The Boston Fed: Savings Through Local Government Regionalization

The Federal Reserve Bank of Boston has just issued a new study on local government in New England, with a focus on Massachusetts and Connecticut. The report, titled “The Quest for Cost Efficient Local Government in New England: What Role for Regional Consolidation?” focuses on author Yolanda Kodrzycki’s well thought out ideas on how local governments can achieve savings and efficiency through regionalization.

The report pays the necessary homage to the tradition of home rule in New England, with acknowledgement of the political difficulties inherent in consolidations across governmental units. Kodrzycki deals with what types of services may be able to be scaled to achieve substantial savings for localities, as well as those services that may not lend themselves to such savings. From the report:

Because local governments perform such a diverse array of services, policymakers need information on which ones are compelling candidates for regional consolidation. Both the experiences of local officials and the findings of scholarly studies indicate that capital- and technology-based services, as well as some other services that require specialized skills, are the services for which interlocal cooperation has the greatest potential for cost reduction. Moreover, in some cases, service quality tends to improve when public services are provided on a regional rather than a local basis. By contrast, most labor-intensive services do not exhibit economies of scale and are provided as effectively (or possibly even more effectively) by smaller jurisdictions.

Kodrzycki homes in on the services that can be shown to have such potential. Both Massachusetts and Connecticut were judged to have the greatest upside potential for savings. I will only focus on Massachusetts. The report highlights three areas where large savings are achievable for Massachusetts, with an estimate that about 20% of current local spending could be impacted. That is a big chunk of money. The areas are 9-1-1 dispatch (Public Safety Answering Points PSAP), local health services, and public pension management.

In the area of PSAPs the study showed Massachusetts has 268 call centers, ranking it 12th in the country per capita. The data also shows that over half of those call centers handle ten or less calls per day. The study, using comparative data, outlines how operational costs scale down on a per call basis as call volume goes up. (In other words the larger the PSAP the lower the cost). Before dealing a little bit more with cost let us diverge to one of the most utilized political argument against such consolidation, which is the potential for diminished service.

Whatever the optimal configuration of PSAPs from a cost standpoint, another pressing concern is the effect of consolidation on emergency response times. We performed a preliminary analysis exploring the relationship between PSAP size and response time, using data provided by the National EMS Information System. With controls for location and a variety of exogenous delay factors (such as language barriers), our tentative results suggest that larger PSAPs are actually associated with faster response times. Thus, consolidation appears to have the potential to shorten the interval between 9-1-1 calls and the dispatch of first responders, an improvement that in turn would tend to have
a beneficial impact on survival outcomes and other indicators of service effectiveness.

Back to costs, with the results being astounding. From the report:

The total operating costs for the hypothetical regional PSAP structure in Massachusetts are estimated at 39 percent of the current costs. Similar calculations using the Maryland and Pennsylvania data yield similar estimates. Thus, the data indicate that by reducing the number of PSAPs to 14, Massachusetts could reduce its overall operating costs by over 60 percent (Table 3). We used a modified procedure based on the New Jersey information,
which indicated the equipment costs for various size categories of PSAPs (as opposed to operating costs for individual PSAPs). These data suggest that Massachusetts might save an even greater percentage in ongoing equipment
expenditures (75 percent) through regional consolidation of PSAPs.

I believe that the equipment issue looms very large on this question. For local PSAP’s that may have just spent valuable capital dollars to upgrade local call systems the savings may be concentrated in operations. But for localities that need additional or updated equipment the savings is through both operations and the capital budget. That is the position Methuen found itself in as we contemplated joining the regional PSAP formed through the Essex County Sheriff’s office. With a state grant for construction of a call center, and with equipment that needed major infusions of capital the City Council rejected the proposal to enter the regional group. The savings foregone by that action amounted to hundreds of thousands of dollars. I digress to show the difficulties involved even where the savings are clear and unambiguous.

In the area of public health the report acknowledges some of the difficulty involved in making valid comparisons. Smaller health departments may actually have lower per-capita costs than larger ones, but that is due to smaller units offering substantially less by way of services. Once service provision is standardized the report shows what you might expect: larger Public Health Departments had lower per capita costs. Massachusetts has 330 Public Health Departments. So after “service equalization” what does the study show in terms of potential savings?

As shown in Table 5, the total cost of consolidated Massachusetts local public health services outside of Suffolk County is estimated to be just above one-half of the current cost. Approximately one-half of the savings result from a more efficient scale of production. The remaining one-half reflects net reductions in services under the “rounded services” scenario.

The study estimates regional consolidation, done roughly on the basis of old county lines, and excluding Suffolk County because of the Boston Health Department’s scale, would produce a 50% reduction in cost statewide. Half of that would be from some diminished services as “standardization” occurred, but half would be from economies of scale. Another pretty hefty number, but another arena where locals would rather pay more in order to control more.

Finally the report goes to pension management. Massachusetts has 100 separate pension systems, and the focus of this study is not money management per se but rather the administrative costs involved in managing these smaller systems. From the report:

Researchers have found that per capita administrative costs are higher for small defined benefit pension plans than for large defined benefit pension plans, in both the private and the public sectors.35
For this reason, some experts have argued in favor of consolidating pension plans within states in order to reduce costs.36 Advances in information technology over time strengthen their position.

In performing an analysis the author examined several different potentials for consolidation, including a consolidation of all local plans, a consolidation of all state plans, and a consolidation that included all plans, state and local. From the study:

For 2007, 54 local government pension plans and 11 state-level pension plans in Massachusetts reported administrative costs to the Census Bureau. We first consider consolidation of all local plans into a combined plan. Such a merger would eliminate the smallest public pension plans in the state (Figure 5, Panel A). According to
the regression analysis, the overall cost of administering pensions for local government employees would fall by about 38 percent (Table 7). Combining all the state-level plans into a single plan (Figure 5, Panel B) would reduce the cost of administration by 13 percent. Incorporating all state and local plans into a single plan with some 500,000 participants (Panel C) would realize even greater economies of scale. The regressions indicate that aggregate administrative costs would fall on the order of about 28 percent from current levels.

Another pretty big savings for taxpayers, and another political front where every inch of ground taken will likely be very costly to those advocating such consolidation.

The author speaks of other potential areas of savings that meet the report criteria, including finance, purchasing, and Information Technology. The report takes a pass on these potentials due to the lack of data that would allow a full analysis. The author is fully cognizant of the difficulties involved, and as far as future policies go advocates for state government to incentivize the locals in the three areas. How? Obviously financial incentives are one way, with the suggestion made (as an example) that grant funding for local call centers be shifted to regional efforts. The desire to remain fully local would become a little bit more expensive for municipalities under this suggested policy.

As a former Mayor I understand the strong resistance to policies that save money through regionalized efforts. Even when faced with savings that are large and beyond dispute locals tend to rationalize bad behavior by disputing the non-disputable, or by inventing potential service issues to rationalize foregoing the savings. For those interested in actually saving money while at the same time providing more and better services this is a report that sheds important light on ways to achieve those savings at the local level. The report can be found here.

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