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.