05/22/2010 05:12 am ET Updated May 25, 2011

Too Big to Fail? Amidst Fiscal Crisis, Governments Must Take Dramatic Actions

Governments and the services they provide the public are being threatened as never before by fiscal crises in every corner of the globe. While countries have been able to withstand deficits in the past, the scale and uncertainty of current financial challenges are testing the ability of governments to meet even their most basic commitments to citizens.

Governments at every level around the world are finding it difficult, if not impossible, to balance revenues and expenditures. In the US, 48 out of 50 states face budget shortfalls in 2010 and even larger shortfalls are projected for 2011. California's shortfall, alone, is almost $52 billion, a staggering 56% of the state's general fund budget. And the states of Arizona, Nevada, Illinois, New York and New Jersey are not far behind.

The situation in the states mirrors the situation being faced by Greece and Portugal (each with populations of 11 million, roughly the same as Ohio with 11.5 million) or Ireland (with 4.5 million people, about the same as Louisiana or South Carolina.) Greece is seeking its own bailout, but imagine the consequences if California, Texas or Ohio were to fail.

In addition to determining how to stay solvent as revenues plummet, the public sector must overcome two huge hurdles impeding their success: a crisis of confidence among citizens in the government's ability to meet their needs, and a political crisis that is eroding public support for meaningful reform and creating inertia at the legislative level.

While fixing its own problems, government must help citizens wrestle with increasing debt, unemployment, shrinking pensions and foreclosures.

Before anything can be fixed, government leaders must be willing to face up to today's economic reality by exercising strong and decisive leadership, regardless of the political ramifications, in order to restore public confidence. Political decisions are fraught with consequences that carry over into the next election cycle. However, there's no way to fix problems without demonstrating the courage to lay out real solutions -- no matter how unpopular -- that are easy for citizens to understand.

In the short-term, this may require such painful actions as reducing or freezing salaries and benefits. Longer term, however, the public sector has much to gain by adapting innovative solutions that have been used by the private sector and some governments to rethink and reshape the way governments work.

For starters, government must aggressively apply the technology and innovation that can increase efficiency and reduce operating costs. Successful companies that embrace these principles not only survive economic downturns, but enter the recovery in a stronger position. There's no reason why governments cannot do this as well.

One time-tested solution that began in the private sector is the sharing of back-office services across agencies -- human resources, accounting, purchasing, fleet management and information technology. New York is considering merging and consolidating seven agencies and authorities, a move that could save an estimated $14.8 million per year. And, the state of Washington has eliminated at least 75 commissions and boards and closed 25 drivers' license centers across the state, replacing them with online kiosks.

On the job front, the German Labor Agency -- Bundesagentur für Arbeit -- has had tremendous success with a Virtual Labor Market. The system links job seekers, employers and employment agencies with job training and employment opportunities, and has become the largest e-government application in Europe with more than a million users every day. To date, more than 5 million workers have found jobs through the virtual market.

With 30+ gubernatorial races in this year's elections, incumbents and new governors should look at the German system and consider other innovative solutions to ease persistent and historically high unemployment rates.

It's clear that solutions do exist. But again, it will take courage and tenacity by our public sector leaders to shed old ways of doing business, embrace innovation and ensure that government will be able to join in the recovery that has already begun in the private sector. The fiscal issues facing the government are difficult, but solvable. Rapid and concerted action can pull governments back from the brink.

When recovery does come, however, government leaders must avoid the temptation to slip back into the old ways of doing business. Everything they do now must focus on building an operation that can be sustained in any economic environment.

We can only hope they choose the right path. Nobody wants to find out if governments are really too big to fail.