Greetings, and welcome back to ZacCast, the official podcast for local government nerds. I am Chad, that's Pat, and we have a special guest today, the one and only Doug Martella, uh, CEO of GoVirtual, CFO. We've had him on before to talk about some accounting and audit stuff, and, uh, you know, by popular demand, honestly, like, we just had to bring it back on. So Doug, welcome back to the podcast.

Everybody loves a good auditor.

Great to be here, guys. Great to be here.

A couple of days ago, Doug, you sent us a text and you said, "Hey, guys, we may have some issues, uh, coming up pretty soon with, with our Zach Tax billing," because there's a new GASB statement out regarding subscription-based information technology arrangements. This is GASB Statement 96, and this could alter the way that cities manage their subscription services. You wanna just kinda go in briefly, Doug, and explain why that is?

Yeah. So, um, it's a new standard, uh, GASB came out with, and, um, it, it resembles closely to what they did with 87 and leases, which everybody, I'm sure, is a huge fan of. Um, but basically it would take your, your subscription, and you'd have to amortize it over the life of, uh, life of the, the subscription term essentially. So if it crosses years, um, if it's a multiple year subscription, that could get kinda, kinda dicey there when you're amortizing and using present value and, uh, calculating all the liabilities. So that, that's kind of the new standard in, in general that kinda came out. Uh, has to deal with all the IT software, all your subscriptions, the software you use to run the, run the city and your finances, any, any kinda IT software like that.

So really what... Okay, so, so real quick. This, this is a podcast for local government nerds, but it is not quite on your nerd level. So can you just talk about, like, practical implications real quick? Are you talking about if you have an annual subscription to, say, a software that helps you analyze your sales tax and property tax, uh, data, and it begins in, say, July, and it runs through the following June. Okay, so that's, say, in a normal y- uh, city with October 1st fiscal year, you have three months in the current fiscal year and then nine months in the subsequent fiscal year. So are you having to book assets and liabilities and sort of wash those things out at the end of the fiscal year based on your, that extra nine months that you've already paid for?

Correct, Chad.

That kinda thing?

Yes, absolutely, yes. So you'd, you'd book your asset and liability, um, for the whole period, and then in the three months in the current fiscal year, um, you'd amortize it at present value. That's how it works, unfortunately.

Where, so where do you wanna go with this, Patrick?

I mean-

Where do you wanna go with this conversation?

My, my first question is, is I wanna be in the room of people who come up with these rules. That's, that's what I want. I wanna know is this, like, a smoky filled room of cognac and whiskey and cigars and all of these auditors around-

I would imagine there's quite a bit of con- cognac, at least some kind of alcoholic beverage.

Yes. Like, do they just sit around and they say to themselves, "How could we make life more difficult and make us more money in the long run?" Like, what, what, what is it that... Why on this rule? I mean, I guess my, my question is, is what is it, what is it doing for cities to put this in their financial report?

Yeah. Let's start with the, with the sort of good faith interpretation. Like, what are the benefits of this that would justify the extra effort?

So to me, the only, the only difference between using a prepaid expense, uh, if you've paid it all up front, and then amortize it all every month over the life of the, um, subscription, is just this just captures the entire liability as to what the government is on the hook for in future years.

Okay, so if, if it's already a paid subscription, so say they prepay the subscription, right, which is most of what we do, it's, like, everything of what we do. It's a one-year deal, they can cancel at any time, um, and it renews annually if they so choose to renew annually, right? So on our deal, they're not actually booking under this new rule, right? Because there is no future liability, 'cause they've already paid the liability. It's still a prepaid expense.

Well, what happens if it crosses years?

Well, that's the thing is if it, if it crosses years, they've already still paid for that year across, right? So if they pay us in July for one fiscal year, but the term goes into the future fiscal year, they, they can move the expense to the future fiscal year, right? But they've technically already paid for it, so it's not a liability. I just went super nerd.

Yeah, you did. Yeah.

Well, in other words, if you were to have an annual subscription that you paid monthly, so you've entered into the arrangement in one fiscal year.

Mm-hmm.

Once you cross that next fiscal year, you still have the obligation to continue it, but you haven't actually made that payment. Whereas if you... I mean, we used all kinds of software-

Oh, tons. Yeah

... where you would, you would pay the annual subscription up front. That's how we operate. That's how a lot of people operate. So if that's the case, and you're on a year-to-year contract, then maybe you don't actually have a liability that needs to be booked. Is that, is that, is that right?

I guess the, uh, the language in here is kinda... doesn't really specify that to its fullest extent. Uh, it's kinda like a lease, you know? If you have a copier lease, you're only leasing it for a year, but we're still, we're still booking it as a, a right to use asset and a liability. So I, I think it would fall more under that category than it would just an expense and then prepay it and write it off every month.

So this is where I had so much fun during audit with my auditors because, and Doug used to be one of my auditors, so he understands this. This is where I walk in the room and I say, "But that's not the way we think about it. I can get out of this contract at any time. I've got a 30-day out clause."I don't have a future liability

Right. At, at the most you would have one month's worth of liability.

That's correct. Right? So, uh, you know, look at that-

Or 90 days-

Yeah

... or whatever the term happens to be.

The other side of this equation is, I mean, let's, let's talk about this from like a, a real, like sizable contract, right? Let's, uh, cities that are using Tyler Technology, right? Munis, those software packages, which do have multiple year agreements. They're not just a one year, every year subscription. You buy a large amount of that software upfront. You have, you know, kind of the onboarding process that costs substantially, and then you have what they call their maintenance agreements, Doug. And I, if I remember correctly, I think that's how they, they do it. So the encode side, you know, there's an annual maintenance agreement that you pay every year and you're on the hook for that contractually. That makes sense. And, and maybe it does... Is there, is there a calculation that's gonna be done in this that shows the actual cost of that software from an amortized standpoint? Like my maintenance agreement is $90,000 a year, thus for, if you amortize that over 20 years, it's actually like a $4 million piece of software.

