Sharing the Wealth: Why the County Pays the City Millions Each Year

2007
The “annexation monster” illustration by local artist Charles Peale, 1982.

Every January for the past 35 years, Albemarle County has transferred a sum of money to the City of Charlottesville under a pact called the Revenue Sharing Agreement (RSA). “Sharing” is a euphemism, as the payments have only gone in one direction. The amounts are not trivial—this year’s payment was almost $16 million, and the total transfer to date tops $310 million. Though the arrangement began as a desperate bargain to stop the city from annexing more of the county’s land, many county residents now wonder if they are paying something for nothing.

“I was shocked to find [the agreement] buried in the budget,” said Bill Schrader, Crozet resident and advocate for local projects. “I served on the Crozet Community Advisory Council and was looking for ways to fund the new library here, and started asking questions about the payments. Few people understand that we are simply giving our money away.”

This article is the second in a series, County Line: The Charlottesville Albemarle Divide. Read the first here.

Since the RSA went into effect in 1982, the county’s population has grown by 48,000, many of whom are oblivious to its details. But a recent presentation on the agreement by County Attorney Greg Kamptner to the Board of Supervisors (BOS) clearly outlined the basic predicament: Despite the Virginia General Assembly’s extended moratorium on the city’s right to annex county land, Albemarle County cannot free itself from the annual obligation to share its property tax revenues with the city.

Debate

While the provisions of the RSA may seem hard to fathom now, the community debate during the years leading up to the 1982 agreement was deeply serious. Current county Supervisors Ann Mallek and Diantha McKeel recalled the unease of those times at a recent BOS meeting. “I voted in favor of the agreement back then [as a citizen], and I remember we were all terrified,” said McKeel. Mallek also sensed a sharp tenor of concern among the populace. “People felt that it would be the end of our existence as a county,” she said.

Ann Mallek, White Hall District Supervisor. (Photo courtesy Albemarle County)

During much of the 20th century, city annexations of adjacent county land were a common tactic for cities to increase their tax base and add revenue to their coffers, partly because of Virginia’s uniquely independent city/county structure. Charlottesville had successfully annexed parcels of varying sizes throughout its history, and had drawn up plans to do so again at the end of a temporary annexation moratorium in 1980. The city’s acquisition target encompassed a 10-square-mile area, from the Rio/29 interchange out to the Pantops region and down to 5th Street South. There was also talk of a larger area under consideration, extending farther north and west and potentially swallowing up 32 square miles of the county.

County residents in the affected areas, led by groups such as Citizens for Albemarle and the Citizens’ Committee for City-County Cooperation, were thrown into a panic as they understood the very real threat they faced. Four square miles of county land, including all of Barracks Road Shopping Center, had been annexed in 1963 to almost double the city’s size, and the county’s revenue loss from that transfer was painfully evident. Subsets of city and county leadership began a series of meetings to negotiate an arrangement that would (a) preserve county-owned property, and (b) provide the city with additional revenue. After a protracted and contentious debate, the contours of a deal began to emerge.

The Revenue Sharing Agreement in its final form prohibited the city from annexing any county land (except Pen Park), and in return, the county would “share” a portion of its property tax revenue with the city each year. (See the sidebar at bottom of this story for a primer on the calculation of the payment.) Key features of the agreement were that (a) the county land values used to calculate the payment were fair market values, even if the property was under land use taxation, (b) the annual payment would be capped at 0.1% of the total assessed value of taxable real property, and (c) the agreement would continue indefinitely.

Proposed boundaries of Charlottesville’s annexation plans, 1980. (Image courtesy Albemarle County)

While some citizens argued against the deal because of its permanence and because county residents would have no say in how the shared revenue would be spent by the city, the Daily Progress and many citizen groups opined in favor of the agreement. A local group called SAFE (Stop Annexation Forever) used an illustration by local artist Charles Peale of the city depicted as an octopus-like “annexation monster,” far-reaching and voracious, to whip up public support for the RSA.

The Daily Progress editors pointed out that the threatened land provided the lion’s share of the county’s property tax and sales tax revenue, which would be lost to annexation while at the same time exposing residents in those areas to the city’s much higher tax rates. To residents’ concerns about the agreement’s perpetuity, the paper countered in a May 1982 editorial that “annexation, dear reader, lasts forever.”

