Iowa cities turn to franchise fees to raise money

Cedar Rapids proposes increase in fees on gas and electric bills

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CEDAR RAPIDS — Cities around Iowa, including Cedar Rapids, are asking residents to pay more in fees found on gas and electric bills as a way of raising money to offset losses from the state’s historic property tax reform.

Cedar Rapids is proposing a 50 percent hike in its franchise fee for both gas and electric bills. For an average electric bill of about $100, for instance, the 1 percentage point increase — from 2 to 3 percent — translates to an extra $1.07, according to Alliant Energy.

While many customers may hardly notice the increase in their bills, Cedar Rapids projects it will generate an extra $2.3 million for the city budget.

“A levy on the utility bill spreads out the cost of government — for fire, police, (and others departments) — across a broader spectrum than just putting it on the property owner,” City Council member Scott Olson said.

On Tuesday, the Cedar Rapids City Council began the process of increasing the franchise fee for MidAmerican Energy, Alliant Energy and Linn County Rural Electric Cooperative by setting a public hearing for March 8.

The council would ultimately need to vote to approve a fee increase, likely this spring. If approved, it would go into effect in fiscal 2017, which begins July 1. Franchise fee revenue, which also includes cable, would increase from $7 million to $9.3 million.

Franchise fees are passed through the utility companies as add-ons to customer bills. According to the Iowa Utility Association, 104 cities in Iowa use the franchise fee for gas and electric.

In Eastern Iowa, Iowa City and Coralville have a 1 percent franchise fee on gas and electric. Iowa City is not planning to increase it, said Dennis Bockenstedt, city finance director, and Coralville did not return messages seeking comment. Hiawatha, North Liberty and Marion do not use the franchise fee for gas and electric.

Olson said raising the franchise fee is a more level approach than increasing property taxes, which are proposed in Cedar Rapids to remain flat at about $15.22 per $1,000 of taxable value for the eighth year. Cities can collect franchise fees from tax-exempt entities such as schools and churches that don’t pay property taxes.

In Cedar Rapids, the money would cover general city costs including pay increases and inflation, Olson said.

In 2009, Iowa legalized cities charging up to 5 percent in franchise fees on gas and electric bills. Des Moines notably lost a class-action lawsuit for overusing franchise fees between 2004 and 2009 and was ordered to repay $40 million to customers. Des Moines now maxes out the fee at 5 percent.

Cedar Rapids had been hoping to hold the franchise fee steady another year and save the room under the cap for a rainy day, such as if the city losses its automated traffic camera enforcement program, which generates about $3 million per year in ticket revenue, Olson said. 

Instead, Cedar Rapids is recommending using its leeway to make up lost ground from property tax reform. The reclassification of rental properties from commercial to residential means $445,859 less in the city budget with growing losses over time. And rolling back taxes on commercial properties could sting in years to come if the state discontinues backfilling the losses.

“The state likes to take credit for decreasing taxes, and they hope people don’t notice they are getting taxed in another way,” said Peter Fisher, research director at the Iowa Policy Project, a group focused on tax, budget and other policy issues.

Fisher said it is not surprising cities are looking to the fees to make up revenue.

“The reclassification of apartments due to their residential classification of properties leaves cities short and scrambling for ways to raise revenue,” Fisher said. “It seems pretty clear why they have to do that.”

Jeff Schott, director of the University of Iowa Institute of Public Affairs, agrees the changes to the property tax code will be an increasing challenge over time.

“The cities are beginning to feel a crunch in terms of revenue being collected from property taxes,” said Schott, who is the former Marion city manager. “The concern down the road is the crunch will be even greater.”

Schott said the franchise fee and a voter-approved local-option sales tax are two mechanisms for growing revenue. Cedar Rapids voters already approved a local-option sales tax to pay for road improvements.

l Comments: (319) 339-3177; brian.morelli@thegazette.com

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