Could New York’s state government realize significant savings by encouraging private-sector firms to challenge entrenched public-sector monopolies? According to a 2003 report coauthored by the Manhattan Institute and the Reason Foundation, New York was spending over $3 billion a year in state funds on highway maintenance, bus transit, mental health facilities, motor vehicles record-keeping, human-resources management, prisons, and welfare and Medicaid administration. “In just these areas, efficiency gains at the low end of the 5 to 50 percent range (gains typically attributed to competitive sourcing) could translate into annual savings totaling hundreds of millions of dollars,” the report noted. “The savings potential is even larger when viewed in the context of the more than $100 billion in total annual operating expenses by New York’s state and local governments.”

Competitive contracting wouldn’t establish an automatic preference for private-sector providers. Instead, it would allow government managers to determine which provider—in-house public employees or private firms—could offer the best combination of price and value when given the opportunity to compete for service contracts.

How to identify the best opportunities? Stephen Goldsmith, former mayor of Indianapolis and one of the most accomplished practitioners of competitive sourcing in American municipal government, memorably described his approach as the Yellow Pages test. “If the phone book lists three companies that provide a certain service, the [government] should not be in that business, at least not exclusively,” he said. “The best candidates for [outsourcing] are those for which a bustling competitive market already exists.”

In practice, of course, it’s not that simple. Once opportunities for competition have been identified, there must be rules for conducting competitions and for managing and measuring results. Based on reforms successfully implemented by the federal government and the Commonwealth of Virginia, the 2003 report suggested that the governor establish a new oversight council, including representatives of the state legislature and the comptroller’s office, which would make competitive contracting the standard way of doing business for every level of government in the state. The council would conduct an annual inventory of all services and activities provided by New York State agencies and public authorities, as well as common activities of local governments. Then it would develop accounting models for determining the fully allocated and unit costs of these activities, since productive competition among suppliers depends on accurate and rigorous cost comparisons. Finally, it would identify areas for competitive outsourcing and manage the resulting competitions between in-house workers and private firms.

Another essential step would be to amend the state’s Taylor Law, which regulates public-sector labor relations, to ensure that the ultimate decisions on subcontracting and potential reassignment of work currently done by public employees would rest with elected officials—who are, after all, the ones responsible for managing costs and delivering services—instead of being negotiated at the bargaining table.

New York State has been moving in exactly the wrong direction on competitive contracting. Under a deal between former governor Eliot Spitzer and state employee unions, the state’s Department of Transportation has recently added hundreds of engineers to its ranks to replace private consultants on highway projects. And the unions are pushing Governor David Paterson to reduce or eliminate remaining private-sector contracts for other services. But with enormous—and growing—budget deficits, there has never been a better time to pursue the idea.