Surviving and Thriving in an Irrational World – part one

Last year I spoke to the Alberta Union of Municipal Associations (AUMA) in Red Deer on the theme of “Surviving and Thriving in an Irrational World”. My talk met with such an enthusiastic reaction that David Barber of the Cordillera Institute (a think tank that focuses on excellence in local government), asked me for permission to reproduce the talk for their readership. They published it in two parts. Here is the first one, including an introduction by David Barber. By the way, if you are interested in local government issues, I strongly recommend that you get in touch with the folks at Cordillera and subscribe to their regular e-mail publications.

Surviving and Thriving in an Irrational World (part 1):  What Threatens Our Futures

A Note from Our Director
This commentary is based on a talk given to the Alberta Urban Municipalities Association at their President’s Summit in Red Deer (Alberta) on April 30, 2009.  Just a little more than 6 months earlier, the cuckoos in Washington (the financial regulatory committees of the U.S. House and Senate) had set off a chain of events which have had devastating effects, not just on the U.S. economy but on economies around the world.  [For more on this fleecing of shareholders and taxpayers, see Issues 03.30 to 03.32.  You can read the summaries of that series here.]  The timing of this chaos, right before a presidential election in the U.S. and a federal election in Canada, inspired the magpies in the major media to dub it as the latest ‘October surprise’.  When it led to the election of their favored candidate for president and sizable majorities for his party in the House and Senate, they marvelled at the ‘brilliance’ of the strategy.  Labelling as brilliant a strategy which gained political victory at the expense of plunging the country and much of the world into recession is just 1 of many irrationalities of these times.

Another is the cheering of the magpies as the new administration in Washington, as well as administrations in Ottawa and other national capitals, launched so-called economic-stimulus packages which are producing the opposite result.  As unemployment continues to rise, as our retirement savings are decimated, as businesses are choked by a scarcity of capital and more punitive regulation, as our senior governments throw around our money — and even more that they have borrowed in our names — as if there is no tomorrow, as officials in Washington and in a number of other capitals are calling for more of the same, those in senior government who are responsible for our municipalities are, once again, talking about municipal reform as a solution to their own financial problems.  And, just what solutions are they considering?  You guessed it — forcing municipalities to merge.  In part 1 of this commentary, Dr. Crowley demonstrates why forced municipal mergers are irrational.  In part 2, which will appear in our next issue, he outlines a rational solution which will not only enable municipalities to survive but to thrive in these irrational times.  Now, here is …

The Big Question
This commentary was inspired by a comment I overheard while I was getting my breakfast on the day of the presentation.  One of the attendees said to one of his colleagues, as he was walking in the door, “I’m here to find out if we¹re even going to be here in five years.”

The question of whether, in fact, some of your municipalities will be here in five years probably depends, more than any other single factor, on what our state or provincial governments do.  And that is a scary thought.  I probably don¹t need to explain why it is a scary thought, but I do think it is important to discuss these matters by way of concrete examples.  So let me tell you a story about the irrationality of senior governments, vis-a-vis municipalities, that comes from my home province of Nova Scotia.

The Chief Cause of Problems Is Solutions!
In the 1990s the decision was made to force the amalgamation of the four municipalities that constituted the Greater Halifax metro area into the Halifax Regional Municipality (HRM).  So if amalgamation was the ‘solution’ what was it supposed to solve and what problems has it created instead?  In my view, to understand the HRM experience, you have to understand three particular circumstances.

The Big Box Scramble
For the first, one might easily make the case that the amalgamation of metropolitan Halifax was caused by the Price Club big box retailer now known as Costco.  This is only a slight exaggeration.  The old municipalities of Halifax and Dartmouth got in a destructive bidding war with each other to attract the Price Club store that had been announced for the metropolitan area.  This was silly, since the benefits of the Price Club went well beyond the boundaries of each municipality.  In the end, Halifax won the right to have the store built within its boundaries at a cost of about $1 million.  That amount was a direct gift from the taxpayers of Halifax to the shareholders of Price Club for zero public benefit, other than sticking it to the municipality of Dartmouth across the harbor.  Ironically, of course, there will shortly be a Costco in the new Dartmouth Crossing shopping center …!  It opens on May 13.

It was events like this that raised great suspicion of the rivalry between these municipalities and convinced many, including in the provincial government, that a single municipality would be cheaper and more efficient because it would abolish such wasteful behavior.