Because the agreement involved contracted debt, the RSA was presented to Albemarle County voters in an up-or-down referendum, where it passed with 63 percent approval (though not in Crozet specifically, where approval reached only 41 percent). The county’s first payment to Charlottesville ($1.2 million) was made in 1983, and payments reached a high of $18.5 million in 2010 before stabilizing at around $16 million for the past several years. The agreement’s cap, a provision thrown in at the eleventh hour of negotiations, has limited the payment in 27 of the 35 years it has been in force.

Regret

County residents felt they had narrowly avoided a calamity, even after the state imposed a moratorium on annexations by cities in 1987. “Pauses” in annexations had come and gone in past decades, and the agreement provided a long-term bulwark against future threats. However, the moratorium was extended until 2010 by the Virginia General Assembly and then to 2018, and this year it was extended again until 2024.

Adding to the consternation of RSA opponents, another state rule allows a county to be declared permanently immune from city-initiated annexations when it reaches “a population of 50,000 persons and a density of 140 persons per square mile.” According to the most recent Weldon Cooper Center population projections for 2016, Albemarle County hits both targets. So at present, the county looks to be impervious to any threat of annexation by the city, yet still must pay millions. Why?

The Revenue Sharing Agreement is a short and tightly written document that represents a binding contract between Charlottesville and Albemarle with no expiration date. The text states that the agreement will remain in effect until one of three events occurs: (1) The city and county are consolidated into a single political subdivision, (2) the concept of independent cities in Virginia is altered so that city property becomes part of the county’s tax base, or (3) the city and county agree to cancel or alter the agreement.

So if, under option (1), Charlottesville were to revert to “town” status, as has been discussed in past years when the city was experiencing financial difficulties, then Albemarle County would assume control of all regional services (schools, police, etc.) and the agreement would dissolve. However, this window is almost closed, because when Charlottesville reaches a population of 50,000 (it stands at 49,000 currently), reversion to town status is no longer available under state law. Option (2) would require a statewide legislative change that would affect dozens of cities in various ways, and appears equally unlikely.

As for the third option, Charlottesville has never publicly shown an interest in altering the agreement. As BOS Chair McKeel noted recently, “City Councilors seem surprised that we have county residents asking about this. It’s just not on their radar at all.” Regarding this issue, over the last twenty years, she said, “I have been briefed by five different County Attorneys and every one of them says the same thing—that this is a legal contract and the contract will stand.”

In his recent BOS presentation, County Attorney Kamptner addressed the questions often raised by county residents challenging the validity of the agreement. Were we under “duress” when we agreed to it? Why have we no say in how the funds are used? Was valid “consideration” paid? If the annexation threat is gone, why can’t we get out of it now? The answers to all of these questions, explained Kamptner, hinge on what happened in May of 1982.

“The hard reality of contract law,” said Kamptner at the meeting, “is that it’s based on conditions that existed at the time the agreement was entered into.” The terms of the RSA, including how the payment is calculated, the lack of county input on the funds’ use, and its permanence, as well as the possibility of a renewed statewide annexation moratorium at any time, were widely discussed and debated. The terms were ultimately approved, as written and without exception, by county voters. Press reports, editorials, and residents’ memories of the times all indicate that the populace understood the choice before them, and each side received something of value in the agreement, so the contract remains valid by law.

Timothy Lindstrom, former County Supervisor and one of the lead negotiators of the RSA, said in his 1992 thesis on the history of the agreement that, “[i]t must be remembered in assessing the future of the agreement that it was the product of the coincidence of interests of two parties motivated by pragmatic self-interest rather than goodwill.”

Review

A recent study by a private, local, nonprofit public policy group called The Free Enterprise Forum used the 10-square-mile annexation map to try to quantify who has benefitted from the RSA. For the 15-year period from 2001 to 2016, the study used publicly available data to conclude that Albemarle County has received $64 million more in local tax revenue generated by that area than it has paid in RSA funds to the city. Good news for the county, though Ann Mallek notes an omission: “That’s fine as far as it goes, but what’s missing is the cost of providing services to those residences in the urban ring.”

Powerless to direct how the “shared” funds are spent, county residents often wonder what happens to them in the city’s budget, where they represent 10 percent of total city revenues. Ryan Davidson, Senior Budget and Management Analyst for the city, explained that they are allocated in three ways. For FY18, about two-thirds of the projected $15.8 million goes into the General Fund and one-third into the Capital Improvement Program (CIP), with a small (2.5%) portion going to the Facility Repair Fund.

