Issue Paper for LUSC (Draft 3)

Are changes to annexation and incorporation statutes warranted to help insure meeting the goals of the Growth Management Act? Many cities think so and most counties would agree, but generally the changes which counties and cities would seek are not the same. To a great extent these differences reflect the different self-interests facing counties and cities.

Annexations and incorporations are not simple transfers of jurisdiction from a county to a city. They are political, sometimes emotional actions, which can have significant financial repercussions for both the county and the city. Most significant annexations and incorporations (A&I) inevitably carry with them highly charged debates about the ability of the county and/or an adjacent city to provide adequate services at reasonable tax rates. Often, these debates take on overtones of protecting one's home and property values from a villainous county or city.

The issues follow:

** Cities are concerned that different requirements exist for petition annexation and for "island annexation" in code and non-code cities, and that GMA prohibits annexation of land outside of established urban growth areas -- even for municipally owned lands. Some counties support standardizing the requirements for petition annexation and most or all would oppose annexation outside of urban growth areas for municipal purposes or otherwise.

** Counties which have not yet adopted urban growth areas are concerned by annexations that preempt establishment of a sound boundary and others have concerns that some cities are annexing large amounts of the urban growth area and allowing development at densities which perpetuate urban sprawl. Quite often it is tax base in the unincorporated area (or potential for tax base) which motivates a city to annex and which causes a county to fear annexation and oppose modification to annexation laws.

** Even more troublesome to counties -- and to many cities -- are incorporations intended to preserve a "rural" density or lifestyle. Some of these incorporations take place to prevent another city from swallowing a neighboring area, and some take place to escape urban levels of development which would be approved by the county. For whatever reason, several recent incorporations have resulted in cities or towns without an adequate tax base, reliant on sales tax equalization which hurts existing cities and dependent on a county government for services which it cannot afford to provide.

** Finally, both counties and cities share frustration with Boundary Review Board action which is inconsistent with GMA plans, county-wide planning policies, or interlocal agreements between counties and cities. However, in the absence of revenue and service agreements between county and city, the BRB acts as a brake on annexations and incorporations which may be fiscally unsound.

To accomplish the objectives of GMA, including the 14 goals, counties and cities need an orderly process that defines which services are more cost effectively offered on a regional basis, which on a local basis, how all services will be paid for, and how the transition will be phased in. The process must allow for local agreement on service definitions, because counties and cities have different arrangements currently in place and different political situations. Portions of current annexation laws may make the task of meeting GMA requirements more difficult. However, that issue is secondary to the overriding issues of efficient service delivery and adequate infrastructure both in both the short and long terms. Without advance agreements on adequate urban services and infrastructure, growth cannot be accommodated in an orderly fashion as GMA anticipates.

If only tax base and density drive annexation and incorporation decisions, the notion that a system of government in which the city, county and state have unique roles to play in the delivery of services quickly gets lost. And, when that happens, needless arguments over annexations and incorporations occur. To understand this statement, a discussion of what GMA is and what it intended is necessary. It also is important to note where counties and cities differ on what GMA is and what it intended.

II. Background. Counties and cities generally agree that GMA, read as a whole, intended to promote a system of government with important distinctions between county and city government and their respective authority and responsibilities, resulting in more efficient, cost-effective service delivery.

For example, RCW 36.70A.020 calls for:

(1) Encouraging development in urban areas where adequate facilities and services exist or can be provided in an efficient manner. GMA counties should not expect to locate development in rural areas unless the development comes under one of the law's exceptions. And both counties and cities must strive for efficiencies.

(3) Encouraging efficient multimodal transportation systems that are based on regional priorities and coordinated with local comprehensive plans. Again, the concept of efficiency is raised and put into a regional context.

As another example, RCW 37.70A.110 puts forth a system in which a county, acting for all residents within the county, designates urban growth areas after a cooperative process involving its cities. This section was adopted before the clarifying RCW 37.70A.210, which will be discussed below. However, RCW 37.70A.110 clearly indicates the Legislature's view that counties and cities are different entities with different constituencies.

In yet another example, RCW 36.70A.210 which was adopted as part of the first amendments to GMA in 1991, begins with: "The legislature recognizes that counties are regional governments within their boundaries, and cities are primary providers of urban governmental services within urban growth areas." This language was added to the GMA to clarify that the difference between counties and cities lies in the geographic area of their responsibilities.

Counties -- and special districts such as public utility districts -- argue that this section should not be read as a directive that cities are the only entities that can provide urban services, and therefore that all urban areas must be within cities. The Act does not say that, and interpreting it that way is not consistent with the Act as a whole, nor with its oft-stated goal of fostering efficiency. Some urban services are, in fact, regional.