The Spending Spree
Second, the discovery of natural gas off the shores of Nova Scotia triggered a huge flurry of public spending on the assumption that the revenue to pay for it was just around the corner.  Except the corner turned out to be two decades away.  By the early 1990s, as the federal government cut back transfers to the provinces in an effort to fix its own fiscal problems, and Nova Scotia’s debt had reached truly monstrous proportions, the province was in desperate fiscal shape — more so than virtually any other Canadian province — and they were desperate to cut costs.

The Information-Challenged
The third circumstance is that we have in Nova Scotia a culture of what I call executive personalism in government (that is the fancy social science-type term for it; you and I would call it pigheadedness, uninformed by any real information) — the policy formulation process is excessively weak, and fashionable ideas that get into the heads of premiers and powerful cabinet ministers are not subjected to searching analysis.  If an idea sounds good to the right people, things happen — heavy water plants, steel mills, long gun registries, Olympic stadiums, and municipal amalgamation being only a few examples.  I am sure that what I am describing here has absolutely no parallels with your own senior governments, but even if this is a totally foreign experience for you, humor me and hear out the rest of the story.

Lessons Missed
Our premier and his minister of finance got it into their heads that there were major efficiencies to be had in amalgamating municipalities.  Now if they had actually wanted to test these ideas properly, if they had wanted to engage in that dangerously radical practice known as evidence-based policymaking, they could easily have consulted the literature on local government and amalgamation, a literature which is now quite vast.  Had they done so, they would have discovered the following.

Smaller Is More Responsive
First, they would have discovered that local government is not merely a device for supplying municipal services, but also for finding out what services people want and how much they are prepared to pay for them.  The smaller the government unit, the better they are at discovering this, because the evidence is very strong that local government is closest to the people, and the smaller it is, the closer it gets to the population.  Amalgamation tends to undermine this relationship and therefore can only really be justified if there are pretty remarkable efficiencies to compensate for the dilution of responsiveness and democratic accountability.

Bigger Is More Expensive
But, second, they would have discovered that the evidence is quite strong that creating local government monopolies doesn’t reduce costs — it increases them.  It levels costs up to the highest common denominator in the pre-existing units, and seems to result in higher trends of cost growth over time.  This is especially true where amalgamation has eliminated competition between pre-existing municipalities both in terms of attracting residents and industry and in terms of tax and service levels.

Smaller Is More Efficient
It seems that the most dynamic force helping to keep costs down is not a highly centralized and bureaucratic monopoly provider of public services, but a decentralization of authority and decision-making within several municipalities in an urban area or even a mixed rural and urban region where residents cannot vote themselves benefits at the expense of other taxpayers in other parts of the region.  This ensures that people only demand services that they’re prepared to pay for, and municipalities have powerful incentives to keep costs low and satisfaction high, or risk the erosion of their tax base as people and businesses vote with their feet.

The Greater Vancouver Example
Where service provision has serious spillover effects across municipal boundaries (such as transit or water provision, for example), it appears that the correct response is a co-ordinating body that takes over those specific functions.  That’s why Andrew Sancton has written that Greater Vancouver, with its many municipalities and the Greater Vancouver Regional District co-ordinating spillover activities, is the best form of municipal government in Canada.  And this is an initiative you can take yourselves.  Prove to senior governments that you can solve spillover problems and take away one of the main reasons they have to put bull’s eyes on your backs.

Harvard Weighs In
In most amalgamated municipalities, spendthrift city centers vote for big spending and pass the bill along to suburban and rural voters who don’t want it.  I am not aware of a single serious scholar studying municipal amalgamation on a broad scale in Canada or the United States who has concluded that they save money or improve efficiency.  In fact, one of our leading thinkers on this issue, Howard Husock of the Kennedy School of Government at Harvard University, is now arguing that de-amalgamation is the way to go …  Hey, Harvard has to be good for something, and if it is saving your municipality from death by merger, I say “Go for it.”

Here is part of what Husock says:

“[S]tudy after study has shown that the efficiency gains of bigger government do not materialize.  [The evidence in one such study established] that such economies existed in only two areas: fire protection and library services.  Localities … can provide other services — police, recreation, public works, waste management — at equal or less cost than an amalgamated, or, in the U.S. context, county jurisdiction. … Somehow, however, the myth of efficiency through amalgamation lives on, so that it is worth explaining exactly why bigger government won’t save money.  And it is worth considering the possibility that the greatest efficiency gains may actually be realized by moving in the opposite direction: breaking cities up into their component neighborhoods.”

