Special District Consolidations

A Research Study for the
Association of California Water Agencies


by Stephen P. Morgan, M. P. A.
Research Associate, School of Public Administration
Sacramento Center, University of Southern California

and

Jeffrey I. Chapman, Ph.D.
Professor, School of Public Administration
Sacramento Center, University of Southern California

December 1, 1994

This Study was Funded under Contract #C940630
with the University of Southern California

Executive Summary

Special districts play a crucial role in the matrix of California governments. They provide a wide array of important services including water, sanitation, fire protection, recreation, hospitals and cemeteries. Because there are so many governments that can fall under the heading of "special district", critics have periodically called for a reduction in the number of districts in an effort to reduce the amount of government in California. They have confused the concept of many governments with that of too much government.

In 1974 Governor Reagan's Local Government Reform Task Force found that "...special districts play a vital role in California's system of local government." In 1987 the national government's Advisory Commission on Intergovernmental Relations wrote, "a multiplicity of general-purpose and special-purpose governments in a metropolitan area is not an obstacle to good government...[A] diversity of local governments can promote key values of democratic government -- namely efficiency, equity, responsiveness, accountability and self-governance."

Nonetheless, questions about the role of special district government have persisted. Accordingly, the Association of California Water Agencies (ACWA) commissioned this study by the University of Southern California (USC) to investigate three questions:

1. What can existing data tell us about the actual changes in the number of special districts in California over the past 20 years?
2. What do current theories and research tell us about the impacts of consolidations in the public sector?
3. What can we learn from the experiences of California special districts that have actually undergone consolidations since the passage of Proposition 13?

The Numbers

The total number of special districts has changed very little over the years. From FY 1974/75 through FY 1991/92 it hovered around 4,900 according to the Office of the State Controller. Since the passage of Proposition 13 the number has increased less than 3%. In the period between 1986 and 1992 the number rose slightly, then returned to its original level. The population of California increased nearly 16% in that same period.

Decreases in many of the traditional categories of special districts have been more than offset by significant increases in the creation of county service areas (CSAs) and joint powers agreements (JPAs). There are 66 fewer water districts, 47 fewer sanitary districts and 44 fewer fire districts than there were when Proposition 13 was passed. In the same period, the number of CSAs has increased by 167 and JPAs have grown by 327. Had these "governments created by governments" been held steady, the total number of special districts would have declined more than 7% since 1978.

Findings from Current Theory and Research

Critics of special districts often mention an array of presumed benefits which would accompany special district consolidations including better government, more responsive government and economies of scale. Current research calls many of those assumptions into question.

Better Government
The advantages of special purpose government cited by Governor Reagan's Task Force and the ACIR have already been noted. Additionally the ACIR sees value in the ability of special districts to aid local citizens in expressing their preferences. "Large and small, as well as single-purpose and multi-purpose, units of local government, when used concurrently, reflect complementary expressions of public preference, not contradictory principles of organization."

Similarly, Thomas DiLorenzo found that "The ability of citizen-taxpayers to create special districts provides a means of accommodating diverse preferences...the application of economic theory leads one to conclude that special districts are conducive to both production and consumption efficiency in the provision of local public services.

Responsiveness
Richard W. Campbell concluded that those who are concerned with responsive government will tend to oppose consolidation. Conversely, those concerned with efficiency will tend to support consolidation. However, Campbell could find no evidence that consolidated governments perform better than separated governments.

The famous model of local economies developed by Charles Tiebout speaks of the importance of providing a variety of options to citizens. Households are then able to choose the jurisdiction that best meets their criteria for the correct bundle of public goods and express their preferences by "voting with their feet." By extension, reducing the number of governments reduces citizen choices and compromises citizen preferences.

Economies of Scale
Probably the most popular argument advanced by pro-consolidation advocates is that of "economies of scale". Research indicates that these economies vary according to the service provided. Moreover, the creation of diseconomies of scale frequently offset initial savings.

Bunch and Strauss found that consolidations of communities with populations between 800 and 14,000 could realize some economies of scale. Fox found economies in elementary schools of up to 300 students, fire departments of up to 10,000 residents, and refuse collection for up to 20,000 customers. DeBoer found similar economies for public libraries with circulations of less than 55,000 per year.

Sher and Tompkins wrote "Remembering that there are also diseconomies of scale in consolidation dramatically alters the strength of the consolidators'" arguments. Zymelman warned that administrators, ...should carefully consider the full costs of central purchasing because savings might not exceed the added costs of distribution. There are also possibilities of delays and loss of flexibility..."

The costs of blending organizations is often overlooked. Salary levels for comparable work are almost always increased to match those of employees in the higher
paid organization. Equipment and facility standards are almost always set at the highest level among the predecessor organizations.

