Galvanizing Local Government Reforms – Part 2

A National Investment in Local Government Oversight and Operations

This is another commentary in Civic Way’s series on reconstructing American government, more specifically local government. In our last two commentaries, we focused on local government fragmentation and how to fix it. Our earlier commentary on the collapse of American Federalism provides a useful foundation for this piece. The author, Bob Melville, is the founder of Civic Way, a nonprofit dedicated to good government, and a management consultant with over 45 years of experience improving governmental agencies across the US.

Highlights

The $150 million Bloomberg Philanthropies donation to Harvard for improving city governance could have a profound impact—as a catalyst for a larger national investment in local government reform. To be catalytic, the investment should be organized around targeted, scalable initiatives, such as:

• Promote local government collaboration

• Prepare for future economic and fiscal crises

• Reinforce local government oversight 

• Transform local government operations

To be national, the investment should have diverse oversight, proven project management, broad governmental participation and meaningful public engagement.

Introduction

On March 2nd, Bloomberg Philanthropies announced a $150 million to Harvard University to improve city governance. In turn, Harvard announced its intent to expand the Bloomberg Harvard City Leadership Initiative, increase faculty positions in city governance, improve collaboration with Harvard’s Taubman Center for State and Local Government and create the Bloomberg Center for Cities.

While the specifics are unknown, this is welcome news. Cities and other local governments are a vital part of the American landscape. And they are hard to manage even without a crisis. Every day, local government officials strive to anticipate diverse and dynamic public demands, deliver services that residents need (and when they need it) and operate as efficiently as possible within legal, regulatory and budgetary limits. The pandemic has reminded us how important local government is, how hard it is to perfect and the value of innovation.

Given the stunning number of local governments (over 90,000) and the range of their capabilities, the Bloomberg Philanthropies donation could have a marginal impact. But, it also offers a unique opportunity. It could galvanize and accelerate the hundreds of ideas that need a financial infusion to dramatically improve local government. Coupled with the fiscal pressures brought by the pandemic, the Bloomberg funds could support overdue reforms, moving us toward a more agile, innovative and efficient local government system. 

Sizing the Opportunity

In recent decades, many local governments have improved. However, this progress has been incremental, imperceptible to most Americans, fans and foes of local government alike. In most cases, local governments have taken these strides on their own, with little federal or state aid, and the pandemic threatens that progress. The Bloomberg grant, coupled with an infusion of other funds, including federal and private funds, could help cities overcome the pandemic and accelerate reforms.

Two formidable questions arise in connection with the Bloomberg donation, however. First, will the funds be targeted to attain meaningful local government reforms or will they be squandered on burnishing academic reputations or promoting prized projects? Second, can the donation be leveraged to attract other funds and support ambitious, yet practical government reform initiatives? They are not unrelated questions.

The answer to both questions is a unifying national public-private project to reform local government. A project that uses the initial donation to attract other funds, assemble a broad coalition of stakeholders and develop feasible and scalable strategies for the nation’s 90,000 local governments. 

How should the funds be targeted? On initiatives that can measurably improve as many local governments as possible, improve our collective capacity to navigate future economic and existential crises and significantly enhance public faith in local government. 

We suggest four strategic focuses for consideration: 

• Promote local government collaboration

• Prepare for future economic and fiscal crises

• Reinforce local government oversight 

• Transform local government operations

The first two initiatives, and their respective elements, were discussed in our last commentary. The other two initiatives are outlined in more detail below. 

How can the donation be leveraged? The first step is to determine the initiatives to be funded based on objective criteria (e.g., impact, scalability and feasibility). The next step is to create a diverse project advisory group that represents local government stakeholders, including government officials, professional associations, foundations and citizens. Next, establish a team of proven professionals and practitioners, including an experienced project director, to carry out the project. Finally, every effort should be made to enable interested members of the public to track the project’s progress against established goals.

Reinforcing Local Government Oversight 

Many politicians complain about central cities and their fiscal management approach, and they are not always wrong. New York City, for example, incurs large budget gaps with some regularity and funds only about half its anticipated retirement benefits. Chicago’s liabilities dramatically exceed its assets. Other large cities, like Philadelphia, also face serious fiscal distress. But small cities are not immune. In North Carolina, for instance, the state’s Local Government Commission assumed financial control of five local governments and another 100 local governments are on the Treasurer’s financial watch list.