The city budget states that: “The majority of this revenue is dedicated to projects and operations that benefit City and County residents alike.” Though the General Fund monies are not earmarked for specific projects, “[t]he funds support public safety departments, parks and recreation, and infrastructure maintenance,” said Davidson. He also noted that RSA-funded CIP projects in recent years have included “sidewalk and bridge repair, bicycle infrastructure, transit bus replacement, parks and playgrounds renovation, and trail and greenway development.”

Supervisor Mallek puts the tradeoff into perspective. “If leaders at the time had not achieved the agreement, we would have been a remarkably different place than we are today,” she said, referring to the loss of county land that almost certainly would have been annexed. From the agreement, she said, “We received certainty, and we kept our boundaries, and the city’s biggest concession was the cap [on the annual amount].” To suggestions that the county should simply refuse to pay the yearly transfer, Mallek demurs. “I am not willing to spend a half-million dollars of taxpayer money on court fees, only to lose that battle.”

Bill Schrader (Photo: Lisa Martin)

Resolve

The battle continues to be waged on other fronts, if intermittently. State Delegate Steve Landes, whose district includes western Albemarle County, proposed a budget amendment earlier this year that would have dissolved Virginia revenue sharing agreements when a municipality’s annexation rights become restricted (as under the current moratorium). While this would have voided the Albemarle-Charlottesville RSA, there are more than a dozen other such agreements around the state that might also have been affected by the change, so Delegate Landes withdrew the amendment and plans to try a different approach in the near future.

Crozet’s Bill Schrader has focused on what he sees as a possible breach of the agreement—a “payment in lieu of taxes” (PILOT) charged to county residents by the city for natural gas service. The RSA prohibits either jurisdiction from imposing a lawful tax on the other that the other could not reciprocate, and to Schrader, the PILOT is a clear violation.

The County Attorney has argued that the PILOT is actually unconstitutional because of how the city accounts for it, and thus does not violate the RSA (which prohibits only legal taxation), but the explanation raises more questions than it answers. “I was disappointed in the County Attorney’s presentation,” said Schrader. “They are still trying to justify the agreement instead of attacking it.”

Though rarely attempted in the past, the payment could be used as leverage in city/county negotiations. During a recent BOS discussion about moving the county courthouse to another location, Supervisor Richard Randolph suggested a way to make the “downtown option” more desirable for the county. “If the city were to offer to re-negotiate the [RSA] with the county, and halve the amount the county owes the city on an annual basis, then I …would be very receptive to re-opening our negotiations with the city,” he said.

Absent such an offer from Charlottesville or an unexpected intervention by the Virginia General Assembly, Albemarle County is bound to be sharing the wealth for a long time to come.

Revenue Sharing by the Numbers

For those curious about the details, here’s an example of how the RSA amount would be computed for the year 2014 using round numbers. Some of these values are estimated, as the figures used in the calculation are not published in county budget documents, only the total is reported.

To create the Revenue Sharing pool, the city and county each contribute 37 cents per $100 of their total assessed value of taxable property into the pool:

  • Cville contribution: $22 million
  • Alb Cty contribution: $67 million
  • Total: $89 million (to be shared)

The above is roughly a 25/75 split. The amounts are then weighted by two factors: the relative population of each jurisdiction, and the relative “true tax rate” each imposes on real estate. The true tax rate is the real estate tax rate, adjusted for the ratio of assessed value to actual sales.

  • Cville population: 48,000 (32% of total)
  • Alb Cty population: 104,000 (68% of total)
  • Total: 152,000
  • Cville true tax rate: 0.9155% of total
  • Alb Cty true tax rate: 0.7545% of total
  • Total: 1.66

Still awake? For each jurisdiction, these two percentages are averaged into a composite, and that “composite index” is used to calculate how much of the pool each SHOULD receive, compared to how much they contributed:

  • Cville composite: 43% (43% of $89M is $38M)
  • Alb Cty composite: 57% (57% of $89M is $51M)

Since Cville’s weighted share is $38 million, but they only put $22 million in the pool, they receive $16 million from the county. The “sharing” has thus far always gone from county to city because the city has more people per dollar of assessed property value, and because they already charge their citizens a higher tax rate, all else equal. Probably the biggest driver of the transfer is county property values, which grow every year and make the pool bigger. Charlottesville will never end up transferring funds to Albemarle unless one or more of these factors changes significantly.

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