Yeah, I don't... I, I mean, that could be classified as just a maintenance agreement, right? Not necessarily a, you know, a-

A subscription

... a subscription. Um-

Oh boy. Loophole notification.

Yeah.

Ba da, da, da, da, da, da, da, da, da, da.

There, there is a... It looks like there is a clause under here for a 12 month or less, uh, subscription, so I guess what we're, what we're generally talking about is anything 12 months or more that, uh, would be affected, which, you know, if, if you're talking about that encode contract and it, it doesn't really fall under the maintenance category, then yeah, it could be, could be hit with this standard.

Yeah, I mean, I, I think Encode calls it a maintenance agreement because they were a software as a service provider before that was even like a term, right? I mean, they, they figured out long term that cities want to make sure that their software operates correctly, and so Encode would sell them the actual physical software and then maintain that software for them, which was just a really early version of software as a service in, in my opinion. Um, so I don't know if the maintenance side would really allow you to get away from that. That's an interesting take. Um, but I, I mean the, the reality is, is there's not a lot of providers out there that operate like we do, right? From a 12 months or less, no strings attached, no contract, cancel anytime perspective, right?

Well, so this is 12 months or less, including options to extend.

Right.

So even though it's an annual thing, if there's an option to extend it, then it would be included. So I didn't see that 12 month contract, and that kind of makes some of my critique a little bit less, um, valid.

A little less sting out of the, out of the bee stinger there.

Um, yeah, 'cause I mean, I was thinking about the net effect of this would be to centralize everything, even small things like Adobe Acrobat, right? Like you have to pay a $12 a month subscription to Acrobat now, and, and especially in... I mean, in big cities, you're already gonna have a lot of centralization, right? But sometimes you just don't wanna go through IT to get a subscription to Acrobat or, you know, something small like that, or some random one-off software that may be an annual contract, and now that has to be also reported and, and accounted for this way. But yeah, so-

Well, my biggest criticism of this-

Now I kinda feel like, eh.

Yeah.

Because if, if it's only a 12 month contract, uh, on like on your just traditional software as a service things, then it, then it actually would not be caught up in this mess.

But, y- you know, when you, when you're subscribing to Adobe Acrobat, you're not subscribing for annual contracts. You're on a monthly plan that goes on forever and ever and ever and ever.

Yeah, I guess, I guess it would have to...

I mean-

The option to extend, I guess, would, would be indefinite.

And then the question is, is the auditor gonna, is the auditor gonna walk into every CM and ACM office or finance director's office and say, "What's your intent with this software package that somebody put on their credit card over in Parks?" I mean-

So it actually doesn't even matter 'cause it says, uh, regardless of the probability of those options being exercised-

Yeah

... as long as those options exist, then they get added to the subscription term, and if that's more than 12 months, then it falls under this.

Correct. So I mean, it's, it just, it seems very unlikely. My biggest criticism of this is, is not that we're tracking it. I, I don't think it's a terrible idea for cities to actually look into tracking this. I mean, um, you know, subscription as a service is a, is a good business model for a reason, uh, but it does save governmental entities a lot of money up front because they're not paying to build that software themselves. Like the old school, um, you know, A400 style softwares that everything was developed specifically for that community, right? Now you, now you have like a base code that is a, is a subscription model, and that, that is probably cheaper, and it allows you to kinda keep up with where software development and things like that are going to stay on the cutting edge of, of what is available out there. It also forces the company to stay on that cutting edge.

So here's the benefit of the subscription software. A, it costs you less upfront.

Mm-hmm.

It does cost more over time, but it costs you less upfront because you're paying it on a monthly or annual basis as opposed to what we used to do, which was just buy a piece of software that might get some security updates, but you would just... I mean, you just buy it on a CD. When you, when you actually buy and own a piece of software, the, the step-up cost for each new, you know, iteration of that software is significantly higher.

Mm-hmm.

And the subscription not only costs you less in the short term, but it also provides the incentive to continue to improve that software, right? 'Cause-There's ongoing payments. They're not... People aren't relying on that next version. So what, what tends to happen whenever, or before subscription models came about, is that you would get all this development into version one, right? And then you sell version one, and again, maybe you have some security updates or some minor feature updates, but then all of the programming effort goes into version two, which is a full paid upgrade.

Mm-hmm.

Right? And so you're, you're kind of left on this dying software. Like, as soon as you buy it, it's, it's basically end of life. And so the subscription model does allow your vendor, it gives them an incentive to continue to iterate and improve. Uh, so even though it technically does probably cost more over time, you theoretically are getting more out of it over time, right? So it's, it's just a trade-off. Not necessarily better or worse, it's just a trade-off.

But there's no threshold.

My big conc-

Right? I mean, that's, that's a-

There's no threshold

... there's no threshold, which is-

The, the, it's the-

What is the term, uh-

It's the time-

Sorry, Chad. What's that?

Material, material.

Yeah, material.

Term.

There used to be this term... You used to tell us all the time when, when we worked together that you only have to worry about the material items. Can you explain that a little bit about what that threshold typically is?

Uh, it all depends on the size of the government, Pat. So, you know, there's, there's a big calculation that goes into it, um, when we used to do audits that comes up with a materiality number. Um, and we'd kinda use that number as a gauge for transactions, uh, to kinda just kinda see, go through their general ledger and, uh, pull out transactions that are, you know, maybe in question over that amount, uh, look for transactions around that amount and above. Uh, that's kinda how the materiality works-

And-

... when you're doing an audit

... in this statement, does it-

So we used to freak out about-

Yeah

... we, yeah, we used to freak out about tiny, minor little-

Oh, yeah

... things that we couldn't foot to the penny, and then-

Just like bad, just like bad city councils

... turns out that that was about an... It was, like, two orders of magnitude below the materiality threshold. But no, so there's no dollar threshold. You could have a $1 subscription that lasts for three years, and it's gonna fall under this because the materiality is not the financial component, it's the length of the agreement.

