Special-District Proliferation and Local Financial Condition: The Hidden Cost of the Externalized Service Responsibility

Abstract

General-purpose governments have increasingly relied on creating special districts to provide specialized public services to subsections of their jurisdictions. There are many presumed advantages of pursuing this strategy, including displacing some of the own-source tax burden associated with providing such services with outside revenue sources. This goal is feasible, as special districts are usually formed across overlapping tax bases across multiple jurisdictions. However, this empirical analysis of 51,000 special district governments in the U.S., collected over the past four decades, finds that increased special district proliferation has generally resulted in decreased financial conditions of general-purpose governments. These empirical results demonstrate that claim public goods provision through special districts produces indirect financial stress on general-purpose governments that must then struggle to use less efficient methods for providing the same or similar services to their under-served citizens who are not covered by the special district.