Potential Cost Savings from School District Consolidation: a Case Study of New York

The early 1990s have been a time of fiscal stress for local governments in the United States with school districts particularly hard hit. This article presents the results of a detailed study of potential cost savings from consolidation of New York school districts. It extends past research on consolidation by developing a theoretical framework which distinguishes several dimensions of economies of scale and defines an empirical cost function for schooling. The results of estimating the model indicate potentially sizeable costs savings from consolidation of districts with fewer than 500 pupils. Using such districts as candidates for consolidation, the study examines in detail the implications of merging these districts with one of their neighbors and finds relatively few districts strong candidates for full consolidation in New York, although some may benefit from sharing of administrative and support functions. The estimated cost model also sheds light on potential diseconomies associated with large city school districts. While findings apply directly to New York, the method developed here has general relevance to state education policy by helping to target candidate school districts for consolidation, and, where consolidation is not feasible, adjusting state aid formulae to reflect more accurately the cost impacts of scale. POTENTIAL COST SAVINGS FROM SCHOOL DISTRICT CONSOLIDATION: A CASE STUDY OF NEW YORK The early 1990s have been a period of fiscal stress for local governments in the United States with federal aid declining, tax revenue stagnant, and little increase in state aid as states attempt to cope with their own revenue shortfalls. The fiscal plight of school districts epitomizes this situation with slow growth in both state aid and property tax revenues. In this tight fiscal environment, state governments, which fund half of school district budgets (U.S. Bureau of the Census, 1992), as well as local school districts have been searching for ways to improve economic efficiency of local schools . One initiative that has received considerable attention is consolidation or reorganization of school districts. Such interest derives from the perception that there are significant cost savings from consolidation of small school districts due to scale economies in the provision of education. New York State, for example, has actively encouraged consolidation of small school districts and local governments through provision of additional operating and capital aid to consolidating governments. Despite a substantial literature on economies of scale in education, there is little consistent evidence on whether school district consolidation saves money while maintaining educational quality. The objective of this article is to present results of a detailed study of potential cost savings from consolidation of New York school districts. The next section improves on past research on consolidation by developing a theoretical framework for evaluating the costs of providing public services. The conceptual model provides a basis for a comprehensive definition of various elements of economies of scale in education. This model is used to estimate an empirical cost function which identifies potential cost savings from school district consolidation in New York. The results of this analysis indicate potentially sizeable costs savings from consolidation of districts with fewer than 500 pupils. As regards possible diseconomies associated with large city school districts, evidence here indicates relatively small diseconomies of scale even for the largest district in the sample (50,000 pupils). Using districts with 500 or less pupils as potential candidates for consolidation, the study examines in depth the implications of