Correct.

So one question's gonna be, does the option to extend on, on small services, like Acrobat... I just use that as an example 'cause that's something that pretty much everyone uses. But even, you know, in smaller cities you have, uh, you have small contracts for things like Office 365.

Mm-hmm.

Right? And I mean, not that this is the best way to do it necessarily, but you don't always have, like, a centralized account that manages every single Office subscription, um, especially when you get into smaller cities and people are just putting them on their P cards, right? So does that sort of... Yes, you can cancel it pretty much whenever, but does... It's essentially an auto-renewing subscription. Does that count as a, an option to extend, or does it have to be, like, a f- written, formal contract that specifies? Of course, I, I've never read the fine print in an Office 365 subscription. Maybe it does have that language in there, and then therefore it would fall into this category. And if so, getting back to sort of what my original concern with this was, is that it really does kind of force a top-down s- centralization of basically every aspect of IT and software. And it, it seems to me that a lot of these accounting rules tend to do that anyway, right? They, they, they ultimately tend to sort of force a top-down centralized management for everything, which isn't always the best way for a city to be run, especially smaller cities, where you benefit from the ability to just sort of do things that, when you need to do them, right? To move quickly and, and, "Oh, I need this software. Okay, I'm gonna get this subscription real quick." I don't have to go through and fill out five pieces, like a requisition form, you know, for a TPS report about why I need this software, or can you please add, add a new, uh, you know, seat to our existing subscription.

Here's the ironic thing. You're gonna have to build a software to track the software. Like, and a finance-

I'm not doing that

I know, I know you're not doing that. Yes, I'm not pitching a business model here. This, this is typically, though, for our listeners, this is typically how, uh, a business gets built by Chad and I, uh, is something like this comes up, and I'm like, "Oh, Chad, maybe we should build that." And we spend two weeks on it and figure out that was a bad idea. But, uh, the reality is, is that finance departments are gonna have to track this, and they're gonna have to go to each individual employee in a city and each individual department. If they truly wanna meet this statement, right? I, I'm not entirely sure they're gonna be able to meet the statement in its current form, but they really wanna do it, they're gonna have to go ask every employee, "What subscriptions do you have?" Or they're gonna have to find somebody who's gonna go through every P card statement to find subscriptions. Like, that's just the reality of it. I mean, Grammarly-

So-

Think about how many people at a city have Grammarly subscriptions.

Yeah, that's a good, that's a good one. And that's like, what? Anywhere from 5 to 40 bucks a month.

Yeah, I think it's-

Depending on what you kinda-

I, I think it's, like, 79 a year for the unlimited version or something like that.

Yeah.

But at, I mean, as a city manager, it made me such a better city manager . My writing is terrible, folks, and Grammarly is my savior on that stuff. I mean, it just really keeps me alive. But, um, I mean, most cities use that. I, I was at a, I, I think it was at, like, a UMANT thing where they brought up the use of Grammarly.

I don't have a problem theoretically with the big things, right? Like your body cam software.

Oh, yeah.

Or especially when there's a capital investment involved.

Oh.

Right? And this, this explicitly calls out the different phases of big projects with, you know, prep and, and setup and things like that.

And especially when that business model is ridiculously screwing over cities. Let's, let's be honest. Think about where body cam... We, we negotiated one of the first long-term software as a service body cam contracts in the state, right? And look at what the cost of those contracts is now.It makes no sense. They were making plenty of money on the first version of those agreements, and now you're talking three or four times the amount of money per camera for software and storage? Come on. And, and we all know storage-

Yeah

... is not that expensive.

No. It's getting cheaper by the day. But, um, you know your financial software, you have permitting software. Like, these are things that you're making investments in, you intend to have... In, in many cases you're going to have multi-year agreements. And if that's incurring a liability on the city, then it makes sense to, uh, to report that in some way. It just seems to me that there's a lot of ambiguity on the smaller things that you might need for a short-term, short-term, but maybe it gets kind of wrapped up in this. And I just worry that, like, what do we have budget offices for? Like, if you're worried about how much you're spending and reporting it, like, you don't need to include all of this drama in your financial statements, especially for things that don't actually have real liabilities, if you can cancel them at any time, but the contract says that it's, you know, a one-year with extensions. If you have a 30-day out, a 90-day out, you don't really have a liability. I don't know. It seems like when you're, you know, when, when you're a hammer, everything looks like a nail, right? So this is... We, we did this with leases. Why not do it with subscription technology too?

This is no different than my argument on building code, right? Building codes are written by the trades, which are required to follow the building code, and if trades wanna make more money on jobs, they make the code more complicated. GASB-

It's like laws are written by lawyers, right?

Correct. I mean, it's, it's just, it's the, it's the same thing. You know, no offense to the GASB folks, but it's basically a bunch of auditors who come into a room, right? And decide what should or shouldn't be tracked based on their experiences. They don't think through the actual operational cost that it's gonna have for them to, to do that, and, and, and ultimately, that's, that's the problem.

Well, the other thing too is when you're talking about stuff that that's, that's that big, it's not like it goes under the radar. You often need council approval anyway for these things. So it's not like you have cities that are just spending hundreds of thousands of dollars just in the dark on these long-term software contracts.

Correct. But cities have no... Major cities that have debt and other things that they, you know, are accountable for, they have no options. They have to follow these GASB requirements, right? I mean, that's, that's the thing is you have to do your annual financial report. It, it... Am I correct on that, Doug? Like, you don't have a choice, especially if you have debt. That's a re- that's a requirement of your bond covenants, right?

Right. It, it's in the local government code as well.

Yeah.

A- as we're talking, now it just sounds more and more like the moral of the story is keep your subscriptions to 12 months or less.

Correct. And don't-

Yes

... talk about your intentions to renew. So...

No, it's not even about the intention. You cannot have an option to renew in the contract.

