How To Understand and Fix Government Budgeting, With Mark Moses

In this episode of the Strong Towns Podcast, Chuck is joined by Mark Moses, author of “The Municipal Financial Crisis: A Framework for Understanding and Fixing Government Budgeting.”

Up for discussion today:

• The dangers of relying on “balanced budgets."

• The difference between city and business finances.

• The issues with privatization and regionalization.

• And more!

• Click here for a computer-generated transcript.

  Chuck Marohn 0:00

  Hey everybody. This is Chuck Marohn. Welcome back to the strong towns podcast. There's certain books that you go out looking for and struggle to find, and I've struggled to find a good one that explains what's going on with city budgeting. There's a lot of books that tell war stories, you know, tell accounts that are a little bit salacious and self serving. I've struggled to find a book that lays out here's what's going on with city budgeting. Here's what you need to know, and here's how to fix it. I recently found that book, and Mark, I don't even know when you publish this book. I think it's rather recent. I am chatting today with Mark Moses. He wrote the book The municipal financial crisis, a framework for understanding and fixing government budgeting. And I'm going to tell you, if you are a mayor, city council member, if you are a city staff member, if you remember the public who cares about like, the way your city's running, this is going to be the most valuable book that you will read this year. Mark Moses,

  Mark Moses 1:08

  welcome to the strong nouns podcast. Thank you, Chuck. It's great to be here. When did this drop? When was this book published? Well, it dropped about three years ago, okay, and I will say if I had to rewrite it today, to up, to quote, update it, I would improve some of my formulations. And, you know, there would certainly be, you know, some editing. But the the main message and the main principles are not dated, and part of that is after 2022, the or at the time the book was published, cities had just gotten this huge insurge of funding from the the COVID relief, the ARPA money, and as a result, the financial problems that they were having going into the pandemic and around the time I was writing the book, were really put on hold. They got a bit of a reprieve there for a couple years. Well now here we are 2025 and now you're hearing, well, the COVID money, maybe things aren't so good, yeah. And it's like, now we're back to where we were in 2020, 2021, which was not great and and you would think would have been better after 10 years or so of a good economy and an opportunity to recover from the Great Recession. The last three years, I've been watching the COVID money burn off and cities kind of get back into this sobering position of, holy cow, we've got to deal with our structural deficits.

  Chuck Marohn 2:40

  Yeah, yeah. Let me start this by asking this question in this way, I'm going to try to represent the typical person that I run into when we talk about this, they'll say something like, Chuck, why are you so uptight? The constitution of my state mandates that my city balances their budget. I know that they got to deal with things every year, but the budget's balanced. The newspaper reports on it. I saw the budget report my council member says they balance the budget. Why is this a problem? Every year they balance the budget and it's fine. What's the problem? There's an obvious answer. I want to give you a chance to to reconcile that, because I think most people believe that their cities balances their budget, and that means all is good, right,

  Mark Moses 3:26

  right? And the idea of balanced budget has almost become meaningless, because if you track a city's revenues and expenditures, they're going to track very closely, but that's just reflecting the fact that they spend what they bring in and and there was a time where the projected revenues, or the revenues would be a bit above the spending level, and there would be an ability to expand or add a service. More recently, the phenomenon is there's barely enough to get by, or sometimes not even enough to get by, when you project your revenues, and now you're having to budget your expenditures. So the question I would ask is, How did you balance your budget? Did you balance it by deferring maintenance, by deferring equipment replacement, by eroding the level of service in your community through, through some of your departments and through some of your services. Are you balancing your budget? Because you're running a 10 or 12% vacancy rate, which really, if you've doing that year in and year out, makes me question your organizational chart and you're in the whole idea of, what are you budgeting for when 10% or 12% of the positions go unfilled? So I think that's really the question is, how did you balance your budget? Because when you get underneath that, then you understand what is looming, what is going to. To be dealt with in the future. I feel

  Chuck Marohn 5:02

  like the craziest example I've seen of a city balancing their budget was in Chicago, where they basically hawked all their like decades of their parking meter revenue for one year of cash inflow to balance, like today's budget at the expense of next year's budget, and when I tell people that they're like, well, that doesn't balance the budget. I don't know if you have a crazy example like that, but talk a little bit about the difference between what a cash budget is like. How should people understand that, and what maybe like a normal balance sheet or financial reporting or that. How these things are different. First

  Mark Moses 5:40

  of all, let's maybe deal with what standard of balancing we really are shooting for. Right. Okay, that's fair in a you know, ideally, you have a budget by which your ongoing commitments, your ongoing expenditures, are covered by stable, ongoing revenues and so. And there's a judgment call on what really is an ongoing revenue. Some some revenues people thought were ongoing, you know, when the pandemic hit, weren't so ongoing and so and but that. But there's something implied in that, that all of your expenses, all of your expenditures needed are really accounted for in that budget. Because once you start shorting that, once you start deferring maintenance, once you start smuggling in some one time expenditures, yeah, like the sale of assets, I think the city of Oakland, California is looking at this as we speak, with respect to the proceeds of selling the their Coliseum complex, sure, looking at using some of the proceeds there to quote, balance the budget or or temporarily resolve their structural issues. So the so the classic balancing of budget implies that all of your expenditures, all of your reasonable expenditures are in that budget. And what's happened more and more is they're they're simply not in the budget. And so then you have some building kind of issue with respect to whether it's funding of your pensions, funding of your retiree medical benefits, funding of your infrastructure maintenance, funding of your vehicle and equipment replacement, if you're quote, balancing your budget at the expense of those things, you're really borrowing from the future and you're shifting costs to the next generation. I'm going to

  Chuck Marohn 7:36

  make an assertion, and I want you to push back on it, in my sense, and I've delved into many, many, many city budgets and dealt with many, many, many city halls. That feels like the normal operating procedure. I know it's not what GFOA recommends or GFA, but it feels like the normal procedure is to kind of patch these holes year to year by putting things off and ignoring things and kind of stretching things. Is that fair?