Given these concerns, one would think that local government accountability would be one of our top priorities. Afterall, we love to measure everything else. Personal activity tracking apps like Fitbit and Lose It! Online time trackers. GPS vehicle tracking apps. Real estate sites like Zillow. School and college rating systems. Personal finance apps like WallHub. Employer ratings like Glass Door. Our demand for report cards and the accountability they promise seems insatiable.

Regrettably, we don’t have a good system for comparing local governments. Sure, there are some tools, but they have limited utility. S&P, Moody’s & Fitch Group issue credit ratings, but only for debt issues, and based on financial data.Truth in Accounting, a nonpartisan watchdog, tracks the financial condition of America’s largest 75 cities, classifying Sinkhole (fiscally weak) and Sunshine (fiscally strong) cities, but their scope is fiscal, relying heavily on recent Comprehensive Annual Financial Reports (CAFRs).

Wallet Hub, the personal finance website, has taken a run at comparing America’s cities using broader criteria, such as livability, jobs and families. It has even tried to measure local government effectiveness with its Best Run Citiesratings. This scorecard grades city services across 38 metrics and calculates a per dollar service quality score using per capita budget data. Highly-ranked cities have included Boise, Provo, Durham, Lexington-Fayette, Fort Wayne and Virginia Beach. While such efforts are laudable, they are no substitute for a vetted, national performance rating system overseen by an independent public agency (e.g., Government Accounting Office).

Unlike the more subjective field of performance measurement, local government accounting and financial reporting have uniform standards. Under the leadership of the Government Accounting Standards Board (GASB) and the guidance of professional associations like the Government Finance Officers Association (GFOA), the CAFR has emerged as the gold standard for financial reporting. While the CAFR has recently encountered criticism for the similarity of its sound to a South African, apartheid-era racial slur—necessitating an acronym change by GASB—it has been recognized since 1979 and is the cornerstone of credit ratings.

The CAFR (soon to be ACRF) reports all government financial activity using fund accounting, an arcane method for classifying different types of financial activities. Governmental funds use modified accrual (cash-like) accounting while proprietary (commercial) funds use full accrual accounting. The CAFR also uses esoteric governmental accounting terms like expenditures for governmental funds and more conventional terms like expenses for commercial funds. In short, what is referred to as Generally Accepted Accounting Principles (GAAP) for government is markedly different from GAAP for business.

Why should we care? Several reasons. The CAFRs are more complicated (and less transparent) than they could be. Fund accounting impedes the consolidation of financial reports into a more useful enterprise report. The baffling terminology quirks make it relatively easy for public officials to brag about balancing their budgets when material budget gaps remain. The CAFRs too often fail to include all liabilities. Governmental funds do not use depreciation nor do they fully value assets (they are valued at cost regardless of acquisition timing).

The GASB issues periodic guidelines to improve financial reporting and accounting practices (e.g., GASB Statement No. 75 which requires the full reporting of all other post-employment benefits). However, current state and local government financial reports do not cover all transactions. The result? Operating deficits and unfunded debt are higher than reported. Public assets are undervalued, which could discourage investment and inflate privatization benefits. Citizens don’t get the full picture.

Many local governments also lack adequate real-time tools for tracking financial activities. The CAFRs are audited annual financial statements, typically not issued until at least six months after the end of the fiscal year. While virtually all local governments have internal budget tracking systems, many lack useful public reports. This disconnect makes it easier for some politicians to spend beyond their means while claiming balanced budgets, further eroding public trust in government, at least among those paying attention.

There are several scalable ideas for strengthening local government oversight that merit further analysis, including the following:

• Design a uniform national system for measuring and tracking local government performance and facilitate the comparison of similarly-sized local governments (like the CMS Hospital Compare and defunct MONITRENDsystems for comparing hospital performance indicators)

• Demystify governmental accounting and financial reporting by deemphasizing fund accounting, adopting the accrual basis, fully accounting for and properly valuing all assets, costs and liabilities and adopting a uniform financial reporting model that conveys all financial activities and net worth

• Develop a new credit rating tool to help rating agencies link future local government credit ratings to broader criteria, including economic prospect, fiscal health, management capacity and community resilience

• Design a model public dashboard for local governments to help interested citizens track local government finances and operating performance and support independent oversight

The GASB’s Financial Reporting Model project should be relaunched with a broader advisory group, one that balances private, public and popular interests. Its funding base should be diversified to better ensure that broader societal interests are served. Ultimately, these strategies will help strengthen government accountability and restore public faith in local government.

