Memo - Utility Franchise Fees
."
.J
Memorandum
To:
Hopkins City Council
Jim Genellie
From:
Date:
Subject:
January 18,2001
Utility Franchise Fees
What authority does the City of Hopkins have to collect franchise fees?
The City has franchises with two utilities, NSP, which is now Xcel Energy, and Minnegasco, which is
now Reliant Energy. These franchises were granted by ordinance in 1987 and 1983 respectively.
Both franchise ordinances allow the City to collect a franchise fee of up to 5% of the gross revenues
earned by the utility from sales within the City. The City would have to pass an additional ordinance
for each utility to begin collecting the fee.
How much could the City collect in franchise fees?
Reliant Energy (Minnegasco) - 1 % of gross revenues would raise approximately $58,000.
Xcel Energy (NSP) - 1% of electric revenues would raise approximately $130,000.
What are the advantages of charging a franchise fee?
It broadens the tax base by including all users of city services, including those entities, such as
schools, churches, and other governmental units that are exempt from the property tax.
Reduces dependency on an already burdened property tax system.
Reduces reliance on an unstable state aid program.
Provides needed revenue to continue services.
Provides revenue for new programs and services.
There is more measure of control over a user fee than a property tax. Less energy consumption
means a lower fee.
What are the disadvantages of charging a franchise fee?
It is seen as another tax to taxpayers.
. The fee does not impact all taxpayers equally.
A franchise fee is not tax deductible.
May negatively impact future economic development.
Additional financial stress on low-income families.
Entities, such as schools and churches that have traditionally not paid taxes would have to pay
the franchise fee.
Page 2
Opposition Arguments (from the City of Fridley public hearings)
. The City is "taxing" a necessity like electricity and heating (natural gas).
. Franchise fees are a hidden tax.
J
Since the school district is supported by property taxes, the franchise fee becomes a tax on a
tax.
The franchise fee is evidence that the City is living beyond its means.
The League of Women Voters is very opposed to any fees that are raised that are not put forth
as a tax when that was basically what they were. It was a hidden tax.
The school district is having funding problems, the franchise fee will only add to the problem.
,The church saw the franchise fee as a change in policy more than the dollar amount and that
what had been a tax exempt institution was now being taxed.
What other cities collect utility franchise fees?
Many cities collect franchise fees for cable television.
Cities collecting electric utility franchise fees:
Apple Valley
Coon Rapids
Hastings
Lino Lakes
Minneapolis
Mounds View
S1. Paul
South 81. Paul
West 81. Paul
White Bear Lake
Cities collecting natural gas utility franchise fees:
Coon Rapids
Lino Lakes
Minneapolis
Mounds View
81. Paul
South 81. Paul
Issues for Discussion
What is the justification for a franchise fee?
What advantage does it bring to the City and its residents?
Should the fee be dedicated for a specific purpose or should.it become part of the General Fund?
How should a franchise fee be structured?
Every user pays the same percentage or different users pay different rates
Rebates for low income residents
Cap on fee payments
Should any franchise fee ordinance contain a sunset provision?
Where do we go from here?
Attachments
Mounds View Staff Report
. Focus News article regarding Fridley Franchise fee
Blaine-Spring Lake Park Life article regarding Blain franchise fee
\Franchise Fee Memo.doc
~.-' -. .
........, ..~
CITY COUNCIL MEETIN'G D.A:
Agenda Section: 9. C 1, 2 , 3
Report Number: 92-405C
Report Date: 10-8-92
Council .Action:
o Special Order of Business
o Public H &rings
o Consent Agenda
EJ Council Business
Plf".....~~
L' 1::rI~il'''.!~;;;'
:ir: ~~
REQUEST FOR COUNCIL CONSIDERATION
Item Description: Consideration of Franchise Agreement and I 1 f
mp ementation 0 Franchise Fee
Administrator's ReviewlRecommendation:
- No comments to supplement this report
- Comments attached.
I
.J
Explanation/Summary (attach supplement sheets as necessary.)
S'UMMARY:
For Council consideration and approval at the Tuesday, october 13th meeting
will be the following Ordinances initially introduced on August 24, 1992
and tabled on September 14th and September 28th to provide additional time
for discussions with representatives both from the residential and business
community:
ORDINANCE NO. 517 GRANTING TO 'NSP AN ELECTRIC UTILITY FRANCHISE AND NO. 518
GRANTING NSP A GAS UTILITY'FRANCHISE
~ .'
~he two franchise agreements are basically very similar to the existing
; franchise agreements; it grants to NSP the .ri~ht to construct, operate,
repair and maintain electric and gas distribution systems within the city.
The Agreements, however, do provide for clear, concise performance
stipulations both for the city and NSP in regards to the use of public
ground, relocation of facilities and required permit procedures.