  Mark Moses 8:05

  Yes, it is. And one of the things I try to communicate is how devastating that is to the organization. When you're, I mean, you're an ongoing, I mean, you're expected to go on indefinitely as a city, and you're, you're, in other words, you're expected to provide services indefinitely into the future. And yet, when you're in this, I call it year to year survival mode, where it's just about getting through one budget, then surviving that, getting to the next one, the organization can't really plan. The organization can't really anticipate. You're you're really sending a message. I mean, I've been in private organizations that were that the savings bank I worked for didn't know from whether it was going to be around the next 60 days, and it was a tough environment to operate in, to work in, because you couldn't really plan and so that's what we're doing to our cities and our city organizations. And then from a distance, it looks like, oh, the city is not very competent, or they're not very engaged, or their their services are deteriorating. But yeah, that's what it looks like from the outside when you've got this turmoil, which I would say is self inflicted turmoil, for the most part, inside the organization. So

  Chuck Marohn 9:23

  you, early in your career, worked for a bank, and you had a little story about this at the beginning of the book. And I found it very interesting, because strong towns is a nonprofit, we actually look at our balance sheet every week. We have a strategy meeting and look at our balance sheet. I ran a private consulting firm before I started doing this, and we had a balance sheet, and I probably didn't look at it as often then, but it was a smaller thing. But you know, once a month we were going through it. Every week I was going through budget stuff. You said this bank was this happens to banks. The bank was having a financial crisis. They didn't know if they'd be around in 60 days. Is, but you made this comment about city government, how it took you a long time. I mean, there was no kind of, like, immediate dashboard warning sign, hey, like the fiscal cliff is here, or this is an emergency. I think someone reading that would go, why is local government so different? Why doesn't it operate that way. Why? Why are the feedback loops so, you know, non immediate and disconnected?

  Mark Moses 10:27

  Yeah, I think there are a couple dimensions to that. One is, I think local governments have made themselves unnecessarily complex. I mean, if you go back maybe to the 70s, what there might be four city departments, right? Public work, please fire, maybe recreation or something else, and now you've got like a dozen departments in in relatively small cities. I mean, think of what that does in terms of span of control. I mean, even when a city manager has assistant city managers or deputies to have department heads report to the city manager is really responsible for or expected to know what's going on in all those departments and so and and he or she's reporting to, you know, five, seven or nine council members. I mean, that's just an impossible organizational structure in which to be effective at all. And so I think we've paralyzed our cities by taking on more and more, not having a standard by which to say, hey, this really isn't in our proper scope. I mean, in 30 years of local government, I didn't really get into my background here, but I have 30 years working, yeah, sorry. I mean, yeah, directly for local governments, I worked for a joint powers authority that provided services to local government. So I've been in and around local government for three decades, and during those three decades, only twice did I hear an elected official push back on a proposal and say or question, hey, is this really in our scope? Is this really something we ought to be doing and so, so in my career, that was a freak question. I think that question should be asked by every council member, every time something's brought forward, because if you don't have that kind of focus, then you have no standard by which to say, hey, this really isn't part of our proper dealings. And so you you incorporate this. I characterize it as systemic scope creep, where you can't budget. You can't you can say you're doing financial planning, but you're really not, because the organization itself is not stable, and it's very difficult to operate effectively. And that's why, I think we confuse our residents and businesses and they, you know, they see the city as acting in these inexplicable ways well, and I think a lot of that is because there, there isn't a clear mission there, there aren't clear boundaries. And so, yeah, we've allowed, you know, because for if something's important, you have to have a department head, right? Because it's not important if it's just an analyst who takes care of the program. And so now you've got department heads for economic development, dei, climate, you know, all these different things that have proliferated that that I think drag down. I've seen drag down cities. And some of these departments work at cross purposes. You know, you've got a housing department trying to do one thing. You've got a building and planning department trying to do another. You've got economic development trying to do another and so the cities themselves are acting at cross purposes, no wonder everybody's confused and paralyzed.

  Chuck Marohn 13:48

  So let me, let me ask you this, because I feel like I get the impression when I, when I read your book, that we you and me agree that local government is really important. And the things that we need local government to do, we need them to be really competent doing that. We're in this age of like Doge and chainsaw hacking of government, and I know that has everybody really stressed out, and there's a lot of tension in city halls about, you know, what's going to happen. I'm on an advisory board for at the University of Minnesota, and people are freaked out there because, you know, they're getting a funding cut here and funding cut there. You and I are talking about how we make local government work better. People start to hear when you say mission creep, they start to maybe get some of those Doge vibes. I'd like you to talk about how this mission creep happens and how it undermines the essential things that we look the way you have to have local government actually do right, like the base things. What's the relationship between those two things? Yeah,

