Up Allen's creek without a paddle: can cities leverage utility service for annexation?

• Author: Reischmann, Catherine D.
• Position: Florida

Cities should beware because even 20 years after it was decided, Allen's Creek Properties, Inc. v. City of Clearwater, 679 So. 2d 1172 (Fla. 1996), continues to raise questions about the legality of municipalities compelling county property owners to annex into a city to obtain that city's utilities. (1) Hailed as a victory for cities, the Florida Supreme Court decision held that cities can require landowners in unincorporated areas to execute "voluntary" annexation petitions in return for access to city utilities. (2) But the decision brings up many troubling issues familiar to those in local government, such as judicial interference in the operation of local government, cities' ability to control growth on their borders through annexation, and the right to leverage annexation for utilities.

Cities are often looking to expand their boundaries because annexation results in increased revenue and lower tax rates in the future. Specifically, annexation helps spread the costs of constructing and operating municipal utility systems to all customers, not just city residents. Although hardly perfect, tending to create pockets of incorporated areas, by mandating annexation petitions from county property owners for utility service, a city addresses the public policy concern of county residents on cities' borders reaping the benefits of city life tax-free.

The Florida Supreme Court recognized that annexation solves the widespread problem of county residents enjoying urban city life, including city utilities, without paying city taxes and fees, as described in the article by Michael Sittig and Harry Morrison, Jr., with John T. Wark, The Annexation Riddle, Quality Cities, March/April 2011 at 17:

State policies continue to encourage Floridians to live and develop property in unincorporated areas where rural land remains available for a relatively inexpensive price and taxes are likely to be lower because urban services are not available--yet. Meanwhile, county residents on a city's fringe, those who do not want to be annexed, go on enjoying the fruits of city life--tax-free. They can drive to a nearby city to do business, enjoy restaurants and parks and nightlife, or participate in cultural and sports activities. And they can do so without sending a dime of their property taxes to city government to support the infrastructure of roads, sewage plants, water systems and police protection that these restaurants, cultural organizations, sports teams and businesses depend on.

County residents or business owners are often not motivated to voluntarily annex into a city because of the increased financial burden that comes along with annexation, sometimes without any additional perceivable benefit because of the ready availability of municipal services to these nonresidents. Cities, then, are faced with a Hobbesian choice. Either the cities accept that those on their borders can use their benefits, including their utilities, and disrupt their land use plans, without paying city taxes; or cities must look for ways to force or, at a minimum, incentivize county residents and businesses to annex.

Further aggravating this dilemma for cities is the impact of Allen's Creek. At first blush, it appears that the decision is highly favorable to cities seeking to annex more territory, since the Florida Supreme Court found a city could require a utility customer located outside the city to sign an annexation petition as a condition of receiving city utility service. The court sided with the City of Clearwater in its quest to force nonresident utility customers into the city. In doing so, the court pointed out that annexation is a legitimate condition for obtaining utility service. Provision of utility service to nonresidents is a proprietary, rather than governmental function, stated the court, which means that in most cases a city has no duty to furnish any service to nonresidents, and so a city can refuse to serve the customer absent the customer acquiescing to a utility related condition such as annexation. (3) The decision also seems to establish the autonomy of government owned utilities to operate outside their borders without judicial interference, absent discrimination.

In Allen's Creek, a noncitizen of Clearwater demanded sewer service. The city required him to sign an annexation petition to obtain that service. He argued he should not have to sign an annexation petition because he claimed Clearwater, as the exclusive sewer service provider to his property under an interlocal agreement with Largo, should provide him service unconditionally. The Supreme Court disagreed, stating that the agreement with Largo merely allowed but did not require Clearwater to provide sewer service to the property, and the city could condition provision of utility service on annexation.

Upon closer examination, the decision adds a lot of uncertainty. The court mentioned two exceptions when a city would have an unconditional duty to serve a nonresident, and in those cases, the city could not condition service at all. (4) Under Allen's Creek, cities are required to provide utilities unconditionally: 1) when the city has "held itself out as a public utility" or "expressly manifested" a desire to serve; and 2) when there is a contract or law mandating service between a customer or a group of customers in an area, and the city. (5) In both categories, stated the Allen's Creek court, a city has a duty to serve the nonresident, which cannot be conditioned on annexation. Because of some dicta describing these two exceptions to the annexation rule, the decision makes uncertain municipalities' power to condition utility service to nonresidents, to use their utilities to require annexation, and ultimately to collect their fair share of taxes and fees from non-residents on the edge of city life.

The owner in Allen's Creek argued both the exceptions applied there, but the court disagreed. The city was not "holding itself out as a public utility," in part because the city only provided utilities to a limited area outside the city. Nor did the city have an unconditional contractual duty to provide utilities to all the unincorporated land within the owner's service area under either Clearwater's interlocal agreement with the City of Largo establishing each city's service area, or a "201 Plan." (6) The court held that neither of those was a contract binding Clearwater to serve the Allen's Creek property.

The fallout from Allen's Creek is that a city must embark on a...