What Court Mergers Teach Us About Cutting Government Costs
Sîan Mughan (Arizona State University) & Dallin Overstreet (Arizona State University)
Across the world, consolidation is a common way of reforming local government. Advocates argue that combining two or more local governments enables the new, larger government to reduce spending by providing services more efficiently. One way that mergers achieve this is by spreading large capital costs over a larger population: instead of two small towns operating their own trash removal service or two small school districts running two administrative systems, the larger local government can operate one. It is also argued that mergers can reduce spending through the elimination of redundant departments, services, and staff.
However, the literature has failed to produce convincing evidence that mergers result in promised cost savings. One explanation is that savings are possible but are often not realized through consolidation because reducing personnel spending is difficult. The fate of municipal employees is perhaps the most sensitive aspect of mergers, and mergers often involve compromises over worker’s future employment. These compromises may be a political necessity, however they also limit the ability of mergers to reduce the size of the workforce, eliminate redundancy efforts, and may even increase the size of government if structural reform requires hiring new workers or finding new roles for now superfluous employees. Our research aims to develop a better understanding of the role personnel costs play in the fiscal outcomes of mergers. We do this by studying consolidation of state and local courts, organizations whose budgets are dominated by personnel costs.
In 1998, California reduced the number of courts operating in the state by merging its municipal and superior courts. Proponents argued this would increase efficiency and reduce costs by eliminating duplicate services and allowing for more flexibility in using judicial resources. Our new research analyzed 26 years of judicial spending data from US states before and after the mergers occurred to estimate the causal impacts of these mergers. The study makes use of synthetic control models to compare trends in fiscal outcomes in California to those in a synthetic control unit that represents a counterfactual California where consolidations did not take place.
The analysis shows that consolidating California's municipal and superior courts into unified countywide courts significantly increased judicial spending rather than decreasing it as intended. Annual current expenditures per person, comprised primarily of payroll, grew by a dramatic $68 – a 46% increase from the $146 pre-merger average (see Figure 1).
Figure 1: Judicial Spending in California
Notes: This graph compares the observed judicial expenditures in California (solid line) a hypothetical Synthetic California (dashed line), which is the weighted average of states that best match California’s pre-treatment characteristics using the SCM algorithm. The difference between the solid line and the dashed line represents the estimated causal effect of merger on judicial expenditures in California.
Personnel costs appear to have driven this spending growth (see Figure 2). Salaries of full-time judicial employees rose steadily for years after consolidation and the number of employees increased immediately following consolidation before returning to prior levels. While some salary growth is the result of equalizing the salaries of municipal and county employees (municipal court employees were paid less than their counterparts in superior courts), the hiring surge shows this wasn't the only cause.
The permanent increases in salaries combined with the temporary increase in the number of workers is an interesting and novel finding as it suggests consolidation affects the composition of the judicial workforce. This may occur if larger, more complex courts require more highly qualified employees who demand more generous compensation packages. Citizens may also demand a larger array of services from larger courts. For example, the creation and expansion of specialty courts (drug courts, domestic violence courts, etc.), expanded access to court services, or more expansive and sophisticated online access which in turn requires employees with specialized experiences and skill sets.
Figure 2: Evidence of Merger’s Effect on Judicial Employment Outcomes
Notes: California is represented by the solid line while the synthetic California is represented by the dashed line. The treatment year is FY1997 and the treatment effect is the difference between the two California's in averaged over the posttreatment period.
California’s experience shows merging governments alone does not automatically generate cost savings and might actually increase spending. Realizing efficiencies after consolidation requires compromises and hard choices. Before pursuing mergers, decision-makers, whether in court systems or local governments, must conduct a realistic assessment of their ability to reduce employee costs. If public officials fail to do this, mergers are unlikely to result in the promised cost reduction. These lessons extend beyond courts to other local government services that provide a variety of human capital-intensive services.
Siân Mughan is an assistant professor in the School of Public Affairs at Arizona State University. Her research interests lay in state and local government fiscal policy. Her current research investigates how tax and budgetary structures impact equity outcomes in state and local criminal justice systems.
Dallin Overstreet is a Ph.D. student in Public Administration & Policy at Arizona State University. His research interests lie in the fields of Public Finance and Economic Policy, with particular focus on trust fund solvency issues within the U.S. Unemployment Insurance program.