TN 2 (02-08)

When two or more governmental entities join to create a new entity, or one governmental entity takes over one or more other entities, or when a village or township government decides to incorporate itself as a city, it must be determined how the outcome of each of these situations affects the Social Security coverage obtained for the employees of the predecessor entities as well as the Social Security coverage status of those employees working for the resulting successor entity.

Different terms have been used interchangeably to describe what occurs in most predecessor-successor situations – merger, consolidation, acquisition, annexation, etc. Social Security uses the following standardized terminology to describe the different types of situations that occur:

• Consolidation

• Annexation

• Hybrid Consolidation

• Miscellaneous Transition

A. What is a Consolidation?

Two or more entities come together to create a new entity. The constituent entities are legally dissolved and cease to exist when the new entity comes into being.

A significant aspect of a consolidation is that the successor entity exhibits both a change in form and a change in substance from its predecessor entities.

1. Change in Form

The organization or structure, of the successor entity is different from that of the predecessor entities. The organization of the governmental and operational processes and the structure of the departments within the successor entity differ from that of the predecessor entities.

2. Change in Substance

A primary example of change in substance is where the dissolution of the predecessor entities results in their termination and the subsequent creation of a new “juristic entity.” The successor entity assumes the management and control once held by the predecessor entities. An indication of a change in substance is a transfer of property, assets and liabilities from the predecessor entities to the successor entity. Other examples would be a change in legal status or the change in powers and functions between those of the predecessor entities and the successor entity.

Example: The Village of Lime and the Town of Orange dissolve and, upon their dissolution, consolidate to become the City of Citrusville. As an incorporated city, Citrusville has a different governmental structure than that of Lime or Orange and gains additional powers under State laws which were not available to its predecessor entities.

B. What is an Annexation?

An entity absorbs or annexes one or more entities. The entities being annexed are legally dissolved and cease to exist, but the entity doing the annexing continues to exist and maintains its overall identity and structure, although a name change might occur.

Example: The Tea School District and the Sweet School District were separate political subdivisions. Each had obtained Social Security coverage separately for their respective employees via coverage modifications to the State’s Section 218 Agreement. Due to a decline in its population and tax base, the Sweet School District no longer could afford to operate its school system. As the result of negotiations between the school boards of both school districts, it was agreed that the Tea School District would annex the Sweet School District, including all the Sweet School District’s property and assets, and make it part of the Tea School District.

As a result of this annexation, the Sweet School District dissolved and filed a notice of dissolution with the Social Security Administration to terminate its Section 218 coverage modification and ceased to exist. The Tea School District underwent no change to its organizational structure or substance from the annexation and absorbed the Sweet School District employees into its existing system. The former Sweet School District employees became Tea School District employees. The Social Security coverage of former Sweet School District employees became dependent upon the Social Security coverage situation in the Tea School District.

C. What is a Hybrid Consolidation?

This is a variation on the consolidation process and has occurred in some City and County Consolidated Government situations. In a true consolidation situation both the City and County dissolve to create the new Consolidated Government. In the hybrid consolidation:

• one of the two predecessor entities dissolves and turns all its powers and functions over to the successor Consolidated Government;

• the second predecessor entity turns over most, but not all, of its powers and functions to the Consolidated Government.

The Consolidated Government is established as a separate political subdivision. Because the second predecessor entity retains some of its powers and functions, it does not dissolve and maintains its Section 218 Agreement to cover its remaining employees. As with a true consolidation, the successor entity of a hybrid consolidation exhibits both a change in form and a change in substance from its predecessor entities.

Example: The City of Kalmar was the county seat of Delaney County. Both Kalmar and Delaney County were separate political subdivisions, and each had obtained Social Security coverage separately for their respective government employees via coverage modifications to the State’s Section 218 Agreement.

In 1980, in an effort to cut costs and eliminate redundant services, the City of Kalmar and Delaney County considered consolidating their governments. Following a favorable referendum of both city and county voters, the City of Kalmar and Delaney County agreed to a consolidation of their governments effective January 1, 1982, to form the new political subdivision of the Consolidated Government of Kalmar and Delaney County. As part of the agreement, the City of Kalmar totally dissolved, terminated its Section 218 coverage modification, and transferred all its powers, functions and employees to the Consolidated Government effective January 1, 1982. Delaney County Government, on the other hand, turned over most of its powers, functions and employees to the Consolidated Government, but did retain the County Sheriff’s Department, including the County Jail and County Court, and the County Clerk’s Office. Delaney County Government did not dissolve or terminate its Section 218 coverage modification and still exists as an entity separate from the Consolidated Government.

The Consolidated Government of Kalmar and Delaney County was a new political subdivision and was the new employer of all the former city and county government employees who were transferred to it. The Social Security coverage they had under their former employers was no longer effective.

D. What are Miscellaneous Transitions?

There are situations where a governmental entity may undergo a significant structural or organizational change that does not fall under the categories of consolidation, annexation or hybrid consolidation. Yet, the change may be such that the entity’s Social Security coverage is affected.

Examples:

Due to population growth, a Village or Township decides or is required by State law to incorporate itself as a city. As an incorporated city, the entity will have additional powers.

An institution of higher learning goes from being its own political subdivision to an instrumentality of the State University system.