  Mark Moses 14:55

  and part of what I'm trying to get across in the book is. That we have to have a thoughtful way. We definitely see there's a problem, and we have to have a thoughtful, fully informed, full full world, full context view of how we're going to approach it. And you know, you brought up Doge, it's like, I think that whole approach is a bit misguided in that, and the whole premise of it, because the you've got one type of group that tries to improve government by throwing technology at it, looking for ways to expand it and and without a clear vision of what government is. And then you've got another group that comes in with a steamroller, unplugging things left and right that also, I don't think really understands or doesn't first say, Hey, wait, what? What is the purpose of government? What is the role of of this agency? And so I'm really suggesting a different kind of approach to let's take a step back and let's look at, hey, you know, I mean, what? What is a city? I bring this up in the book. I spent 30 years in local government and never had a conversation with anybody about, like, what is a city? What is the role of a city? It's all just kind of assumed in the background. People just have their own floating thoughts or their own ideas. Nobody really talks about it explicitly. And I think we need a little more or much more in the way of explicit attention to that question, because, again, part of the thesis of my book is that it's impossible to successfully manage or budget for an amorphous organization, and that's what our cities have become, because they decide who they are And what they are from council meeting to council meeting, and that the reason things come across is so incompetent and so out of step is that the cities themselves do not have a stable way of operating. There's just no standard by which to say, this is what we do and this is what we don't do, and consequently, everyone's confused. The you can call it budgeting, but you're really not budgeting, and we can get into what it really turns out to be in practice, but you're not financial planning. You're you're not really managing your your city manager is more of a juggler than a manager and your finance director, budget officer, is really in a in a passive role under the current structure.

  Chuck Marohn 17:29

  Let's talk about how we do budgeting. You describe this really well, and I've struggled with this, and I've struggled to describe it, so I appreciated the way you described city government as almost this, you know, tragedy, that Commons problem where, like, this lump of money comes in from disparate places, property taxes, sales taxes, licensing fees, etc, and it gets dropped into a bucket, and then we fight over or allocate, like, how is that bucket going to be allocated? And there's no, what I've called feedback loops, right? Like we do x and then we get y as a like a feedback that tells us, okay, this is something we should continue to do or not. Those things kind of are gone in government, almost by design of the way the flows come in and out, and that has a distorting effect. Can you maybe describe that in your words? Because I, I struggle to people who don't understand how government works. Think it's very clear, like you just sit down and you allocate so much to police and so much to fire, and then you move on. And in the private sector, you, you and I both are not advocating running government like businesses, but in the private sector, if you try like something new and nobody likes it, you quit doing it pretty quickly, because you get that feedback like, no one's No one's buying my product, no one's buying my service. On the government side, you're allocating from just a big fund, and that does distort things. How would you describe that? How would you explain that?

  Mark Moses 19:02

  Yeah, well, first of all, I fully agree government is not a business, right? I think it's a huge mistake to and I've seen council members do this, and this is another purpose of writing the book. Is council members successful in their own businesses come in with that framework and think they can overlay it on government. And, you know, just taking a step back like, what is a city government, right? It's the local legislative authority that is empowered to legislate and enforce its those powers. It's given legislative authority and enforcement powers that operate in a given jurisdiction, geographic jurisdiction. And I say that's good for some things. It's good for very important things we need to be able to plan and do business and associate and interact and be protected. But it's not good for other things. Things. And I don't think it's good for the kind of things that that the private sector, whether it be for profit or nonprofit, can can innovate much better. I mean, when you think about it, you're you're bringing something under a bureaucratic structure. And there's some things that are very appropriate to bring under that structure. I don't believe in private police forces or some kind of competing judges to litigate or determine property rights. And that's a that's a function, that's a legitimate function of government that we need to preserve and do right. And when you overlay all these other things that basically where you declare a monopoly and and make something a city function, now you're bringing it under the city umbrella and, and I'll give you an example that you know may not be popular with a lot of people, but yeah, take recreation. It's like, you, I mean, I see a lot of nonprofits that flourish and provide all kinds of great recreational services. And when a city takes over that kind of function, it's basically saying, I mean, the story is, oh, well, we have to do it, because nobody else will do it if we don't. And I think that's a huge misconception, because other people do come in and fill these gaps. I mean, soccer was not always popular. When I was growing up, I didn't learn soccer, but now you've got soccer is a one of the main things you know, kids today get involved in, right in terms of competitive sports. And so who started that it wasn't a city decided to start soccer if there was more and more demand for it. You know, people tired of their kids getting injured in football and wanted another type of sport to get their kids into, for example, so or a sport more people could play. So the My point is, we make a big mistake in assuming that if the city doesn't do it, nobody will do it, and then when we bring something under the city umbrella, now it has to follow all of the city purchasing rules and guidelines that are appropriate for a local government bureaucracy that's charged with legislative this legislative authority. But, but how do you run a recreation department that way? I used to get into tangles with a recreation director because she couldn't understand. Well, why do we have to go through this process when we're hiring? Why do we have to go through this process and get these bids when we're trying to get athletic uniforms for softball, and it's like, and then why do we have to go to the city council and compete for attention with police and fire when we want to open a new facility or something? And so we cram these things in under the umbrella of the city, and I see that crowds out the private innovation. It sends a message that this is our function, and we're the ones that should be doing it. And then just one last thing on this point, you've got artificial constraints, because now your recreation department is operating within the city limits, and maybe that isn't a good place to draw the lines in terms of the vision of where this you know, where the recreation demand is and and how many cities, or even a partial city, should be the primary focus instead, it's just the accident of the city boundaries is, is now your boundaries for a recreation department. Let

