started doing this, so success has been<br />
proving possible.<br />
Wrapping up our interview, here are a<br />
few short and easy questions.<br />
The best kind.<br />
Best book you’ve read recently?<br />
Power and Progress: Our Thousand-Year<br />
Struggle Over Technology and Prosperity<br />
by Daron Acemoglu and Simon Johnson<br />
(PublicAffairs, <strong>2023</strong>). Acemoglu is one of<br />
the most respected economists today and<br />
thought to be a likely future Nobel Prize<br />
winner. His grasp of history, sociology,<br />
and other disciplines provides for a<br />
great multidisciplinary look at complex<br />
problems. Artificial intelligence is being<br />
described by many as the most important<br />
human invention since fire, so it is good<br />
time to think about how the benefits from<br />
technology will be distributed.<br />
Favorite GFOA conference location?<br />
Chicago. I live in Chicago, and it is hard<br />
to beat sleeping in your own bed for a big<br />
conference—which doesn’t often happen!<br />
Best state/provincial association<br />
conference you’ve been to?<br />
I go to a lot of state/provincial conferences,<br />
and I love them all equally.<br />
And it looks like you want to be invited<br />
back. OK. What is one thing that GFOA<br />
staff would say about you?<br />
As a researcher, I’d want to do a survey on<br />
that to find out. (Author’s note: see sidebar.)<br />
Hear more from Shayne by following GFOA on YouTube:<br />
youtube.com/@GFOA<br />
If not for government finance, what would<br />
you be doing?<br />
I came within 24 hours of being a police<br />
officer. Out of school I applied to both a local<br />
government finance office and the police<br />
department. The finance office got back to<br />
me a day before the police department. So,<br />
maybe I’d be talking about police research<br />
right now!<br />
Mike Mucha is the deputy executive<br />
director of GFOA.<br />
AUGUST <strong>2023</strong> | GOVERNMENT FINANCE REVIEW 71
10 STEPS<br />
TO BETTER PUBLIC<br />
ENGAGEMENT<br />
The budget is the most important document a local government<br />
produces because it outlines how resources will be utilized to<br />
address a community’s policy priorities. Citizen engagement is<br />
therefore foundational to a sufficient budgeting process, providing<br />
benefits including increased government legitimacy and reduced<br />
public cynicism.<br />
1<br />
Quality over quantity.<br />
More public engagement is<br />
not always better. Select<br />
suitable issues for engagement, set<br />
clear goals, and avoid overburdening<br />
the public with excessive<br />
information. By focusing on quality<br />
interactions, public finance initiatives<br />
can make the best use of resources<br />
and give citizens the best experience.<br />
2<br />
Build<br />
or bolster<br />
institutions to support<br />
public engagement.<br />
Collaborate with existing<br />
departments specializing in public<br />
information or communication,<br />
create internal facilitation teams,<br />
or seek external resources<br />
like universities, community<br />
foundations, or civic organizations.<br />
3<br />
Think<br />
of public<br />
engagement as an<br />
improved capacity for<br />
sense-making. Move beyond<br />
conventional engagement methods<br />
that collect individual opinions and<br />
preferences and instead focus on<br />
deliberative engagement processes<br />
that facilitate interaction, nuanced<br />
discussions, and exploration of<br />
trade-offs.<br />
4<br />
Help<br />
the public engage<br />
with complexity. Many<br />
of the issues that most<br />
inspire the passion of citizens are<br />
complex problems. Complex<br />
problems pose distinct challenges<br />
to democratic discourse, but<br />
embracing complexity and fostering<br />
dialogue can enhance public<br />
understanding, refine priorities,<br />
and promote collaborative actions<br />
to address complex challenges.<br />
5<br />
Push back against the<br />
politics of cynicism with<br />
the politics of co-creation.<br />
Public engagement can be designed<br />
to promote common understanding,<br />
and it can be used to jointly work<br />
toward solutions. Rather than focusing<br />
on what divides the community, focus<br />
on what unites it and begin public<br />
engagement efforts from a position<br />
of mutual understanding.<br />
6<br />
Revitalize<br />
the<br />
“responsibilities” that<br />
go along with “rights.”<br />
Shift citizens’ mindset from being<br />
individualistic consumers of public<br />
services to active participants in<br />
addressing community issues<br />
through coproduction and tradeoffs.<br />
Ask how they would solve<br />
the problem instead of just what<br />
they want.<br />
7<br />
Develop<br />
robust strategies<br />
for dealing with bad actors.<br />
Design the engagement to<br />
minimize the potential for bad actors,<br />
like using deliberative engagement<br />
methods, small group discussions,<br />
and trained facilitators.<br />
8<br />
Understand the role<br />
of the “expert” and<br />
play it with care.<br />
The public is less likely than it once<br />
was to defer to the expertise of a<br />
local government’s professional staff,<br />
so try adopting a facilitative approach<br />
that encourages citizen discovery<br />
rather than simply presenting facts.<br />
9<br />
Balance expert judgment<br />
and public engagement<br />
to find the solutions.<br />
Public engagement is not the same<br />
as direct democracy. Quality public<br />
engagement weaves together input<br />
from both experts and the public to<br />
help public officials reach wise<br />
decisions.<br />
10<br />
Make<br />
public<br />
engagement work<br />
for elected officials.<br />
Elected officials have a lot to<br />
gain from high-quality public<br />
engagement, but they also face<br />
risk when it goes wrong. Work<br />
with them to codesign public<br />
engagement so it manages risks<br />
and reduces the public officials’<br />
direct time investment.<br />
©<strong>2023</strong> MICHAEL AUSTIN C/O THEISPOT.COM<br />
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