3% fee on gas and electric would net $750K annually
BY CHUCK VANDENBERG
FORT MADISON – A franchise tax on gas and electric consumption in the city appears to be the favored option of Fort Madison city officials to bring the city out of it’s financial pinch.
City Manager David Varley presented about five options Tuesday night to current councilman and council members-elect following the council’s regular meeting. The options looked at the next five budget years.
In two of those options, Varley included a franchise tax was at 2% with an increase to 3% in the third year in one of the options.
Iowa code caps municipal franchise taxes at 5%. According to Alliant Energy, a franchise fee typically takes up to six months to be implemented after the franchise fee has been adopted by the city council by ordinance. Varley said it will take at least six months to educate the public on the issue.
He said the city could limp through another year under current budget conditions, but it would be difficult.
Mayor Brad Randolph asked if it would be an easier sell to the public if there was a sunset clause on any ordinance implementing the franchise tax.
“What if you got up to your numbers up at 2024 or 2025 and sunset the franchise fee? But then how do you sustain it,” he said.
“You’re hoping that something happens for a better budget, better balance, other revenue sources. If it’s a tough pill to swallow, you’d only have to swallow it for a certain period of time.”
Varley said he didn’t think it would be possible in just five years for revenues to increase enough to offset funds the franchise tax would bring in.
“I don’t think, through property tax or anything other source, or property or sales tax combined, I don’t think by year five we could make up enough to equal a 3% franchise on both electric and natural gas. I just don’t see it,” Varley said.
Randolph said a sunset would at least force another conversation on the issue.
The franchise tax cannot, by Iowa code, be collected concurrently with a Local Option Sales Tax, which is in place in Fort Madison. A 2% tax on gas and utilities would generate roughly $560,000 per year. However the utilities would not be able to collect the 1% LOST or about $81,000 per year, for a net gain from the franchise tax of approximately $479,000 per year. A 3% tax would net the city $759,000 per year.
One advantage to the franchise tax is that every penny would stay in Fort Madison, paid quarterly. The city only gets about 30% of the sales tax collected in the county. Sales tax is paid to municipalities based on the amount collected in the entire county, split up by a complicated formula of population and valuations.
The average residential monthly cost increase for electric would be about $1.25 according to city projections. No natural gas projections were provided.
Varley said about 64% of Iowa cities currently have combined electric and gas franchise taxes in place, and another 19% have one or the other. The average franchise tax rate for Iowa cities comparable to Fort Madison in population was 3.6%.
Without a substantial increase in revenues, Varley said the city is looking at some drastic cuts.
The first two options, Varley dubbed, “The Null Alternative” and “The Drastic Option” were presented to show what the city is looking at if they either do nothing or make drastic cuts to services, to offset losses in revenue.
The most significant losses are sales tax revenue and revenues from the riverboat casino that were phased out several years ago.
The county’s valuation has gone up in the past 12 months and could result in additional property taxes for the city, but the state imposed a soft cap effective this budgeting cycle that caps revenue growth from property tax at 2%. However, local governments can override the cap with an extra public hearing to explain the reasons for the override, and then a 2/3 vote of the council, which would be five of seven council votes.
Varley said The Drastic Option was only put together to show the level of cuts needed to balance the budget going forward.
He said that option puts the general fund in a very good financial position during the five years with funds left for capital improvements, but comes at the price of closing the library and the Old Fort and eliminates the Parks Department. It would also require closing the city pool.
The Null option puts the city in the red in year 2 and doesn’t allow enough reserves to pay one month’s bills.
Of the three other options, he said Option 1 could be considered, but it’s not really viable because it requires reductions in public safety including both fire and police, library, parks, and the closing of the city pool.
The second option, which is the first to include a 2% franchise tax, would keep the city at current funding levels, but won’t provide any additional funds for improvement projects in the city.
The third option, including the 2% franchise tax in year one, which goes to 3% in year two, Varley said puts the city in a “fairly healthy financial position”. He said this option allows a build up of funds for emergencies and provides a modest amount of funding that could be used for improvement projects.
Varley also said if no increased revenues were considered, to balance the budget in year 1, the city would have to cut the Police Department budget by 15% and cut the Fire Department budget by 19%.
In lieu of those cuts, because many council members and recently elected council members have indicated they wouldn’t support cuts to public safety, the city would have to cut the library and parks budget by 75%, or eliminate the Planning Department, the swimming pool and the cemetery operations combined.
That option, according to projections, would generate an additional $1 million over five years for capital projects including streets, and put the city in a positive cash position through 2025.
Varley said there’s been some sentiment that the city hasn’t been operating within their means, and he said people only need to look at the fact that the city has reduced staff by 17 in the past 16 years while providing the same level of service.
He said the biggest hope for increased revenue outside of the franchise tax would be online sales. He said the state has a new sheet on their revenue reports that show a “remote sales” line.
“Even that, it’s not a drop in the bucket, but it’s a couple drops in the bucket,” Varley said.
“It’s definitely a help, and assuming that’s what were getting, but your talking, and this is a wild guess, maybe $60,000 a year and it doesn’t get you there.”
Mohrfeld said it’s critical to sit down with the industry and large consumers of utilities going forward. He also said the unique aspect is that anyone who turns on the lights or burns gas, pays the tax.
“If we feel new revenue is necessary, the one thing that is interesting about franchise fee is that it taxes the 40% of the properties that don’t get taxed in town that we provide services to.”
Council member-elect Rebecca Bowker said the tax disproportionately effects low income people who may have a $1,200 monthly budget and would have to absorb an increase in their heat and gas bill.
Council member-elect Tyler Miller asked about revenue generated from tourism. Varley said the amount is small and a majority of the hotel/motel is from corporate stays from local industries.
Miller said his point was that the city is wasting all it’s hotel/motel tax on the riverfront for something that will never make a profit.
Councilman Chris Greenwald said if the Old Fort has ever had value it’s right now because it’s a big draw for guests coming into town off the cruise lines.
Councilman Bob Morawitz said if the Old Fort were to disappear, the boats would disappear.
Mohrfeld asked to start the budget process earlier this year and Varley said he could have a budget presentation ready by mid-January.