Both Agreements also provide for a franchise fee of no more than 4% on the
gross operating revenues of NSP and a monthly payment schedule of the fees
to the city as opposed to annual payments after one year as the provision
of the current Franchise. .
Both Agreements are consistent with provisions generally accepted in other
Metro cities and both agreements have n reviewed and approved both by
NSP and our city Attorney.
RECOMMENDATION:
a.
e..
L____
."
I .
STAFF REPORT
OCTOBER 13, 1992
PAGE TWO
ORDINANCE NO. 519 IMPLEMENTING A ELECTRIC AND GAS FRANCHISE FEE
At the Public Hearing (held on August 24th)
At the Public Hearing held on August 24th, the' rationale for
implementation of a franchise fee was discussed in detail. The
discussion centered on the following:
* Franchise fees are another form of taxation - acknowledgement of
this has always been clearly stated in all written and verbal
communications from the City.
* Franchise fees, as opposed to general property tax, impose
payment on all users of City services.
* Franchise fees/user taxes raise revenue with less financial
impact on the average' valued home owner~
* There is more measure of control over a user tax than a
a property tax. Less energy consumption means less tax.
If someone is on an extended absence from their home, their
property tax is not decreased.
* The franchise fee is not an allowable itemized deduction on
Federal and State Income Tax returns.
./
If the franchise fee was 4% the average residential utility
customer's annual franchise fee payment would be approximately
$40.
Approximately 50% of those persons filing Federal and state
Income Tax returns itemize deductions. A family of four with
an annual income of $40,000 would realize a tax savings of $10
if the franchise fee were an allowable itemized deduction.
* Franchise fees would raise needed revenue to continue essential
and resident requested services. At the maximum rate of 4%. a
total of $277.000 would be raised. In order to continue to
meet these service needs, the City needs to raise approximately
$155,000 for budget year 1993.
* with the past practice of the Legislature of cutting promised
(and much needed Local Government Aid - 1/3 of the city's
budqet) mid-year and after the City'S budget has been
finalized and the revenues established for the year, the City
anticipates additional cuts to LGA in 1993 in the range of
$100,000-$150,000. Implementation of a franchise fee would
. .
STAFF REPORT
OCTOBER 138 1992
PAGE THREE
raise the needed revenue to offset the drastic, anticipated
LGA cuts without service reductions or future hiaher property
taxes.
* Action by the Legislature to change the property tax rate
structure (while good for most of the City's residents and
businesses) has resulted in reduced revenues for the City
at a time when the City's operational expenses are increasing.
* Implementation by the state sales tax onto all City purchases
has resulted in a $60,000-80,000 expenditure to the city.
* The state of the economy has resulted in lower investment
earnings, fewer construction permits, less economic
development revenues for the City - monies used to offset
expenses and keep property taxes down.
Meetings with representatives from the business and residential
community have resulted in discussions on the following points:
* Most notably and most appreciated, a recognition both by
representatives of residents and businesses that the City
has in the past and continues to be frugal and economically
sensitive to the taxpayers and that many events outside the
control of the City have resulted in the city's need to be
creative in finding revenue sources.
* The need for a sunset clause for the franchise fee (3, 5 or 10
years).
* A sliding scale of fees for commercial/industrial consumers.
* Without a sliding scale of fees, the preference for increased
property taxes vs the franchise fee.
The Franchise Agreements provide that the City may impose
a maximum of 4% on NSP's gross operating revenues for the rights to
transmit and furnish electric and gas energy to the residents and
business of Mounds View. How the fee is structured is left to the
discretion of the city as long as the fee structure never exceeds
a total of 4% of revenues. Alternatives to the straight 4% across
the board (on both electric and gas, residential and business) are
presented below. The Ordinance implementing the fee has been left
blank in the section which establishes the rate and its structure.
Upon conclusion of Council's discussion, the Section II of Proposed
Ordinance No. 519 can be filled in with the option which the
Council has agreed upon.
STAFF REPORT
OCTOBER 13, 1992
PAGE FOUR
OPTION NO. 1
Fee structure
4% on electric; 4% on gas; all users
Exemption on winter space heating -
November 1 - April 30
*Revenue Generated
$ 277,000
$ 221,000
OPTION
NO. 2
Fee Structure
*Revenue Generated
3% on el~ctric and gas - all users
EXemPtion on winter space heating-
November 1 - April 30
$ 207,960 ...
$ 166,010
OPTION NO. 3
Fee structure
3% on electric and gas - residential
3% on gas - commercial/industrial
Sliding scale for commercial/industrial electric:
3% on small users (NSP classification DC100
& D5100
2.75% on intermediate users (NSP classification
DK004, DP004, DT004, DT005,
2.3% on secondary users (classification GK004)
1.7% on large users (classificatioll GP004)
. *Revenue Generated
$ 126,060
23,454
TOTAL:
$ 1,340
$ 12,473
$ 14,268
$ 5,111
$ 182,716
These totals are "approximate" based on 1992 actuals.