  Chuck Marohn 23:35

  me give you another example and see how you react to this. I I see people in the housing space, where cities feel very compelled to what I've said be the dumb money at the card table. When it comes to affordable housing, we're going to build housing. We're going to find we're going to go out and get grants from the federal government, the state, and you know, putting these units that, when you look at the per unit cost, are way off the charts. We're going to take taxpayer money and essentially subsidize that. And then you go up the hall to the other department that regulates housing, and you see that housing is broadly over regulated, and when the market is not able to respond, this seems to me like always one of those things where I'm like, What? What is the mission here at City Hall. Is it to build affordable housing? Is it to go out and, like, lose taxpayer money building housing, or is it to make housing affordable, which would mean a completely different like regulatory approach in the place up the hall? Is that, are we talking about the same kind of thing? I

  Mark Moses 24:35

  think the solution is to let the local market work. And we we've impeded the local market on various counts, right? I mean, first of all, I mean, we've got things that are beyond the city's control. We've got incentives to own houses for for tax purposes that that push people into buying houses that maybe they're better off as renters, maybe they're, you know. Not, you know, maybe home ownership is a vision for some people and a success for some people, but maybe it's not for everyone. So I think that's a bad premise, to assume that all homeownership, all owner occupied, is good and and all renters is a situation we want to try to avoid or overcome, I don't, I don't. I think that's faulty in itself. But if we're really talking about, you know, how can we let developers solve problems instead of getting their way? Well, I mean, zoning is one issue, the the tax incentives is, is another issue outside the control of the city, and then building in the building codes is another, is another issue. I think developers could solve these problems, you know, minimum square footage, you know, and and all the other rules around building is another impediment I think developers could easily solve. I don't think it's a technical problem. Developers can easily solve that problem if they were unleashed and able to to design and build the way they could now, you know, zoning isn't something you just, you know, say, okay, all these rules go away tomorrow. I think that's something. You need a phased approach, and you need to give some notice to if you're going to back off on certain zoning. But, but we've, we've tied our own hands, and then, yeah, and then what do we do? Rather than untie the hands and unleash the innovation of the developers and creativity of the developers, we create a new city program called affordable housing, which only creates winners and losers. I mean, I've seen these programs, and you literally have to be a lottery winner to get one of these subsidized units. And then what about all the people that don't win that lottery? They're still sitting on the sidelines. You You haven't helped them, you've just thrown a lot of money at a problem, and you haven't done one thing to address even 20 years out. I mean, let's just say you you were going to sunset a zoning, zoning type restriction. You know, seven years out, 10 years out, 12 years out, at least every year, you're getting closer to that time, and developers can get ready to act, whereas now their hands are tied. How

  Chuck Marohn 27:24

  does budgeting and the way cities go about budgeting reinforce this mission creep thing, you know, where, where? In a sense, you're you're allocating this common pot of money across multiple, you know, interests, people, departments that show up and make a claim on it. How does the budgeting process not just reinforce it, but prevent us from, I think, asking deeper questions about the long term structural balance of our city? Yeah,

  Mark Moses 27:58

  I think the budgeting process is really one? Is it the effect of the the mission creep? And is it the effect is one of the casualties of not having a clear mission, not having a clear scope of of what the city should and shouldn't do, because when it comes time to budget, maybe now's a good time to just kind of talk about that. Yeah, go for it is. What do you do? You know, in January, you say, okay, you know, fiscal year starts July, 1 time to start budgeting for the new fiscal year and and maybe I'll, I'll bring up zero based budgeting as a way to make my point here, because I've tried zero based budgeting, and it's one of those things that people keep bringing up. Okay, so you I sit down as the budget manager in January and I'm going to prepare a zero based budget. Sounds great. We're going to question everything. We're going to scrutinize everything, just like

  Chuck Marohn 29:02

  zero basis. Every department is zeroed out. This is a Jimmy Carter era, right? That's right, right? That's right. Every budget balance zeroed out, and you got to essentially justify every expense,

