Kragnes v. City of Des Moines

Citation714 N.W.2d 632
Decision Date26 May 2006
Docket NumberNo. 06-0026.,06-0026.
PartiesLisa KRAGNES, Appellee, v. CITY OF DES MOINES, Iowa, Appellant.
CourtIowa Supreme Court

Mark Godwin, Deputy City Attorney, Des Moines, for appellant.

Bradley P. Schroeder of Hartung & Schroeder, Des Moines, for appellee.

Terrence L. Timmons, Des Moines, for amicus curiae Iowa League of Cities.

Ivan T. Webber and James R. Wainwright of Ahlers & Cooney, P.C., Des Moines, for amici curiae Cities of Sioux City, Dubuque, Early, Oskaloosa, Manchester, Algona, and West Des Moines.

John V. Donnelly of Sullivan & Ward, P.C., West Des Moines, for amicus curiae Iowa Association of Electric Cooperatives.

WIGGINS, Justice.

A citizen of the city of Des Moines brought an action against the city alleging the franchise fees the city assessed in its franchise agreements for gas and electric power services are illegal taxes. Both parties moved for summary judgment on this issue. The district court found the franchise fees were illegal taxes and enjoined the city from collecting the fees. Although we continue to adhere to our view that any franchise fee charged by a city must be reasonably related to the city's administrative expenses in the exercise of its police power in order not to constitute an illegal tax, we find there is a genuine issue of material fact as to whether all or part of the franchise fees in this case are so related. Accordingly, we reverse the district court's ruling and remand the case for further proceedings.

I. Background Facts and Proceedings.

In 1960, the City of Des Moines (City) entered into an electric franchise agreement with Iowa Power and Light Company, a predecessor in interest to MidAmerican Energy Company (MidAmerican). The ordinance contained "an annual franchise, occupation or privilege tax" of one percent of the gross receipts derived from the company's distribution and sale of electric energy to customers within the corporate limits of the City. That same year, the City entered into a similar agreement with Iowa Power and Light Company concerning the distribution and sale of natural gas. This ordinance contained "an annual franchise, occupation or privilege tax" of two percent of the gross receipts derived from the company's distribution and sale of natural gas to customers within the corporate limits of the City.

After the expiration of the 1960 franchise agreements, the agreements were updated by ordinances. Iowa Power and Light Company retained the electric franchise for a fee equal to one percent of the gross receipts derived from the company's sale of electric energy to customers within the corporate limits of the City. Midwest Gas Company held the gas franchise for a fee equal to one percent of the gross receipts derived from the company's sale of natural gas to customers within the corporate limits of the City.

On May 6, 2004, the governor signed a bill phasing out the sales and use taxes on the sale and furnishing of gas and electricity for residential use. 2004 Iowa Acts ch. 1133, § 1 (codified at Iowa Code § 423.3(84) (2005)). The legislation reduced the sales tax from five percent to two percent on residential users of gas and electricity billed on or after January 1, 2004, through December 31, 2004. Iowa Code § 423.3(84)(b)(1). The legislation further reduced the sales tax to one percent on residential users of gas and electricity billed on or after January 1, 2005, through December 31, 2005. Id. § 423.3(84)(b)(2). Finally, the legislation eliminated the sales tax on residential users of gas and electricity billed on or after January 1, 2006. Id. § 423.3(84)(b)(3).

At the time the governor signed the bill phasing out these sales and use taxes, the City was experiencing problems in delivering services to its residents because of diminishing funding from the state. The City was considering increasing its property taxes to hire more police and firefighters, fix deteriorating neighborhoods and streets, and maintain the library's hours. When the City realized the state was phasing out the sales and use taxes on residential gas and electric service, it recognized that if it replaced the sales and use taxes with a higher franchise fee, the actual cost of electricity and gas to the residential customers would not change. In deciding whether it should raise property taxes or increase the franchise fees, the city manager's office distributed a summary proposal giving an overview of franchise fees. The overview provided:

• A city may amend its electric light and power and/or gasworks franchise to provide for collection of a franchise fee under the Iowa Code. (Iowa Code § 364.2)

• The city council may grant, amend, extend or renew an electric light and power, heating or gasworks franchise without an election, subject only to the possibility of a reverse referendum petition. (Iowa Code § 364.2(4)(b)). However, a public hearing must be held.