OPTION NO. 4
Any of the above options, can exempt all local government, school
buildings and facilities, if the Council so chooses. Such action
would reduce the fee collected by $35-$45,000.
STAFF REPORT
OCTOBER 13, 1992
PAGE FIVE
OPTION NO. 5
Any of the above options may also include a sunset clause which
essentially would state, in a new Section No., II The franchise fees
established herein shall automatically terminate on December 31,
unless reenacted by the City Council after a public hearing
preceded by public notice published in the legal newspaper no less
than 10 days prior to the public hearing.
RATIONALE FOR FRANCHISE FEES
*
Sound business practice. -- compensation to -
City from the Franchise holder for costs
incurred from use of public lands, equipment
and staff.
*
Consistent with historical practice in City
and Metro Area
- 5% Franchise Fee on Cable Company
* Alternative Form of Taxation
- Broadens the tax base by. including all users
of City services
- Less lIout-of-th"e-pocketll costs to taxpayer
than property tax increase'
* User fee based
- Water Utility
- Sewer Utility
ADVANTAGE OF FRANCHISE FEE
*
Reduces dependency on ~n already burdened
property tax system
*
Creates the mechanism whereby the City can
establish stability of property tax increases in times
where City has no control over increase
Fire Bond
Fiscal Disparities
Reduced Tax. Rate Schedule
Reduced Values
*
Provides needed revenue to continue services
D.A.R.E.
~ Police Service
Fire Services
Code Enforcement
Park Maintenance
Infrastructure
Equipment Replacement, repair
Reduces reliance on unstable state aid programs
*
*
Provides revenue for .new programs/services
Senior Center and Programming
Highway 1 0 Redevelopment
Senior Housing
Business Retention
Housing Rehab Allows City to Participate in
Matching Fund Program
~.
. DISADVANTAGES
*
Represents another TAX to taxpayer
Fee in gas utility does not impact all taxpayers
equally
*
*
Franchise Fee is not tax deductible
.J
Tax and franchise fee comparison on selected residential
homesteaded properties located within the. City of Mounds View.
Payable 1993
Tax Capacity Rate
(Same as '92)
Payable 1993
Tax Capacity Rate
(92 rate + $ 280,000)
21.147%
25.817%
Tax Rate
Increase
2209%
Focus News - November 18, 1999 - Vol. 9, No. 46
City officials defend controversial franchise fee
ordinance
Debate scheduled on franchise fee referendum
By Pam ela Bolander
Focus News
Fridley
While the citizen's group that forced a referendum on the franchise-fee ordinance continues its grass-roots campaign,
city officials have packaged, in the more readily digestible form of the city newsletter, the materials they considered
when they investigated and then crafted the 3 percent fee proposed by the ordinance. The fee, which council pa~sed
unanimously, remains suspended pending the outcome of the Dec. 14 vote.
According to the city's estimate, this fee would cost the average residential consumer $3.03 each month and would net
the city an additional $716,000 revenue each year. This revenue projection was included in the year 2000-01 budget
and, if the ordinance is voted down, would mean a $700,000-plus shortfall in the city's budget next year.
The franchise-fee ordinance has created
extensive controversy in several council
meetings. Opponents of the fee have put
forth several arguments against the
ordinance. Foremost among them is the
argument that the city does not need a
franchise fee - if it does, it is overspending
and the ordinance simply represents a
response to poor planning.
"We are not in trouble
et, but we don't want to
be either. "
- City manager Bil
Burns
Although the city is not "in the red," said Burns, it has been spending down its cash reserves for several years.
According to Burns, decreasing those reserves serves to decrease interest earnings, bond ratings - which allows the
city to borrow money, when necessary, at a lower interest rate, impairs the city's ability to match Federal grants and
its ability to respond to emergency needs.
"The city's finances are very much like your personal fmances," said Bums. "We are not in trouble yet, but we don't
want to be either. As we have less and less [cash reserves], problems compound themselves and the hole you are in
becomes deeper and deeper."
"The money raised by the franchise fee," said Barnette, "is money to be spent on creating new and improved
programs ... and to support existing programs, particularly public safety and youth programs."
Some of those programs and a sampling of their associated costs include: public safety expenses like the hire of six
new police officers since 1994 and Project Safety Net, at a co~t of$325,000 and $100,000 respectively; after school
programs offered through the Recreation Department ($59,500) and through the Community Center and Hayes
Gymnasium ($56,000); the city's rental property inspection program, totalling an estimated $50,000 annually; and
other costs that Bums said have been increasing without compensating increases in property taxes which remain,
according to figures provided by the city, the lowest of nine surrounding communities.
Second, opponents have argued that revenues should be raised through the established mechanism of property taxes.