Very Few Economies of Scale
Professor Husock introduces my third point, namely that it is a fairly small part of public services where there are significant ‘returns to scale’ — in other words — where the bigger you are, the cheaper it is to produce a unit of a given service.  Researchers seem broadly to agree that roughly 80% of municipal services enjoy no economies of scale.  The evidence says pretty unambiguously that the lowest observable levels of per unit costs for most services are compatible with very small municipal units (on the order of 5,000 to 10,000 residents).  Moreover, there are significant diseconomies of scale beyond relatively small population numbers — on the order of 250,000 residents.  And, finally, that the supposed savings from smaller councils and elimination of several city halls and other trappings of multiple local governments, is so paltry as to be not even worth mentioning.

The Fruits of Executive Personalism
But of course, given the culture of executive personalism (remember this means pigheadedness of the ‘don’t confuse me with facts; my mind is made up’ variety) that I mentioned, they didn’t consult the literature or the research.  Had they done so, they, like California under Gov. Ronald Reagan, would likely quickly have abandoned their amalgamation policy.

Instead they committed a nearly always fatal mistake — they hired a consultant.  And instead of asking this consultant to review what was known about the dynamics of local government, they asked him to write an abstract report about all the ways one could, theoretically, save money if one were an all-knowing manager and if there were economies of scale in the provision of most municipal services.  The consultant duly told them that there were significant savings to be had at very low cost.  This is not hard to do since any outsider can look at any organization and identify ways that things could be done ‘better’.  In 1996 HRM was duly created.

Halifax Regional Municipality as Test Case
Now what is interesting to note is that the HRM is an extremely valuable test case, because it is the only large scale amalgamation in North America to have been studied from the outset by a team of experts.  A very great deal of what Bob Bish, one of Canada’s leading authorities on local government, learned from his years of studying municipal government, and from the HRM study in particular, became the key material for his extremely illuminating paper for the C. D. Howe Institute a few years ago under the revealing title of Local Government Amalgamations: Discredited Nineteenth-Century Ideals Alive in the Twenty-First.

A Brief Disclaimer
Now before I report on the findings of Professor Bish and his colleagues, let me emphasize that these results were preliminary, and the research team themselves recognized that the five years they gave themselves to study the new entity was not enough for it, and its procedures, to be fully formed.  Still, certain things are clear and I have not seen anything in the subsequent years of HRM’s operation to persuade me that these early results were atypical or unrepresentative.  In our work on our municipal performance report, I see no evidence that the trends I have identified have changed for the better.

What This Test Case Tells Us
So what can we see with hindsight?  Well, for example, the consultant’s implementation study underestimated the cost of amalgamation by a very significant margin.  The final tally, including a new financial management system and labor agreements, reached something on the order of a minimum of $40 million, whereas the estimate was under $10 million.  No cost savings or economies of scale are observable yet, and it is not obvious that they ever will be, or where they might come from.  Both taxes and other charges, as well as debt increased significantly.  User charges rose and average residential property taxes went up about 10% in urban areas and by as much as 30% in suburban and rural areas in the early years, and it has got much worse since.  Polling data show low levels of satisfaction with post-amalgamation services, although again it may be premature to make a strong judgment here.

What about Economic Growth?
Recalling the Price Club fiasco, it was clear that the business community thought that amalgamation would produce a more disciplined and efficient municipality and that this would improve the business climate.  Other than the innovative public-private partnership that now looks after HRM’s economic development, I haven’t seen the evidence that this has occurred.  It is worth noting, as an aside, that those U.S. metropolitan areas with the highest rates of economic growth count many with the most fragmented local government structure.  There is no observable correlation between amalgamation and economic growth.  The expectation that these two things would be correlated shows a misunderstanding of the relationship between local government and economic growth.

What about Service Delivery?
There is still a very high degree of monopolistic in-house provision of services, although there are exceptions in areas like solid waste collection.  An innovative public-private partnership process for the construction of a waste water treatment system collapsed, in large part, in my view, because the powers-that-be in HRM favored in-house monopoly provision for political reasons, ignoring the efficiency losses and loss of innovation and accountability it almost always entails.  Now that that system has been built, it is performing poorly and is going to have to be shut down for months this summer.  Unlike with a private provider, who could have been made to pay penalties for this poor performance, the public sector monopoly sails on serene in its indifference.

To Be Continued