Mosman Municipal Council

I don't know if you're only looking for Federal examples, but one best practice example of Web 2.0 use at a local government level we noticed a few months ago is the Mosman Municipal Council.

You can see our full post about it here: http://creativecommons.org.au/node/255 and a case study here: http://wiki.creativecommons.org/Case_Studies/Mosman_Municipal_Council.

But in summary, they've published a community engagement strategy which makes mention of just about every Web 2.0 trick in the book: social networking, blogs, wikis, crowd-sourcing, Creative Commons licensing, even open formats and API. It discusses the importance of these measures in promoting transparency and accountability, and prioritises training Council staff and members to make use of these tools. The strategy has already started being implemented through various initiatives (particularly through the Mosman Library: http://www.mosman.nsw.gov.au/library).

And best of all, the strategy itself is under a Creative Commons licence, allowing other councils to make use of it themselves.

We weren't able to track down the author of the strategy, but they definitely deserve kudos.