City council eyes revenue source in utility franchise fees

BY CHRIS CLARK | JULY 02, 2009 7:20 AM

A new Iowa City fire station could finally be built, but not without local residents and businesses chipping in a little extra.

The Iowa City City Council further discussed this week the idea of imposing a franchise fee on utilities, such as the one providing gas and electricity, after Gov. Chet Culver signed a bill in May that allowed cities to assess such charges at rate of up to 5 percent.

It the fee passes in Iowa City, revenue must be used at least partially for inspection, oversight, and regulation of utilities, according to terms of the bill.

The city could charge MidAmerican Energy a franchise fee of up to 5 percent of its total revenue. And though the fee officially taxes the business, consumers will pay the difference.

At a June 29 meeting, city officials discussed what percent they would charge and how they would spend it.

“I would not agree to 5 percent,” Councilor Connie Champion said. “I would agree to maybe 2 percent — only enough to staff the fire station and maybe [to hire] a couple new police officers.”

For each 1 percent increase, Interim City Manager Dale Helling estimated the city would bring in around $840,000 per year. The maximum franchise fee could earn upwards of $4 million a year — more than enough to fund construction of a new fire station and related expenses.

To build the station, Helling projected the city would borrow around $2 million — likely to come from the city’s landfill reserve. The new station is estimated to cost $950,000 per year to run, and an additional $75,000 to train, hire, and equip one new officer during his or her first year.

UI student liaison Jeff Shipley urged the council not to approve the fee. It comes too soon after the passage of the narrowly passed local-option sales tax, which went into effect Wednesday, he said.

“A lot of people thought that if [the local option sales tax] passed, then the city wouldn’t increase any more taxes or fees,” Shipley said.

If the fee is approved, Helling said, the city would not be able to collect the local-option sales tax on utilities, requiring at least a 1 percent franchise fee to make up for lost revenue. Overall, only a 2 percent minimum franchise fee would balance the city’s income.

Franchise fees made headlines last month when a Polk County judge decided the city of Des Moines was using them illegally. A Des Moines resident filed the lawsuit in 2004 after seeing franchise fees on her bill.

The plaintiffs’ attorney, Brad Schroeder, said Des Moines was charging a 5 percent franchise fee and generating $13 million annually. He said city officials were only using 1.25 percent of the revenue legally.

“The city felt it could charge whatever it wanted, however much it wanted,” Schroeder said. “But when you start charging too much, it’s a tax because it’s just going to the general fund. And that’s illegal.”

State lawmakers passed the bill to essentially legalized the fees, but with certain restrictions brought up in the lawsuit. The judge ruled the city must have a specific purpose for the money generated.

No official decision was made Monday regarding details of the fee.

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