Local governments everywhere in the U.S. have been asked to “Do more with less” for many years now.  In particular, across the Northeast, a movement has been afoot to trim costs through the consolidation, elimination or reorganization of various levels of local government.  And yet, after many analyses, reports, public meetings and referenda, precious few communities have, in fact, undertaken a substantial municipal reorganization.

There are many reasons for this outcome, all of which have bearing on the future of the municipal consolidation movement.  For some stakeholders, there is an issue with community identity and historic preservation.  Others see it as a loss of adequate representation, control over local decisions and the comfort and protection of a tight-knit community bound together by an elected body.  Some question the cost savings that might occur: how a presumably larger municipal entity could possibly deliver the same services at a lower cost and whether the costs and disruption of the transition will ever be recovered in presumed long-term savings.  And then there is the all-important question of “fairness”, as it is widely accepted that reorganizations typically shift tax burdens from one group to another, sometimes without the consent of those adversely affected.

Despite these objections, the financial case for reorganization seems to be clear.  Of the host of reports completed to date on reorganization propositions, the vast majority show a savings of some degree to the constituency in question, whether it be Village residents in a dissolution process or school district voters in a district consolidation referendum.  In fact, the savings projected in a few of these instances seem immensely compelling.  And yet, residents have not embraced such measures.  For example, since New York State substantially altered the process of village dissolution in 2010 through its GML Article 17-A law, 15 referenda have been held in various villages across the state. All but 2 of those referenda have returned a “no dissolution” outcome.  A similar pattern can be seen in school district consolidation votes and other municipal reorganization initiatives.

This seeming incongruity may have an explanation that has been given short-shrift in the public discourse to date on municipal consolidation: the element of uncertainty.  Human beings are, by their nature, pre-disposed to prefer the known over the unknown.  In countless clinical studies by psychologists, human subjects have shown an unconscious bias towards things that are close to them, known and understood.  In one extreme example, when presented with several objects to choose from, simply having touched one of the objects is enough for the typical subject to prefer it, statistically speaking, over an equal substitute.  Why exactly this occurs is not completely understood, but a case can be made that evolution has equipped us with survival skills that include the inherently conservative preference for the comfort of the known (our family, our tribe, our land, our customs) to the unknown.  This translates across many of the domains of modern life: for example, when choosing among particular investment opportunities at a given rate of return, a person will naturally prefer an investment that offers less risk because the likely result obtained is better understood (i.e. is less uncertain).  Consider the voter to be a savvy “investor” determining how to allocate resources in public vote on reorganization, and it is not surprising that the voter/investor favors the lower risk alternative.

What is true for individuals is doubly true of municipalities, which are essentially a grouping of those same risk-adverse people.  Governments are not set up to be entrepreneurial in nature (nor should they be) and regularly have to make decisions whose results will echo through the years if not decades to come.  Municipal officials are seldom rewarded for taking risks but are often punished, electorally speaking, when risky decisions take an unfavorable turn.  In asking governments to make major changes to their organization and even jeopardize their very existence, it seems only natural that the burden of proof should rest squarely on the shoulders of those advancing the agenda of change.  It is not sufficient to say that savings are “likely”, even if statistically speaking that may, in fact, be the outcome.  And therein lies the problem.

This burden of proof has not been met in many instances and may be a very difficult target to achieve under current conditions.  In the example cited above regarding village dissolution votes under New York State GML Article 17-A, an intriguing lesson can be learned.  The Article 17-A process was put into place with the express intent of facilitating municipal consolidation, one feature of which was an accelerated and fixed time table for putting the matter to referendum.  Unfortunately, in many instances, that has meant that local governments, both the village and town or towns in question, have not been able to study the matter in sufficient detail and disseminate the information to the public. The voters have therefore had to vote with a high degree of uncertainty: “Will this really save me money?”, “Will all the services I currently receive continue or be terminated?”, “What will happen to the employees, assets and debts of the Village?”, etc.  As shown, voters have clearly preferred the status quo.  Rather than expedite the process, Article 17-A has brought municipal reorganization to a screeching halt.

In contrast, under the previous New York State statute governing village dissolution (Article 19 of Village Law), the process was quite different.  There was no fixed timeline and local governments had ample time to evaluate alternatives, ponder outcomes and prepare the public with sufficient detail.  In each instance under Article 19, a complete Village Dissolution Plan was published and reviewed prior to the vote and the public had the opportunity to air grievances and be heard.  The outcomes were markedly different: of the 13 most recent referenda on village dissolution under the Article 19 law, fully 7 returned a vote in favor of the proposition.  We compare this 54% passage rate to the 13% rate under Article 17-A, and a case can be made that uncertainty played a significant role.

Thorough examination and dissemination of information are, however, not the only barriers to removing uncertainty from the process.  Wholesale municipal reorganization has many inherent uncertainties that may never be fully extinguished.  For example, village dissolution can be proposed by a village board, studied by a village-appointed committee, and voted on by village residents.  But the actual village dissolution is largely accomplished by the town board, which is charged with providing for the continuity of services in the now defunct village.  That town board answers to a larger set of constituents which may not align completely with the intent of the village’s plan.  This is especially true when a large tax burden shift may occur.  While too complex to describe herein, the execution of a dissolution process is a somewhat subjective affair with respect to the town’s obligations to respect the plan.  Further, some matters cannot be dictated via the village dissolution plan: does the town board hire former village employees or not?  Does it respect their previously accrued seniority, benefits and wage scale?  What happens if, after two years and a new election at the town level, the board wishes to discontinue a service being provided in the former village?  Will the town board charge costs to the former village residents for services only provided to them or will those costs be spread across the entire town tax base?  Which services might be discontinued by a future town board?  Will the town substantially alter the zoning laws of the former village sometime in the future? 