  Mark Moses 29:12

  exactly. So I sit down as budget and I've what I'm telling you, I've done, okay, yeah, yeah. I sit down and I say, Well, wait, we've got and let's just talk about the general fund, which is typically 70 to 80% personnel costs. And I say, wait a minute, these labor agreements are already in place. We know who we're going to employ and what we're going to pay them. And so my coffee isn't even cold, and and I've got 80% of the budget allocated, yeah, 80% of the budgets already allocated. And it's more than that, because today, labor contracts don't always don't already tell you what you're going to pay these employees. It also tells you a lot about how they're going to work. You can't change some. Schedules, staffing levels, you can't make major changes in the way work's being done that's going to change a job description without some meet and confer, without some negotiation with the with the labor groups. So now I'm, I mean, it's in a way, so it's worse than 75% it's, it's the 75% and I can't do anything substantial about the way the organization is doing business, whether you're talking about adding technology or or changing a methodology in terms of the the way the service is delivered. And then you've got contracts where they're multi year obligations, and yeah, theoretically, the Council could pull the plug on them under its authority, but that's a whole discussion. That's not something you just do. And some of those things involve commitments that are heavy duty, political commitments or, or just things that you you couldn't pull the plug on without making some kind of accommodation or, or some other plan. And then you've got to go through the process of, well, what is that other plan? And so now you're, you know, it's not even 10 o'clock in the morning, and you know, you're still in your first cup of coffee, and you're up to 90% and then, you know, and then what else do you have? You've got utility costs. You've got just the other costs, all these fixed costs, yeah, all right, all the things. And so you're lucky if you're not at 102% with your zero based budget, you know, by the time you go home for the day. And so that's really the problem is, we're not looking at the cause and effect of, you know, we try to attack the expenses without looking at, well, what caused those expenses? You know, it's not just a matter of oh, 5% across the board. Cut or tighten your belt if you cut the expenses, but you still have the same mission. You still told the departments they're responsible for this breadth of scope, then you might frustrate them, or you might inspire them to, you know, make some kind of maneuvers, but, but you're not going to solve the the core problem, which I think the core problem is, we haven't really defined what these cities ought to be doing. Commit to that as a scope and stick to it, and we also have given a pass to some of the areas that are most important, you know, police and fire. We've, we've we've taken away management's right to to determine how to deploy those this the staff in those areas, the public safety staff. We we codify minimum staffing levels. We codify how many people on an engine. We codify all these things so that you can't come up with a more appropriate, cost effective way of delivering these services. Quick, Quick example on that during the pandemic, when there were the lockdowns and you're out driving around, there's nobody in sight, right? You're just driving here to there, everywhere, freely. There's no no such thing as commute going on. Well, what about all the fire stations whose sole justification was, oh, we need this station because the commute traffic's gotten so bad. In order to ensure a given our target response time, we have to have this station. We have to build it. We have to staff it. If you and I were running a fire service during the pandemic, those stations would have gone dark, or at least semi dark, because the whole justification for their being there is gone, but city managers City Councils had no ability to do that because the staffing levels were all codified. And you know that when they call it minimum staffing level, but it really winds up to be a maximum staffing level, because you're staffing year round for your maximum demand, it would be like Macy's staffing in July and having the same kind of hours that they hold during December for the holidays, right, right? The bottom line point there was budgets at the effect of all this, and that's why I think a lot of the budget solutions that are offered are misplaced.

  Chuck Marohn 34:21

  Okay, I want to ask you one of my pet peeves then, because I hear what you're saying, and you get there, and you know, 102% of the budget is allocated before you even present it to the city council. It goes to the council, and, you know, you're like, if it's my city every year, the very first one is like, here's our 12% tax increase budget. And then the council's like, whoa, we can't do that. And then they go back to the drawing board. At some point, people look over at the finance director and say, solve this problem for us. And I'm always frustrated, because I feel like the finance director is. It either comes to the meeting with intellectual impotence or that is, in a sense, imposed on them as part of the process. I feel like you have a nuanced view of the finance director. Why don't you just talk about that role? Because I think it's really important, but it doesn't function the way that I feel like it should, right?

  Mark Moses 35:22

  Yeah, and it it well, it functions differently from city to city. Some of it depends on the financial strength of this, of the city manager, sure, you know, there's a certain division of labor that winds up, you know, happening between the finance director and the city manager, but and the role is sometimes determined by the aptitude of the finance director. I mean, some Finance Directors are, are really more accountants than than finance type people, and they're, they're good at the accounting, and they don't see things through a finance and a forward looking budgeting type lens, and so and, you know, frankly, you get people go into that field because they they like numbers more than people, and they're not really comfortable with the limelight or making decisions and all that. And and then even when you've got a finance director who maybe is prepared for a bigger policy role. Council's really holding the cards, because when the when the council fails to delimit the scope of the organization and sends a message that, you know, you can put together your best budget, but you know, come August, we're going to be voting on something that's going to change it, and it's just a moving target. I mean, I've seen budgets that are pretty much obsolete by the time they hit the by the time the final budget hits the city's website, it's already obsolete, because the council's already moved on and is already adding more things and and changing things. And so, I mean, that's not a fair environment for anybody.

  Chuck Marohn 37:04

  I watch, though the Finance Directors, I've seen over and over and over again, where you reach the impasse, and people look to the finance director and they say, in a sense, solve this or the value, the way we value you is your ability to solve this problem. And so they go back and they do the financial alchemy, and the council doesn't, I mean, these are people who ran for council not because they wanted to do finance and they wanted to do budgets. And their accountants, they ran for council because they want to get, you know, quote, get things done. The Finance Director goes back and is like, yep, if we defer maintenance, if we borrow this money for this capital project instead of spend it out of our budget, if we do A, B and C, that really hurts the city long term. We can solve this budget today. And the council is like, Yeah, we like that person, that finance director, exactly,

  Mark Moses 37:56

  exactly. And it's a setup for that type of pattern. And that's why you see that type of pattern throughout the country, is that the the finance director can't control the scope of what the organization takes on. That's what the governing body, that's what the city council does. And so, yeah, so you can't the finance director can't solve the problem. The finance director can put in stop gaps. Can, you, know, paint things over so that you can declare victory and say you have a balanced budget, but that budget is no stronger than the council's discipline in terms of, does it take on more three months later or six months later, when when you've already deferred maintenance, you should be saving up for that to make up that deficit, not saying, Oh, great, we solved the problem. Now we can add more. Can

  Chuck Marohn 38:51

  I give you the opposite to I, and I want, I want to know if you see this, I see sometimes Finance Directors, city managers coming to council with hard numbers like this is a real problem, and this is an issue, and I'm going to kind of push you to make a hard decision, and if not losing their job, certainly losing their credibility and their desirability and the trust they have, because They, in a sense, what I think is like, do their job responsibly. Is that a is that a fair assessment, too? Have you seen that occur? Yeah.

