(FORTUNE Magazine) – THIS SUMMER will be remembered as the season the woes of local government came crashing into our schools, libraries, and living rooms. Unprepared for recession and undone by their own past extravagances, state legislatures and city councils have burdened us with one of the weightiest packages of tax increases and spending cuts ever. Already beset by a national government that cannot balance its budget, Americans must now contend with local democracies that, if not exactly broke, are broken. The shards are everywhere: fired teachers in Los Angeles, stiffer tuition fees in Minnesota, truncated welfare benefits in California, and 5,000 pink- slipped employees in New York City. State Budget & Tax News, a newsletter, estimates that state taxes alone will rise as much as $20 billion this year, probably the steepest increase, adjusted for inflation, since the Depression. The National League of Cities reports that 85% of all U.S. municipalities have raised fees and taxes -- or imposed new ones -- in the past 12 months. These will amount to another $10 billion annually, forecasts University of Michigan professor Edward Gramlich, who is conducting a study of state and local finances. Even with all that new cash, 61% of city governments claim they won't have enough money in the kitty to pay their bills this year. Since cities, like states, are generally barred from running deficits, get set for more taxing and slashing before January. No wonder citizens are fed up. In New York City, the tragicomic attempts by politicians to close a $3 billion budget deficit prompted an irate real estate developer to place a front-page ad in the Times: ''Karl Marx government didn't work in Moscow. Marx Brothers government doesn't work in New York.'' But state and local governments can be made to work. There are alternatives to the bulimic spend-and-trim cycles that have plagued them for decades. Look behind the headlines about fiscal crises and rising taxes, and you'll find a growing number of officials quietly embracing concepts that have transformed American industry over the past decade -- quality, teamwork, outsourcing, and, yes, customer service. This new better-management movement transcends geography and ideology, showing up in cities as liberal as Madison, Wisconsin, and as conservative as Phoenix. Even privatization, long a nostrum limited to those on the right, is picking up adherents across the ideological spectrum. The accounting and consulting firm Deloitte & Touche estimates that more than half of all states and cities have contracted out at least one previously public service. Says Arkansas Governor Bill Clinton, an ardent student of private-sector quality techniques: ''We have to manage our way out of our problems. It is imperative that we learn how to do more with less.'' UNCLE SAM, already up to his stovepipe hat in debt, can't be counted on to bail out local government. Though federal grants to states, cities, counties, and other jurisdictions rose from $77 billion in 1978 to $131 billion in 1990, Washington's share of their combined budgets shrank from 26.5% to 17.9%. Complains New York City comptroller Elizabeth Holtzman: ''The federal government has pulled the rug out from under states and cities.'' Yet Congress continues to pile on new costs by passing laws that, while laudable in their intent -- cleaner air, safer workplaces, healthier children -- are niggardly in their funding. In 1990 alone, legislators approved bills that will soak the states for some $15 billion over the next five years. None of this bothered states and cities much during the 1980s. Robust economic growth boosted revenues from sales, income, and property taxes, allowing governments to spend at a devil-may-care pace and to ignore the ever- rising costs of things like maintaining aging roads and bridges. In high- tax Minnesota, for example, state expenditures grew 57% faster than the rate of inflation. During the decade, states added 600,000 employees to their payrolls -- a 20% increase, while the U.S. population grew by only 9%. When recession hit, it packed a double whammy, crimping expected revenues and driving up demand for programs like unemployment compensation, welfare, and Medicaid. Big cities in the Northeast have been especially hurt. Places like New York City and Philadelphia, whose tax bases have been shrinking for years, must contend with a contagion of daunting social problems -- crack, teen gangs, AIDS, and homelessness. Says New York University business professor Robert Lamb: ''Cities are in a fiscal nutcracker. They are carrying an ever greater burden with ever fewer resources.'' So far no states or cities have spectacularly transformed themselves from fiscal panhandlers to fiscal paragons. But the number of small miracles is growing. Consider Madison (pop. 191,262). Wisconsin's capital and home to its state university remains best known for its radical, Vietnam-era politics. In the early 1970s, a city official even proposed renaming a downtown street Ho Chi Minh Trail. These days Madison is in the thrall of an entirely different sort of revolutionary -- W. Edwards Deming, the nonagenarian guru of statistical process control and worker empowerment. Long lionized in Japan but ignored in his own country, Deming visited Madison in 1983, about the time his precepts were finally catching on at Ford and other U.S. companies. One of Deming's seminars so impressed then-mayor Joe Sensenbrenner that he