Cities argue that GMA intends they provide most, if not all, urban services; and that what is needed to accomplish GMA's goals and objectives is an orderly process that permits cities to more easily assert jurisdiction over urban unincorporated areas and provide cost-effective urban services. Portions of current annexation laws that make that task more difficult should be changed. Counties, too, need an orderly transition so they can manage their changing role under GMA; but that "changing role" is nowhere defined.

Part of the disagreement over the meaning of RCW 36.70A.210 lies in the definition of "urban services." It is almost as if the definition were written one hundred years ago when cities were separated by wide expanses, and no one thought of urban services crossing city boundary lines.

Urban Services. The definition certainly does not reflect what is happening on the ground today, where regional delivery of services by counties, cities, and even special districts is common. As amended last session, RCW 36.70A.030(17) states:

"Urban governmental services" or "urban services" include those public services and public facilities at an intensity historically and typically provided in cities, specifically including storm and sanitary sewer systems, domestic water systems, street cleaning services, fire and police protection services, public transit services, and other public utilities associated with urban areas and normally not associated with rural areas.

If GMA were read to mean that only cities can provide urban services, then future countywide transit and sewer systems, for example, would have to be operated by a city or perhaps a combination of cities. But that reading runs counter to the GMA's classification of counties as regional governments and of its intent to promote efficiency. However, provision of "urban services" is a significant revenue source for many cities; one can imagine that many cities would like to be the sole government authorized to provide water and sewer service.

What did the GMA mean by its definition of urban services? As demonstrated by the quote from RCW 36.70A.030(17) above, the term is used most often in the context of differentiating between urban and rural areas. Another example occurs in RCW 36.70A.110(4), which states:

In general, cities are the units of local government most appropriate to provide urban governmental services. In general, it is not appropriate that urban governmental services be extended to or expanded in rural areas except in those limited circumstances shown to be necessary to protect basic public health and safety and the environment and when such services are financially supportable at rural densities and do not permit urban development.

Counties argue that, in any case, GMA does not adopt or even imply the current policy by many cities that an area must be annexed before it will provide services. Provision of services does not require a change in jurisdiction. Sub-section (4) therefore limits cities as much as it limits counties.

Cities argue that, in order to assure the accomplishment of GMA goals, there must be a reliable procedure to effect orderly transition of jurisdiction with UGAs from county (unincorporated) to city (incorporated). It is within incorporated areas that urban service levels are to be provided and where sprawl is to be minimized. Existing state annexation laws do not provide for this orderly transition, and in fact, make such a transition difficult at best and sometimes impossible.

To sum up, the argument on GMA intent boils down to this:

What does all of this have to do with changes to statutes relating to annexations and incorporations?

A. County Argument - Local Government Finances. Under existing law, there is no mechanism to ensure that an annexation or incorporation will result in a financially healthy city and that it will not adversely impact the financial stability of the affected county and special districts. Indeed, there is no mechanism for ensuring that an annexation or incorporation will promote the goals of the GMA.

Until there is some mechanism, most counties will not support making either action easier.

Financial health of cities. Cities must be financially healthy. If they are not, their residents (who are also county constituents) suffer reduced, often inadequate services. It is common experience that cities turn to counties for help with their financial problems. Further, county and city tax bases are intertwined; counties benefit financially from healthy cities. Ten or fifteen years ago, when the first wave of annexation and incorporation occurred, the financial condition of a city was not a problem. Before initiating an annexation, a city assured itself that the annexation would at least pay for itself in terms of associated revenues and expenditures. Areas that were not financially viable were simply left unincorporated; and the county continued providing services, though with a reduced tax base.

Areas that incorporated in those years, generally had sufficient commercial and industrial tax base to support themselves. In cases where revenues were inadequate, the new city became eligible for sales tax equalization funds from the state.

GMA has changed that situation. A wave of incorporations has taken place, mostly in the urbanized counties. Some of these new cities do not have the tax base necessary to support themselves and are reliant upon state sales tax equalization.

Existing cities are faced with annexations of primarily residential areas which usually do not carry a "profitable" tax base with them. Cities must provide services to these areas, and some are finding it hard to do. The situation is complicated by the fact that the growing number of cities eligible for sales tax equalization has reduced payments from that source to older cities.