Transforming Local Government Operations

We know how to aggregate best practices and use them to bring about meaningful societal changes. To illustrate, Energy Star, an EPA-administered program for rating energy efficient appliances, and LEED, a privately-administered system for encouraging energy-efficient building construction, have had an indisputable impact on the nation’s pursuit of greater energy efficiency.

We have had considerably less success in local government. It is not a case of neglect. There are many public sector benchmarking systems and best practice offerings, in fact, too many. Scores of good government groups, professional associations and universities have contributed to the proliferation of such tools. Individually, they vary widely in quality, utility and accessibility. Collectively, they are incoherent and unfathomable. In short, local governments who want to improve cannot turn to a single reliable source of best practice data. 

Local governments also employ inadequate planning and budgeting practices. With few exceptions, most fail to integrate planning efforts with other elements of a robust budget management process. Many have long-term financial plans and long-range capital improvement plans. Some use performance indicators and others offer interactive public budgeting tools. Nearly all do regular budget monitoring. But precious few local governments weave these elements together into one seamless process. For too many local governments, a flawed budget management system drains all meaning from the phrase “bang for the buck.” 

Finally, while many local governments have invested heavily in new technology, most local governments continue to be hamstrung by antiquated legacy systems, fragmented data management and mounting cybersecurity threats. Even when localities upgrade their technology, they often fail to update their laws, regulations and processes, or refocus their services around customers. The result? Outdated regulations, unwieldy business processes and cumbersome administrative systems. Mind-numbing forms. Maddening approval requirements. Intolerable waits for licenses and applications.

Fortunately, there are several scalable ideas for transforming local government operations through a well-funded national initiative, including the following:

• Develop a universal benchmarking dashboard that is easy for local governments to use, perhaps adapting a proven system that highlights exemplary performance from public, private and nonprofit sectors across the world (e.g., the Drucker Institute’s comprehensive effectiveness measurement system)

• Develop and deliver an accessible local government best management practice toolkit that includes proven measures for improving local government (e.g., streamline regulations, enhance revenues, control costs, reengineer processes, incentivize productivity and leverage assets) 

• Design a model planning and budget management process with integrated strategic plans, multi-year and annual operating plans, capital and operating budgets and performance metrics, an interactive citizen budgeting tool and a rigorous evidence-based sunset mechanism 

• Develop a customer-focused technology model for modernizing local government services, including a comprehensive, collaborative public data management strategy, a menu of proven, affordable digital service packages and a cooperative procurement hub for acquiring and managing private technology resources

The customer-focused technology model will offer many ways for local governments to revamp their operations. Advanced data techniques for streamlining eligibility processes. Reengineered services and processes. Modern technology for digitizing traditional processes (e.g., judicial, licensing and permitting). Mobile devices for improving field staff productivity. Expanded citizen self-service. A unified customer service and engagement platform. Cloud-based data security and storage solutions. Cybersecurity help desk and training webcasts. Coordinated ransomware risk management program. A go-to technology resource for all local governments.

Seizing the Opportunity

States have been called the labs of democracy, but many local governments were better positioned to assume this role—before the pandemic. But this global crisis has brought shrinking revenues, rising costs, crushing debt and staggering instability to local governments throughout America. While many have struggled valiantly and even performed admirably, they lack surplus funds for new initiatives. 

The Bloomberg grant is thrilling even as a one-off, but it offers far more promise as a catalyst. With matching funds from other sources, including the federal government and other foundations, it could attract over $1 billion to invest in national reform initiatives. With the active participation of others, such as representatives of public agencies, practitioners, governmental associations and think tanks, it could have a lasting, generational impact. It could change the way we think about local government.

Most local governments want to improve, but they can’t do it alone. With strategically-targeted investments like the Bloomberg grant—and the lessons of the pandemic still fresh—we have a once-in-a-century opportunity to renew local government. To replace outdated laws, structures, systems and processes. To unify fragmented structures. To rebuild their capacity for meeting future challenges, including the next pandemic.