By Gregg Hennigan
IOWA CITY – Some Iowa City Council members have referred to it as a “little gift” from the state.
They’re talking about the new state law that allows cities to impose franchise fees of up to 5 percent on natural gas and electric service.
While it’s doubtful many utility customers will speak of it as warmly, the appeal to city officials is that the fees are a potential new revenue source other than property taxes, upon which city budgets are heavily reliant.
How common the fees will be is not yet know.
The Iowa City Council will discuss it further at a work session Monday. Officials in Cedar Rapids, Coralville, Marion and North Liberty said they had not yet talked about the fees. Waterloo Mayor Tim Hurley said city staff have discussed it but no plan has been developed.
But the fees likely will be brought up when cities begin preparing their budgets later this year.
“Certainly that (franchise fees) is something we are going to be looking at as we do our future financial planning for next year’s budget, but right now” the city has no plans on imposing them, Cedar Rapids City Manager Jim Prosser said.
Before the new law was approved in May, the Cedar Rapids council OK’d a 1 percent fee on gas and electric service beginning July 1 that will generate an estimated $1.2 million a year.
Cities previously were allowed to charge the fees only to recover their costs related to utility services. About 20 Iowa cities already collect the franchise fees, according to John Sehnert, franchise manager with MidAmerican Energy. Dubuque, for example, has a 2 percent utility fee, City Manager Michael Milligen said.
The fees have not been without controversy. A Polk County judge recently ruled that the city of Des Moines overcharged for franchise fees and must repay resident millions of dollars.
Iowa City does not collect the fees, but last month a majority of council members indicated their support for collecting up to 5 percent on gas and electricity and putting the money toward public safety, including the long-discussed fourth fire station.
“I don’t think we have a choice,” council member Connie Champion said.
Support for the fees is not a slam dunk, however. Council member Matt Hayek said this week that using the money for public safety would make the fees more agreeable to him, but he doesn’t believe they should be seen as an opportunity to ignore the city’s the financial problems.
“I think it’s important to not view the franchise fee as a get-out-of-jail-free card in terms of the budget situation,” he said.
Every 1 percent on gas and electric utilities would generate an estimated $360,000 and $490,000 annually, respectively, according to interim City Manager Dale Helling.
Local-option sales taxes, like the one Iowa City voters just approved, cannot be collected on natural gas and electric utilities if a franchise fee is in place, so Helling suggested the first 1 percent of the fees be used to offset the lost tax revenue, which is to go toward flood-related projects.
But even at 4 percent, the money brought in would be significant, at up to $1.96 million on electric and $1.44 million on gas annually, according to city estimates.
Furthermore, the fees can be collected on those who don’t pay property taxes, such as public bodies, churches and some non-profits. Council members have occasionally bemoaned the revenue they lose from tax-exempt entities, especially the University of Iowa.
In 2008, there was nearly $2.1 billion worth of exempt property in Iowa City, with the UI accounting for more than $1.8 billion of that.