The Wall Street Journal | May 27, 2009
By Bobby White

As the recession batters city budgets around the U.S., some municipalities are considering the once-unthinkable option of dissolving themselves through "disincorporation."

Benefits of this move vary from state to state. In some cases, dissolution allows residents to escape local taxes. In others, it saves the cost of local salaries and pensions. And residents may get services more cheaply after consolidating with a county.

In Mesa, Wash., a town of 500 residents about 250 miles east of Portland, Ore., city leaders have initiated talks with county officials about the potential regional impact of disincorporating. Mesa has been hit by a combination of the recession and lawsuits that threaten its depleted coffers, leaving few choices other than disincorporation, said Robert Koch, commissioner of Franklin County, where Mesa is located.

Two California towns, Rio Vista and Vallejo, have said they may need to disincorporate to address financial difficulties; Vallejo filed for bankruptcy protection last year. Civic leaders in Mountain View, Colo., have alerted residents that they are left with few options but to disincorporate because the town can't afford to salaries and services.

Incorporation brings residents a local government with the ability to raise money through taxes and bond issuances. It also gives them more control of zoning decisions and development, and usually provides for local services such as trash pickup and police as well.

Dissolving a town government, on the other hand, often shifts responsibility for providing services to the county or state. A city's unexpired contracts usually remain binding, and residents are still obligated to pay off any debt.

But long-term commitments such as pension liabilities and day-to-day services such as sewage and water can be folded into services run by the county, public-policy experts say.

Disincorporations are rare, usually resulting from population declines that leave too few residents to support the government. The most recent in California occurred in 1972, when stalled growth and political instability led Cabazon to dissolve itself, according to the California Association of Local Agency Formation Commissions. In Washington state, the last one occurred in 1965, when Elberton gave up its autonomy after 70 years, according to the nonprofit Municipal Research and Services Center in Seattle.

Today, some small municipalities are exploring the step to escape some financial burdens that have been exacerbated by the recession.

Rio Vista says disincorporating would eliminate 38 jobs and shift its sewer services to the county. Vallejo says disincorporating would end public-safety-employee contracts, which city leaders blame for pushing the city into bankruptcy.

Most talk of disincorporation appears to be exploratory, and some public-finance experts say towns may not have that option if it is being used to unload financial obligations. "This is somewhat of a legal gray area, because disincorporation was not designed to allow cities to escape financial hardship," said John Knox, a public-finance consultant with the San Francisco office of law firm Orrick, Herrington & Sutcliffe.

Mr. Knox, a bankruptcy consultant to Vallejo, said shifting oversight of a city's services to a county or state during the current economic environment would be a tall order. In California and many other states, the county or state must approve such a move, he said. Most counties are ailing as badly as cities, and are unlikely to readily approve a disincorporation, he said.

That isn't stopping some towns from checking into the possibility. In Mountain View, a Denver suburb with about 500 residents, sales-tax revenue has shriveled with the departure of four businesses last year, undermining its ability to pay city-government employees or to afford police and sewage service.

"We were surprised that it got this bad this quick," said Betty VanHarte, mayor of the 104-year-old city. "We have really tightened our belt and increased fees to solve some of our problems, but it's been very difficult."

Colorado recently hired public accounting and consulting firm Clifton Gunderson LLP to help Mountain View deal with its troubles. Chuck Reid, a consultant with Clifton Gunderson, said the town hopes to escape disincorporation, but its murky long-term financial outlook may make it the only option. The town could dissolve and be absorbed by the county, or merge with another nearby municipality, he said.

A group of residents of Spokane Valley, Wash., have a different motive for their campaign to disincorporate the city of 90,000 near the Idaho border: They want to keep their city's government from increasing taxes and fees that would finance construction of a modern downtown district.

The growth plans are too costly and break from the region's tradition of bucolic living, said Susan Scott, owner of Larks Storage in Spokane Valley, and one of the disincorporation campaign's planners. "Too many people are hurting from how bad the economy is doing," she said. "We just can't put up anymore with what the government wants."

Spokane Valley Mayor Richard Munson said that the city is providing services in a cost-effective manner, and that only a minority of citizens want to disincorporate.