And the Winner Is...

Who Will Benefit the Most From Annexation?

Sam's Bar-B-Que owner Dan Mays says rising costs for city services are hard on small businesses.
photograph by Jana Birchum

Three weeks ago the city council took a break from the throngs of suburbanites protesting the injustices of the city's annexation plan and scheduled the first public hearing for the alleged "winners" in the deal -- current city residents who, for the mere price of a 10% hike in their water/sewer and drainage fees, stood to gain $1.5 billion worth of new property. City staff has since pared down the fee increase structure to a mere 3.26% for water and sewer services, with no increase in drainage fees. The October hearing for the so-called city winners did not attract a broad public response. Councilmembers heard mostly from prominent, informed citizens -- Frank Sturzl of the Texas Municipal League, Terrell Blodgett, a UT urban management professor, LBJ Dean Edwin Dorn, and city Planning Commission member Art Navarro, among others -- who outlined the classic supportive reasoning for annexation: Cities die when their wealth escapes to the suburbs; multi-governmental jurisdictions inhibit environmental protection and infrastructure planning; economic and social equity suffers; annexation is the most viable tool Texas cities have to protect their tax bases.

Outside council chambers, however, Mike Blizzard was milling around full of doubt. Blizzard is with the Our City, Our Choice group that seeks more voter control over investments the city makes outside its borders. He said he had been sitting in on neighborhood meetings, and hearing people ask why, if annexation was such a benefit to them, it was costing them money. Blizzard said he had not yet seen numbers proving that city growth truly pays for itself. "We've been subsidizing growth in these areas for years and now we're being told we have to pay again," Blizzard said. "That doesn't make sense."

Meanwhile, on the sidewalk in front of city hall, MUD residents staged a mini protest. "Speak up against annexation!" they shouted at passing cars. "You don't want us, we're expensive!"

The furor over annexation had been mounting predictably. Newspaper advertisements sponsored by the Taxpayers Defense Fund had kicked off that day, warning Austin residents that annexation would cost them $9 million per year for at least the next 10 years. One week later, the Statesman reported that the city would be shouldering more than $70 million in new bond debt when it annexed the 15 areas in its plan, including millions of dollars owed to the MUD facility developers, which would be due immediately, in cash.

Inevitably, then, the second annexation hearing held for city residents last week drew sharper financial dispute from both Austinites and suburban dwellers. Just before it began, Assistant City Manager Toby Futrell attempted to pass through the chamber lobby on her way to the dais and was intercepted by grinning, smug Circle C residents eager to explain how the city's environmental ordinances would prevent development in their area and most certainly undermine Futrell's revenue figures. After a brief spar, in which Futrell explained to deaf ears and unwavering grins that the S.O.S ordinance requirements were indeed factored into her flowcharts, Futrell disengaged herself to talk with a man who identified himself as a Tarrytown resident.

"Oh, good," said Futrell, "now I get to talk to one of the winners." But the man, an accountant named Blake Houston, didn't feel like a winner. Not when, as Houston pointed out, the city's high price of living prevented him from affording a home as large as those of his suburban friends.

"But do you know why they can afford that expensive home?" Futrell responded. "Because the city spends $14.5 million for roads in the county that you don't get a dime back for." Houston maintained, however, that he gets benefits from those roads, too. So Futrell changed her tack, explaining that $150 million spent on capital improvements now means residents like Houston get back millions for city services.

"No, I don't," Houston retorted. "It's like my Discover card -- I never really get any money back. I just get higher rates.... It ticks me off we're going out increasing my rates for things I think are foolish."

Lingering Doubt

Few Austin residents have publicly expressed doubt in the city's ability to deliver a real return on investment from annexation, but the mistrust is out there. Matt Ladner, for example, a young ACC professor who, with his wife Anne, recently bought a condominium just north of the university, wonders if Circle C residents have a point when they say the city has overshot revenue projections in their area.

"I understand the free-rider argument," says Ladner. "[Suburbanites] are living in Austin and want to enjoy Zilker Park and whatnot. But on the other hand, if annexing some of these areas is going to be a drain on us, I don't see why we should support it."

And across the interstate from Ladner, where Sam's Bar-B-Que owner Dan Mays counts out $150 to a couple of local carpenters who need cash up-front to buy materials to install a light outside Mays' business, rising utility bills are no small thing. "Hell, 10% of anything's a lot," says Mays. "The small businessman can't make no money." Informed that the higher rates are for installing new water lines and facilities in the annexed areas, Mays asks, "Are they going to bring them back down when they're done building it?"

Citizen mistrust has been fed, however, by a proliferation of homespun information which is arguably far off the mark. For example, the figures published by the Taxpayers Defense Fund ads have been refuted by Futrell as a classic example of the "fallacy of straight-lining per-capita expenses out into new populations," meaning that they do not take into account the city's pre-existing capacity to extend fire and police protection into the annexed areas. They also severely understate the millions in revenues to be gained through new commercial sales taxes and utility surcharges, Futrell says.

