Editor's note: The following is the third of a five-part series on government budgets and government spending that comprise the 2012 Keating Report. The topics we are covering include: federal budgets, state budgets, public-private partnerships, local government budget trends and government construction.

Public-private partnerships (P3) may be another tool that governments can use to balance their budgets, says William Reinhardt, editor of the Public Works Financing newsletter. "People believe they are entitled to more and more services from government, but our huge deficits and negative net worth say to me that most people are not willing or able to pay for those services," he says.

Reinhart points to Puerto Rico as a bellwether for new P3 projects around the U.S. Puerto Rico's governor is using a comprehensive P3 law to help address budget problems in the commonwealth.

"More and more government officials 'get it' and are running procurements that allocate risks in ways that draw in private capital, creativity and long-term diligence," Reinhart says. Florida, Alaska, Texas, Colorado, Indiana and Kentucky are some of the states that are looking closely at transportation P3 proposals to meet unmet needs, he says.

"I believe we are at the inflection point now in the P3 market where governments are really broke, and they know it. And they are increasingly willing to entertain P3s as a compelling option for helping to close the infrastructure gap," Reinhart says.

Administrators in Sandy Springs, Ga., (2010 population, 93,853) operate their city almost exclusively with P3s. "We have been able to maintain our high level of public services because of the public/private partnership model under which we operate," says Mayor Eva Galambos. "Except for fire and police, our departments are run by private firms that compete for the contracts. This has saved us considerable amounts. We just rebid the contracts last June, and the savings from the rebid new contracts amount to $7 million over the next five years."

Galambos sees more of the same in 2012. "I believe that the trend in local government will be in the direction of using the private sector via competitive bids to achieve savings. We adjusted our budget for the current year to reflect the lower property tax assessments due to the recession and devalued real property. I am hopeful that the worst of these reductions are behind us and that our other revenue sources will hold up. I see no major change in our budget for 2012," Galambos told Govpro.

Patrick Louis Knudsen, senior fellow at the Washington-based Heritage Foundation, says that increased contracting-out of government services could be a possible solution to government budget problems. "More contracting-out might work," he says. "What would be a better solution, though, is for government to simply pull back and stop doing a lot of the things it's doing, and instead of contracting out, just go ahead and privatize things, and let the private sector do more of these activities."

The taxpayer is taking a hit in the wallet, Knudsen says. "Whether agencies are paying government employees directly or hiring a contractor, it's still taxpayers' dollars that are going out. It's still a government program, and that spending is dead weight on the economy. The government would be much better off just paring away things that are not necessary for government to be doing."

View additional installments of our 2012 forecast as well as the 2011 Mid-Year forecast.

Related Stories

• ARRA-funded construction and public private partnerships
• Keating Report on government budgets and spending, 2nd half 2011
• 2011 Keating Report on government budgets and spending