You Say You Want a Revolution

State and local leaders are realizing how reliant they are on other sectors to meet public goals and expectations. This column discusses the implications of that reality for public managers.
by | February 7, 2007

In a previous column, I discussed the "silent revolution" that is transforming the public sector: increasingly, all levels of government are relying on a wide and diverse range of third parties to develop, design and implement public programs. The federal government is using more indirect tools, such as contracts, grants, loans and tax expenditures, to achieve national goals through states, localities, nonprofits and private companies. State and local leaders are also realizing how reliant they are on other sectors to meet public goals and expectations, whether it is private and nonprofit contractors for child care or private shipping companies for port security.

In this column, I'll discuss the implications of these trends for public managers. As a greater range of actors is invited and empowered to share in the process of determining program goals and delivery, results are far less certain than might be obtained through traditional hierarchies. The disconnects between smart policy proposals hatched inside government and the results achieved years later are greater, particularly if we fail to understand this more demanding and complex public management environment.

The greater complexity faced by public administrators is depicted in the following chart developed by the Government Accountability Office.

The traditional world of direct government provision was able to focus on the right dimension of the chart since the management environment of the government agency was principally responsible for the results of government programs. Whether it was the Forest Service or the Veterans Administration, the government agency itself controlled the funding, the rules and the employees responsible for achieving the agency's goals.

However, in the third-party governance world, the management of agencies is just one of several important factors influencing results. As the chart indicates, achieving goals in third-party environments requires focusing on the selection and design of the tool used to implement the program as well as on the nature of the third-party actors participating in the program. For programs such as Medicaid and homeland security, the kinds of tools deployed, e.g., grants and regulations, and the incentives and capacities of third-party actors, e.g., state and local governments, have a greater bearing on results than the internal workings of federal agencies themselves. Even agencies commonly thought of as relying on traditional hierarchies (i.e., the Internal Revenue Service) have become increasingly dependent on third parties to achieve their goals. The IRS, for instance, recently contracted out the collection of a portion of delinquent tax debt and fundamentally depends on other sectors, such as employers and banks, to accurately report on wages, interest and other items of taxpayer income or deductions.

Moreover, as tools used by governments at all levels have become more indirect, their design and management becomes more complex. Tax expenditures, for instance, are not managed in the traditional sense except in the rather infrequent cases when the IRS examines the claim in an audit. Instead of transactional reviews, the most important leverage that public managers have in achieving public goals is through the control of relatively obscure design features of these instruments. For instance, while the Hope and Lifelong Learning Tax Credits were advertised as enabling greater college participation by lower-income families, the credit does not even reach the families with the greatest need because most lower-income families pay no income tax--the credit would have to be made "refundable" by the issuance of a check from IRS for these families to gain the benefit. No federal management outreach initiative can overcome the bias set in motion by this little-understood design feature.

As if this weren't daunting enough, public managers also must work to understand the incentives and capacities of the increasingly diverse networks of third-party actors they rely upon. Banks, insurance companies and private developers are among the latter-day "street-level" bureaucrats responsible for the delivery of programs as varied as guaranteed student loans, flood insurance and low-income housing. Thus, for instance, private insurance companies, working under the aegis of the federal flood insurance program, have become key players responsible for influencing the shape of reconstruction in the wake of Hurricane Katrina, to the surprise and disgruntlement of many displaced residents.

The experiences of some jurisdictions with public-private partnerships illustrates the challenges involved in building constructive partnerships between public infrastructure agencies and private businesses with differing goals, incentives and interests. While ideally such partnerships can offer new support and financing for cash-starved governments, in practice these arrangements can saddle taxpayers with high risk and costly obligations for years to come. The financial savings estimates that frequently lure governments into arrangements with private firms were often overstated, while the long-term financial risks to governments were understated.

In spite of these challenges, the rewards are significant when managers and policymakers succeed in effectively influencing networks. An example is a little-noticed but critical "victory" achieved by federal education officials in reducing the level of student loan delinquencies from over 20 percent in the mid-1990s to less than 8 percent in recent years. High default rates stemmed from the incentives provided for network partners (banks and trade schools); a 100 percent federal guarantee caused banks to be lax in their review and oversight of borrowers, while the loans created a new market for opportunistic proprietary trade schools, which often failed to provide their students with the education necessary to find viable jobs to pay back the loans. Perceptive federal policymakers took action in the 1990s to better align the incentives of network partners. Banks were given a financial stake by being held responsible for a portion of defaulted loans; proprietary trade schools with high default rates were barred from the program; and new incentives, such as wage garnishing and tax refund offsets, were applied to delinquent borrowers.

Understanding these tools and how they interact with various implementation settings has become the emerging and elusive skill set that public policy analysts and managers will need to broker intelligent interventions to address complex problems in the years to come. As the response to Hurricane Katrina illustrates, restoring public confidence in government requires us to master governance. Muddling through simply won't do.

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