Artificial Intelligence (AI) and Municipal Finance: Challenges, Potential Perils and Opportunities
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Stephen R. Rolandi
October 30, 2023
“AI is a tool. The choice about how it gets deployed is ours. AI is neither good nor evil. It’s a technology for us to use.” – Dr. Oren Etzioni, educator, entrepreneur and Founding CEO, Allen Institute for Artificial Intelligence
A topic very much in the news these days is the subject of Artificial Intelligence, or more commonly known by its initials “AI.” Throughout world history, there have been only a small number of breakthroughs that significantly altered people’s lives, such as the Industrial Revolution, invention of gunpowder, the printing press, computers and atomic energy.
Today, AI is transforming society in fundamental and profound ways, and clearly has the potential to surpass the impact of these prior historic technological changes.
We can define AI as technology utilizing software and hardware to perform tasks that are typically associated with human intelligence, such as learning, problem solving, planning and decision-making. As an academic discipline, AI was founded in 1956, and its development floundered for many years due to a lack of external research and development funding, as well as other national priorities.
It should be noted that AI is very much a part of machine learning, which is the study of computer programs that can improve performance on given tasks automatically.
In the 1990s a breakthrough occurred, when researchers realized that a new approach was required that would enable machines to learn on their own. After 2012, R&D funding increased significantly for AI research. As a discipline, AI draws on many disciplines, including: statistics, psychology, economics, linguistics, neuroscience, philosophy and many others.
Currently, AI has many applications and has made significant impacts upon education, law, warfare, national security, transportation, etc. AI has even transformed the way we interact with information technology (IT).
AI has also now had profound impacts in the world of finance, specifically local government finance, which includes revenues, expenditures (spending), debt and assets to pay for many services citizens have come to rely on in local communities, which currently totals approximately 90,000 governmental units (counties, cities, towns, villages, school and special use districts) across the United States.
One key component of local government finance is the use of municipal bonds to finance capital improvements and other infrastructure needs. The municipal bond market in the United States is huge, currently in the vicinity of $400 billion (please refer to my April 28, 2023 article appearing in ASPA’s PA Times Online).
AI, as has been reported in trade publications such as The Bond Buyer, has finally arrived in the municipal bond industry. Historically, the municipal bond market has been averse to change, but the municipal market is slowly beginning to incorporate AI into workflow systems, which are tools that succinctly summarize financial and legal documents used for official statements provided to the private sector, regulatory bodies, rating agencies and private investors. This is not surprising as the municipal bond market utilizes large amounts of information as its stock in trade.
What are some of the challenges and issues that AI (and its partner, Machine Learning) poses for the municipal bond marked, and by extension, state and local government finance? I believe there are several:
- Can AI/ML transform bond trading from an art to a science? AI/ML can be used to more accurately explain and predict municipal bond pricing and risk. If so, can AI/ML be utilized to set fairer bids, and offer lower prices for municipal bonds? Could AI/ML be used to help CFO officers accomplish more with less staffing resources? AI/ML might be beneficial here;
- Would AI/ML make the financial information contained in bond statements more easily understandable by prospective buyers, investors and the general public? Some industry practitioners already using AI/ML believe that this technology would be able to achieve this objective, and thus serve the public (taxpayers) better;
- Finally, there is a public policy aspect to AI/ML and the municipal bond market. Given that municipal bonds are the backbone of state and local government finance, can AI/ML help public officials improve democratic governance? The current generation of text based bond models are not yet able to generate text (language) in a way that is useful to governance, not to mention legal and regulatory requirements of public security issues.
These are just some of the issues that state and local government, as well as the municipal bond industry, will have to grapple with in the next few years. There are also national implications as well which will require Congress to develop nimble solutions as well. Stay tuned.