Yeah. So, and, you know, we are, uh... I mean, gosh, out of all the cities we have, we have what? Like, three with contracts. I don't know how many there are. There's not many. Um, but the reality is is that, you know, it's, it's crazy that there's not, like, a threshold set on this. I mean, there, there should be some type of threshold so that we're not tracking down the Grammarly subscriptions of every city employee who writes emails. What you got next, Chad?

You just wanna jump in?

Sure.

Okay. We can move on. I'm a... I, I am a little bit disappointed. I had, I had this whole rant prepared, and then Doug was like, "Oh, there's a 12-month exemption." Kind of throws me o- off my game here. Okay, so let's talk about something fun then. I came across... Uh, it's funny how much of our pod has been stuff that I saw on Twitter recently, but I came across a tweet where, uh, a guy was talking about incentivizing YIMBYism, which is the opposite of NIMBYism. Uh, yes in my backyard as opposed to not in my backyard. The idea was residents would be owning fungible shares in a citywide REIT rather than the land under their house. Now, we both, or we all three of us kind of think that this is not really workable, but as an alternative to something like this, we kind of threw around, and Doug said you said you had talked about this in the past with someone, an a- actual exchange, a market to buy shares in municipalities. Same, the same basically, uh, thought process as, you know, the actual stock market, but instead of buying shares in companies, you'd actually have an exchange to buy shares in municipalities, and then you would essentially own a portion of it. You could, you'd... There'd have to be some kind of market mechanism that you built in order to allow for this, but as financial reports come out, as new projects, as new development comes out, right, there's value theoretically that's being added to the city proper, and that would increase or decrease the interest in people buying shares, right? Obviously, there's going to be sort of an up and down mechanism, but this could be an interesting way for cities to get investment to incentivize particular types of development, right? 'Cause, like, if you just live in a city, you're already there. Like, you've put your investment into your house. You don't tend to want it to change, right? Like, you're there, you've marked your spot, and this is the big problem that cities face from a development standpoint. Allowing people to actually become shareholders in the city could give them different incentives for development. We have at, on occasion, Patrick, gone through some of these sort of half-baked ideas. This is definitely one of them, but what do you think?

So I, I just, I think it's a pretty interesting idea. I mean, uh, personally, I think investing... I, I mean, I, I think it could be a substitution for how a city takes out debt. I think that could be one of the big areas, right, that you would do this. I think it's a way for, like, a city would have its own IPO, right? It would go out and say, you know, "We're, we're gonna have an IPO. This is the revenue we bring in each year. These are our expenses. This is how we are going to be able to provide dividends to, um, you know, our, our shareholders."So forth and so on. Uh, and I think that would be a very interesting way for cities to operate. I think it's a much more free market approach. I also think it will directly influence how cities operate. The problem is, is I don't know how you mix the fiduciary responsibility that you have to a shareholder with the fiduciary responsibility that you have to a resident who votes politically, right? I think that's the, that's the big imbalance. There are people out there, I don't know a ton about this, I've maybe read like two articles on this, uh, but there are cities out there that have gotten into, uh, like the, uh, the coin side, right? Um, and, um, you know, like Miami has, has created their own coin that they're selling, and they're using it to raise funds for city purposes, things like that. I think it's-

You're talking about a crypto coin?

Yes, like a crypto coin. And they- they've created their own crypto exchange, or crypto coin exchange there for, I think it's like the MiamiX coin or something like that. I'd have to look it up. But, um, and- and you can't, like, you can't buy it on Coinbase, but you can look it up and see it on Coinbase if you wanted to. Uh, and- and you'll see that it has like a value and- and a market cap and all that type of stuff. So all that being said, that's an interesting topic, and there are multiple cities that are looking at doing that. Um, I haven't heard anybody look at it as if, like, you are a company. You know, like a, like a true stock offering. I just think the hardest part about that is how do you, how do you balance the interest of your stockholders versus the interest of your residents, because your- your residents are really driving the revenue of the company itself, and- and I think that would be, that'd be interesting. But I've always said the best city to live in would be the city that is so productive economically that they could write their citizens a check for living there. Like, that would be the, the best city to live in. Or cut taxes substantially, one or the other. It's the same thing. But the re- the reality is, is that, I mean, we used to joke all the time in Hudson Oaks that if we could tax car sales, we would have so much sales tax, we, we could not possibly come up with enough cool projects. We would have to send residents a check in the mail, right? 'Cause you had like more than 20,000 cars a year that got sold out of Hudson Oaks, something like that, and if you just did the math on that at a percent and a half and how much we would make on all that, it was ridiculous, right? So w- and we all hope we were Alabama, where Alabama has sales tax on vehicles. But yeah, I mean, I- I think it's a very interesting idea. Just the question is, is I don't know, I don't know how you balance it. So I think the crypto exchange idea is actually a little more interesting because I think that, that has a little bit more value to it.

So Doug, I'm gonna let you jump in here, but I actually disagree because the crypto itself is... it's, it's not backed by the full faith and credit of the City of Miami, right? It's just a digital asset-

Correct

... that's going to appreciate or depreciate just like any other crypto, right? Like, the problem with... My, my problem with crypto is that it has all the problems of fiat currency, and it has a whole lot more downside. But-

Explain fiat currency, so... A lot of people don't know what that means.

Just cash money. Central bank-

Okay

... operated cash money that's, you know... I mean, like a dollar has no value except for the fact that it's backed by the full faith and credit of the United States government, right? It's just a piece of paper. It has no intrinsic value. The same is true of crypto. It's just something, right? Part of the value theoretically is that, uh, in most cases they are limited. There's only so many Bitcoin that will ever be mined. There's only so many Shiba Inu, right? They're already like capped out. And so now you're seeing, uh, that, that meme crypto sort of tanking. I mean, other than the just-

It has stabilized a little bit. Don't tell our viewers that. To be clear, we're not financial advisors, but some of us do own Shiba.

The, the, the Miami coin, like how does it tie back to Miami's future?

So they're-

You know what I mean?

Yeah.