resolved to bring quality management to city government. Eight years later the assault on Madison's entrenched bureaucracy is still far from complete, but Madison's QP campaign (for quality and productivity) is proving that public service need not be an oxymoron. Michael Lewandowski, a broad-shouldered man with a thick moustache and a hearty laugh, was shoveling muck in Madison's energy resource recovery plant when he signed on with a QP team two years ago. The plant converts solid waste into a fuel suitable for generating electricity. The mission of the team, which consisted of three workers and three managers, was to discover why it was taking garbage truck drivers up to 1 1/2 hours to enter the plant, dump their loads, complete their paperwork, and get back out again. The solution seemed obvious: Expand the plant's tipping platform (at a cost of several million dollars) to allow more than one truck at a time to empty its contents. But after attending eight full-day sessions on the mechanics of quality -- including group dynamics, consensus decision-making, and basic statistics -- Lewandowski and his team wanted to base their decision on hard data, as Deming insists, not hunches. They spent four weeks logging drivers' activities. Their conclusion: Bottlenecks could be reduced if the plant cut down on inspections and paperwork and if half the trucks started work an hour earlier. These recommendations cut the average waiting time to 15 minutes. The city now picks up trash with 23 trucks, down from 26, and taxpayers didn't have to buy a costly tipping platform. DON'T ASSUME that Madison's cynical, unionized work force instantly embraced the cult of quality. Smart alecks initially referred to colleagues on QP teams as ''Queer People.'' But Deming's principles have since become so widely accepted that some union leaders want to win a commitment from management to get them written into their next collective bargaining agreement. Says Lewandowski, now out of the muck and a coordinator of street maintenance: ''I like the problem solving, the feeling like you're a person. It improves morale, it improves productivity, it cuts down on stress.'' And it often saves money. Madison buzzes with quality projects, not just among city workers but among state and university employees as well. All share a commitment to treat citizens as valued customers rather than anonymous taxpayers. At the Division of Motor Vehicles' 127 service centers, 85% of all drivers get a new license in 15 minutes or less -- a feat accomplished by opening more of the centers during evening hours and redeploying personnel so they spend less time processing papers and more time dealing directly with customers. At the university, students can register for classes by phone, instead of standing for hours in a pavilion normally used to exhibit livestock.

The QP campaign has even survived a change in administrations. In 1989 Joe Sensenbrenner, running for a fourth two-year term as mayor, was defeated by Paul Soglin, a former student radical who had been Madison's mayor in the heady days of the early 1970s. During the campaign, Soglin charged that QP had produced too much talk and too few results. Since taking office, however, he has become a supporter: ''One of the few options we've got, given that there are more and more demands on fewer and fewer public dollars, is to try to do what we do better.'' Since companies pay for a big chunk of state and city budgets -- which totaled $765 billion last year -- business has a sizable stake in helping local government become more efficient. But the advice it has traditionally proffered -- a solemn report issued by a blue-ribbon panel of executives -- rarely makes much headway. Says Dana Badgerow, commissioner of Minnesota's Department of Administration and a former Honeywell executive: ''No one wants a bunch of private-sector weenies coming in and telling government how to do its business without any understanding of political constraints, budgetary pressures, or federal mandates.'' But in Arkansas, business has made a difference by playing a different role. Bill Clinton, governor of this relatively poor Southern state for 11 of the past 13 years, became enamored of quality-based management techniques in 1986. He had seen how they had helped revitalize Arkansas Eastman, part of Eastman Kodak. Clinton first set up a quality information and training office in the state's industrial development commission -- chiefly to proselytize to small business. After three years, the governor realized something was missing. Says he: ''We were being hypocritical. We were doing this for the private sector, but not for our own top-down, old-fashioned state government.'' Clinton asked Asa Whitaker, Arkansas Eastman's quality management coordinator, to draw up a blueprint for bringing these techniques to the bureaucracy. The intense, soft-spoken Whitaker did much more. For 12 months he devoted half his time -- free of charge and with his employer's backing -- to indoctrinating government officials, including Clinton and his cabinet, in the art and science of quality. Says Whitaker: ''Bringing about change in state government absolutely has to start at the top.'' The effort has now spread to the 24 largest state agencies. In March the legislature authorized creation of a five-member state quality management board (made up of politicians and business people) and budgeted $1 million for quality training over the next two years.