"The annexation areas generate more than enough to cover operating expenses from the first year," says Futrell, a claim documented by a city report showing an expected $2 million net gain to the general fund in the first year following annexation. That figure more than triples through the next year, and accumulates to more than $30 million after five years. The capital improvements residents are buying through increased utility rates have useful lifetimes of 50-100 years, Futrell says, and they capture property with an average per-acre value of $350,000, which compares to a $200,000-per-acre valuation inside city limits.

As for covering the developer's original costs for water facilities (the developer reimbursement costs reportedly due immediately upon annexation), Futrell says they are included in the annexation flowcharts and, contrary to initial reports, can be financed over the long term.

The increased rates, however, are not likely to ever go down, according to Planning, Environmental & Conservation Services Director Roger Duncan, because further capital expenses will inevitably arise in the future. But annexation heads off some future costs, staff say, that would result from extending sewer pipes into unincorporated areas where septic tank systems will inevitably fail. And as Jeff Jack, president of the Austin Neighborhood Council, points out, the positive cash flow generated by expanding the utility system, estimated at $224 million over 25 years, is a hedge against property and sales tax increases -- increases which experts say are inevitable when cities don't rope in revenues from suburban developments.

El Concillo's Fernandez says annexation is yet another of the city's slights against the Eastside

photograph byJana Birchum

Blizzard and others are partially correct when they say that the city has been subsidizing growth in the MUDs by providing water and sewage services, but in fairness to the MUDS it should be pointed out that they have been paying for those services. According to the water utility's wholesale services manager, Mike Erdmann, the city contracted with MUDs in the 1980s on revenue bonds to extend city pipes into outlying areas, particularly south of the city, but the city is still the primary user of those facilities and the MUDs cover a percentage of the bond debt based on the amount of services they use -- usually 5% to 15%. The city will have to assume full responsibility for the bond debt upon annexation, Erdmann says, but it gains all the subsequent revenues, too.

It is also important to remember, Erdmann points out, that those bond contracts were a clear first step toward MUD annexation, and the city has subsequently built large, area-wide facilities, such as pumping stations and multi-million gallon reservoirs in northwest Austin, in anticipation of full incorporation of those areas into the city.

MUDs have subsequently taken on new debt, guaranteed by the city, to expand facilities within their borders, which the city will also assume upon annexation. This mountain of MUD debt is what annexation skeptics like Blizzard find hard to swallow, but it's a matter of interpretation whether the city is encumbering itself with "new" debt or merely "deferred" debt. MUDs came into being, Erdmann explains, because the city could not raise the bond revenue it needed in the Eighties to compensate for Austin's population boom. As bond proposals failed, badly needed utility infrastructure could not be expanded, and independent MUDs were the only solution.

Now, says Jack of the Austin Neighborhoods Council, the city is playing "catch-up" to harness the growth that escaped 10-15 years ago. New annexation costs are just growing pains that voters avoided in the Eighties, he says. Furthermore, he adds, the existing debt arrangement, with MUDs and the city as co-signers on contract revenue bonds, costs the city indirectly because such "contingency liabilities" (where the city relies on a third party for debt payments) produce higher bond rates when the city borrows.

It is impossible to know for certain whether the city's estimated tax revenues from the annexed areas will fully materialize, but Futrell says she believes her numbers are highly conservative, figuring in only about half the amount of new development that could reasonably be expected. "We told staff to take the most conservative numbers they could in their model," concurs Councilmember Gus Garcia.

Coming Out Ahead

As measured in dollars and cents, the city almost certainly stands to emerge a winner from annexation, and many neighborhood groups in Austin are lining up in support. "For Austin to be viable as a regional area, it has to have this annexation," says South River City Citizens president Rene Barrera. "We feel that capital has fled the city and now we're going to get it back." Growth is an undeniable reality in Central Texas, adds Jack, and Austin residents have to face the fact that "demographics show the preponderance of new residents have chosen to live in the hinterlands," meaning the city has to invest in that growth now or risk forever losing out on its benefits.

"It's the height of short-sightedness to say that because of one-time increases in fees that coincide with annexation, that therefore the annexations are a bad idea," agrees Barton Hills resident Craig Smith.

Still, residents like Central Austin's Ladner wonder if the city is jeopardizing those future benefits by failing to negotiate more amicable annexation deals with the suburban areas. "If this is a grudge match between Circle C and the city, I don't want to pay for it," he says. Ladner's comments parallel the analysis presented in the city's own "Strategic Partnerships" report, which states that while annexation is a tool the city has to protect its future, it is a tool that "should be used with the recognition that a central city is part of a larger metropolitan area that must cooperate to ensure future success."