It's just a thing, right? It doesn't actually tie back to their growth or their, um, development patterns or anything else that might change with the city itself. This is just something that they built to make, to bring in some money.

Yeah, so the city just basically built it as a, as its own crypto and then raised money by selling it, and then eventually, you know, people will buy it based on what they believe the value of that digital asset to be. I mean, it's-

Right, of the coin.

Of, of the-

But it has nothing to do with the city's future financial stability.

No, 'cause the city has basically already sold the asset, right?

Right.

The city created the coin. They sold the asset at its face value. They raised like 225 million with it. I think they technically could continue to sell coin to raise more money with it, um, but there's no repayment mechanism there, right? So people have basically bought 225 million of this coin. And I think that's the right number. I may be a little off on that. But they've bought this, this coin, and the city's gonna go use it for public projects. Can you imagine if a small city in Texas just decided to start their own crypto and sell a coin and get on the crypto meme craze and, and, and raise money?

Maybe. But I guess you could cash out there and use it one time. But the benefit of an actual exchange is that it encourages more productive development over time, which increases the value of your shares as opposed to just this sort of digital-

I agree

... you know, currency.

And it has the same benefit of somebody buying a coin. Why do people buy crypto? 'Cause they're placing cash, right? For tax purposes. That's a lot of the reason why people buy crypto.

Yep. So, so one option could be to resolve yours, and again, Doug, I'll, I'll let you jump in here. But one option could be is, you know, balancing the fiduciary responsibility to investors versus to voters and taxpayers, is issuing shares to your residents and business owners perhaps, but, uh, either based on, I don't know, parcel size or property values or just one per, you know, one per resident. Um, but you could-

Would you open your city council to become like a board of directors? So there would be like the politically elected board, and there would be like the shareholder elected board?

I don't think you'd wanna do that.

I, I, I just... I mean, like we're brainstorming here, folks.

No, I, I think it could be one in the same

Okay

But that could be a way to get around it, is to give shares as a condition of residency, whether that's, you know, personal or business residency. But you basically have like, you know, like A stock, B stock or something

Mm-hmm

You could buy your A stock, or if you live there or work there or whatever, have your business there, you'd have this other separate stock. Or it could even be the preferred stock. Um, but that would be an option or a way to get around what you're concerned about, is by default making those people also shareholders and not just second-class citizens as taxpayers who don't own an interest in the future growth, uh, financially

And I have like, like in my mind I have like four or five city managers that are popping up in my head right now that I would love to have in this conversation. Um, but the, the reality is is that that basically makes city managers more CEOs

Right, of a, of a company from that standpoint

Cities just, cities just aren't in the business to make money, and I think that's, there's gotta be another way to incentivize an investment from an outside party, um- So, so I would always say that that's the wrong sentiment for a city. Uh, uh, to be hon- I never ran a city that way. I was always in the business to make money, right? I always wanted to run a profitable city. I never wanted to show a loss in my general fund

Right

That's, you know ... But that's not how all cities run. You're 100% correct. That seems to be a little outside of the norm. But I, I, I think if cities would operate more with that mentality, we would have smarter development patterns than we have right now. I mean, that's ultimately, it, it comes right back to what we always talk about, which is when you develop poorly and you don't make a good, wise, long-term investment decision on that development, it impacts you. And if you had stockholders who were looking at what that return on each of those investments was on a quarterly basis, and you were filing quarterly earnings reports and things like that, we would know it in year 2, 3, 4, and 5, and not in year 25 and 30.

One thing you could do is in those quarterly reports is have a standardized version that, like a development report that shows the actual ROI calculations on that growth, right? So that gives pot- potential investors and also residents and shareholders some ability to say, "Oh, well you're putting in this mixed use development, but it's not, like the way that you're doing it is not actually financially productive. So like why am I gonna keep investing in here? I'm gonna sh- sell these shares and go somewhere else where they're actually doing something that's gonna be financially productive."

And if it's financially productive, one, one of the big issues you have in cities is you only have like 4 or 5% of your residents who vote in your local elections, right? So if there's financial incentive to a stockholder who may be getting some type of dividend or something like that out of the structure, then they're gonna be more involved and care more about the elections in my opinion, right? If I'm not getting my dividend or my share value is falling and I've got real money in the game, then ... And I, I think about that this is interesting for a city who may not have a property tax, right? Where you go out and you, you have an IPO for your residents to put in capital and sell, sell stock and then, you know, be able to, to basically benefit from the growth that the city's gonna have over the future instead of bond holders benefiting from that. 'Cause an individual private company has the same options. They can go public and they can raise money in the public market or they can go sell bonds, right? It's, it's no different. It's just cities don't have the option to go public on the market.

So I wanna ask you a question here, 'cause as an auditor you've looked at a lot of cities and their organizational structures and what they spend money on. What would something like this possibly do to what cities are spending their money on? Is it going to make organizational priorities change? Police, fire, parks, libraries. Like is it going to change the calculus about when you fund what?

Well, I definitely think that, uh, labor would be affected big time, um, because in a lot of cities you just have, uh, positions that have been there for a long, long time, and that's, that's how it's always been, and those are the positions that need to be filled. Um, but if you have some sort of incentive to, um, maybe either make money or return dividends or grow your city by selling shares, um, just like any private company, you're probably gonna cut some slack first. Um-

So are you saying that the primary job of a city is not just to employ people?

Oh

Yeah, I guess-

I guess that's-

I've never, I've-

I guess that's what I'm saying

... first time I'd ever heard.

Is it, is it a public safety, number one? Economic development? Take care of the residents? Um, but when, you know, when I was at Hudson Oaks and with you guys, I mean, the whole, the whole goal was to be lean and, and do what's best for the residents and what's best for the city, um, not necessarily a, you know, a job, a job creator of a city just, just to have a job there, you know? Or another labor, so-

Well, the big, the big goal was, I mean, number one in the comprehensive plan, no property tax, right? So if you're not gonna have a property tax, you, you had to make decisions that generated revenue. You could not make-

And that limited long-term operational costs

Correct. It limited liability long-term

We didn't add, we didn't add FTEs unless there was real pain and we were not able to get our job done

Correct. To, to the brink of almost losing employees is what we would do.

