‘Yellow Pages Test’ Would Ease State, Local Budget Pains

Innovative governments applying competition to service delivery, public assets

President Obama a few months ago blamed the nation’s economic weakness on spending cuts by state and local officials “who are not getting the kind of help that they have in the past from the federal government and who don’t have the same kind of flexibility of the federal government in dealing with fewer revenues coming in.”

There’s been no significant change in the situation since then, which brings up some important questions, such as why are state and local governments weak, and why aren’t they getting help from the federal government?

Unnecessary Programs

First and foremost, the federal government is in no position to help. It has run four consecutive budget deficits topping $1 trillion. When the president made his remarks last summer, the national debt was $15.7 trillion. It now tops $16.3 trillion.

And it already did “help.” Much of the $787 billion “stimulus” actually went to states and localities to prop up their budgets.

Like their federal counterpart, states and localities are paying the price of years of profligate spending.

They have failed to apply the “Yellow Pages Test.” That is a process of getting government out of activities that are commercial in nature and otherwise available from private enterprise-businesses listed in the Yellow Pages. When governments conduct these activities in-house, they are taking from the private sector and making government unnecessarily bigger.

The federal payroll is growing, not shrinking, in part due to an Obama administration initiative called “insourcing”-canceling contracts with private companies, bringing work back into the government, and converting private enterprise workers into government employees.

Owning Enterprises

An excess of government workers is not uniquely a federal problem. Years of over-employment by states and localities have left these governments with an unfunded pension liability of up to $3 trillion, according to the Congressional Budget Office. And like Uncle Sam, they are in dire straits because they are engaged in activities they had no “business” getting into in the first place.

Here are just a few examples:

  • Many states and local governments own and operate golf courses, often at a loss.
  • Westchester County, N.Y., owns Playland, an amusement park known to many as the closing scene of the Tom Hanks film Big.
  • Harrisburg, Pa., went bankrupt in large part due to a failed venture into the waste incineration business.
  • Seventeen states run either retail or wholesale liquor enterprises, or both. Last summer Washington State became the first state since the end of Prohibition to fully divest itself from both markets through privatization.
  • Trenton, N.J., owns a Marriott hotel near the state capitol building. It has a virtual monopoly, being the only hotel in the downtown area, yet it still fails to turn a profit.
  • California owns horse race tracks, as did New Jersey until it recently began privatizing its facilities.
  • A recent fad is municipal broadband, city or state-owned Internet providers.
  • Phoenix suburb Glendale, Az. owns the arena that is home to the NHL Coyotes. To try to salvage its 10-year old “investment” in the arena for the bankrupt hockey team, the city approved the equivalent of a $325 million bailout, overpaying a prospective new owner to operate the arena for the next 20 years to avoid the team leaving for another city. Even worse, the city paid $50 million in arena subsidies the last two years while laying off dozens of workers to close a $35 million deficit.

Similar examples abound. Government employees are making maps, designing roads, managing web sites, writing software, serving meals, mowing lawns, painting walls, washing clothes, and doing thousands of other tasks that have little to do with governing. The government is the nation’s largest banker, insurer, homeowner, landlord, utility provider, and bus, transit, and passenger train operator.

‘The Model’: Privatization

Contrast this with Sandy Springs, Ga., an Atlanta suburb of 94,000 residents with a public payroll of seven employees. The New York Times noted, “With public employee unions under attack in states like Wisconsin, and with cities across the country looking to trim budgets, behold a town built almost entirely on a series of public-private partnerships-a system that leaders around here refer to, simply, as ‘the model.’ Cities have dabbled for years with privatization, but few have taken the idea as far as Sandy Springs. Since the day it incorporated, Dec. 1, 2005, it has handed off to private enterprise just about every service that can be evaluated through metrics and inked into a contract.”

Sandy Springs proves many government functions can be handled by the private sector, a lesson policymakers at all levels should learn. Furthermore, it should concern every American taxpayer that all states, counties, and cities receive federal funds, so their failure to set priorities is rewarded, indeed subsidized, by the Feds.

Government at every level should inventory its real property assets and sell those that are luxuries rather than necessities. This will not only generate revenue but also eliminate future operating expenditures.

All governments should also carry out a commercial activities inventory and apply the Yellow Pages Test, or the Sandy Springs Test, to identify non-core activities that are commercial in nature and thus could be subject to private sector competition to lower costs.

John Palatiello ( is president of the Business Coalition for Fair Competition. Leonard Gilroy ( is director of government reform at Reason Foundation. This article was originally published by The Heartland Foundation on December 31. 2012.