  Mark Moses 39:28

  And, I mean, I've seen city managers fired for I saw one city manager who was brought in because of his expertise, and the council said, Hey, we want you to dig in here and tell us where we stand. And when he told them, he they didn't like the answer and but he was one of those genuine kind of, you know, tell it like it is. You know, you hired me to tell you, and I'm going to tell you. And then they decided they got rid of them. Uh. And actually three of those council members got recalled because here the city had had so much trouble with credibility with the public, but when the public saw that the city manager was telling it like it is, and wasn't talking in circles and and trying to gloss over things, he gained instant credibility with the public, to the extent that that they recalled the council members who who got rid of him for really telling it like it is. So, I mean, I think you want, you want to connect with the public, and I think a lot of council members lose their perspective on this. You've got to talk straight. You've got to want to know what the real answers are and where you really stand, and you have to be willing to confront that, yeah, yeah. And it's unfortunate that we put people in that kind of position, but I think it's the it's the right thing to do professionally, is to to tell it like it is. I

  Chuck Marohn 40:58

  always tell people, we need good people in government don't make your crusade to die on a hill right like you got to be around tomorrow to do good things. But when it comes to this budgeting stuff, it is really hard because the incentives are to make things look better than they are. I don't know if there's any mechanisms internally to shift away from that if you have people who I'm not going to call people's integrity into question, but I think if our cultural expectation is for brutal honesty over the long term, we're going to get a different outcome than if our cultural expectation is make this thing work today and make sure I get what I want.

  Mark Moses 41:46

  Yeah. And I think that cultures there that you just described are vary from from agency to agency, from city that's very and yeah. And so, I mean, I've been in what I would characterize as fairly healthy environments where people wanted to know. They didn't want you to hold back. They wanted the truth, and they wanted to engage with the facts. And then I've seen other I've been in other organizations where everything was politicized. I mean, you couldn't conduct any business between July and November, or August and November, because that's when the council members were up for re election, and they didn't want anything controversial. And so now, now all of a sudden, you're an organization, right? Complex organization, not just four departments, but 12, yeah, and you're trying to do business. And now you know certain things are off limits for September, October, and, you know, into November, because somebody's running for re election and doesn't want to have to comment on it.

  Chuck Marohn 42:50

  Well, go back to that bank that was going to fail in 60 days unless they made some changes. You know, you couldn't have that conversation in a lot of governments. Exactly, exactly? Yeah, can we talk a bit about infrastructure? Because this is one of, I mean, I'm a civil engineer. This is one of our early passions at strong towns. Is the way cities do infrastructure. I've seen city after city where they privatize their water system or privatize their sewer system, and the very first thing that happens is that rates double or triple. And you know, they say, Well, this is what you know, this is what it takes to run this thing. Why do cities struggle so hard to essentially run a business with seemingly every advantage, whether it's the ability to borrow at low rates, the fact that you don't have to pay property tax, the fact that you have, I mean, you wrote in the book at some point, I don't have the exact number, but like, basically, like, a utility has, like, a 30, 35% advantage as a public utility over a private utility in terms of operating margins. Why? Why don't we see that reflected in the service we get, the bills we pay, like all of that,

  Mark Moses 44:03

  yeah, it's easy, because when the when the local government moves in and declares that this utility service is going to be a local monopoly, you you right there with that act. You've foreclosed on any private innovation you've there's no competition or nobody working on how they're going to replace it, because the city has taken over this domain, whether it's water or wastewater and so or garbage and so forth and so, the that, in itself, means there's nobody out there trying to outsmart you because they can't compete. You foreclose that. And so now you've got this closed system. Talk about no feedback. You've got this closed system, and then the pricing for your quote service is. Is now a political thing, and that can go either way. Right? I've seen some environments where there's plenty of money, plenty of increases to cover infrastructure, and the infrastructure is healthy, and the utility, at least in terms of its service, thrives. Now, what that would have cost with in a competitive environment. You know, we don't really get to find that out and then. But more often, council members will come in and they'll try to hold the line on the costs, and they'll hold the line on increases, and they think they're doing their rate payers as a service. By doing that. Meanwhile, there's a ticking time bomb as the infrastructure deteriorates or there's more and more regulations to follow with respect to wastewater, and now the city can't afford to accommodate the new regulatory structure and the new demands on their system, and so basically, you you change the dynamic from where there's some tie between the cost of doing the business and the the revenues to the revenues are just a political thing that may be too much, not enough, but it's hard, and it's but it's difficult to even figure out a standard to judge it by too much and not enough, because, again, there's no market for for this, you've you've taken over the market, or you've foreclosed on the market, and then, you know, you wake up one day and it's just either your infrastructure is deteriorated, or you've got these, this crazy kind of pricing that, whenever somebody Does, from a technological point of view, solve the issue of like wastewater disposable disposal, it's like you're left with all this infrastructure and all these costs that you'll that you've never been able to get back and you'll still be owing on the system. Because I think technology is moving in a way where you may not need a centralized wastewater collection and disposal system

