State governments have fallen off a fiscal cliff. The numbers are staggering -- a $17 billion deficit in California alone, $40 billion to $50 billion nationwide. And as soon as states start slashing, local governments will join them.

But big challenges always bring big opportunities. Rather than traditional medicine -- tax increases, spending cuts and accounting gimmicks -- public leaders should look to the many innovations pioneered in recent decades to wring more bang out of the government buck.

There are dozens of management reforms that can not only save money but also improve services. The key is to make performance consequential. If you want to cut spending, reward employees for saving money. When the wastewater division of King County, Wash., let its 300 employees keep half of what they saved through a gainsharing program, the employees saved $2.4 million in four years. In Indianapolis, garbage collectors saved more than $2.1 million in their first year alone.

Or try "enterprise management." Make organizations that can sell their services earn their budgets by selling to citizens or other agencies, in competition with private providers. Suddenly, their survival will depend on how well they please their customers, and at what price.

Many governments have turned their maintenance, printing, training, data processing and other internal service operations into competitive enterprises. Minnesota, Milwaukee, the Edmonton school district, even Australia and the United Kingdom have used this approach. It can save 10 percent a year for several years.

Another powerful way to create consequences is "managed competition." Use competitive contracting to make public agencies compete with private firms. Indianapolis, Phoenix and dozens of other cities, counties and states have used such competitions to improve services, often saving 20 percent to 25 percent the first time they bid a service.

The second key is to give public managers the flexibility they need to cut costs. No organization can improve its performance if its people are tied up in red tape. If an agency embraces competition or commits itself to specific results, give its leaders flexibility in how they hire, pay, purchase and invest.

Former Florida Gov. Lawton Chiles did this during the last recession, beginning with two departments whose leaders the Legislature trusted. In four years, the Revenue Department increased its collections while reducing employment and slashing operating costs. In 1995 the Federation of Tax Administrators called it "a model of how government should function" and gave it a National Management and Organizational Initiative Award.

A big part of cutting red tape is reforming the budget, accounting, personnel, procurement and auditing systems. The messages these systems send about following bureaucratic rules are more powerful than any exhortations to perform better.

Shift from line-item budgeting to performance budgeting. Streamline your procurement rules. When Michigan gave managers credit cards for any purchase up to $1,000, it slashed its processing costs by 90 percent. The same reform in the federal government has saved billions of dollars.

The cost of mistrust is staggering. For every three people our governments hire to deliver services or enforce compliance with laws, they hire a fourth to check up on them, on the assumption that most of us, if given the opportunity, will lie, cheat and steal. In special education, for instance, teachers spend almost half their time filling out forms to demonstrate compliance with federal and state rules. If we could find less expensive ways to win compliance, we could save money and give our schools a massive infusion of what they need most -- time to teach.

Crisis does create opportunity. When elected officials are desperate to save money they will approve bills they would never even read in good times. All it takes is a little courage and a few good ideas. And after the innovations of the past decade, good ideas are all around us.

David Osborne is a managing partner of the Public Strategies Group, a consulting firm that helps public organizations improve their performance. He is co-author of Reinventing Government, Banishing Bureaucracy, and The Reinventor's Fieldbook.