The Wall Street Journal, August 29, 2011
THE OUTLOOK: by Conor Dougherty
When Civic Mergers Don’t Save Money
Governors and lawmakers across the U.S., looking to trim the costs of local government, are prodding school districts, townships and other entities to combine into bigger jurisdictions. But a number of studies—and evidence from past consolidations—suggest such mergers rarely save money, and in many cases, they end up raising costs.
Economists who have studied the issue say there are a number of reasons why several small governments can end up costing less than a single larger government. For starters, small governments tend to have fewer professional—and higher-paid—employees, such as lawyers. Studies show small governments generally rely more on part-time workers, who receive fewer long-term benefits such as pensions and health-care coverage.
Another reason: When small governments merge, they often “harmonize” services and employee benefits to the highest level among the combining units. In other words, the consolidated city finds it politically expedient to take on the more-expensive version of everything. Employees at the city with lower wages get raises and residents of the city with fewer services get more.
“If the rationale [for a merger] is cost savings, you’re going to be disappointed,” said Enid Slack, director of the Institute on Municipal Finance and Governance at the University of Toronto.
The logic often cited behind consolidations is saving money by shedding layers of management or having departments share equipment such as snowplows. But managers and equipment account for far less than half of local governments’ expenses—most of their cost is rank-and-file labor.
There are other reasons for merging government entities. Some services—such as public transportation—can be more effectively provided over a large area than a small one. And Jennifer Bradley, a fellow at the Brookings Institution, says some mergers that haven’t yet generated savings might do so in the future.
“The reason we haven’t seen cost declines is there have been either sweeteners to make the deal work, such as promises of leveling up pay or various labor protections,” she said. In the current environment of deep fiscal stress, “you might find consolidation or collaboration efforts are also not jobs-protective. Local government payrolls are already being cut deeply.”
Still, when it comes to controlling local government’s largest cost—labor—smaller governments generally do better. Take Illinois, where budget troubles and pension obligations have eroded the state’s credit rating. There, state Sen. Terry Link proposed a bill that would lead to local governments being combined or dissolved in a bid to save money. “There are a lot of these units of local government that aren’t necessary anymore,” said Mr. Link, a Democrat.
But a study this year for a group representing most of Illinois’s 1,433 townships used state data to show that tiny townships are the state’s most austere government operations. Spending by the state’s townships grew 17% from 1992 to 2007, adjusted for inflation, according to the study. State expenditures over that same period grew 51%, while spending by larger municipalities grew 50%; school districts’ spending rose 74%. One reason: Townships have fewer employees per person and use more part-timers, reducing salaries and benefits.