• There is no statutory limit on the level of franchise fee to be collected, although as with any user fee it should bear a relationship to the cost to the city of the utility's occupancy of public areas in the city.

• Currently, all Iowa cities collecting franchise fees do so based on gross receipts. This would not have to be the basis of a franchise fee — in other words, the Code does not prohibit the collection of fees based on the "units sold" (e.g. therms or kwhs).

• A city must have a valid franchise ordinance in place that authorizes the collection of the fee.

• Franchise fees can only be collected from customers for facilities located within the corporate limits of the city imposing the fee.

• City facilities are exempted from collection of franchise fees. (Iowa Code § 364.2(4)(f))

• A city can exempt certain customer groups from collection of franchise fees. Algona collects franchise fees only on the distribution charges of gas transportation customers, not on the gas supply costs of transportation customers. Any exemption would have to be made on a nondiscriminatory basis.

• If a city imposes a local option sales tax, the enactment of an ordinance which imposes a franchise fee will eliminate the ability of the city to lawfully impose a local option sales tax on the sale or use of natural gas, natural gas service, electricity or electric service. (Iowa Code §§ 422B.8, 422E.3(2))

• 28E agreements have been used to transfer funds collected via franchise fees between governmental bodies. Rock Valley will be using a 28E agreement to transfer funds to the local school district to replace school funding that had been collected through a local option tax.

• A city which collects franchise fees can not also collect a fee for the use of its right of ways. (Iowa Code §§ 480A.3, 480A.6)

MidAmerican Energy Company's role is to collect the fees established by the city ordinance and remit them to the city.

After determining an increase in the franchise fee was preferable to a property tax increase, the City proceeded to negotiate updated franchise agreements for gas and electric service with MidAmerican, which at the time held the franchise agreements with the City to provide it with gas and electric services. The updated agreements extended the gas and electric franchises for an additional ten years. The agreements also increased the franchise fee to three percent for gas and three percent for electricity effective September 2004. The agreements also permitted the city council to further increase the franchise fees to an amount not greater than six percent on a majority vote of the city council after giving the public fourteen days advance notice.

The City placed the ordinances amending the gas and electric franchises on the city council agenda for June 7, 2004. Prior to the council meeting, the city manager prepared a council communication regarding the franchise ordinances. The communication contained the following statements:

At present, the City is facing a number of critical issues: the need for more police and firefighters required to meet homeland security responsibilities; deteriorating neighborhoods and streets; and reduced library hours. The need for higher property taxes is on the horizon to fulfill these basic service needs. Furthermore, the State is poised to eliminate more aid to local governments (i.e., Homestead and Veterans credits) which will further limit the City's capacity to maintain services.

Over the last several years, resources and staff have been stretched to cope with the challenges of providing quality services while funding has diminished. However, a franchise fee increase offers the best alternative funding opportunity to assure adequate and essential services are provided to the citizens of Des Moines. The net effects are minimal to residents because the fee structure adjusts to the historical rate once paid in 2001. . . .

. . . .

If the franchise fee were not available it would require a property tax rate increase to cover the costs for the same level of services needed. . . .

. . . .

I recommend committing [the franchise fees] to basic services of the city, which includes additional police officers (12) and firefighters (24), street reconstruction in neighborhoods, and reinstated library hours.

In lieu of increasing the property tax, the City passed the ordinances amending the franchise agreements, raising the franchise fee to three percent on gas and three percent on electricity. The Iowa utilities board approved the amended franchise agreements.

In September 2004, the City began receiving the increased fees. The City deposited the revenue generated by the franchise fees in its general fund. The 2004 increase in the franchise fees allowed the City to enact one of the largest property tax cuts in its history. In January 2005, the city manager reported to the mayor and the council that the increased franchise fees were generating enough revenue to restore the library hours, hire twenty-four additional firefighters, hire twelve additional...

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