As Michigan’s local governments have experienced to varying degrees slight to extremely severe revenue declines in recent years due to the changing Michigan economy and the collapse of the residential housing market, state leaders have extolled local governments to save money by cooperating and combining local government services. There is a presumption behind the common wisdom that services can be performed cheaper if they are spread over larger geographic areas and populations. This principle, called “economies of scale,” often exists in services that involve high fixed costs, such as investments in equipment or facilities.
On the other hand, services with costs that are mostly personnel-related often increase in cost as the size of the program or service expands. This is because the administrative oversight costs and prevailing compensation increase at rates that exceed whatever economies of scale might result. Nonetheless, savings also can result when combining services allows a local government to tap into expertise that would otherwise not be available or would be costly to duplicate.
MTA is a strong proponent of local government cooperation where local officials have identified a resulting real cost saving or an improvement, but we caution that state mandates and sweeping generalizations that service consolidation is a “best practice” does not reflect the true complexity of local government services. MTA has written extensively on intergovernmental cooperation, and additional information is available by clicking here.