HD27 - Report on the Impact of Annexation and Immunity Actions on Affected Localities with Regard to State Aid, Mandates, and Regulations

  • Published: 1989
  • Author: Commission on Local Government
  • Enabling Authority: Appropriation Act - Item 76 (Regular Session, 1988)

Executive Summary:
Item 76 of the Appropriations Act for the 1988-90 biennium directed this Commission to study the "financial impact of annexation and immunity actions on affected localities with regard to state aid, mandates, and regulations." The Commission was directed to undertake the study as a result of legislation introduced before the 1988 session of the General Assembly in behalf of Pittsylvania County which would have prevented any reduction in State financial assistance to that locality for a five-year period as a result of the January 1, 1988 annexation by the City of Danville.*(1) Thus, while the Commission on Local Government was directed to undertake a general study of the financial impact of annexation and immunity actions on affected localities, the impetus for the study was the recent annexation experienced by Pittsylvania County.

The annexation experienced by Pittsylvania County on January 1, 1988 transferred to the City of Danville 26.83 square miles of territory and approximately 10,300 persons.*(2) With respect to the general financial impact of that annexation on the two localities, it should be noted initially that the reviewing court, under the authority granted it by statute, directed the City to provide the County with certain compensation to assist it during a period of transition.*(3) The court directed that the City (a) pay the County $1.45 million for the acquisition of County-owned schools and other property in the area annexed, (b) assume responsibility for the retirement of 23.5% of the County's outstanding indebtedness, and (c) compensate the County $1.9 million annually for a five-year period for its prospective loss of net tax revenue.*(4) In directing the City of Danville to compensate the County for the loss of net tax revenue, the court excluded from consideration the County's loss of intergovernmental assistance. The trial court's decision on this issue was based upon the provision in Section 15.1-1042 of the Code of Virginia which states that a county may be compensated for its "prospective loss of net tax revenues..., to such extent as the court in its discretion may determine, because of [the] annexation of taxable values to the city." The trial court construed this language, consistent with a previous Virginia Supreme Court decision, to exclude from the compensatory payments imposed on the city any reduction in federal and State assistance which would be experienced by the county as a result of annexation.*(5)

Pittsylvania County's request for extraordinary State assistance through June 30, 1993 rested, in part, upon the fact that the compensatory payments by the City of Danville were not intended to cover the County's loss of intergovernmental aid. Apparently based in large measure upon this situation, financial consultants for Pittsylvania County estimated in early 1988 that the County would experience during FYI989 "Uncompensated Damages due to Annexation of approximately $1.4 million.*(6)

This Commission recognizes that the annexation experienced by Pittsylvania County on January 1, 1988 provided the impetus for this study and, accordingly, has made it a major focal point for analysis. That annexation, however, may be utilized as an appropriate context for reviewing the timing and procedures by which State agencies generally make adjustments in the financial assistance programs which they administer in instances of annexation.
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*(1) S. B. 386 (1988). The proposed legislation would also have authorized State agencies to review all programmatic mandates and regulations which they administer relative to local governments and would have permitted them "to suspend, defer, reduce, or otherwise adjust" Pittsylvania County's obligations under those mandates and regulations for the same five-year period of time.

*(2) City of Danville v. County of Pittsylvania, et al, Order of Annexation, Case No. 84-171, Circuit Court of Pittsylvania County, July 7, 1986.

*(3) Sec. 15.1-1042, Code of Va.

*(4) City of Danville v. County of Pittsylvania, Order of Annexation, July 7, 1986. Annexation courts have generally required annexing cities to assume a portion of a county's outstanding indebtedness based upon the percentage of the county's property assessables annexed. The property assessables in the area annexed by Danville were estimated to be 19% of those in the County generally. The annexation court, however, required the City to assume a portion of the County's outstanding indebtedness based upon the percentage of the County's local tax collections derived from the area annexed by Danville. That percentage was determined by the court to be 23.5%.

*(5) County of Rockingham v. City of Harrisonburg, 224 Va. 62 (1982). In interpreting Section 15.1-1042 the Supreme Court stated that "we hold that the funds a county hopes to derive from State and federal appropriations are not prospective tax revenues" within the contemplation of Code Section 15.1-1042(c). (Ibid., 89.) As a pragmatic matter, this Commission observes that intergovernmental aid is generally distributed to localities on various measures of need (e. g., population, the average daily membership in the public schools, welfare caseloads, etc.) and is decreased when the objective measure of need is diminished.

*(6) Robinson, Farmer, Cox Associates, County of Pittsylvania, Virginia, Financial Forecast for the Fiscal Years Ending June 30, 1989-93, [Jan. 1988], p. 3.