ARKANSAS'S quality program has produced no starbursts -- just a shower of small victories. The state's Department of Education discovered it didn't really need so many reports. It trimmed 24 documents from the list that schools must file and saved 55,000 man-hours. The Department of Human Services cut the error rate on its nightly computer runs by 68% after a quality team, nicknamed the Bug Busters, figured out which programs were causing problems and why. Does quality have political legs? The articulate and congenial Clinton, who may run for President in 1992, thinks so. Says he: ''Democrats should want to do this. We are viewed as the crowd that likes to raise taxes and expand bureaucracy. The burden is more on us ((than it is on the Republicans)) to make government work.'' SOMETIMES government works best when its functions are handed over to the private sector. Chicago, where officials don't talk much about empowerment or statistical process control, offers a striking example: a high-tech parking ticket system designed and managed by the city, with computer and data- processing operations contracted out to EDS, the General Motors subsidiary. Before the new system was introduced, parking enforcement in Chicago had long been beset by corruption and ineptitude. In 1986 the supervising judge of the city's traffic court was sentenced to 12 years in prison for case fixing. But the best way to get a parking ticket fixed in the Windy City was to ignore it. After a police officer wrote a ticket, it took an average of two years for a record of its existence to show up in Chicago's microfilmed files. Most cases that reached traffic court were dismissed because the ticketing officer failed to show up. During the 1980s some 19 million tickets -- worth $420 million -- went unpaid. Says parking administrator Inge Fryklund: ''If you had wanted to design a system to make the city look ridiculous, this would have been it.'' When Richard M. Daley, son of the legendary machine boss, was elected mayor in April 1989, he vowed to come up with a parking system that worked, and appointed Fryklund, a former prosecutor, to get the job done. Here's how: All parking tickets written by police officers -- some 14,000 per day -- are delivered to EDS's computer center on the fifth floor of the traffic court building. There the tickets are electronically imaged and stored on optical disks the size of phonograph records. For the city's 46 parking enforcement aides (a.k.a. meter maids) the operation is even slicker. They punch out tickets on hand-held computers and portable printers. Every night this information is electronically transferred into EDS's main files.

Anyone who doesn't pay a ticket promptly gets a computer-generated letter asking for a check. The traffic court no longer has jurisdiction over parking tickets, but if a citizen demands a hearing, the computer assigns him a week- long ''window'' during which he can drop in (no appointment necessary) at any of the parking bureau's four service centers. There he meets with the first available hearing officer. The officers, private-practice lawyers under contract to the city, use workstations linked to the EDS command center to call up a citizen's file -- complete with an image of the ticket -- and render a decision on the spot. Cases can also be contested by mail. EDS constantly updates its files on deadbeats. After five unpaid tickets, a car is fair game for the city's wheel-clamping crews. When these patrols spot a suspect car, they punch its license plate number into a laptop radio terminal. The number zips to the EDS data center in Herndon, Virginia, which flashes back a decision in under ten seconds to either clamp the bum or give him another chance. All this gee-whiz technology hasn't cost Chicago a penny in capital investment. That has been borne by EDS, now in the second year of a five-year contract. The firm, which says it hasn't yet recouped its investment, charges the city a per-ticket processing fee. Fryklund figures the new system is saving $5 million a year in administrative costs. It is also generating a pile of cash. Ticket revenues -- $31.3 million as of the end of July -- are running at nearly double last year's pace. Because it's now cheaper to feed a meter than to risk getting ticketed, meter revenues are up sharply too. CAN BETTER management alone balance a city's books? It has helped in Phoenix, where officials have just closed a $22 million operating deficit without raising taxes or significantly reducing services. With its rapid growth, clement weather, and broad boulevards, Arizona's capital and largest city bears little resemblance to the old, congested municipalities of the North. That goes for the way it's run as well. The mayor and city council (think of them as a board of directors) can hire or fire only one person -- the city manager (think of him as the CEO). Says Paul Johnson, 32, a thoughtful former business executive who has been mayor since 1990: ''There's no spoils system here. Most department heads have been here a long time, and they have become very good at delivering services.''

