Georgia's Supreme Court won't delay an election to decide if a new Georgia city should be carved out of an existing municipality.
The court on Monday voted 7-2 to deny the city of Stockbridge’s request to expedite an appeal of its de-annexation case and declined to postpone the Nov. 6 referendum to determine if the proposed city of Eagle’s Landing will be created in the de-annexed area.
The state’s high court has yet to rule on Stockbridge’s main case. Rulings are also pending in two federal suits — one in which the city’s bondholder contends that the de-annexation law violates a federal law governing contracts because the proposed new city won't share Stockbridge's debt.
In the case before the Georgia Supreme Court, Stockbridge says that Act 548 and Act 559,
The law approved in Senate Bill 262 permits the de-annexation of about 51% of Stockbridge’s assessable residential and commercial property value to pave the way for the new city of Eagle's Landing. SB 263 authorizes the creation of Eagle's Landing, if voters in the prospective city approve it.
“A divided Georgia Supreme Court declined to stay the Nov. 6, 2018 referendum, but the merits of the Stockbridge’s challenge are still under consideration by the Supreme Court and we await that decision,” said Stockbridge City Attorney Mike Williams.
Vikki Consiglio, chairman of the Eagle’s Landing Educational Research Committee, was happy with the Supreme Court ruling.
“We are very pleased the court has decided to allow the election to go forward and allow the citizens to vote to decide whether they do or do not want the city of Eagle's Landing,” Consiglio said.
Residents who would remain in the less wealthy rump of Stockbridge won’t get to vote in the referendum. They also would be left to pay all of the city’s outstanding debt.
Stockbridge officials have said they believe the annexation would be unprecedented, and point to prior requests for cityhood approved by the Georgia Legislature that occurred by assembling land from unincorporated areas.
The proposed annexation has been panned by analysts because of its potential impact on other Georgia cities.
Stockbridge and the city’s sole bondholder, Capital One Public Funding LLC, have also filed separate federal suits.
COPF owns $11.75 million of unrated bonds issued in 2005 and 2006 by the Urban Redevelopment Authority of Stockbridge. Proceeds were used to build a number of city projects, including a new city hall.
“Stockbridge has contractually pledged to levy property taxes on all taxable property within the city of Stockbridge as the underlying security for the bonds,” COPF’s complaint said. “Following any such de-annexation, Stockbridge’s existing ad valorem tax base … will shrink by half.”
The tax base was a “critical aspect” of the credit assessment that induced COPF to purchase the bonds, and if the referendum passes it will lose the right to obtain a court order against Stockbridge because the original property pledged for the bonds will be outside the city’s borders, the company said.
The “de-annexation acts fail to provide a justification for such impairment and loss of COPF’s contractual rights as there is no legitimate public interest in affording some taxpayers the option to excuse themselves from servicing their share of municipal debt obligations that were validly incurred by their local governing officials,” the complaint said.
COPF said it has already suffered concrete injuries as a result of the acts, and it will be “further irreparably harmed” if the referendum occurs without apportioning the financial obligations secured by the current tax base.
“Dramatic, government-sanctioned reductions in a tax base quite simply are not expected in municipal debt markets without debt apportionment,” bond attorney J. Hobson “Hobby” Presley Jr. wrote
Implementation of the de-annexation plan will have “significant consequences for all municipalities in Georgia, not just Stockbridge,” unless a public policy is advanced that justifies such a reduction in a city’s tax base, said Presley, a partner at Maynard, Cooper & Gale PC in Birmingham, Alabama.
“Successful implementation of the de-annexation plan, without such a public policy justification, could open the door to similar, arbitrary action with respect to other municipalities based solely on the legislature’s power to re-draw boundaries if it chooses to do so,” he wrote.
Presley cited reports earlier this year by Moody's Investors Service and S&P Global Ratings, both of which said Georgia’s legislation is negative for Stockbridge and the state’s municipalities.
The legislation establishes 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, Moody’s analyst Nisha Rajan said in May.
“The negative impact from this unexpected credit risk will be reflected in higher interest rates, if market access is still possible,” Presley said. “Higher interest rates mean that the cost of servicing debt will increase, debt capacity will decline, and Georgia municipalities will be more limited in their ability to provide basic facilities and services for their residents.”
Presley also wrote that a “dramatic” increase in Stockbridge’s tax burden raises concern that the city will experience “diminishing returns” if it’s required to increase tax rates to support its debt.
Stockbridge doesn’t currently assess a property tax.
Both taxing authorities and creditors, Presley said, must remember that taxes can reach a tipping point where people and businesses leave “to escape the increasing burden, which reduces the tax base further, so that further increases produce less and less tax proceeds.”
“Capital One and other creditors of Stockbridge should be justifiably concerned about this potential for diminishing returns,” Presley said, adding that’s why ratios such as debt-per-capita and debt-as-a-percentage-of-taxable-property are carefully analyzed in municipal finance.
A large reduction in taxable property and population in Stockbridge will probably have a “significant, negative impact on the credit standing of Stockbridge and will have a corresponding effect on the security afforded to Capital One and its payment expectations,” said Presley.
“In my opinion the de-annexation plan to be implemented through the de-annexation acts will have a substantial, negative impact on the contract rights of Capital One under the Stockbridge bond documents,” he concluded.
COPF contends to law violates the contract clauses of the U.S. and Georgia constitutions. The company is asking the court to grant preliminary and permanent injunctive relief by prohibiting election officials from conducting the referendum.
Stockbridge also filed a federal suit in August contending that the Georgia laws violate constitutional contract clauses.
Federal Judge Leigh Martin May is considering consolidating the cases. Both were filed in the Atlanta division of the U.S. District Court for the Northern District of Georgia.
