From my perspective, one reason for upgrading is that it puts the referee into a group that, at a minimum, will get an annual observation that should encourage him/her to improve their performance. If a referee does not upgrade, they theoretically could referee for years without getting any objective observations on their performance (notwithstanding the constant "help" we all get from the touchline). If they do not get this and do not try to improve, they could develop a number of bad habits that will be difficult to break once and if they are pointed out to them. Also referees who upgrade tend to be assigned to work with better referees which will also help improve their performance. It also requires the referee to meet minimum physical requirements that should be maintained.
Don Walthall, State Emeritus Referee and State Assessor.

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