An interesting idea for sure. Local coins could easily be done through ERC20 tokens although we'd have to be careful that they are distributed fairly or else we run into the current ICO scam situation but with local coins.

How do local coins stay decentralized if they're working with the local government? Or is it the community that creates the token? You should check out district0x and some of the suggested districts as two of them are similar to the local coin idea.