Grassroots graft.

When it comes to corruption, state governments are second to none.

Let me stipulate right up front that Washington is a fetid swamp of scandal. During the past two decades, whatever respect Americans might have had for their national political leaders has steadily sunk into the soft muck of Watergate, Abscam, Iran-Contra, Whitewater, Filegate, Chinagate, Fornigate, etc.

I'll make a bold statement, however. Government corruption is less rampant in Washington than in Albany, Sacramento, or (especially) Little Rock. It is striking that many of the Clintons' most egregious ethical lapses - involving state pension funds, kickbacks, shady land deals, illegal federal loans, and cattle futures - occurred while Bill was governor of Arkansas. Presidents and congressmen make headlines with giggling interns and intricate campaign finance irregularities. State politicians still do it the old-fashioned way: lobbyists with sacks of money, all-powerful committee chairmen who give themselves state contracts, business executives who pay cash for government appointments or regulatory nods.

State officials do this sort of thing a lot - mostly because they keep getting away with it. They typically face less scrutiny than national politicians do, and they have many opportunities to enrich or impoverish individual firms. By contrast, Congress does things that affect whole industries, making it simultaneously more powerful and less amenable to garden-variety graft.

While political observers can count on a couple of hands the federal legislators who've resigned in disgrace during the last decade - Dan Rostenkowski and Bob Packwood come to mind - recent scandals in state legislatures have embroiled dozens, if not hundreds, of lawmakers in tawdry investigations and costly prosecutions. In the last few years, newspapers have been rife with stories of corruption in states such as Arizona, South Carolina, Rhode Island, Kentucky, New York, New Jersey, New Mexico, and Massachusetts. And no one knows what the final body count will be in poor Arkansas, where the Whitewater investigation has turned into a broader scandal of bid rigging, insider deals, and thievery throughout state government.

Let me illustrate my point about state corruption with a few examples. Beginning in the late 1980s, the Kentucky state legislature underwent two major scandals, both involving regulatory oversight.

In the first case, lawmakers enacted measures in 1988 and 1990 that hurt a small harness racing operation on the Ohio River. Its owner sought relief in the state capital, only to be told by a prominent lobbyist that it would probably cost around $100,000 - in campaign cash to various lawmakers - to make his problems go away. The racetrack owner, to his credit, didn't pay up. Instead, he went to the FBI, which began an elaborate sting to catch lobbyists and lawmakers in the act of buying and selling votes for cash. The feds eventually netted 11 bribery convictions, including one involving the speaker of the state House.

The second Kentucky scandal involved health care regulation. Humana Inc., based in Louisville, got a special exemption from state licensing rules for some of its health care facilities. Later, an investigation found that a Humana vice president had paid $10,000 for the necessary legislative votes. Kentucky's penal system swelled again.

Rhode Island politicians were also buffeted by corruption charges in the early 1990s. The wide-ranging scandal involved a mayor taking kickbacks from city vendors, a former governor fined for steering state contracts to his political supporters, and judges tripped up on bribery and fraud charges. In perhaps the most colorful incident, state police put a North Providence clothing store under surveillance based on a suspicion that mobsters regularly met there. The suspicion proved correct but incomplete: One regular attendee at the meetings was the chief justice of the state Supreme Court, who later resigned.

This case may sound like a DeNiro movie treatment, but it's hardly unique. Many state scandals feature dramatic scenes. In "AzScam," the Grand Canyon State's brush with slime, a state representative in line to chair the House Judiciary Committee was caught on camera bringing a nylon gym bag to the office of a lobbyist and stuffing $55,000 into it. Another Arizona lawmaker was actually caught on tape saying, "I don't give a [expletive] about issues.... My favorite line is, 'What's in it for me?'" If that bit of dialogue were used in a screenplay, it would be ridiculed as unrealistically blunt.

I used to think my home state of North Carolina - where I run a think tank, the John Locke Foundation - was different. During the past two years, I've discovered how wrong I was. It all started the day after Christmas in 1996. Entering a crowded supermarket, I picked up a copy of a local black-owned newspaper to read in the checkout line. I was greeted with a glowing story about two local politicians, elected to the state Senate the previous month, who had given out $100,000 in "discretionary funds" to several nonprofits in minority neighborhoods. "That's my Merry Christmas present," said one of the senators-elect. "[We] are already having a positive effect."