Yeah

I mean, to be honest, we would, we would get an employee almost, almost to the brink of burnout, and then we'd be like, "All right. We're gonna get you some help." And, um, or, "Hey, I'm gonna give you a little bit of a pay raise, but I need to, I need to see you stretch even a little bit more," right? That's the other side of that.

Right. But that's-

They love me for it now

... but that's not a mentality-

Right? Maybe

That's not a mentality that most cities take. That FTE count is, is like gold. Right?

Well, you know, obviously I think there's a big difference between management styles. It's, it's not necessarily based on age, millennials versus baby boomers or, you know, it's just different styles. Some managers, you know, they have that badge that they want which is I went into a city and I grew it by 100 FTEs, right? And there are some cities that the managers that walk in and say

I reduced it by 100 FTEs, but everybody's paid at top of market, and I have the best employees in the world, right? It's just a, it's just a different mindset there. Uh, but I think Doug is right. Labor gets hit pretty substantially, but I think priorities get hit even harder. I think you become a very lean, mean city, and you don't do a lot of the extras because there's no value to the shareholders in the extras unless you can prove a direct benefit. So it's not, you know ... It, it's just, it's, it's you have to ... You would have to tie everything back. So you'd have to prove that a library brings you economic development to your city, which is gonna be incredibly-

Or, or property value growth

... or property value growth, right? Which y- you're right. It's gonna be ... You know, so I mean, here's one. High-speed internet. If you have a community that doesn't have fiber to the house in today's world, the value of those homes is lower. If you have a community with fiber to the house in today's world, the value of that home is higher, right? So there's probably an incentive there for a city to do a fiber to the home project. That's gonna generate value to the shareholder, to the revenue line, whatever that may be. But you ... It's really hard to do that with other soft services. So and when people ask us what soft services are, Chad, what, what do we mean by that?

Social services, community services-

Yep

... libraries, parks. All the things that are very nice to have but tend to take the first hit when there's a sign of trouble. But I, I-

They're the s-

I mean-

They're the skin and the flesh, but not the bone.

So I have, I have come around over time.

Whoa.

Um, I still think that a lot of these services that we provide could be done in a more efficient and better way-

Wait a second. Chad is about to get squishy

... than what we do. But I do think that there's, there are arguments to be made for those amenity services. They do provide quality of life enhancements, and they make living in an area more attractive.

Which services-

Right? Now-

... specifically are we talking about here, Chad?

Well, let's just, uh, let's just imagine a very walkable, dense neighborhood where you could walk to a library. It may not be a huge central public library, right? Like a downtown library, you know, in Dallas or Austin or something, but a neighborhood library that you could walk to in five minutes or less on a safe road and stop by, uh, a deli or, like, a little neighborhood store on the way home and grab some food or, you know, just not like urban living per se, 'cause most places, especially in Texas and across America are not what you would classify as, like, high-density urban living. But there could ... I mean, there is value in having it, that community aspect, and having the ability to run into your neighbors while you're just out walking and doing things and participating in, in, you know, community. We, we have lost a lot of social capital over the past 50, 60 years, and a lot of that probably has to do with the fact that you have to drive everywhere that you go in this country, and you, you're not, like, waving to people as you drive. Like, maybe you're kind of waving them as you pass them, but, like, the ... You're not stopping and talking, right? And this is an issue that's, that's caused problems in, uh, policing. It's caused issues in just general, uh, neighborhood capital, the relationships that we have with our neighbors, right? And it's hard to put a financial quantification on that, but certainly there's an argument to be made that there is value in that kind of development. But the other thing too though is you don't necessarily have to make that as the goal in order to have a financially productive neighborhood or development. It can kinda be a byproduct and still get what you need. Um, one of the benefits of financially productive developments is that it as a corollary makes these other things that we like to have more financially viable. So I don't know. Doug, I have a question for you though, 'cause obviously there's, there are a lot of on-their-face objections to something like this, and I mean, truthfully, it may be an absolutely terrible idea. It probably is. But one objection would be that, uh, just like with the stock market, it encourages managers and executives to focus on short-term gains over long-term viability. Would that not be the case with this too? Like, how would you keep it from encouraging your city manager to focus on, "Well, I, I, I need to get the end of this fiscal year looking good, and if that means that I screw something up, uh, no, I'm gonna, I'm gonna cut my street maintenance, 'cause I'm ... That's gonna put my, uh, my balance, you know, in the black, and we're gonna be good there, and then that'll kind of boost my, my stock value for, you know, the next quarter or whatever." How do you prevent that kind of short-term thinking from pervading in cities? Because honestly that's ... We already have enough of that.

Yeah. I think it really affects your long-term projects that you wanna do in the cities if you do something like this, right? Um, I mean, you'd really have to come up with a, a sophisticated, comprehensive plan that's five, 10 years down the road to attract long-term investors. But in the short term-

But we don't like planning. We don't like hamstringing ourselves with these long-term plans that sit on shelves, right?

Right, because in, in the sh- in the short term-

I mean, uh, what, what ... When I say we, I mean us. I don't mean city, the city management community. We obviously love our plans. But in terms of their abilities to actually be actionable and, um, provide flexibility as things on the ground change, they can actually cause more harm than good depending on how you actually, you know, put them together.

Right. I mean, if you're always thinking about short-term thinking, short-term thinking, you're never gonna get anywhere long-term in a city, um, in this kind of model where you're just trying to attract investors with your bottom line. So that could be a, a big hindrance to this kind of stock exchange model for cities.

What do you think, Pat?

I mean, I just think-

How's that gonna change your mind as a city manager in terms of what you're looking at for, you know, two, three, four, five years down the road?