Financial health of counties. While the cities have a problem, counties are faced with the fact that their revenue system is outdated and inflexible. One of the axioms of government is that the commercial/industrial tax base subsidizes residential services. As the first wave of annexations and incorporations transferred the commercial/industrial tax base to cities, counties were left with their "unprofitable" residential areas, as well as the responsibility to continue providing countywide services.

Counties have only three local revenue sources: property tax, which is highly unpopular; sales tax, which is the revenue most affected by annexation and incorporation; and timber tax, fees, and other miscellaneous revenues. Counties are not authorized to impose business and occupation or utility taxes, as cities are. When sales tax revenues are annexed away or are flat, counties experience problems because they do not have a revenue source to replace them.

In this context, most counties are unwilling to bear the whole cost of bringing an unincorporated area up to an adjoining city's standards and then let it be annexed. The tax base to pay the costs of such an upgrade is annexed, leaving counties to foot the bill. It is a little like asking a high tech company to do all the research and development, and then turn over the resulting product to another company free of charge.

Financial healthy of special districts. Special districts provide for unincorporated areas many of the services cities provide to their residents - e.g., water, sewer, and fire. Annexations and incorporations can also leave these special districts in an untenable situation if their remaining tax base cannot support the services they must offer.

Annexation, incorporation and GMA goals. GMA places counties squarely in the middle of two conflicting streams of thought. One stream holds that GMA should not interfere with a person's ability to develop his or her land. The other holds that people should not be forced by GMA to accept densities they do not want. Striking a balance and drawing an urban growth line has been difficult in the extreme in most counties.

The fight has been especially bitter in mostly rural counties because people left outside the urban growth area have little recourse once their appeals have been decided. They can try to form a new county, but that action is difficult, if not impossible.

People fighting density do have recourse beyond the courts. They can incorporate. While new city comprehensive plans will eventually have to go through the GMA process, including the Boards, for the moment, their supporters believe they can control their land use destiny. Thus, cities without an adequate revenue base get formed.

B. City Argument - Annexations. The annexation and boundary review board statutes present a sometimes formidable hurdle for annexations rather than facilitating annexations which are consistent with overall GMA goals and particular local government GMA-based plans and regulations. Following are issue-by-issue discussions.

Petition-Method Annexations. Generally areas annex to a city in one of two ways:

Annexation petitions in code cities require 60% assessed valuation to be valid. However, for first and second class cities and charter cities, the percentage required is 75%. This distinction is law is viewed by many as being arbitrary and counter-productive. It penalizes non-code cities, generally the state's largest cities most capable of absorbing growth; and often results in very small scale annexations, a few parcels at a time. This piecemeal approach to annexations makes provision of urban services extraordinarily difficult and costly.

These circumstances tend to prevent larger, more logical annexations and boundary formations and favor smaller annexations with one or more large property owners as the center of an annexation proposal. Larger property owners are more likely to be commercial properties or properties with development potential and more likely to cause frictions between counties and cities over the practice known as "cherry picking," where higher value properties are annexed to cities to obtain services and lower value properties are left in the county. Yet faced with the burden of 75% assessed value petitions, such annexations are even more attractive to cities.

The Commission recommended legislation to make 60% the standard for petition-method annexations in counties under GMA by June 30,1994. However, inadvertent omission of the date in the bill drafted for the 1997 session caused the whole provision to be amended out.

Island Annexations. In 1997, as recommended by the Commission, the Legislature amended statutes to modify so-called "island" annexation procedures. However, these changes did not provide for a vote of citizens within such "island" on annexation to non-code cities. Even in code cities, the authority for such an annexation was limited to areas in existence as of June 30, 1994. Some cities question whether the date is necessary.

Boundary Review Boards. Since the passage of GMA, boundary review board (BRB) cases have taken on a different character and are more likely to be focused on the provision of urban services as the primary reason for citizens seeking annexations. Even with changes to BRB statutes, including recognition of GMA as a major factor to be considered, some recent cases appear contrary to the intent and the goals of the GMA. In the opinion of some cities, the BRB has exceeded its role, ignored agreements achieved between a county and a city, and substituted its judgment for that of local elected officials.

Existing statute allows a county to eliminate its BRB (RCW 36.93.230), if there is an agreement between the county and all of the cities within its boundaries. As a practical matter, such an agreement is not likely in most areas given the diverse nature of relationships between cities and counties.

One suggestion is to allow a county to eliminate BRB jurisdiction in a portion of a county. Proponents of this idea believe that not all portions of a county are "ripe" for BRB elimination at the same time.