There are additional factors that have been largely ignored in the consolidation debate.

Organizational Behavior
Perhaps the most questionable assumption in the pro-consolidation argument is that larger, consolidated organizations will continue to behave just as their smaller, predecessor organizations did. Existing theory and research do not support such assumptions. On the contrary, larger organizations, with combined revenues and responsibilities, will tend to identify options which were not available to their predecessor organizations and ultimately need greater resources to sustain them.

Size also creates new personnel issues. For example, a larger work force often requires more middle managers. An administrator who may be competent at managing a 50-person work force may have to learn new skills to work with a pool of 100 people or more. As new employees are hired, their qualifications, and salaries, will be commensurate with those of "big governments" elsewhere.

Monopolistic Behavior
Closely related to the organizational behavior of large organizations is the fiscal behavior of organizations with reduced competition.

The Tiebout model describes the choices that citizens make when selecting a jurisdiction in which to live. Local and state governments frequently compete to attract businesses as well. Tax incentives are offered to lure factories and shopping malls into new areas. Oates and Schwab write that "...if many local governments compete against one another...the taxes that consumers and businesses pay ...would exactly equal the value that each places upon the public provided good."

In less technical terms, John Shannon uses the "convoy analogy" to describe the benefits of multiple governments. No government can afford to fall too far behind in service provision or run too far ahead in terms of taxes charged.

An additional problem is noted by Willam Niskanen. He argues that, as the monopolistic power of a government increases, it becomes more likely that the government will spend money at levels higher than citizens would demand. That is because, it is more difficult for citizens to monitor the efficiency of larger governments.

Case Study Findings

The study also investigated the actual experiences of six different special districts that had gone through consolidations since the Passage of Proposition 13. Many of their experiences mirrored those described in the literature.

In all cases, total revenues coming into the governments involved have increased since the time of consolidation. There is no evidence that consolidation is a technique for making governments get by with less.

Nearly all reductions in salaries and expenses were short-lived. Many consolidation agreements expressly prohibited salary reductions. In the one case where compensation was reduced, the consolidation ultimately failed. In another merger, involving three governments, costs were reduced. However, two of the three governments had no full time employees and had been staffed under contract by employees working for the third government.

With one exception, some form of bureaucracy increased. In some cases it was additional personnel. In others, extra layers of management were imposed between operational personnel and elected officials. In older consolidations, additional structures were added to the base organization over time.

The case studies pointed out some important problems with citizen representation. A simple reduction in representation would not be surprising since a typical consolidation combines two governments, serving two communities, but eliminates some elected positions. However, citizens in a dependent district that were merged with an independent district, experienced greater local control when the resulting consolidated government was independent.

For any merger to be successful, all parties involved must perceive some personal advantage in making a change. The case studies illustrated some important factors to be considered when proposing a consolidation.

Enterprise districts have little incentive to consolidate unless they are contemplating an expansion or enhancement of service. If existing treatment plants are adequate, for example, two water districts are not going to merge, abandon one facility, and lay all new pipelines to a central plant. However, if two neighboring districts are contemplating facility upgrades or increasing capacity, a consolidation is one option that might be considered. Not only might one new larger plant be more cost effective, but the combined resources of a consolidated government might facilitate more favorable financing terms.

In the case of non-enterprise districts, the situation is somewhat different. Proposition 13 created clear winners and losers. Aside from using politically unpopular special assessments, the only way in which a non-enterprise district can increase its income is by having increased real estate values and frequent property turnover within its boarders. Thus districts in the "growth" areas of California have seen increased revenues in recent years while districts in relatively "built out" regions have suffered. Ideally, consolidations would take place between "growth" area districts and "built out" area districts.

However, there needs to be an incentive for "growth area" districts to participate. Otherwise one district subsidizes the other. Successful consolidations have taken place where the "built-out" district can offer political strength, financial strength (in terms of reserves or enhanced credit ratings) or organizational strength (in terms of personnel, equipment or facilities).

The issue of representation is also an important one in this context. Citizens in small districts often fear they will lose control and identity in a merger with a bigger government. Moreover, if a rural, sparsely populated district combines with a more densely populated suburban or urban district, at-large elections will favor the more populous community.

Conclusions

Consolidations of special districts should be undertaken cautiously, on a case by case basis. The existing trend toward voluntary consolidation indicates that local governments are already capable of recognizing areas where structural changes are needed and are responding accordingly.

There is little evidence that consolidations will reduce citizen costs or encourage public sector efficiency. Competition among governments is a much more effective tool for accomplishing those goals.

The pooling of resources often does create a new, larger organization with greater capacity and more options for service provision. However, these advantages must be weighed against the reduction in citizen access to government and the dilution of citizen representation which accompany government mergers.