Councilmember Daryl Slusher has emphasized repeatedly that the council remains open to creative solutions offered by MUD residents that would still ensure economic equity, environmental protection, and sound regional planning. But he admits that any efforts to forge agreements between MUDs and the city are susceptible to the "legacy of mistrust" that has been nurtured for years in the state Capitol. Even if Austin were able to work together with MUDs to lobby for the enabling legislation needed to grant interlocal agreements, Slusher says, such an arrangement would not prevent individual residents from challenging the deal in court. "Payment in lieu of" options, whereby a MUD chooses which services it wants from a city and pays fees accordingly, is not particularly appealing from the city's point of view, either, considering that two of the Circle C MUDs have never made payments on contract revenue bond debt they share with the city.

Eastside Opposition

Recent developments indicate that more than one "legacy of mistrust" threatens the annexation process. Prompted by phone calls from MUD board members and fueled by the city's highly publicized failure to build a planned entertainment center on the east side, neighborhood organizations and the Nation of Islam church are on the move in Eastside neighborhoods to rouse opposition to annexation. While this opposition won't be able to stop the annexation process, the political consequences could be severe. Present councilmembers could be ousted out of office by a collaboration of angry Eastside and suburban voters, and the city could land in judicial hot water over the changes in voting demographics caused by the addition of 35,000 new mostly white voters (see last week's "Council Watch").

El Concilio coordinator Gavino Fernandez says his group will be opposing annexation because it hasn't been told what the potential economic and political impact will be. Eastside neighborhoods like Montopolis that suffer from drainage problems aren't likely to benefit from the dilution of City Improvement Project (C.I.P.) funding caused by adding acreage to the city, Fernandez says. Currently, C.I.P. spending is capped at certain levels, and though the possibility exists that new tax revenue will be used to raise those caps, Eastside neighborhoods could tumble further down on the priority list, says Fernandez.

Fernandez is indignant that the city has offered him no information about annexation's impact on voting demographics other than a report showing a "1%" change -- a facile summation of the ratio of new residents to the current total population, which is meaningless from a minority voter standpoint. In the city's at-large voting system, Fernandez says, minority political representation is definitely threatened by the influx of conservative suburban voters. "This present city council represents one of the worst abuses of government power, imposing an agenda [annexation] that does not reflect the interests of this community," Fernandez says.

Councilmembers Willie Lewis and Gus Garcia say the Eastside's fears over slowed development, deteriorating city services, and minority voter dilution are unfounded. "People have complained about annexation since this city had four square blocks," says Lewis, adding that he is not aware of infrastructure needs in the new areas that will drain resources from the Eastside. As for the perceived voting differential, Lewis says minorities have little voting strength now anyway, and "What difference does it make what percentage you lose by?"

Garcia says that as the city population has mushroomed, the city has so far managed to keep up with services just fine. Projects that have been delayed, such as the Central City Entertainment Complex, have been more the result of contract problems and cost overruns than city inaction or neglect, he says.

It's hard to predict just how strongly minority neighborhoods will oppose annexation, but conversations with some citizens indicate that anti-annexation fever could find a foothold on the Eastside. The Rev. Tommie Baker, whose Twelfth Street Baptist Church sits just down the road from the Nation of Islam mosque, says he has not yet heard opposition to annexation, but knows his congregation would be sympathetic to the message. "We need to fix our own home before we go bringing others in," says Baker, listing abandoned houses full of drug addicts and bad streets as evidence of city neglect. "Folks on the other side of town don't care about these things."

And Stonegate Neighborhood Organization president Trudie Brieger, who says her group has not yet studied annexation and emphasizes she is speaking for herself, says that years of broken city promises make her immediately doubtful that her neighborhood will benefit from it. "I'm fearful of anything like that," says Brieger. "After you've been burned more than once you begin to get reluctant. You have to show me something sometimes." While not critical of city services in general, except for bad street maintenance, Brieger says more utility expenses are tough on retirees like herself. "It's always a big deal [utility increases] for people who don't have money.... You keep escalating this kind of stuff and I doubt that younger people will even be able to get started here," says Brieger.

Fernandez, who says he expects to hold meetings with his El Concilio neighborhood groups and MUD residents by December, says annexation will inspire more talk among Eastsiders of forming their neighborhoods into incorporated areas to take more control over their tax dollars.

It is this mistrust from its own residents, more than the clamor of newly annexed suburbanites, which the council will have to face through the long term. As the city grows, it will need more than positive flowcharts to show it can act in the interest of its residents. The issue of local control provides common ground for anti-big-government activists such as Linda Curtis, suburban isolationists, and the resurgent political consciousness and activism in Eastside neighborhoods.

A city divided and unable to plan for the future is certainly ripe for more strife, but annexation at least guarantees the council the leverage to bargain from a position of power in resolving internecine struggles, and keeps satisfied residents confident in the strength of their government.

Meanwhile, city services are keeping at least some city customers happy. Texas Oaks homeowner and recent annexee Rick McManigle praised council for the improvements in police protection and drainage maintenance the city brought to his neighborhood. "For the services we're getting," said McManigle, "we feel Austin taxes are our fair share of paying for what we use in the community."

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