Easy Choice for Taxpayers on Des Moines Franchise Fee Referendum

On March 4, 2014 residents of Des Moines will be asked to vote on whether the City ought to have the option of raising the franchise fee (which is applied to all gas & electric utility bills) in order to pay off a $40 million court judgment. No matter one’s views on how the City got to this point, the obligation is real and the franchise fee is by far the preferred method to generate the necessary funds.

The judgment results from a ruling that the City acted illegally for a number of years in levying the franchise fee in an amount beyond what could be justified. The court ordered a portion of the fees be refunded.

The City has already paid the judgment into a court fund using the proceeds of $40 million in bonds issued specifically for the purpose. This made sense because the judgment would otherwise have continued to accumulate interest charges. Now the question is how to pay off the bonds.

The City needs no special permission to raise the property tax rate for this purpose; in fact in the official offering it has already identified property taxes as the source of repayment for the bonds. Unless an increase in the franchise fee is approved by voters, the City has made it clear that property taxes will be raised by 41 cents per $1,000 of taxable value, for 20 years, to generate the necessary repayment funds.

Why is the franchise fee a better option than the property tax?

  • It will spread the payment out among a greater number of people, thus lessening the impact on any one individual or business. Only 60 percent of property is taxable in Des Moines (one reason why its property tax rate is already so high), while the franchise fee reaches everyone. An average homeowner would pay $444 per year in property tax but $273 in franchise fees.
  • It will more closely align with the group of individuals and businesses who will be receiving the court-ordered refund. The group that is receiving the refund would also be the group paying the fee increase.
  • Des Moines already has high property taxes, and taking them still higher will make the city even less competitive. Currently the most reputable national comparative study of property taxes ranks Des Moines third highest among the largest cities in each state, in terms of its effective commercial property tax rate, and fifth highest for homeowners (1). (These comparisons are based on the consolidated rate for city, county, school, hospital, community college, etc., not just city taxes.) Statewide, the consolidated rate for Des Moines is tenth highest among 945 cities and would move up to third highest with the increase.

Because Des Moines has, of necessity, already been aggressive in reducing annual operating expenditures for the past ten years and faces further reductions, there is likely not room in the operating budget to absorb another $3 million per year for debt service. However, the city could ameliorate some of the impact of a franchise fee increase by looking at other ways to reduce fees and charges, and should more aggressively pursue these options.

No matter what, the franchise fee needs to be a tool in the toolkit, and must be approved by voters to become viable. From a taxpayer standpoint, there’s no question the franchise fee is a better option than a property tax increase. Vote “yes” on March 4th.

(1) 50-State Property Tax Comparison Study, by the Lincoln Institute of Land Study and the Minnesota Center for Fiscal Excellence, May 2013.

5 Responses to Easy Choice for Taxpayers on Des Moines Franchise Fee Referendum

  1. Paul Caligiur Sr says:

    What is the operating budget of the City of Des Moines. All the flowers that line Fleur Dr are beautiful but maybe they could not be planted for 10 years, I bet there is excess in a lot of city department budgets that can be cut. You are asking people who, it was already judged paid too much franchise fee money, to pay more again to pay the debt on the City illegally collecting too much money. I think there are a lot of places in the ordinary budget that can be slightly cut over 7-10 years to make up this $40 million.

  2. Paul Caligiur Sr says:

    The operating budget of Des Moines is FY2014 City of Des Moines Budget $535,057,954 , down from about $600,000,000 in 2012. If $2 million of this Franchise fee repayment could be paid from budget sources rather than increasing property taxes or upping the new Franchise fee then that $2 million would be on 3.7 time 10 to the minus 7th percent of the budget. I am sure the City Leaders can find slight diversions in the budget to pay this off without raising more more taxes or franchise fees.

  3. Roberta Powell says:

    I am voting against the option of paying an increased franchise fee over paying higher property taxes for several reasons no one has addressed.
    First, the claim is made that a franchise fee is cheaper, but I don’t understand how. Forty million dollars is forty million dollars.
    Second, robbing Peter (the East, North and South sides of Des Moines) to pay Paul (The West side), then forcing Peter to reimburse Peter is unfair and unjust. The poorer, denser populated, older neighborhoods pay a higher share of property taxes than the West side. The West side has a higher standard of living because I believe they receive a higher proportion of services.
    Third, a franchise fee forces renters to pay a hidden “property tax” when they receive little benefits from the city. Landlords who benefit most will not pay. Poorer people in poorly insulated, substandard housing will pay an even higher portion of the fee. For many years! They receive fewer services.
    I noticed several city council members are landlords.
    Fourth, franchise fees help hide taxes from taxpayers. People don’t even know what they are paying and for what they are paying. This lawsuit proves that. Who knew?
    Property owners who pay the increase in property taxes will be encouraged to participate in keeping property taxes within reason if they only know how much they are paying. I will start protesting the unrealistic assessment of my property. I hope everyone will. I will not support beautification schemes with no practical value. I will oppose building streets to nowhere. How about forgoing flowers and not watering green strips along streets during droughts? How about addressing our aging sewer system?
    I want to see city council members improve the city, not its image.
    Several council members have supported the franchise fee. Of course they would. They imposed and benefitted from it for decades, even though it was ruled illegal. They want it.
    I say it is unfair and needs to be stopped. A court has agreed.
    Thank you.

  4. Jennifer says:

    Quite frankly, the parties involved in agreeing to increase franchise fees, illegally, above and beyond that which was acceptable, thus creating the $40 million lawsuit, should pay the debt through paying for frivolous expenditures that normal large and small businesses would have to sacrifice.

    I can truly say that as an employer, if we didn’t have the funds, we didn’t splurge…. The city must analyze their own budget, and make some cuts.

    Special Revenue Funds 2013-2014

    Employee Appreciation Events
    2013 $24,408
    2013-2014 $29,000

    I’m pretty sure going without will not greatly impact morale.

    Secondly, in analyzing the finance budget, the $112 million dollars in non departmental revenue, could be used for the $40 million that the city needs to pay back.

    Quite frankly, you have to be a moron to not see that if we have our left hand out to collect the debt the city owes us due to fraudulent collection, then why would we then turn around and pay them with our right hand through penalization of increased property taxes, or an increase in franchise fees.

    I am disgusted!

  5. Gretchen says:

    These are all great comments, and all of these ideas are good ones and will be pursued by the Taxpayers Assoc. of Central Iowa.

    Unfortunately, the City has the upper hand right now because they have already DECLARED they will raise the property tax if the franchise fee isn’t approved. No matter how much any of us believe there are some savings to be found elsewhere, and that cutting the budget is a better alternative, the City is not going to do that. So the vote on March 4th is important if one believes it’s better to spread the “pain” out among more parties.

    Regarding rentals, typically if a landlord pays the utility bill they are going to pass the franchise fee on to the renters. They will also do that with a property tax increase. We’re still back to the idea that the franchise fee spreads the pain out among more parties.

    Thanks for the comments

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