Do Cities Actually Save Money When They Merge?

There are benefits in city consolidations, but the payback may not be financial.
August 2013

In the 1950s a trio of mining towns in Michigan’s Upper Peninsula were booming. The three burgs -- Stambaugh, Mineral Hills and Iron River -- had a combined population of nearly 9,000 and shared a bright economic outlook fueled by a post-war demand for local iron ore and timber. But by the early 1990s, the mining and logging had stopped, the population had shrunk to just under 3,000 and the future was bleak. So in 2000, they did something practically unprecedented: They reconstituted themselves as the new consolidated city of Iron River.

Some economists offer a simple and compelling argument in favor of consolidation. Many of the 90,000 or so local governments in this country, they say, deliver identical and redundant services, so we can realize better economies of scale, greater efficiency and lower taxes if we cull some of that overlap.

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Consolidated governments are often quite different from their component parts. When cities merge with counties, for instance, the new government reconfigures how and where it delivers services. Rural school districts often merge so they can access new revenues and offer new amenities. But when cities consolidate with one another, the goal is usually to deliver the same services with smaller overhead over a larger geographic area. Iron River and other city-city consolidations allow us to see if, all else being equal, consolidation saves money or whether city-city mergers are more of a challenge to the conventional theory.

According to the Census, there have been about 10 true city-city consolidations over the past 30 years. Almost all involved two rural municipalities of fewer than 2,500 people that merged to form a new entity. The evidence from these cases -- including Census data and interviews with several of the participants -- shows that reality departs from theory in three important ways.

First, saving money is only one of many financial reasons to consolidate. Some cities believed consolidation would form the larger population base needed to compete for state shared revenue, federal grants and other resources. Others thought a merger would help the community’s economic development prospects. That was some of the thinking behind the consolidation of cities that became Norwood Young America, Minn. In almost all the consolidations though, the cities saw a merger as a last chance to transform their community for the better, even if the fiscal implications were unclear. Iron River’s current city manager, Perry Franzoi, put it well when he said the leaders of that consolidation “didn’t really know how it would affect taxes and spending, but they did know the status quo wasn’t working.”

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Second, it turns out that consolidations rarely save money. In fact, for the majority of citizens directly affected in these cases, consolidation has meant higher taxes and spending. Some cities consolidated because a larger government could improve local infrastructure. This has usually meant new debt and new taxes to repay that debt. Others offered generous pensions and health-care benefits to employees pushed out in the consolidation, thus saddling the new government with expensive legacy costs. In the consolidated town of Oak Island, N.C., per capita spending is two or three times higher than before consolidation, and that’s by design. Consolidation allowed this coastal community to offer new services needed to build a vibrant tourist economy.

Third, consolidation’s effect on local politics is transformational. Leaders in several of these communities noted that consolidations gave them a better understanding of what their citizens want from government, what they are willing to pay for that government and how to set priorities that better reflect the community’s sense of itself.

Consolidation is hard work, and the benefits of it are not yet well understood. The political benefits are much more obvious than the chance for lower taxes. At least, that’s the story in Iron River and elsewhere so far.

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