In an effort to combat bloated government spending in the state, Gov. Rick Snyder wants to provide incentives for municipalities to consolidate. By combining local units of government, Gov. Snyder is hoping to create economies of scale and reduce expenditures. But before Michigan charges ahead on a consolidation crusade, a look at the research on the topic is in order.

Numerous studies investigating the putative cost-savings of municipal consolidation show mixed results. In 2009, at the behest of a state commission studying local government in New Jersey, Rutgers’ School of Public Affairs and Administration undertook a literature review of various consolidation studies. Among other conclusions, the report warns that even though “there is some support for reducing the number of governments” via consolidation, “there is a considerable body of literature that does not support consolidation.” For example, the report discusses the absence of efficiency gains in Australian and Canadian municipal consolidations in the 1990s.

Cost-savings from consolidation may seem to make sense, but there are several reasons why merging municipalities may not save as much money as some suggest. A study analyzing consolidation in Georgia reviews some of the overlooked costs involved in the process. Exclusion of one-time “transitional costs,” such as expenditures for consolidation consultants or new buildings for a larger workforce, can cause the full costs of consolidation to be underestimated.

Another consideration, highlighted in a Syracuse University report, is the phenomenon of “leveling up.” For example, a particular township employee might earn $50,000 per year before a merger, while the corresponding city employee might earn $70,000 per year. After consolidation, if the township employee’s salary increases to $70,000 as well, the new municipality will have higher compensation costs.

Leveling up can also occur with services. Using the city-township example, the more robust snowplowing schedule of the city might be extended to include the township roads as well, again raising total costs. As the experience of Detroit attests, larger government does not necessarily mean cheaper government.

Research on the cost-saving potential of municipal consolidation is best described as highly variable and contradictory. In fact, the only real conclusion one can draw from the many studies on the subject is that there is no conclusion. The Syracuse University report summed up this reality, stating: “Policy makers should not expect any dramatic cost savings from consolidation and should avoid using the argument of cost saving as the main benefit of reform.” Overall, much of the literature on consolidation ends with a proviso declaring mixed results and calling for further research on the topic.

The belief that efficiency gains from consolidation lead to cost-savings assumes that government adheres to a “demand-driven” model of operation. This theory treats government like a corporation that seeks to increase efficiency and cut costs. The demand-driven thesis, however, is not an accurate model for school district consolidation, according to a Mackinac Center report by Andrew J. Coulson. In his study, Coulson also tested “public choice” theory, which argues that public officials ultimately seek to advance their own interests. In the public choice model, such officials attempt to accumulate and spend as much money as possible in an effort to enhance their influence and power. Coulson found that the data provided “compelling support” for the public choice theory, noting that the “incentive structure” of public schooling encourages districts “to maximize their budgets.”

Although no one appears to have tested public choice theory vs. demand-driven theory in municipal consolidation, local municipal officials would likely behave in the same way as school officials: seeking more money rather than cutting costs. Some public choice theorists argue that the very existence of fragmented units of government creates competition among municipalities, which can increase public-sector efficiency. In such a structure, residents serve as consumers by voting with their feet and moving to more efficient and responsive municipalities.

Ultimately, consolidating municipalities to save money is dubious. There are other alternatives for reining in out-of-control government spending, such as bringing public-sector benefits in line with the private sector and privatizing services. These options reform government incentives instead of re-structuring the public sector to mirror a corporation.

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C. Jarrett Dieterle is a 2010 graduate of the University of Richmond and a summer intern with the communications team at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.