City Attorney John Urner will discuss the county's letter with the City Council in closed session, Mayor William Breichner said.
The annexation policy was unanimously adopted by the city on May 28 and went into effect Sept. 1. Urner has said the policy is legally defensible, Breichner said.
Urner did not return phone calls Friday.
Opponents of the policy, including Breichner, have said it could hurt development. Breichner favors annexation, but disagrees with using water and sewer service to bring it about.
City Council members have said the policy is important because it will lead to more annexations. Annexations and redevelopment within the city can help solve the city's financial problems, they said.
Councilmen N. Linn Hendershot and Kristin Aleshire said Friday they would not vote to change the policy. The policy is in the city's best interest, Aleshire said.
Councilman Lewis C. Metzner and Councilwomen Penny May Nigh and Carol Moller said they needed more information before they could say if they would vote to change the policy.
Breichner and other city officials said they were disappointed the county has threatened legal action rather than trying to resolve the issue in joint city-county meetings. The mayor has called for such a meeting several times in recent weeks.
"I had really hoped we could avoid it (the lawsuit). It is totally unnecessary," Breichner said.
But County Commissioner William J. Wivell and Douglas said attempts to resolve the matter have failed.
"This is not something anyone in the county wanted to do. But it is a last resort," Douglas said.
The county hopes the dispute can be resolved without going to court, Wivell said.
The draft lawsuit lists the Home Builders Association of Washington County, Home Construction Corp. and Paul Crampton Contractors Inc. as co-plaintiffs.
If the dispute is not resolved, the county would proceed with the lawsuit even though three new commissioners are scheduled to take office in early December, Douglas said.
"The five who are in the driver's seat now make the decision," he said.
The policy violates the 1997 city-county agreement because it places conditions on the provision of service, Douglas said.
He said the policy also violates state case law because the city, by providing water and sewer service, is acting as a public utility service. As such, the city can't refuse to provide service to customers who refuse to agree to annexation, he said.