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Over the last 50 years, consolidation has dramatically reduced the number of school districts in the United States, and state governments still recommend consolidation, especially in rural school districts, as a way to improve school district efficiency. However, state policies encouraging consolidation are often challenged on the grounds that they do not lead to cost savings and instead foster learning environments that harm student performance. Existing evidence on this topic comes largely from educational cost functions, which indicate that instructional and administrative costs are far lower in a district with 3,000 pupils than in a district with 100 pupils. However, research on the cost consequences of consolidation itself is virtually nonexistent. This paper fills this gap by evaluating the cost impacts of consolidation in rural school districts in New York over the 1985 to 1997 period. Holding student performance constant, we find evidence that school district consolidation substantially lowers operating costs, particularly when small districts are combined. The operating cost savings ranges from 22 percent for two 300-pupil districts to 8 percent for two 1,500-pupil districts. In contrast, consolidation lowers capital costs only for relatively small districts, and capital costs increase substantially when two 1,500-pupil districts come together. Overall, consolidation is likely to lower the costs of two 300-pupil districts by over 20 percent, to lower the costs of two 900-pupil districts by 7 to 9 percent, and to have little, if any, impact on the costs of two 1,500-pupil districts. State aid to cover the adjustment costs of consolidation appears to be warranted, but only in relatively small districts.

During the Great Recession, local governments experienced unprecedented fiscal stress. Among localities, special-purpose governments are especially vulnerable to recessions due to their reliance on sole revenue sources. School districts are one example that depends heavily on state aid on top of property taxes. However, the literature is very thin on the savings behavior of special-purpose governments. This paper contributes to filling the niche: it uses a 28-year panel of fiscal and socioeconomic data for school districts in New York State to examine the determinants of fund balances. Our findings show that the savings of school districts are affected by their size, fiscal capacity, and revenue portfolio. The results are similar for reserved funds and unreserved funds, which suggests that school districts use reserved funds as a savings mechanism. However, the savings are not necessarily related to economic cycles.

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