In light of the above, there are a number of ways states that wish to promote local government reorganization can help to remove uncertainties in the reorganization process.  First, states should provide maximum flexibility to local governments in terms of providing ample time and resources for data collection, deliberation, examination, planning and public hearings.  This will give voters some level of confidence that the matters have been addressed thoroughly.  Secondly, states should mandate that any effected level of government be involved in the formulation of a reorganization plan.  In the case of village dissolution, for example, the town should have an equal seat at the table during the planning process and a strong if not dominant influence on the outcome of the final plan.  Third, states should clarify the obligations of the surviving entity to abide by the plan to all reasonable extent.  Fourth, states should set up a clear means of arbitrating disputes over the execution of the plan.  Currently, the defunct entity is, by definition, no longer in existence and cannot itself defend the plan’s intentions.  Fifth, states should provide some protection to zoning ordinances and other laws of the non-surviving entity for a fixed period, so that such laws remain in effect for a meaningful period of time.  Sixth, states have significant legislative and, in same instances, constitutional work to clarify and ameliorate the processes by which reorganization can occur.  For example, in New York State, towns are prohibited from absorbing village fire departments due to a conflict in law (they must instead contract with third parties) and cannot form special policing districts without a specific act of the legislature.  Since public safety is one of the most fundamental aspects of local government, this presents a tremendous level of uncertainty as to the outcome of reorganization.

In some instances, of course, local government reorganization simply does not make sense financially or organizationally and should not be pursued.  But there is a mounting body of evidence that consolidation and reorganization have the potential, in fact, to save money in some cases.  To make the best possible “investment decision” for or against municipal consolidation, citizens need to be given surer footing and clearer assurances of the likely outcomes.  By removing these elements of uncertainty, states can advance their municipal reorganization agendas. 

Acknowledgement: Data on municipal consolidation votes in New York State provided courtesy of Wade Beltramo of the New York Conference of Mayors. 

Last month we won the lottery – not the mega millions, but for a seat at President Clinton’s keynote address to the “Open for Business” conference in Albany. President Clinton provided the economic developers in the room a number of tips and ideas, particularly focusing on clean energy industries and how to support existing businesses and entrepreneurs. He cited several examples of innovative ideas and successful projects that he has personally encountered during his travels. Among President Clinton’s ‘tips’ was a suggestion to check out Massachusetts Institute of Technology’s (MIT’s) policy regarding the licensing of intellectual property.  So what is so special about MIT’s licensing system?

First, a very brief primer: Licensing of university property is an important form of technology transfer, i.e.  the movement of knowledge and discoveries from academia to the general public.  Universities that accept federal research dollars can patent intellectual property from that research and then license it to third parties for a fee and/or royalties.

Many universities see this as a welcome source of funding to support research or general operations.  For over a decade, however, MIT’s primary objective has been to view technology transfer as a public service and not a business.  Its mission is to (a) foster commercial investment in the development of inventions and discoveries, and (b) through these investments, and the economic development and products that follow, provide direct benefit to public.  We note the clear absence of the ideas of “maximization of profit”.

We see the following as key elements of MIT’s track record of leveraging its intellectual property to maximize public benefits:

• Very low initial licensing fees ($25,000-$100,000) reduce the barrier to entry.
• Low royalties (3-5%) allow the commercial entity a higher probability of reaching profitability.
• The Institute will accept a limited equity position in partial lieu of royalty payments, allowing the commercial enterprise to attain positive cash flow more quickly.  This also allows MIT to enjoy potential upside without a significant investment or risk of loss (other than the opportunity cost of the lost royalties).
• While allowing for exclusive license arrangements, MIT imposes several important limitations that assure that the indirect public benefits are maximized.

On this last point, MIT will issue an exclusive arrangement only for a limited term.  It also imposes other performance milestones on the licensees that require them to hit benchmarks in terms of employment, sales and sub-licensing.  That way, if a licensee fails to leverage the intellectual property in an economically friendly manner, MIT can reclaim and relicense the property to others.  This assures the Institute that the property not be tied up and under-utilized (intentionally or unintentionally).

MIT credits these particular policies with its track record of exceptionally high levels of commercialization attainment.  However, you might wonder how large of a subsidy is required for the Technology Licensing Office to operate.  After all, the TLO also operates all the normal incubator-type services: counseling and coaching, some formal education, patent fees, negotiations with interested partners, not to mention a staff of 33 professionals!  TLO does attempt to recapture some of its costs from licensing through fees and royalties.  In fact, after recovering basic legal costs of patenting and licensing IP, the TLO then takes a cut of 15% of any royalty payments.  The balance of royalties is distributed in thirds between the IP inventor, the inventor’s department at MIT and the MIT general administrative office.  This cut allows the TLO to cover its basic operating costs and more.  In fiscal year 2010, the TLO grossed revenues of $76 million, of which $60 million came from royalties, $9 million for patent reimbursements and $1 on equity cash-in.

Can any research center accomplish this track record?  The TLO’s website responds with a resounding “Yes” and explains, “Start with outstanding people; clear, articulated policies; and a streamlined process.  To get started, however, you will also need a sum of money to invest in filing patents and building a portfolio. Do not expect to break even for five years or more.”  In other materials, the TLO provides the following insights on “lessons learned” on how to position stakeholders, IP policies and the technology transfer organization for maximum effect:

• With the exception of the occasional "blockbuster", licensing revenue is small. 
• Don't expect product royalties for 8 -10 years
• Most companies want quick time-to-market
• Publishing lists of available technology is not effective
• The inventor is the best source for leads