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Memo - Utility Franchise Fees .t"" t. 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. Since the scho~l 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 St. Paul South S1. Paul West St. Paul White Bear Lake Cities collecting natural gas utility franchise fees: Coon Rapids Lino Lakes Minneapolis Mounds View S1. Paul South S1. Paul Issues for Discussion What is the justification for a francIllse 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 .........~ ... . q.. .-... hlC~E~ V~8 CITY COUNCIL MEETING D~ Agenda Section: 9. C 1 t 2 t 3 Report Number: 92-405 C Report Date: 10-8-92 COlmcil Action: o Special Order of Business o Public Hearings o Consent Agenda ~ Council Business REQUEST FOR COUNCIL CONSIDERATION ItemDes~paon: Consideration of Franchise Agreement and Implementation of Franchise Fee Administrator's ReviewlRecommendaaon: - No comments to supplement tbis report - Comments attached. I -~ Explanation/Summary (attach supplement sheets as necessary.) ~lTMMARY: 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 ~ranchise 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 a~d our city Attorney. RECOMMENDATION: a. Motion to approve Ordinance Nos. 517 and 518 granting to NSP an Electric and Gas Energy Franchise continaent upon approval of Ordinance No. 519 Implementing a Franchise Fee. ~ Rotion to approve Ordinance No. 519 Implementing a Franchise ~e on Electric and Natural Gas utility companies for the operation wf the utility within the City of Mounds View as Per Agreed Upon Rate Schequle t \ . 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 13, 1992 PAGE THREE raise the needed revenue to offset the drastic, anticipated LGA cuts without service reductions or; future hiqher 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 ~ouncil 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 elActric and gas - all users ~tion 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 & OS100 2.75% on intermediate users (NSP classification DK004, DP004, OT004, DT005, 2.3% on secondary users (classification GK004) 1.7% on large users (classification GP004) *Revenue Generated $ 126,060 23,454 $ 1,340 TOTAL: $ 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-the-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 incr~ases 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 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,(00) 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. ~ ~ranchise- fee ordinance has created .sive 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 lYet, but we don't want to be either. " - City manager Bill 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 Burns. "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." liThe 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 i .police officers since 1994 and Project Safety Net, at a cost of $325,000 and $100,000 respectively; after school rams 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 Burns 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. Burns also asserted that the cost to the residential user would be "somewhat less" than an increase in property taxes. "We on the Council did is ten 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 Burns, "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 comment 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 F ocus, "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 Pae:e , . Blaine-Spring Lake Park Life Posted 3/23/00 Blaine set to pull the plug on meter franchise fees as soon as June 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. 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 .