A Tale Of Two Cities: How Municipal M&A Saves Taxpayers, Prevents Budget Shortfalls

The phrase “mergers and acquisitions” conjures to mind white-shoe investment banks, private equity and Fortune 500 firms. But as cities struggle to balance budgets, shave bureaucracies and cope with unsustainable pension and healthcare obligations to public employees, an intriguing concept could offer some relief: city and county mergers.

In the same way that private-sector consolidations offer efficiencies and economies of scale, municipal mergers can cut operational redundancies, saving taxpayers money in the process. Combined resources also offer a bulwark against state budget cuts and prevent tax hikes.

In 2011, the $3.7 trillion municipal bond market was comprised of more than one million different municipal bonds outstanding that had been sold by 44,000 state and local issuers, according to data from the Securities and Exchange Commission.

The sheer volume and complexity of the marketplace suggests considerable overlap in the scope and scale of these bonded projects. Additionally, consolidating county and local governments can also save money by hiring fewer bankers to sell their bonds in the marketplace. (As an aside, this post focuses on local governments; not-for-profit, 501c3 hospitals issuing municipal bonds have also seen fast and furious consolidation in the wake of the Affordable Care Act.)

This month, newly-elected Illinois Governor Bruce Rauner, a Republican, said he would create a Local Government and Unfunded Mandates Task Force to examine possible mergers. Moody’s Investors Service, my former employer, dubbed the move a “credit positive” for the Illinois local government sector.

Moody’s reports that the Land of Lincoln has more units of local government than any state with 6,963, as of 2012. This saddles taxpayers with the costs of redundant core and administrative functions, from schooling to road maintenance.

On the East Coast, in November 2011, voters of New Jersey’s Princeton Borough and Princeton Township approved a consolidation of the two towns into a single municipal entity called Princeton. Voters relied on a report from the Center for Government Research, a Rochester, New York-based non-profit advising Princeton on proposal, estimating $3.1 million in savings from the merger within the first three years (The merger took effect in January 2013, so results aren’t final yet.).

It took nearly sixty years for the marriage to finally occur; Princetons had voted on the measure five times previously without approving the merger and had already shared services for years. However, when residents learned they could save an estimated $200 in average annual tax savings per property in each town, they voted for it by an overwhelming margin. Princetons also had backing from the state (including an offer from Gov. Chris Christie to cover 20 percent of the total $1.7 million in merger costs); the New Jersey 2008 Municipal Consolidation Act encouraged contiguous municipalities to consider consolidation to better manage growth and save money.

Elsewhere, the City of Louisville, Kent., merged with Jefferson County in 2004, creating the nation’s 17th largest city. The move won an upgrade by Moody’s for the combined entity; the whole was greater than the sum of the parts.

Taxpayers are likely to agree as well, and this is a trend we could see continuing to increase across the country.