  Chuck Marohn 47:03

  I look at like a water distribution system. And I look here in my city, we're 150 year old city with 100 you know, a very, very old system. The city next door was 800 people when I was a kid, and is 10,000 people today, it's the suburb that grew when we set our rates. Here. We look at the neighboring city and say, what are their rates? And I'm like, well, these are, these are two, like, vastly different places. The other thing that I watch us do over and over again is we add new stuff, and we never ask a question, how many rate payers. Do we need to make this pay off? How much tax base do we need to make this work out financially? We just add because we can provide more service to more people. Are these a function of, like, a political feedback loop, as opposed to a financial feedback loop, like, what is absolutely because

  Mark Moses 47:58

  we ask, what's the neighbor sitting? Neighbor city charging. But we don't go beyond that. We don't say, are they charging? What are their costs? Charging too little? What are their costs? I mean, all we know is, in their political environment, they find it acceptable to charge X amount. That's that's really all we're learning from them. They might be calling anything about their than we are, right, their efficiencies. We're not learning anything about that. All we're learning about is, you know, their rate payers will tolerate x. And so the assumption is, well, if their rate payers will tolerate x, then then ours should too. And, and, yeah, completely divorced from I mean, and you and you question, why don't they become more efficient, or why don't they challenge the way they do business, when that's the way you you scale your revenues and your charges, then you're there's no incentive at all. There's no push at all to rethink the way you deliver service, how you employ people, how you use technology and so forth. I'm going

  Chuck Marohn 49:04

  to say this, and then I want you to either agree or say, like, that's insane. I feel like, if you have a monopoly, say on a water distribution system, like we're going to provide water or we're going to collect sewer, or we're going to provide garbage pickup or electrical service, the burden you have to deeply, deeply understand the finances of what you do to like have this account is so much higher than if there was a privately delivered system, because you, you, in a sense, don't have those feedback loops that give you the feedback you have to institute them yourself. Is that a fair Yeah,

  Mark Moses 49:40

  I think that is a fair description. And okay, and in a way, it's worse than that. You not only have a feedback loop, but there's no self correction. I mean, private industry doesn't always succeed, right? There's some things, but when it doesn't succeed, it goes away and somebody else comes in. Yeah. And so you've got, not only do you have a feedback loop, but you have a self correcting mechanism that, okay, so a vendor goes bad, or a private supplier of a given service goes bad, there's somebody out there who is ready to fill that gap. And so, I mean, if it's a viable service, and if it's something real, that that people find valuable, then there is going to be somebody stepping in. And so, so that's what we rob ourselves of, and that's really part of the message of what I think we need to do, because government can and should be a positive influence on the on the residents and and business owners. But yeah, it can't be a positive influence if it's crowding out private solutions and in the course, distracting itself from from protecting its residents and businesses.

  Chuck Marohn 50:59

  You have critiques of privatization, and you have critiques of, uh, regionalization. And they, they, they aligned with my critiques as well. I want to give you a chance to because I think a lot of people hear what you know, what you and I are talking about. They say, well, let's privatize that system. Or they hear what we're talking about, like, let's, let's join with other governments to make this more efficient. Yeah,

  Mark Moses 51:21

  and so privatization, too often, winds up being privatization and name only. We put together an operating contract for our water facility, or wastewater facility, and then we call that privatization. But when you dig into the details, I think there's just multiple problems. One is the sometimes it's done in haste where, hey, we got to raise some money. We're, you know, we know this isn't working. Well, it sounds good to say we privatized it. It'll get some people off our backs. So let's just privatize it. So not a lot of notice period. You're probably not dealing with a lot of bidders. It winds up to be potentially a crony type of deal, because, because there isn't much of a market, because you haven't given the market an opportunity to to prepare for it. So, so maybe you get a couple bids, if you're lucky, and then the the local government will still have control over this utility, and so it'll still feel obligated to tell to dictate to the vendor. Okay, you've got to hire our people, because we can't just get rid of them. Lay them off. You got to pay them at least this much. You need to do this other living wage type stuff you need to, you know, buy in a certain way, because we don't want to turn this over to you. We're still the steward, so we don't want to. So all of a sudden, the new vendor is being hit with all of the city policies that the city bureaucracy operates under that tie its hand so it can't truly be innovative. It can't truly figure out the best way to deliver the service. You're basically paying a private company to mimic the city

