Ending Forced Annexation in Texas: Fiscal Implications of Involuntary Annexation

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Ending Forced Annexation in Texas: Hon. Jess Fields & James Quintero, TPPF, Center for Local Governance (July, 2015)


The Fiscal Implications of Involuntary Annexation

Annexation has been noted to have uncertain fiscal implications for the communities involved, both the annexing entity as well as those being annexed. Edwards (1999) noted that “… the fiscal effects of annexation are not obvious, nor are they easily predicted.”36 The fiscal consequences of an annexation depend largely upon the circumstances in which the annexation occurs, as well as variables in the cost of service provision which may or may not be out of the control of the municipality.

One difficulty that arises in estimating the costs to service annexed areas is in the frequent necessity of issuing debt to finance new projects that may become necessary as a result of annexation. Edwards and Xiao (2009) highlighted the fact that debt is often taken out to finance the service costs of annexation.37 Annexation violates tenets of American RepublicThe bond issuances to pay for extending services to annexed areas will expand the debt burden of the municipality whether or not the tax base ever expands through development in the annexed area. If the annexed area fails to develop in such a manner as to expand the tax base to cover the debt service, taxpayers will nonetheless be on the hook for those expanded services.

Edwards and Xiao (2009) also discovered that cities who annex frequently have lower per-capita expenditures on police and fire services.38 Why is this? This is likely not the result of any efficiencies in servicing more spread out areas, but the fact that to properly do so would be much more expensive. As a result, municipalities face a strong disincentive to expand such services, especially in light of the fact that expensive capital projects such as water and wastewater extensions are so often necessary. That means less spending on police and fire per capita as a result. This is supported in much earlier research that focuses on Texas cities with Cho (1969), who found a “…slight correlation with higher taxes and moderate correlations with lower expenditures…”39

The increase in service area is not merely correlated to lower per capita spending, but may also result in other inefficiencies in government service provision. Edwards and Xiao (2009) further concluded that while efficiencies may be more difficult to achieve with lower density resulting from annexation, municipalities that maintain higher density, perhaps through less annexation, are more likely to benefit find such efficiencies.40 “Our research shows that service delivery and administrative efficiencies are certain with higher density development,” they write.41

An interesting dichotomy arises here between the professed planning preferences of many local officials and their actual practice in the policy realm of annexation. Many in the planning community seek denser development in the interest of having more sustainable services, and for other reasons. This does not mean policies are necessary to force such densities upon communities; rather, that these sorts of policies, often referred to as “smart growth,” are in widespread use.

One could imagine that the need for such policies would be diminished if communities were to, as it were, “live within their means” when it came to territorial expansion. It is prudent to ensure that the services of the community, whatever they might be, are well provided to the residents of the population within the existing boundaries before expanding rapidly. It is the wild expansionist tendencies of those cities practicing aggressive annexation that is often irresponsible, from the standpoint of providing services.