Postscript:
There is already a great deal of literature (and much more to come) about AI/ML. I would recommend the following books if you would like to begin learning more about AI:
- Mustafa Suleyman, “The Coming Wave: Technology, Power and the Twenty-first Century’s Greatest Dilemma,” Crown Publishers (2023);
- Brian Clark, “Explaining It to Mom: CHATGPT and the AI Revolution,”
Independent Publisher (2023);
- Henry A. Kissinger; Eric Schnidt; and Daniel Huttenlocher, ”The Age of AI and Our Human Future,” Little Brown (2021)
Happy reading! We all need to learn more and keep current about what AI/ML can and cannot do in our rapidly changing society and world.
Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and was Senior National Council Representative. Currently an advisor to ASPA’s New York Metropolitan Chapter, Steve has also served on many other association boards in New York and Washington, DC. You can reach him at: [email protected] or [email protected] or at 914.441.3399 or 212.237.8000.
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Artificial Intelligence (AI) and Municipal Finance: Challenges, Potential Perils and Opportunities
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Stephen R. Rolandi
October 30, 2023
“AI is a tool. The choice about how it gets deployed is ours. AI is neither good nor evil. It’s a technology for us to use.” – Dr. Oren Etzioni, educator, entrepreneur and Founding CEO, Allen Institute for Artificial Intelligence
A topic very much in the news these days is the subject of Artificial Intelligence, or more commonly known by its initials “AI.” Throughout world history, there have been only a small number of breakthroughs that significantly altered people’s lives, such as the Industrial Revolution, invention of gunpowder, the printing press, computers and atomic energy.
Today, AI is transforming society in fundamental and profound ways, and clearly has the potential to surpass the impact of these prior historic technological changes.
We can define AI as technology utilizing software and hardware to perform tasks that are typically associated with human intelligence, such as learning, problem solving, planning and decision-making. As an academic discipline, AI was founded in 1956, and its development floundered for many years due to a lack of external research and development funding, as well as other national priorities.
It should be noted that AI is very much a part of machine learning, which is the study of computer programs that can improve performance on given tasks automatically.
In the 1990s a breakthrough occurred, when researchers realized that a new approach was required that would enable machines to learn on their own. After 2012, R&D funding increased significantly for AI research. As a discipline, AI draws on many disciplines, including: statistics, psychology, economics, linguistics, neuroscience, philosophy and many others.
Currently, AI has many applications and has made significant impacts upon education, law, warfare, national security, transportation, etc. AI has even transformed the way we interact with information technology (IT).
AI has also now had profound impacts in the world of finance, specifically local government finance, which includes revenues, expenditures (spending), debt and assets to pay for many services citizens have come to rely on in local communities, which currently totals approximately 90,000 governmental units (counties, cities, towns, villages, school and special use districts) across the United States.
One key component of local government finance is the use of municipal bonds to finance capital improvements and other infrastructure needs. The municipal bond market in the United States is huge, currently in the vicinity of $400 billion (please refer to my April 28, 2023 article appearing in ASPA’s PA Times Online).
AI, as has been reported in trade publications such as The Bond Buyer, has finally arrived in the municipal bond industry. Historically, the municipal bond market has been averse to change, but the municipal market is slowly beginning to incorporate AI into workflow systems, which are tools that succinctly summarize financial and legal documents used for official statements provided to the private sector, regulatory bodies, rating agencies and private investors. This is not surprising as the municipal bond market utilizes large amounts of information as its stock in trade.
What are some of the challenges and issues that AI (and its partner, Machine Learning) poses for the municipal bond marked, and by extension, state and local government finance? I believe there are several:
These are just some of the issues that state and local government, as well as the municipal bond industry, will have to grapple with in the next few years. There are also national implications as well which will require Congress to develop nimble solutions as well. Stay tuned.
Postscript:
There is already a great deal of literature (and much more to come) about AI/ML. I would recommend the following books if you would like to begin learning more about AI:
Independent Publisher (2023);
Happy reading! We all need to learn more and keep current about what AI/ML can and cannot do in our rapidly changing society and world.
Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and was Senior National Council Representative. Currently an advisor to ASPA’s New York Metropolitan Chapter, Steve has also served on many other association boards in New York and Washington, DC. You can reach him at: [email protected] or [email protected] or at 914.441.3399 or 212.237.8000.
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