Municipal Purpose Annexations Outside UGAs. In GMA counties, if land is outside a UGA, it is not annexable, nor can an incorporation as a city occur. The purpose of this requirement was to help ensure that urban services would not be extended outside UGAs to facilitate urban-style densities and development. Frequently, cities will only extend their sewer and water utilities to developable property if the owner agrees to annex.

At issue is the prohibition to annex municipally owned lands now outside a UGA. Because not all cities annexed such lands prior to adoption of UGAs, or lands have since been purchased, some cities find they cannot annex and protect these lands. Legislation was considered in 1997 that would have allowed such annexations for "municipal purposes." Because "municipal purpose" was not defined, the section was vetoed.

Generally, counties have not been persuaded that cities have a need to annex lands outside their incorporated boundaries. In addition, counties are concerned that absent a definition, such lands could be annexed, then sold and developed as "urban." Cities agree some definition is appropriate to ensure that any such lands be maintained for municipal purposes and that, if sold, should no longer be within a UGA.

Planning Within UGAs. Cities argue that jurisdictions planning under GMA are required to plan for the areas outside of their jurisdiction but within the urban growth area. Thus, it is expected that at some point these cities will assume jurisdiction of most, if not all of these areas and provide most, if not all of the needed urban services.

Cities are going to be reluctant to continue to spend tax money for planning, engineering, and capital costs in anticipation of ultimately serving these areas. While these areas remain in unincorporated status, development proposals continue to come forth to the county for processing, These proposals may or may not meet the standards of the eventual host city. In most cases where city and county standards are substantially different, the county standards are not sufficient to meet more intense urban needs. When these areas eventually annex, cities and property owners may be left with expensive retrofitting of properties or a lower urban standard and perhaps lower property values compared to properties developed at higher standards. Encouraging these areas to be annexed, or resolving the standards issues between counties and cities would reduce or eliminate these issues.

Counties, however, do not agree with the basic assumptions underlying this city argument. Although GMA requires local comprehensive plans to be consistent with each other, it does not give any jurisdiction any authority to plan beyond its boundaries, except that counties must eventually adopt the countywide planning policies developed jointly with the cities. Further, it cannot be accepted as a generality that county standards are lower than a cities. In fact, county roads, for example, can be of a higher standard because of the availability of the county road levy.

IV. Options (which may be combined in various forms):

Pro: Making it easier to annex or incorporate at this point in the implementation of GMA will be counterproductive. It will jeopardize the financial stability of all the local governments involved without appreciably furthering GMA goals.

Also, the House Government Administration Committee is reviewing annexation issues and may propose legislation on its own.

Con: Annexation issues remain important to cities and the Commission had agreed to changes last year. The legislative drafting oversights should be corrected and forwarded to the legislature.

Other issues regarding annexation and incorporation have been brought to the attention of the Commission and should be considered in developing recommendations to the Governor and legislature.

Pro: Until those agreements are in place, the financial instability problem cannot be overcome.

Con: It may be necessary to reform the local government finance system to make such agreements workable. SSB 5038 (RCW 36.115) was a feeble attempt by the legislature in that direction.

Pro: Only because of drafting errors were these sections not included in SB 6094.

Enactment of these provisions would standardize annexation in all GMA-planning cities as of June 30, 1994.

Con: Last year's package of "agreements" among Commission members was a series of compromises. Not all Commission members may agree to the same items again.

Further changes in annexation statutes should be initiated by the Legislature.

Option 4: Authorize a GMA planning county to eliminate BRB jurisdiction in a part of the county

Pro: Boundary Review Boards can be eliminated in GMA-planning counties when the county and all cities have completed their plans and regulations. It makes sense to allow their elimination in a portion or portions of the county that have met the same criteria.

Not all areas of a county are "ripe" at the same time for BRB elimination.

Full or partial elimination of a BRB may only take place if the county agrees. The county must have confidence that issues of interest to impacted partioes are resolved.

Con: There are no assurances, other than what GMA requires, that issues of interest to citizens and special purpose districts can be resolved without a BRB.

Granting "partial elimination" authority to a county will not resolve city/BRB issues if the county does not use its authority.

Pro: Allows cities to annex and regulate lands outside their borders and UGAs for specific uses and purposes.

Con: Without carfeul drafting, cities might be able to develop and/or sell land for urban uses.

Pro: Facilitates annexation of difficult-to-annex areas regardless of their time of creation.

If coupled with providing citizen rights to require a vote in non-code cities, removal of a date does not preclude a citizen's right to vote or decide on annexations.

Con: Could allow a city to annex an area or areas and then use the liberalized "island" annexation procedure to annex an area against residents' wishes.