Merging Local Governments Usually Doesn’t Make Economic Sense

As cities and counties find themselves strapped for cash, we shouldn’t be surprised that they think they can save money by merging services. Unfortunately, the evidence shows they most often won’t. This literature, however, isn’t cited among the media reporting on mergers. For example, the Wall Street Journal has an article describing the recent trend toward local government consolidation.

Municipalities around the country are looking to merge services, departments and even themselves in an effort to cut costs in the recession.

Pennsylvania Gov. Ed Rendell’s budget address proposed consolidating the state’s 501 school districts into as few as 100. Next door in New Jersey, Gov. Jon Corzine wants the smallest school districts and municipalities to merge, singling out “doughnut-and-hole” townships in which one government’s area surrounds another’s. The president of San Diego’s city council recently suggested the cash-strapped city merge with San Diego County.

Seattle’s decision to close five schools has sparked protests, some touching on race and class.

Oddly, the article talks about the potential economic benefits of merging and the political opposition, but doesn’t even touch on the academic evidence that questions whether the supposed fiscal benefits will even materialize. More often than not, they don’t.

In fact, a review of the academic research on city county consolidation conducted for the Indiana General Assembly’s Marion County Consolidation Study Commission by the Indiana Policy Review found that lower spendng (and taxes) was not a sure thing. The survey found that “In general, it is uncommon (although not impossible) for operating costs to decrease–due primarly to the ‘leeling up’ of salaries and benefits.”

Academics who study the issue tend to be more favorable to mergers based on a survey for the Indiana General Assembly, even though this view is contradicted by the academic research. Still, even among these experts with a pro-merger tendancy, a consensus appears to exist that mergers will not reduce taxes. Moreover, “Academic opinion lacked consensus or general agreement on whether city-county consolidation would increase responsiveness. This disagreement was particularly split for law enforcement.”

The reason why consolidation doesn’t reduce taxes or increase efficiency is fairly straightforward: Without competition, monopolies have virtually no compelling incentives to reduce costs or provide services efficiently. Consolidation and mergers create monopolies over government services. So, we should expect their costs to go up, not down.