Can Tennessee retroactively cut state-shared revenue to a city to claw back money tied to annexations made during a recent moratorium window?

Subject

Opinion No. 15-30, Authority of State to Withhold State-Shared Revenue from Municipality, April 2, 2015

Plain-English summary

Tennessee SB 121 proposed reducing state-shared revenue to any municipality that had expanded its corporate limits by annexation-by-ordinance between April 15, 2013, and May 15, 2015, by an amount equal to the increase in property tax revenue the city received from the annexed territory. This was a response to annexations that occurred during a legislative moratorium on most annexations-by-ordinance under Tenn. Code Ann. § 6-51-122. A state representative asked whether the General Assembly had the constitutional authority to do this.

The AG said yes. Municipalities are "creatures of the state" with no vested rights in legislative enactments that benefit them. The Contract Clause of the U.S. Constitution and Article I, § 20, of the Tennessee Constitution do not protect cities and counties against the state in their governmental capacity. Tennessee Supreme Court precedent going back at least to Cunningham v. Broadbent (1941) is clear: the legislature can alter the way state-shared revenue is distributed, even retroactively, even when a county or city has been relying on the existing formula.

Currency note

This opinion was issued in 2015. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

Tennessee imposed a moratorium on most annexations-by-ordinance in Tenn. Code Ann. § 6-51-122 from April 15, 2013, to May 15, 2015. SB 121 would have penalized cities that lawfully annexed during the moratorium under one of the statutory exceptions by reducing their state-shared revenue distribution by an amount equal to the increase in property tax they got from the annexed area.

The Contract Clause arguments did not save the cities. The U.S. Supreme Court has long held that local governments are creatures of state government and lack constitutional protections against their own state. Hunter v. Pittsburg, 207 U.S. 161 (1907). Tennessee follows the same rule. Cunningham v. Broadbent, 147 S.W.2d at 410, said the legislature could even cut the statutory interest rate paid by the state to counties on highway reimbursement bonds, without violating either federal or state contract clauses, because "[i]n such functions the County has no rights which the Legislature may not subsequently modify or abrogate."

This is sometimes called Dillon's Rule: local governments possess only those powers the legislature grants them, and what the legislature gives, the legislature can change. Smiddy v. City of Memphis, 203 S.W. at 513 ("political power conferred by the Legislature upon a municipality cannot become a vested right as against its creator").

Common questions

Did SB 121 ever become law?
The opinion addressed the proposed bill. Whether the bill was enacted (and in what form) is a separate question.

Doesn't the Contract Clause protect against retroactive legislation?
It protects parties in their private capacity. Cities and counties dealing with the state in their governmental function are inside the state's own structure, not outside it as private contracting parties. The U.S. Supreme Court and Tennessee Supreme Court have held the Clause does not apply to that relationship.

Could a private taxpayer or property owner in the annexed area challenge the law?
The opinion did not address taxpayer-standing or property-owner challenges. The question was about the city's rights. A property owner alleging a different constitutional injury (due process, takings) would need a separate analysis.

Does this mean the state can do anything to municipalities?
Within constitutional limits, mostly yes, when the relationship is governmental rather than proprietary. Constitutional limits like uniform taxation, equal protection, and home-rule provisions can still apply.

Citations

Hunter v. Pittsburg, 207 U.S. 161 (1907); Cunningham v. Broadbent, 147 S.W.2d 408 (Tenn. 1941); Smiddy v. City of Memphis, 203 S.W. 512 (Tenn. 1918); Southern Constructors, Inc. v. Loudon County Bd. of Educ., 58 S.W.3d 706 (Tenn. 2001); First Util. Dist. v. Clark, 834 S.W.2d 283 (Tenn. 1992); Metropolitan Dev. & Hous. Agency v. South Cent. Bell Tel. Co., 562 S.W.2d 438 (Tenn. Ct. App. 1977).

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2015/op15-30.pdf

Original opinion text

Authority of State to Withhold State-Shared Revenue from Municipality

Question

Can the State of Tennessee lawfully and/or constitutionally withhold from a municipality state-shared revenue for an area that was lawfully annexed by the municipality between the operative dates set forth in SB 121?

Opinion

Yes. The General Assembly has the authority to change the portion of state-shared revenue that it allocates to a municipality both retroactively and prospectively.