Phoenix has been privatizing some of those services since 1978 -- years before the concept became fashionable. But the byword is not privatization. It's competition. Simply farming out functions to the private sector is no guarantee that taxpayers will get a better deal. When the city council puts a contract out for bid, it also invites city departments to submit proposals and ( slug it out with private firms. The winner is the lowest responsible bidder. If city workers lose jobs in the process, they are offered the first crack at openings in other departments. To see the results of such competition, take a ride on a Phoenix ambulance. Six years ago the city's emergency transportation service, then operated by nine private companies, was on the critical list. The average response time from the instant someone called for help to the moment a vehicle arrived on the scene was 19 minutes. In 1984 Phoenix began soliciting bids for a single, city-wide ambulance service. Seven private companies and the fire department entered the fray. The fire department won. Since then it has delivered service that is not only better but also cheaper. Average response time is down to just five minutes -- a tribute, department officials say, to their better-trained work force and more centralized routing of calls. A study by the city auditor shows that the department spends 25% less per trip than the price pledged by the one private bidder that met Phoenix's exacting standards. Part of what makes such competition work is employee involvement in decision-making. When city sanitation managers on Phoenix's north side realized they were in danger of losing their contract, which is up for renewal next July, they suggested that workers form a quality team. The problem: The cost of repairing garbage trucks had climbed well above the $3.06 per mile that managers had promised they would deliver when they won the contract six years ago. The quality team found that mechanics, because of a convoluted reporting system, routinely performed redundant inspections. As for the drivers, some were pitifully ignorant of the fundamentals of preventive maintenance. One hirsute fellow routinely brushed his locks near the truck's air-conditioning vent, causing the system to clog up and shut down. Now, with better cooperation between drivers and mechanics, maintenance costs have fallen to $2.63 per mile, saving taxpayers $273,000 a year and making the sanitation workers' contract look a lot safer. THE WHOLE CULTURE of government in Phoenix encourages and rewards employees for speaking up. When workers make suggestions that save money, they can earn bonuses of 10% of the amount saved, up to a $2,500 maximum. Awards above $1,000 are presented in a ceremony hosted by the mayor and city council. Ronald Jensen, a white-bearded civil engineer who runs the Public Works Department, offers this thought on how to motivate city employees: ''I find that pats on the back, rather than kicks in the ass, usually pay off.'' Without such small, constantly evolving improvements in the nitty-gritty business of government, it's easy to run off the rails. Just ask the good people of Minnesota, a place so progressive and peaceable that a Time magazine cover story once dubbed it ''A State That Works.'' But that article was published in 1973. In the 1980s Minnesota government went on a taxing and spending binge that finally came to a screeching halt this year. Republican Governor Arne Carlson, elected last November, had to cut spending, raise taxes, and use his line-item veto to close a $1.7 billion deficit in the budgets for 1992 and 1993. Among the areas affected: education, human services, and the environment. Admits Carlson: ''We undid part of the Minnesota miracle.'' Under his predecessor, Democrat Rudy Perpich, Minnesota had already begun to introduce quality management -- but only in a few departments. Carlson, with help from the private sector, aims for nothing less than a complete overhaul of a sprawling 200-agency bureaucracy last restructured in 1939. Says he: ''Our government was resting on its laurels and overdue for a real sharp analysis of itself.'' In Minnesota today, 33 agencies share some jurisdiction over children. Another ten hold sway over the environment. Dana Badgerow, the feisty former Honeywell exec who runs the Department of Administration, bemoans the lack of an intelligible accounting system. Says she: ''I'd like to make the statement that things cost too much here, but I can't, since I don't know what things cost.'' And this is in a state that ''works.'' State and local governments can do noble things. They can safeguard the streets, nurture the young, and shelter the homeless. But in an era of limited resources, governments must focus not only on performing good deeds but also on doing a good job. A decade ago an economic downturn pummeled U.S. industry, shook it out of its complacency, and wrought essential changes in the way it did business. If the recent recession speeds a similar reawakening in America's Statehouses and city halls, the gains may offset the pain.