Special Districts: America’s Shadow Governments

April 5, 2021

By Christopher B. Goodman, Assistant Professor of Public Administration, Northern Illinois University 

When I teach about the property tax at Northern Illinois University, I play a game with my public administration graduate students. I ask the homeowners in the class to dig out their property tax bill and share it with the class. We go line by line looking at the millage rates of each levy and examine who is doing the levying. Some, like the county, the city/village or the school district(s) are easy to identify. But other line items are somewhat more obscure, like mosquito abatement districts, conservation districts, civic center authorities, joint water authorities and on and on.  

This naturally leads to conversations about why these specific services are provided by a special district rather than a general government and whether this arrangement leads to higher taxes. We discuss whether, if there was a different vehicle for funding these services, property taxes might go down. In my state of Illinois, home to the largest number of independent local governments in the country, this is a particularly important question. But like many questions like this, there are no easy answers. 

Let’s back up. What is a special district? Definitions vary from state to state; however, California’s definition is likely the most transferrable to other states. Special districts have four characteristics: 1) they are a form of government, 2) they have a governing board, 3) they provide services and/or facilities, and 4) they have defined boundaries. This could easily be the definition of a city. The defining feature is commonly the singular nature of the service being delivered.  Most special district provide a single service to a defined geographic area. The diversity of kinds of services provided is immense. The most common areas are fire protection and water supply; however, there are a near unlimited combination of other services provided. 

Service provision by special district is popular in the United States. In 2017, the U.S. Census Bureau reported 38,542 independent special districts or roughly 43% of all independent local governments. (Independent special districts are a subset of all special districts, requiring substantial administrative and fiscal autonomy from other local governments.) 

In addition to being numerous, the growth in the number of special districts over time has been dynamic. The number of independent districts in the US grew from just over 8,000 in 1942 to the nearly 39,000 we have today. Some have attributed this growth to the extreme flexibility of special districts. In many states, special districts can take on nearly any physical shape, have any size population contained within them, and overlap any other forms of local government (the academic literature refers to this as “territorial flexibility”). 

Special districts are financed in two primary ways. Some districts such as fire protection districts rely almost exclusively on the property tax. Other like water supply districts rely heavily on fees for service or user charges. 

The perennial question is whether the financing of many overlapping, single function special districts lead to higher (or lower) taxes and other sources of revenues than would be charged if all services were provided by a single local government. In general, research has led to this answer:   higher levels of overlapping special districts lead to the need for higher level of local government revenue than would be expected with no overlapping entities.  This effect is on the order of 10 to 25 percent higher revenues. These additional revenues do not appear to be spent on local government employees, so the logical conclusion is these revenues go toward excess spending, over and above what would ordinarily be demanded.

It is unlikely that this is a factor of any intentional fraud or malicious intent. Rather, the lack of coordination between independent local governments leads to higher spending.  Because the service area specific spending proposals do not have to be weighed against one another in a unified budgeting process, spending (and therefore the revenues to support it) grows more than it would be if all spending proposals had to compete for limited resources. 

It follows that some consolidation among special districts may be fruitful; however, it isn’t that simple. Because of the extreme territorial flexibility of districts, it is unclear how merging them would actually work. District borders and municipal/county borders align in some instances but not all. So, the question of which districts should be merged into one is a knotty one.

 A more concerning aspect is the relatively hidden nature of special districts. Political participation in local government elections is low compared to state or federal governments, and it is likely that participation in special district elections or public meetings is lower than the average local government. It is possible that with higher participation the excess revenue/expenditure issues would be less severe than the research suggests.  

Special districts are a ubiquitous yet relatively hidden staple of many areas. They are common, provide many services that residents and businesses rely on, but are also a relatively unnoticed part of local government to many people. Bringing these “shadow governments” out of the shadows is a key first step. Residents may prefer services by special district once they know that is how services are arranged. Or they may not, and informed reform (likely at the state level) can occur. As with many things in local government, it is complicated. And that is alright as long as we lean into the complexity and try to work through it.