  Chuck Marohn 53:10

  and extract a little bit off the top right, exactly, exactly,

  Mark Moses 53:13

  and yeah, extracts the little licensing fee, you know, on this for the city for the opportunity to do that, and so and then, and then all these things start becoming uncovered. Like, well, the city's been deferring the maintenance, and things are breaking down and and so now you're confronting these things that were always there in the background. But now and then, who gets the blame for it? The vendor gets the blame, or privatization gets the blame. This wasn't a problem before we farmed it out, and so it it's a complete misunderstanding of of the dynamics, of what, of what's really going on, so that that's the privatization and name. Only problem is that you're not private. Is privatizing? It to to truly privatize, you would do something like this, you would give notice and say, and I'm not saying this has to be a short term notice. Maybe it's a 10 or 12 year notice. We're getting out of the wastewater business. You know, in 15 years, everyone you're on notice, we're going to, we're going to figure out, over the next 15 years, how to get the city out of this business. Now you've given an opportunity for private capital to come in and and solve the problem of, how are you going to deliver these services to these residents the with respect to regionalization, I'll give you an example of what that sometimes looks like. I was looking at the because it sounds like a great opportunity, right? You've got too many boards, or too many fire chiefs, or too many, right? You know, accounting systems. And so now let's just put it under, you know, one umbrella. And so in the case of fire, I saw this where these. Two Cities try to form like a just a regional kind of understanding of how they would join together to provide service. Well, one fire department had a start time of 7:30am the other fire department had a start time of eight. These are like legacy structures that they didn't want to upset, or they're on different kind of structures in terms of their FLSA, their overtime calculations, and so now nobody's going to it's not like a true merger, where you actually figure out the new standard and then everyone's going to adopt the new standard, because you've got these labor agreements that are fixed that now you have to accommodate. And so by the time you run around and and make everybody politically happy, you've missed the opportunity to enjoy true economies of scale and true wins from emerging or regionalization. And this is hard enough in private industry when banks merge or cultures merge, and somebody ends up on top and someone ends up on the bottom and and, you know, those don't always work out if they can figure things right. So, so there, there are enough challenges with the whole idea of regionalizing or emerging, but with with the city structure, and with less opportunity to rewrite labor agreements and and really turn on a dime and change your way of doing business, then what you wind up is just with a Bigger bureaucracy.

  Chuck Marohn 56:38

  I watch, you know, one insolvent government entity merges with another insolvent government entity in the hopes that it will solve their budget problem. And, you know, a negative plus a negative, when you add them together, is still a negative

  Mark Moses 56:55

  wasn't added kind of negative premium to the fact overhang. Yeah, you're, you know that you're still trying to everyone's still trying to get their head around what is this new organization and who's really running it? Yeah, yeah.

  Chuck Marohn 57:08

  Let's end with this. And I know we've spent a lot of time trying to explain what's not working. I know in your book, you set out a vision for what local government should do. And I again encourage our listeners to go get the book The municipal financial crisis by Mark Moses. It's very, very good. You will find it really helpful. I feel like the central takeaway, at least, what I took away is that we need to have realistic expectations for what local government does. Can you maybe as just a closing thought, share what you hope people would take away. And in terms of that, from from your writing, from your work,

  Mark Moses 57:49

  there's a couple levels that I hope to help people be less frustrated and less confused on and and part of what I intended to do in writing the book was to demystify the budget process to demystify how decisions are made in local government, because from a distance, it really is confounding and can be frustrating. And in the solutions that were offered for financial struggles and and organizational struggles, I thought, yeah, those are on point to a certain extent, they hit issues that are really there. I mean, there really are. I mean transparency and metrics and and incentives are all like legitimate categories of things that you should be thinking about. But if you don't go back to the basics and say, you know, what is this organization all about? What is it good at? How can it really be a positive effect on the residents and and business owners? If you don't have a positive vision of that and can't delimit the activity of the organization, you're setting it up for failure. And my position is not, oh, this is just all bad, you know, get rid of it. This is we need to really focus on on the pauses, on the good that that the governments were set up to the services and functions they were set up to perform in the first place, and then get out of the way of private capital, of innovative nonprofits, so that the government isn't competing with them, or marginalizing them, or restricting their ability to come up with good solutions, unleash all that, and then, I think we have a bright future, but things are so tangled. It's it's not just magic, like you just go in there, and a year later, everything's different and better. It took a few decades to get from four city departments to 12 city departments. It's going to take some time to unravel some of that, unbundle some of that, and make thoughtful decisions about okay, if the government agency really needs to get out of this business. Because other people can do it better. What kind of notice do we give to the community so that they can organize around that? Because with the course we're on, my perspective is it's not that taxes are too high, it's that in this structure, they'll always have to go higher and and serial tax increases are not they're not sustainable. You just end up extracting more and more from the local community, and you're using your residents and businesses as the means to the end of the government agency, rather than the government agencies truly supporting the residents and businesses. So I think we need a positive vision of what the city can be and how it can really help its residents and and businesses flourish, and taking on everything and considering that everything is fair game to be on the table is is just not a prescription for success. And so we need more discipline and more focus. Mark, if

  Chuck Marohn 1:00:58

  people want to get a hold of you, what's the what's the what's the best way to follow your work?

  Mark Moses 1:01:03

  I'm on Twitter. I'm Muni finance guy, that's okay. Finance guy, my website is Muni finance guy.com, you can reach out to me. I think your your people did reach out to me through that's

  Chuck Marohn 1:01:18

  what we did. Yeah, yeah. Make sure and put it on the show notes so people

  Mark Moses 1:01:22

  Yeah, and yeah, I'm happy to engage with people because I'm really what I'm doing now, and what my mission now is testing these ideas in practice, seeing what resonates, formulating things so that they'll really be helpful and and be time savers and frustration savers for whether it's city council members, interested residents in the community, anybody that's trying to help local government be better. I'm trying to be part of that solution.

  Chuck Marohn 1:01:52

  You're listening to the strong nouns podcast that was Mark Moses. The book is the municipal financial crisis, a framework for understanding and fixing government budgeting. A lot of really good, really deep information there, Mark, thank you so much for taking the time and for chatting with us. That was That was wonderful. Thank you, Chuck. This was very enjoyable. And thanks everybody for listening. Keep doing what you can to build a strong town. Take care.

ADDITIONAL SHOW NOTES

• Download the Strong Towns Finance Decoder to get to the bottom of your city’s finances.

• Connect with Mark Moses:

  • X/Twitter

  • Website

• Chuck Marohn (Substack)

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