I, I don't think it would've changed my mind as a city manager

By the way, I, I always, I always looked at my city... It was different for me. I always looked at my city council as like a business board, not as a political board.

It's 'cause you had no property tax, Pat.

That's correct. I mean, it's, it's, it's, it's hard to have conversations with managers that are, that have to be more responsive to five residents who get upset. Um, I always spoke to those residents, I always informed them, but they never influenced my recommendations and decision-making. I, I think is, is what I would say, right? Um, I would try to influence those residents, uh, and, and bring them to my side of the equation, uh, from what's the best method to go. Um, but I was a city manager who always provided, "Hey, here's, here's the options and here's the options I, this is the option I would choose, and this is why I would choose this option." I was not a manager who laid out three options and just waited for my council to make a terrible decision. I just didn't do that.

Well, as long as you make the best option the middle one

Right. Yeah.

Then they'll, they'll pick the right one, right?

The old grad school rule, yeah. So I mean, but the, the reality is, is that, uh, there are a lot of managers out there that are just options managers. They, they want direction from their council and, and, and my point in that, this would be a great debate at UNT. Um, my point in that would be is that those council members are highly unqualified to make a lot of those decisions. They don't have that educational base, they are not in the career field, they don't know the minds and, and kind of the, the traps. And so at, you have to have somebody there who has seen it, or can at least call somebody else who's seen it and look at it. And so I think, um, there's a lot of managers that don't wanna take those steps because that's a very, that's a more dangerous approach to management because you put yourself out there. You become the target of something if it goes wrong, but that's more of a CEO model. If a CEO decides that they're gonna do something different in their logistics chain or in their sales processes and it doesn't go right and they miss earnings, they have to be held accountable for that, and, and I believe it's the same way for management in cities. Um, it, it would be better if there was functionally a process for residents to have more buy-in into an organization, rather than the pick up and move method. Which I've heard some people say, "Well, you don't have to live here. You can pick up and move next door."

Vote with your feet.

Yeah, vote with your feet. I just... That's hard. Um, it... A, a house is not a cash asset.

Well, one, one thing that this does is it, it flips the script a little bit because instead of the taxes that you pay being a burden, now you actually have ownership in the community in a real sense.

Mm-hmm.

Not just some sort of like an intangible-

Would this incentivize, would this incentivize a reduction of property tax or an increase in property taxes? I think it would incentivize a city to... Well, I mean, look, that's a really good question 'cause I think you could have value cities and you could have luxury cities, right? Like, you could have the Nordstrom's of the world, and you could have the Dollar Stores of the world. Like, I think, I think there could be different economic approaches for each individual city based on circumstances.

But don't we already have that, though?

Uh-

I mean, you move to some places, and you know you're gonna be paying a premium for the name on the town.

But you don't. That's the thing is it's, that's not necessarily the case. Like, look at the, look at the tax rate-

Well, and partly you do. Okay, so the tax rate is just one component.

Yeah.

Right? There are places that you can live where the value of the house is significantly higher because of the name on the address.

This would be such a good Dr. Kruger conversation right now. Th-that I would say, and, and look, there's no scientific study behind this comment and, and I may be totally wrong, but I would say that places that have value, that have increased significantly in value over the years also have low taxes, lower utility rates, and are generally cheaper to live in than places that have lower value homes.

So is this a, is this a he-heteroscedasticity problem? Or multicollinearity, where essentially you're looking at, uh, you're looking at an independent variable that is actually influenced by other variables that you're kind of ignoring. So if tho-those, those neighborhoods or those cities with great growth are the ones with lower taxes, lower utility bills, is that a cause and effect scenario, or are those actually independent?

I, you don't know. Some of it may be size related, right? But let's, let's look. I mean, I could throw a couple examples out there. Just look at the water, sewer, and property tax rate in Southlake, Texas, in Colleyville, Texas, in Alamo Heights, Texas. I mean, look at all these high net worth communities where people live in, you know, $600,000 plus homes, probably upwards of well over a million. And they're probably playing, paying less in taxes than somebody who may be living in a $400,000 home in Fort Worth, Texas. That's, that's the point I'm trying to make is is that if a city is run more efficiently, they actually can provide better services and charge less to each individual stakeholder.

So are you saying that Colleyville and Southlake are run more efficiently than Fort Worth?

I'm saying that, I'm not saying that technically. I, what I've... Yeah. I would-

Is there, is, uh, is there an element of-

It, it doesn't, it doesn't change my argument that cities get too big, right? I mean-

No, no, I, we, we agree on that.

Yeah.

But is there an element in, in when with that comparison, you're talking a couple cities of what?

100,000. A couple of them are 100,000.

Seven there.

And then one of them's almost a-

Southlake's 100,000

... a million. Southlake's at least 60,000 or 70,000, isn't it? We're looking it up, folks.

Let's, let's go to the Google.

Go to Google. Ba ba da da ba ba ba. So but the, the reality is, is there-

30, it's 32,000.

32,000. Okay.

32,000. You're talking, uh, one-fifth the size or less of, of a Fort Worth, right?

Mm-hmm.

Geographical. I mean, Fort Worth is a big city-

Huge city

... geographically.

Yeah. One of the biggest in the nation.

It's diverse, uh, in terms of the population and the landscape, the si- like, wh-where things are laid out. So like, that may not be the most fair comparison, but I don't disagree that there are, there are... These things sort of play together. Like, they're all interrelatedBut I, I, I don't know. I just wonder if-

Say there's al- there's already some, like, market-driven dynamics there, is basically what I'm trying to say.

Yeah. Yeah, I, I, I agree. I think there are. Um, you look at, uh ... So i- in a Colleyville or Southlake, right, you're paying, you're paying for where you're living, the environment that it's in. You know, Colleyville in particular is not going to let certain types of development there. They've been kind of slow to, to develop.

Mm-hmm.