- Council member Bob
Barnett
According to city officials, the franchise fee will
accomplish several things that simply raising
property taxes will not. It will diversify the tax
base and, according to Burns, "helps remove the
City from competition with the school district for
property taxes. The fee will also be collected by
all users of city services, including exempt users
like. the railroad, state and federal agencies, and
some businesses. The fee will be."less painful" to
taxpayers because it will be paid in small
monthly increments. rather than in lump sum
form on yearly property tax rolls. Bums also
asserted that the cost to the residential user would
be "somewhat less" than an increase in property
taxes.
"We on the Council did
isten and respond, "
Opponents also feel adding a fee to a necessity will drive lower and fixed income residents out of the city .
According to Barnette, the ordinance addresses financial problems that may be faced by low to middle-income
residents through the inclusion of an amendment that offers a rebate of those costs.
Burns doesn't believe there will be a large number of families that will invoke the rebate, which is applied at year-end
to families that fall below the federal poverty level guidelines.
". number of people getting cash assistance and food stamps in Fridley has steadily been going down," said Bums,
"If that's any indication of the number of people below the poverty guidelines, I don't believe there will be a large
number of people at all."
Finally, some residents charged the city "snuck" the ordinance through and did not not adequately consider public
comment on the issue.
City officials expressed surprise that such an allegation would be made. The city advertised the public hearing,
included a large article on the proposed fee 'in its June edition of the city newsletter, and heard public CO.Lnment on
three separate occasions.
"We have three amendments that reflect a lot of the concerns expressed by the public," said Burns.
Council member Barnette added, in a letter to the Focus, "We on the Council did listen and respond," referencing
amendments that would give rebates to low and moderate income families, the school district and small business
owners that would have been unfairly effected by the fee.
"This was all done openly and in public forum. It was hardly secretive or misleading," Barnette said.
The League of Women Voters will host a debate Dec. 11 to discuss Fridley's utility franchise fee referendum,
scheduled for a vote Dec. 14.
Return to November 18, 1999
Index Paf!e
"I
Blaine-Spring Lake Park Life
Posted 3/23/00
by L.A. Jones
Life editor
Even though the sun is scheduled to go down on Blaine's franchise meter fees on
electrical and natural gas service on Dec. 31, 2000, the city will be short-circuiting the
quarterly charges well before then.
Responding to continual criticism from the public, including residents comprising the
Blaine Referendum Group, about the need for the fees in light of a $1.7 million surplus
left over from the 1999 budget year, Blaine Mayor Tom Ryan March 16 directed city
staff to draft an ordinance eliminating the fees effective as early as June 1.
"It's kind of a festering sore in this community right now, and obviously we don't need
the revenue anyway," said Ryan. "We might need it again in the future, but we don't
now."
Blaine's franchise fees on electrical and natural gas service were adopted in August
1998 and were always scheduled to sunset after two years on Dec. 31,2000.
When the controversial meter fees were adopted, a majority of the Blaine City Council
believed they were necessary for the city to meet its expenditures because levy limits
had been imposed by the governor and the Minnesota Legislature for two years.
Unanticipated receipts from building permits and other fees associated with the city's
unprecedented growth, however, boosted the city's revenues far beyond what city staff
or the council could have ever envisioned, according to Terry Dussault, director of
management services.
".1 , ~
. j
At the time and before the franchise fees were adopted by a majority of the council, they
were vigorously opposed by the MetroNorth Chamber of Commerce and other Blaine
citizens on the grounds that they were a "hidden" form of taxation to which public
officials could not by held fully accountable.
The fees for electrical and natural gas services currently in place amount to 70 cents
per residential meter per quarterly billing cycle. The revenue they were expected to
raise for the city had been seen as needed to provide for increased services at a time
when the city was fully enmeshed in a phenomenal growth cycle.
Recently, the Blaine Referendum Group began a formal petition process to gather a
minimum of 10 percent of the signatures of voters in the city's last election to put the
elimination of the franchise fees up for a referendum vote.
The group is also involved in a petition process to place a referendum before voters that
would prevent the city from using up to 50 percent of the principal in the city's capital
improvement fund for a city hall. If the necessary signatures are gathered and the
measure passes at the polls, principal in the capital improvement fund could not be
used unless approved by 60 percent of Blaine's voters.
Now that the franchise fees will be eliminated early, James Harnan, a member of the
Blaine Referendum Group told the" Blaine/Spring Lake Park Life" last week, the
citizen effort to end the meter fees will cease but the group will continue its efforts to
seek a referendum on the use capital equipment funds for a new city hall.
Later information obtained by this newspaper from two spokespersons for the group
indicated this was not the case - that the Blaine Referendum Group will continue its
petition drive until the Blaine City Council officially acts to repeal the meter fees.
@ Blaine-Spring Lake Park Life