The notion of passing out taxpayer money like Christmas candy was bad enough. But then I started to wonder how someone who had not yet taken office, much less served long enough to slip some pork into the state budget, could get his hands on "discretionary funds." After some digging, reporters for the Locke Foundation's Carolina Journal discovered that the money had come from a secret $21 million slush fund, known to only a few legislative leaders. The money had been "reappropriated" from surplus funds in a reserve account for the repair and renovation of state buildings. As is typical of such shenanigans, negotiators had inserted the reappropriation with four cryptic lines in the middle of the night during the previous year's state budget deliberations.

Legislative insiders and their political consultants doled out this money with abandon. Several grants were timed to help embattled incumbents cut ribbons a few weeks before an election. In other cases, the money appeared to be payback for favors done by rank-and-file lawmakers or wealthy contributors.

The grants were hard to justify on policy grounds. Wealthy Pinehurst, home to some of the world's ritziest and most famous golf resorts, got money for a new fire truck. Several senators and representatives steered money to local nonprofits which they served as board members. The Andrew Jackson Memorial and Museum, located along the South Carolina line near a "birthplace" most historians view as mythical, got a $200,000 check - twice its annual operating budget. The same state senator who obtained that grant (and who serves on the museum's board), gave government money to another nonprofit (for which he is also a board member) in a revealing manner. According to a local newspaper, The Enquirer-Journal, he attached the check to a football and threw it across the room to the group's founder during a benefit roast. It seems that dispensing taxpayer money had become a game to him and many of his colleagues.

Some lawmakers used the money to entice private groups onto the public dole. In one case, Playspace, a nonprofit museum and entertainment facility for children in Raleigh, had been on the verge of establishing itself as a self-sufficient organization. After years of receiving state and local grants, Playspace had ended its grant requests, planning to rely on admissions and membership fees as well as private donations. But in December 1996, at the urging of Sen. Eric Reeves (D-Raleigh), Playspace accepted a $5,000 check from the state.

Legal action on some of the improprieties we uncovered is pending. But to our dismay, the slush fund scandal was only the beginning. The Locke Foundation began receiving a steady stream of anonymous tips about wasteful spending and political influence. In 1996, a former employee of the state's Division of Motor Vehicles named Algie Toomer received a controversial $100,000 settlement from the state for employment discrimination. As lawmakers convened hearings in 1997 to investigate the matter, we obtained an exclusive interview with Toomer and his attorneys. He told us about illegal campaign fund raising among rank-and-file DMV employees.

There seemed to be a climate of "pay to play" at the DMV, with workers not so subtly promised that the governor would be apprised of their financial support or lack thereof. On a single day in February 1995, Toomer and some 80 of his Department of Transportation colleagues made contributions to Gov. Jim Hunt's 1996 campaign kitty. More than one-third of the employee donors received pay raises or promotions within a couple of months. According to a report by the watchdog group Democracy South, the contributions were often collected and "bundled" by politically appointed DOT supervisors, who used the cash to strengthen their connections to the governor's office.

By the time we published Toomer's allegations in the August 1997 Carolina Journal, the rest of the news media had begun their own scandal investigations. In September, The (Wilmington) Star-News reported evidence that the governor, his secretary of transportation, Garland Garrett, and his campaign finance director, Jim Bennett, had promised a seat on the North Carolina Board of Transportation, a powerful appointed panel, to a campaign contributor for $25,000. The allegation came to light because the donor, James Allen Cartrette, didn't get the appointment and started complaining about it.

Is selling a government post and then reneging on the deal, among other things, a case of mail and telephone fraud? Columbus County District Attorney Rex Gore looked into the matter and decided not to indict anyone, but he made it clear that he believed the charge. "I personally believe that Mr. Cartrette fully expected to get a DOT position," he said. "I personally believe that Mr. Garrett and Mr. Bennett did little to lead him to believe otherwise. I might get a conviction at the corner store, but I could not in the courtroom." A federal investigation is ongoing.