ANALYSIS

Senate Bill 121 proposes legislation that, if enacted, would reduce the State's distribution of state-shared revenue to municipalities for annexations by ordinance that occurred within a specified timeframe. Specifically, SB 121 provides that "[i]f a municipality extended its corporate limits by means of annexation by ordinance between April 15, 2013, and May 15, 2015, or if an annexation by ordinance became operative or effective during that time, then the state shall reduce the state-shared revenue that would otherwise be distributed to the municipality in an amount equal to the increase in property tax revenue that the municipality receives from the territory annexed by ordinance."

Senate Bill 121 addresses the period between April 15, 2013, and May 15, 2015. The General Assembly previously imposed a moratorium on most annexations by ordinance during this period, subject to certain exceptions. Tenn. Code Ann. § 6-51-122. For annexations by ordinance that were permitted during that time period, SB 121 would change the distribution of state-shared revenue generated from the annexed area. Specifically, SB 121 would reduce the municipality's state-shared revenue by an amount equal to the increase in property tax revenue that the municipality received from the annexed territory.

As a general rule, neither the Contract Clause of the federal Constitution nor its Tennessee counterpart applies to relations between a municipality and its creating state. Article I, Section 20, of the Tennessee Constitution states "[t]hat no retrospective law, or law impairing the obligations of contracts, shall be made." Article I, Section 10, of the United States Constitution similarly provides that "[n]o state shall . . . pass any law impairing the obligation of contracts." The Tennessee Supreme Court has held that the meaning of these provisions is identical. First Util. Dist. v. Clark, 834 S.W.2d 283, 287 (Tenn. 1992).

See generally Tenn. Att'y Gen. Op. 07-51 (Apr. 16, 2007) (citing, inter alia, Hunter v. Pittsburg, 207 U.S. 161 (1907); First Util. Dist. v. Clark, 834 S.W.2d 283 (Tenn. 1992); Cunningham v. Broadbent, 177 Tenn. 202, 147 S.W.2d 408 (Tenn. 1941)). "[L]ocal governments are creatures of the state and possess no more authority than has been conferred upon them by the General Assembly." Southern Constructors, Inc. v. Loudon County Bd. of Educ., 58 S.W.3d 706, 714 n.9 (Tenn. 2001). "[P]olitical power conferred by the Legislature upon a municipality cannot become a vested right as against its creator." Smiddy v. City of Memphis, 140 Tenn. 97, 102, 203 S.W. 512, 513 (1918). As a "creature of the State," a municipality can acquire no vested rights in the legislative enactments that benefit it. Metropolitan Dev. & Hous. Agency v. South Cent. Bell Tel. Co., 562 S.W.2d 438, 443 (Tenn. Ct. App. 1977).

In Cunningham v. Broadbent, 177 Tenn. 202, 147 S.W.2d 408 (1941), for example, the General Assembly enacted legislation reducing the statutory interest rate paid by the State to counties on highway reimbursement bonds. Dickson County and other plaintiffs attempted to sue state officials, contending that the legislation impaired their vested contract rights in violation of Section 20, Article 1, of the Tennessee Constitution, and Section 10, Article 1, of the United States Constitution. Id. at 205, 147 S.W.2d at 409. In rejecting Dickson County's claims of impairment, the Court reasoned, "first, that no contractual relationship exists between the State and the County by virtue of these enactments, and, second, that if a contract was created thereby, the County being merely a political subdivision of the State, such contract is not protected by the State or Federal Constitutions from alteration or revocation. In disposing of this question the learned Chancellor very concisely and forcefully said: 'The County is a subdivision and arm of the State, and the parties were dealing with governmental purposes and objects. Neither the Constitution of Tennessee, nor of the United States, imposes any restraint upon legislation affecting the contractual relations between the State and its political subdivisions, entered into in their governmental capacities and dealing with governmental functions. In such functions the County has no rights which the Legislature may not subsequently modify or abrogate.'" Id. at 207, 147 S.W.2d at 410.

In accordance with these authorities, the General Assembly has the power, at any time, to alter the method in which it distributes state-shared revenue to the cities and counties of this State. This principle is broad enough to allow the legislature to change, and require reimbursement for, funds that have previously been distributed under a different formula. Neither the Tennessee nor the United States Constitution imposes any restraint upon legislation affecting the relations between the state and its political subdivisions. As against the state, a municipality cannot acquire any vested right to continue receiving state-shared revenue under any particular formula or at any previously-established rate. The General Assembly remains free to enact legislation amending this distribution scheme as it sees fit.

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

MARY ELLEN KNACK
Senior Counsel

Requested by:
The Honorable Joe Towns, Jr.
State Representative
37 Legislative Plaza
Nashville, Tennessee 37243