Franchise Fee
Referendum Image

Some background about the franchise fee and why refunds are being issued:

What was the Des Moines utility franchise fee?

A 5% fee received by the City of Des Moines, based on your monthly costs for natural gas and electrical service as billed by MidAmerican Energy Company. When it was first adopted by the City in 2004, it was called the “utility franchise tax” on your utility bill.

Why did Des Moines charge a franchise fee?

The franchise fee was a way to distribute the cost of services and reduce municipal reliance upon property taxes as a major revenue source.

  • Some users of city services, such as the federal and state governments, non-profit hospitals, churches and colleges, do not pay property taxes. They do pay the utility franchise fees.
  • Through the franchise fee, the burden of paying for City services is spread among service users helping to keep property tax at a lower rate.
What was the money used for?

Des Moines used the revenue from the franchise fees each year to pay for vital services such as public safety - police, fire protection as well as parks and libraries.  No franchise fee revenue has been left over at the end of each year.

Was there a court case about this?

Yes, Kragnes v. City of Des Moines. The “Legal” section below has more information on this.

Will Des Moines collect a franchise fee?

Yes, as now allowed by state law, Des Moines collects a 5% utility franchise fee to distribute its costs of providing services to everyone who benefits from the services.

 

Do other cities have franchise fees?

Almost 75% of Iowa cities collect a franchise fee.

 

What was the court case (Kragnes v. City of Des Moines) that caused the refunds?

A Des Moines resident, Lisa Kragnes, sued the City of Des Moines, saying the franchise fee was illegal. This case then became a class action suit on behalf of all people who were paying the fee. The courts ruled a portion of the utility fee received by Des Moines between September 2004 and May 2009 had to be returned to those who paid the fee because the City’s costs of regulating the gas and electrical utilities was less than the amount collected. This refund is in accordance with the court’s ruling. State law now allows the city to collect the fees without regard to cost of regulation.

 

How much was the court judgment?

About $39.9 million. The following payments, totaling about $8.2 million, will be made from this judgment award:

  • Payment for the attorneys representing Kragnes was $7 million
  • Award to Kragnes as class action representative was $ 7,500
  • Expenses incurred by class action attorneys was $517,444
  • Rust, Inc. administrative costs for refunds was *$650,000
  • Amount remaining for refunds is *$31.7 million

    * Estimated
Does Des Moines have that money?

No, the City did not have $40 million cash available to pay the judgment. The City has borrowed the funds and must pay back the loan also known as bonds.  The proceeds from this loan have already been paid to the third-party administrator to be distributed to members of the class.  The City must now make payments on the loan.    

 How is the City going to repay these bonds that are necessary to pay for the refunds?

Repayment of the bonds will be handled by a temporary increase in the franchise fee.

  • On March 4, 2014 Des Moines voters approved a referendum to raise the franchise fee by 2.5% for about a 7 year period.
  • State law allows the 2.5% increase to be in place for no more than 7 years and the revenues can only be used to pay for the franchise fee refund.