Southlake doesn't want Walmarts, right? Like, they're gonna have a specific type of development that they allow. So you kind of, you kind of ... But again, this gets into the whole NIMBY thing, right? Like, you're buying in, and you kind of want it to stay pretty much what it is when you bought. If a Southlake, and these are just examples, right? It could be Highland Park, it could be anything. But, like, if a Southlake opened up shares on a market, and then all of a sudden was trying to focus on providing value to those shareholders from a growth standpoint, whether it's actual development or just revenue growth, I mean, would that change how Southlake builds or Colleyville?

I mean, Southlake's an example of strong standards brings in strong development, right? Uh, you know, I don't, I don't know if I would change that development pattern they have. It's not the easiest place in the world to develop. It's not the hardest place-

It's so wild 'cause-

... in the world to develop

... but you gotta think, too, did, does Southlake have that market because they grew a specific type of demographic of population, where they got to a tipping point where now they could demand a certain type of development style?

So-

I mean, you can't just start from scratch-

Mm

... and demand that.

I have a personal relationship with a couple developers that started their career in Southlake, and they started the development of mobile home parks in Southlake, right? Manufactured housing parks. And so, um, I think Southlake has generally changed because of the real estate 101, location, location, location. It's in the middle of everything, right? And so it generally drives. I think there was some political leadership in Southlake that figured out really fast that if, if they become more stringent, that they can encourage development and be patient for what they want. I encourage all cities to look at that. Um, it's probably the number one conversation I have with city council members, development directors, CMs in cities that are growing, is that you don't have to just accept all growth. You have to evaluate all the growth that you're gonna get. And a lot of times more stringent standards allows you to grow a very specific way, but it provides the glide path for developers to develop. They get more nervous-

Oh

... when they don't have standards than they are when they do.

So there, I think you need to stratify when you talk about the standards. 'Cause when you go to Southlake, there's a very specific building style, right? Every- everything has a similar aesthetic.

Correct.

All this ne- new stuff has an aesthetic. But you can build a traditional American sort of suburban retail power center that's not super financially productive, but looks really nice because you required a certain facade, and, you know, uh, trees and things like that. But Southlake-

They were-

... also has some higher density stuff-

Correct

... that i- is much more productive than what you would see in a traditional suburban development.

It-

So it's not just standards on what it looks like, it's also how it's built.

Yeah, South ... To be clear, Southlake doesn't have a lot of traditional multifamily, right? But Southlake does have, uh, what I would consider a level of density that, um, that created revenue generation, uh, specifically to generate growth in that area that was positive, not negative. I think Southlake looked at, we have these core areas, we have these corridor plans, we have town centers planned, we have all these other things that are there. Um, and if we say, "Hey, this is all we're going to allow from a development standpoint, and we're gonna be stringent," then that's what de- will develop. They were just patient, I mean, at the end of the day. And they, they force it to be done on their terms. And I don't think there's anything wrong with that. A lot of times-

No, but it-

Sorry. Go ahead.

It does raise questions about whether this model would be functional, right?

It, it, it-

Because are you buying, are you buying shares in a Southlake, Doug, knowing that they have a vision for what they want, but I mean, it could take 20, 30 years for it to actually pay off? Like, is, does that model work if you're trying to actually operate on some kind of exchange like what we're talking about?

Depends what kind of investor you are, right? Just like anything. I, I mean, I think there's money out there for that, though. I mean, i, i- is, is Coach purse gonna change who Coach purse is? It doesn't change the fact that you have to buy a Coach purse every year, Chad, right? Or a Louis Vuitton.

Uh, no. Louis, Louis Vuitton, yeah.

Okay. But, uh, you, you get what I'm saying. Like, it doesn't, it, it doesn't change that.

Also, it's, it's not me buying the Louis Vuitton.

It's a gift for your wife every year-

Just for the record

... right around the same period of time, right? So-

Yeah, I, I don't wear one.

Yes. But, but the reality is-

Look

... although we did buy, we did buy Doug-

Not that there's anything wrong with that. I just don't-

... like a more, like, suitable man bag, right? His, he has a-

It's called a messenger bag

... he's got a new-

That's what you call them

... he's got a new satchel.

Yeah.

So Doug showed up to GFOAT, let's tell this last story- ... before we wrap all this up. So we got a few text messages from, from some friends, because Doug showed up to GFOAT in a very non-ZackTax-looking bag. Um-

There's nothing wrong with it, by the way. There's nothing wrong with the bag.

It was, it was like Velcro and, and, and, and, like-

It works. It's just old and kind of ugly.

What, what was it?

It's-

Mm.

It's an old laptop bag that we bought him, like, two years ago.

Do you still have it, Doug?

Yes.

You gotta send us a picture so we can put it in the show notes of how ugly this bag is.

I'll have to.

So show it to me, show it to me right now on the video so I can see it. All right, folks, we're gonna put this in the show notes. It's like an o- it's like an HP bag.

I don't even know.

Oh, it was like, it's like an Amazon Prime bag that we probably bought for, like, $19 at some point.

Some, some bag, yeah.

He's gotten his 10 years worth of work out of that thing.

He's got 10 years out of it, so so he now, um, he has now been gifted by the company a nice, uh, leather satchel bag so he won't embarrass us at conferences. That's actually a very nice bag. Chad clearly picked that out.

It is a very nice bag.

Yeah. So, um, but hey, we gotta wrap up, Chad.

Yeah.

It's been real. It's been fun. It's been real fun.

I always love talking about these kind of crazy ideas, just kind of see where they go.

This was highly nerdy.

'Cause usually they're, usually they're terrible ideas, and this, again, this probably is one of the worst ideas we could ever come up with. But just as a thought experiment, it's kind of interesting to see where the logic would take you if that was gonna happen, so. Doug, I appreciate the insight on Gasby and, uh, all that fun stuff. Thanks for coming on.

Thanks for having me again, guys. Looking forward to another appearance in the future.

Thanks, Douglas.

Yeah, now that you have a, a better mic and a better bag, we can- ... definitely make that happen.

Oh.

All right, y'all.

We'll see you.

Take care.

Okay, bye.