Having come from the private sector originally, I can attest that bureaucracy thrives outside the halls of government as well. And as a consumer I can attest that poor service thrives outside the halls of government too.
Do government agencies, local and state governments take brand management seriously? Some do, but the perception persists. I found interesting Demos' research in this area back in 2005 - they looked at public perceptions of government and did a great series of kitchen-table roundtables with citizens. But the idea of government marketing itself and managing its brand like a corporation strike some as manipulative and counter to the goals of engagement and transparency; how does an organization of, by and for the people effectively respond to public perception issues?
Of course, being involved in internet strategy I think the social/collaborative tools now available provide great opportunities to address these issues. But only if they're implemented thoughtfully, in a sustained way. It will be interesting to see if the promise they hold to re-engage citizens and address the brand problem gov has will be realized.