Chapter 7: Enterprising Government: Earning Rather Than Spending

Government is under constant pressure to keep local taxes down. In this chapter, Osborne and Gaebler describe how some state and local governments have used innovative methods to actually earn money that would otherwise need to be raised from taxes. These enterprising governments have learned to recognize their assets and generate revenue from them. They have done so in four main ways:

1. Making use of the profit motive. Government rarely thinks in terms of raising money. But government often owns land and provides other services that can be turned into profit-making ventures. Sale of land for development or of public services that only benefit some individuals, such as golf courses or marinas, are examples of ways government can raise money.
2. Charging user fees. User fees are already fairly common, for services such as garbage collection and parking. However, in some cases public services that benefit affluent individuals, such as golf courses and tennis courts, are subsidized by all taxpayers. A simple and fair alternative is to charge user fees to those who benefit from a service. User fees are appropriate as long as the services provided are private goods, not collective goods, which benefit society at large, such as police services. In addition, special arrangements may be necessary to ensure lower-income people have access to services.
3. Making investments based on expected returns. Government traditionally focuses on minimizing costs, but enterprising governments pay attention not only to cost but also to potential returns on expenditures. This requires thinking over a longer term, which can be politically difficult. But several examples illustrate how initial spending by governmentsuch as to protect land under intense development pressure that will later require massive government investmentcan pay off with savings later.
4. Turning managers into entrepreneurs. There are several techniques for allowing managers to operate in a more entrepreneurial fashion. By reforming traditional budget systems to allow departments to keep the funds they save or earn, government provides managers with incentives to save and make money. Introducing a loan pool against which managers could borrow automatically, up to a certain limit, would give managers access to capital that they could use for innovational purposes.

Governments can, and often do, create enterprise funds to operate certain services. In contrast to agencies funded from general revenues, enterprise funds are self-supporting. While they are not appropriate for all services, they can be effective for those services that are expected to support themselves either fully or partially, such as water and sewer services. Because any funds they earn or save are returned to the fund, enterprise fund managers are encouraged to spend less money and make more money than other managers.

Amazingly, public managers are often unaware of the true costs of the services they provide. Budget figures often exclude indirect costs such as overhead, capital costs, and employee benefits. If they don't know how much they are spending, they cannot pursue profits. Determining their true costs helps entrepreneurial governments discover what services are being subsidized and make decisions about how to turn costs into earnings.