Over the course of many years, I have witnessed plenty of petitions by unincorporated areas to be annexed by existing cities. It is relatively rare that I have come across an earnest de-annexation proposal. A good portion of the time, the mere threat of splitting away from an existing governmental entity is enough to bring about the desired change or changes. Now, one such proposal is on the table in Georgia, one of the most conservative states, which has a high regard for creditworthiness. With the plan sitting on the desk of Gov. Nathan Deal, we were induced to take a closer look.

John Hallacy, Bond Buyer contributing editor
John Hallacy Doug Goodman

The new proposed city of Eagles Landing would take the heart out of the existing city of Stockbridge. That’s because new city would be at the geographic center of the existing one. From a practical perspective this configuration may prove to be awkward in a variety of ways, when it comes to providing a good level of services for citizens.

Eagles Landing would be approximately 11.9 square miles with a population of 18,227, a size that is not atypical in many states.

A study by the University of Georgia estimated that the new entity would be “financially feasible.” The forecasted financials for the new entity show estimated revenues at $7.5 million and expenses at in the range of $5.5 million to $6.0 million. Reserves would be established at the equivalent of two months of expenditures. A property tax of 0.02 mills within a 5.0 mill limit is deemed sufficient to fund a significant part of the budget.

Now we turn to some of the more weighty considerations. The non-exempt assessed valuation for Stockbridge would decline by about half, to $378.7 million from $756.7 million. Of course, this would be quite a blow to the existing city. At present, the city of Stockbridge is not levying a property tax. This status is extraordinary in its own right. The city has a very significant $11.3 million Unassigned Fund Balance versus a budget of $9 million. There is no pressing need for a levy. However, any city would prefer to have the ability to do so in reserve if times change. Certainly, if half of the tax base goes away, imposing a tax may be unavoidable under the best of circumstances.

The proposed city, Eagles Landing, would also take more of the commercial property from Stockbridge. The commercial assessed value for the latter would plunge to $135 million from $292 million. This means a greater burden on the residential component, especially in light of the prospect that imposing a millage is likely to become a necessity.
Another issue is that many of the other taxes, fees, fines and other revenues would flow to Eagles Landing. The six existing hotels and motels would shift to the new city, along with $205,000 of revenue. The Local Option Sales Tax allocation would also reflect the greater level of activity to be expected in the new city. The impacts are not evenly divided from most perspectives.

We know that folks on different sides of the divide probably have strong feelings about what the outcome should be. That is the democratic process. However, we are more troubled by the lack of discussion about Stockbridge’s existing debt. Audits and budgets show $13.025 million of Urban Redevelopment Revenue Bonds outstanding that were sold in 2005 and 2006 to fund the New Town Center. There is also an environmental note outstanding in the amount of $1.5 million.

In the studies that were conducted, there was no real discussion or accommodation for a proportionate share of the outstanding debt. In other circumstances and in other state where de-annexation has been proposed, responsibility for the debt must be apportioned to the existing and the new entity.

This process does not appear to have taken place here, unless it is treated somewhere else in a document that has not been widely circulated. The debt service on the larger transaction amounts to $1.2 million in the fiscal 2018 budget. The environmental debt service (water & sewer) totals $127,000. It would appear that the new entity should be responsible for its proportionate share of each of these debt service burdens. We are not certain how these important considerations will be resolved.

Many questions will remain even if the separation and creation of Eagles Landing becomes law, which may be possible without the governor’s signature.

There are many lessons to be learned from this developing case. Most bondholders believe that the entity responsible for any debt will be around for the duration of that debt. Of course, a certain amount of change in the tax base is an everyday risk that bondholders are aware of and bear when they purchase the debt. It is always possible that there may be a loss of a corporate taxpayer or there may be a loss of a business to a natural hazard of some kind that may not be fully insured. What is different in this case is the magnitude of the change. A loss of 50% of a tax base may be insurmountable and would be expected to put the remaining entity into a stress scenario even under the best of circumstances.

Perhaps a more important issue here is the implication for other credits in the state that may be subject to efforts to split away from an existing entity. We would not go so far as to say that this should never happen. That would be downright undemocratic. However, the responsibility for the assumption and servicing of the debt should have a very high order of priority.