Another spate of news stories, in The Charlotte Observer and The (Raleigh) News & Observer, reported that several Board of Transportation members - and even, in at least one case, the governor himself - had pushed for highway projects to benefit themselves or political patrons. In August 1.997 the Locke Foundation joined with three left-of-center policy groups in a joint request for a state performance audit of DOT and prosecution of wrongdoers. The resulting audit called for significant changes in DOT structure and operations.

The problems in North Carolina's transportation department - from excessive politics to insider dealings and mismanagement - led to the resignation of the secretary of transportation, the state highway administrator, and two board members. In February 1998, the FBI, the U.S. Department of Transportation, and the Postmaster General's Office (which handles mail fraud) announced a wide-ranging investigation of North Carolina's DOT.

Last year, the governor announced reforms aimed at reducing the number of patronage employees in the department and tightening procedures for hiring and promotion. State lawmakers are debating DOT reforms that include downsizing the board, tightening ethics guidelines, reorganizing and privatizing transportation divisions, and handing over highway revenues and authority to local governments.

You might think this long ordeal has validated rather than tarnished the processes through which North Carolina fights corruption. After all, the news media, with a little prodding, did leap into the fray. The legal system, creaking and groaning all the way, did begin investigations and forced some crooks from office. Hunt was forced to cede some power and go through the toughest political scandal of his career. Yet the governor's approval numbers are through the roof. North Carolina voters have either tuned out the scandal stories or concluded that "everyone does it, so why pick on Hunt?"

State corruption is far harder to combat than corruption in high-profile Washington or in local government, where decisions receive more local media coverage and where citizens can attend meetings and corral officeholders. States are the middle, "missing" layer of government. Press contingents in state capitals have been shrinking for years. Many voters lack basic information about who governs their state and what they do.

It will take more than exposes and lawsuits to clean things up in state capitals. It will take basic changes in what state governments do and how they do it. Here are a few of the most important reforms:

* Toughen civil service and contracting rules. I was a reluctant convert to this idea. I used to think that rigid rules for hiring state employees and awarding contracts were unnecessary impediments to running government more like a business. Now I recognize the truth: Government can't and shouldn't be run like a business. It doesn't face the discipline of the profit motive. It relies on attitudes and behaviors fundamentally different from those confronting entrepreneurs. The alternative to civil service protections for employees is not a merit system but selling jobs to campaign donors. Exempting state agencies from bidding procedures means buying office supplies from an agency head's cousin.

* Cut back regulation. There are good economic and moral reasons for minimizing the encroachment of the state into private decisions. But one of the most persuasive arguments is that appointments to regulatory agencies and specific regulatory decisions are often bought by high-dollar donors. One glaring example is nursing home regulation, as the Kentucky case showed. In many states, operators who want to open new homes must obtain a "certificate of need" from state regulators. Coupled with state authority over nursing home reimbursements from Medicaid and other programs, this power makes the nursing home industry a reliable source of campaign cash. Other big campaign players in most states include the gaming industry, real estate developers, home builders, and health care lobbies such as optometrists and chiropractors - all of which worry about regulation.

* Fightpork-barrel spending. While discretionary funds tapped by lawmakers for pet projects in their districts make up a relatively small percentage of most state budgets, they consume a tremendous amount of time and result in a disproportionate amount of corruption. Consider state funding of the arts. While the Locke Foundation has long opposed such spending on principle, over the short term we have settled for reforming the process by which the money is distributed. Grants to local arts groups now must go through an open process of application, priority setting, merit consideration, and approval, which will reduce the amount of logrolling and waste.

As long as human nature remains what it is, there will be potential for official corruption. Government will always be necessary to carry out essential functions such as law enforcement. For the foreseeable future, education and some kind of social safety net are likely to remain government responsibilities as well. Finding ways to carry out these functions without buying and selling influence is a critical challenge, one that advocates of limited government should make their own.

Contributing Editor John Hood ([e-mail]) is president of the John Locke Foundation, a nonprofit think tank based in Raleigh.