It’s Hard to Get Cities to Share Services. States Can Help.

Fiscal incentives can encourage local governments to consolidate redundant operations.
December 2018
Business people putting their hands in.
By Justin Marlowe  |  Columnist
Endowed Professor of Public Finance and Civic Engagement at the Daniel J. Evans School of Public Policy & Governance at the University of Washington

Leslie Knope had it right. The local government official at the heart of the TV show “Parks and Recreation” captured the challenge of local citizen engagement when she said, “What I hear when I’m being yelled at is people caring really loudly at me.”

A sure path to “loud caring” in local government is to consolidate services. Citizens want lower taxes and less fragmented government, but they also want the autonomy and identity of “their” local government. So instead of combining governments, many local leaders have developed interlocal agreements, service-sharing arrangements and other forms of collaborative service delivery to share responsibilities across localities. In concept, interlocal sharing affords citizens the economies of scale and efficiencies of a larger government, but without sacrificing local control or identity.

Interlocal sharing is everywhere, and most local policymakers agree there should be more of it since it can allow localities to deliver services they can’t pay for on their own. Most small counties, for instance, can’t afford a full-time public health epidemiologist, but two or three can share one. Most small cities don’t have the money for a sophisticated cloud-based IT system, but a collaboration of cities can come up with the funding.

Meanwhile, state governments have a raft of incentives to encourage local governments to solve problems collaboratively. Many offer such types of assistance as startup grants and loans for shared capital projects. These incentives are an important part of the current state-local landscape, but it’s not clear if they change local behavior. Fortunately, new research from Sungho Park of the University of Alabama and Craig Maher and Carol Ebdon of the University of Nebraska sheds some light on the issue.

The researchers studied interlocal collaboration among Nebraska counties. Nebraska is an ideal setting to examine these issues. It has more counties than most states, and state law caps county government property tax rates and total property tax collections. In other words, Nebraska has many small, fiscally constrained governments that should be eager to collaborate.

Like many states, Nebraska’s state government offers fiscal sweeteners to encourage interlocal collaboration. In fact, Nebraska offers the ultimate fiscal sweetener: It authorizes counties to collect an additional property tax dedicated to supporting interlocal activities. For a typical county -- that is, one with $2 billion in taxable value that currently collects $6 million each year in property taxes -- the bonus for cooperating could mean an additional $1 million in property taxes. That’s a powerful incentive to get along.

Park, Maher and Ebdon’s study revealed three key lessons. First, state incentives matter. They found that prior to the advent of the special property tax in 1999, only 66 of Nebraska’s 93 counties participated in interlocal sharing. Today 87 counties participate. During that same time, average county spending on interlocal activities increased from 2.5 percent of total spending to 5.83 percent.

Second, interlocal collaboration saves money. The research showed that for every 1 percent of additional spending on interlocal activities, spending in all other services decreased by 1.6 percent. That’s a noteworthy effect, given that some counties spend up to 8 percent of their budgets on interlocal activities. Collaboration seems to encourage more efficient service delivery.

Third -- and perhaps the most surprising finding -- is that collaboration affects spending in different ways. For counties close to the state maximum property tax rate, interlocal activities do not seem to increase or decrease countywide spending. By contrast, for counties below that maximum tax rate, interlocal activities lead to much lower countywide spending. In other words, collaboration can lead to more efficient service delivery, but only for counties with the fiscal flexibility to collaborate. That makes me wonder how Nebraska and other states might adjust these policies to promote sharing among the jurisdictions that could benefit from them the most.

Clearly, interlocal collaboration has much promise as a way to solve local fiscal problems. With carefully crafted policies, states can play a meaningful role in helping localities to play well with each other. That’s good for everyone who’d like to avoid “loud caring.”