Georgia de-annexation law creates credit concerns for hundreds of cities

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Georgia’s more than 500 municipalities could be negatively impacted if large-scale de-annexations become a trend, S&P Global Ratings said in a comment about a proposal that could cut one city’s assessable property value in half.

S&P said the recent passage of Georgia Senate Bills 262 and 263, which would de-annex land from Stockbridge to create the proposed city of Eagle's Landing, raises concerns regarding the credit stability of debt issued by Georgia cities.

The bills do not apportion Stockbridge’s outstanding, unrated debt, leaving the new city responsible for none of it and the rump of Stockbridge liable for the full amount.

“While Stockbridge may continue to service its debt obligations without interruption following the potential de-annexation, the legislation is significant, in our opinion, as it could result in a sudden and dramatic change in the city's credit profile,” said S&P analyst Randy Layman. “While incorporation and de-annexation in the state are relatively common and vary in size and credit implications, it is our opinion that the acceptance of this particular case could encourage similar efforts statewide.”

The de-annexation legislation allows 51% of Stockbridge’s assessable residential and commercial property value to be annexed to create Eagle’s Landing. Residents of the proposed new city will vote on whether to incorporate in a November referendum.

Gov. Nathan Deal signed the bills May 8 over the objections of Stockbridge city officials.

If de-annexation occurs, the much smaller remainder of Stockbridge would be obligated to pay off about $13.02 million of privately placed Urban Redevelopment Agency lease-revenue bonds and $1.5 million of water and sewer notes issued through the Georgia Environmental Facilities Authority. Both have final maturities in 2031.

S&P said its ratings assessment includes an institutional framework credit factor that reflects its views of the legal and practical environment that local governments operate in.

The factor takes into account the state's framework for predictability, revenue and expenditure balance, transparency, and system support.

“We believe that the institutional framework score for Georgia cities could be affected should the [de-annexation] issue become more pervasive or should the courts or legislature fail to address debt apportionment in instances of de-annexations similar in scope,” Layman said.

In November, a separate referendum will be held on a proposal to annex about 2,100 residents from unincorporated Henry County and a few commercial properties into Stockbridge.

The residential property has an assessed value of $35.2 million while the commercial and industrial property has a combined assessed value of $8.62 million, according to a fiscal analysis by the Carl Vinson Institute of Government at the University of Georgia.

“Even if the area being proposed for possible annexation is added to the city, coupled with the de-annexation of territory considered in our previous analysis, the result is a significant loss to the tax base of the city,” a study commissioned by Stockbridge said.

If voters approve both referendums, the study said Stockbridge’s assessed property value would drop to $420.9 million from $755 million, while the city would lose 52% of its commercial property value and 44% of its total assessed property value – a scenario that would equate to a 37% loss of the city’s revenue stream.

“In addition to losing a significant amount of revenue irrespective of whether the city is able to gain additional parcels, the fact that the additional parcels are residential-heavy means that Stockbridge will have to increase expenditures to serve these citizens,” the study said.

Moody's Investors Service has also said that local governments in Georgia face heightened credit risk because of the de-annexation issue.

The bills are credit negative for Stockbridge and local governments generally because they establish a precedent that the state can act to divide local tax bases, potentially lowering the credit quality of one city for the benefit of another, according to Moody’s analyst Nisha Rajan.

“This legislation marks the first time that portions of a city are de-annexed in Georgia to create a new city,” Rajan said.

Stockbridge filed a lawsuit in a state court May 17. It contends that the de-annexation bill is unconstitutional.

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