Municipal mergers: cons and pros
Municipal mergers are one of the most common reforms of jurisdiction size
Municipal mergers, also known as city-county consolidations, refer to the process of combining two or more local government units into a single entity. This process has been proposed and implemented in various cities and regions around the world as a way to improve efficiency, reduce costs, and address issues such as population decline and financial distress. However, the decision to merge municipalities is not without controversy, and there are both pros and cons to consider.
One of the main advantages of municipal mergers is that they can lead to cost savings and increased efficiency. By combining the resources and services of multiple municipalities, a merger can reduce duplicated efforts and administrative costs, resulting in more efficient and cost-effective delivery of services to residents. Additionally, a larger and more diversified tax base can help to stabilize local finances and reduce the risk of financial distress.
Another potential benefit of municipal mergers is that they can lead to increased regional cooperation and coordination. By combining municipalities into a single entity, a merger can facilitate the development of a more comprehensive and coordinated regional plan, leading to better land use, transportation and other infrastructure decisions. Furthermore, a merger can also lead to increased representation and decision-making power for residents, who may have greater access to services and resources as well as better opportunities to participate in local governance.
However, there are also several potential drawbacks to municipal mergers. One of the main concerns is that mergers can lead to the displacement of low-income residents and exacerbate socio-economic disparities. This is particularly true when the merger involves wealthier municipalities absorbing lower-income municipalities, leading to rising housing costs and displacement of low-income residents. Additionally, merging municipalities can also lead to the loss of local identity, history and culture, which can be important for residents.
Another potential drawback of municipal mergers is that they can be difficult and time-consuming to implement. The process of merging municipalities can be complex and politically charged, requiring significant time and resources from both municipalities involved. Moreover, the merger process can also be costly, and there is no guarantee that the anticipated cost savings will be realized in the short term.
There have been a number of studies on the impacts of merger reform on financial efficiency in different countries, studies that assess the impact of municipal mergers on performance of local budgets and income are still scarce in Armenia. Despite strong local opposition, the government of Armenia has forged ahead with its ambitious project of municipal reorganization. The debate over the merits of this reorganization is set to continue, raising the question of whether municipal mergers drive regional development.
Furthermore, it is important to note that, despite variations in ideologies from one country to another or one period to another, economic theory and data suggest that citizens are better served in urban regions that have numerous small municipalities rather than those dominated by only one or a few. Municipal mergers are a significant policy question in many countries, yet empirical evidence on the effect of these mergers on the production of municipal budgets (effectiveness) and income is limited, especially in terms of analyzing the changes before and after the merger.
My research examines the fiscal consequences of municipal mergers by analyzing a large-scale merger reform in the Republic of Armenia. This reform, implemented from 2016 to 2017, resulted in a substantial reduction in the number of municipalities. Using a difference-in-difference design with municipality-level panel data over 2011–2020, I find that total income and municipal budget own income (local revenue) significantly increased after the mergers.
According to my research, the chart below illustrates the positive impact of the merger reform on municipal budget incomes. This suggests that municipal mergers can lead to increased income and improved financial efficiency for local governments. However, it is important to note that the results of this research are specific to the merger reform in the Republic of Armenia, and further research is needed to examine the effects of municipal mergers in other countries and contexts.
The formation of the administrative territorial units has begun in parallel with the approval of the Soviet system which was characteristic of the Soviet Union. It was regulated by the Decree of the Supreme Soviet “On the Order of Resolving issues of Administrative-territorial Structure of the Armenian Soviet Socialist Republic”. According to the current legal acts there were classified into urban and rural settlements. Therewith, the cities and country- towns within the republican jurisdiction were considered as urban settlements, villages and districts were the rural settlements irrespective of administrative jurisdiction. The Republic of Armenia was divided into 37 administrative units.
The reform of territorial administration in the Republic of Armenia has started since 1995. Establishment of the state institutions and administrative system was urgent for newly independent Armenian Republic. Changes in state administrative system are stipulated in the Constitution of the Republic of Armenia, which was adopted by referendum in 5 July 1995.
Administrative territorial division in the state administrative system has its particular place and it is no coincidence that among the number of laws aimed at the democratization of the public administration system the RA Law ”On Administrative-Territorial Division of the RA” (4 December, 1995) was one of the first laws, which was adopted, taking into consideration that Article 104 of the RA Constitution stipulates administrative territorial units, that is marzes(regions) and communities, as well as those marzes, which consist of rural and urban communities.
My research examines how changes to the municipal mergers affect municipal budget taxes [2]. The main purpose of merging municipalities is to build more efficient and effective local governments with greater financial capacities by improving effectiveness of municipalities. The structure and financing of a tax change are critical to achieving regional development. I use a dif and dif econometric approach that enables us to distinguish treated and not-treated municipalities based on the mergers. The municipal mergers impact on municipal taxes for long term is uncertain, but many estimates suggest it is small.
In conclusion, municipal mergers can have both pros and cons to consider. While they can lead to cost savings, increased efficiency and regional cooperation, they can also lead to the displacement of low-income residents, loss of local identity, and difficulties in implementation. Therefore, it is important for municipalities considering a merger to carefully weigh the potential benefits and drawbacks and to involve residents in the decision-making process.
References
[1]. Avetisyan, Sergey, Concept of Municipal Mergers: Evidence From Republic of Armenia (July 26, 2022). Available at SSRN: https://ssrn.com/abstract=4173094 or http://dx.doi.org/10.2139/ssrn.4173094
[2]. Avetisyan, Sergey, Do Municipal Mergers Affect on Municipal Taxes? (August 23, 2022). Available at SSRN: https://ssrn.com/abstract=4198055
