consultants are sandburs

Thursday, December 19, 2013

RAMSEY - FRANCHISE FEES: ABC Newspapers Reporting.

This link. It tells the general story better than extended commentary here. Read it.

I was out of town for the Nov. 19 meeting discussed in the report, and did not attend the Dec. 10 council work session [which was not broadcast], but did view the broadcast Dec. 10 council meeting. There, as anticipated, the motion that prevailed, Tossey dissenting, was to reject specific language proposed by the Charter Commission (where a unanimous vote in favor of the language would have been needed to adopt it at the council level). Part of the motion to reject was consistent with the joint meeting as characterized at the council table, i.e., that discussions should continue. Some may say it's kicking the can down the road, but it is how it is. The Charter Commission has a planned meeting in January.

In the ABC report, a two sentence paragraph needs exploration; the first sentence being of most interest:

Another downside of franchise fees, the council and charter commission said, is that it is not tax deductible unlike property taxes. But with landlords likely recouping the extra fees through rents, the renters would be able to get their money back through property tax rebates.

As with a lot of legal questions, it could be argued as yes, no and maybe. Depending on what result is being advocated. In support of tax deductibility, or at least in support of demonstrating a good faith belief on the part of a taxpayer and his/her professional tax advisor, (with each such situation requiring taxpayer reliance upon the retained professional's advice and not something "read on the web"), the argument would be three-pronged, based on consideration of three separately numbered Minnesota statutes. read together, to determine the actual intent of the legislature.

First, there is the franchise fee authorizing provision; MS Sect. 216B.36, stating in relevant part:

216B.36 MUNICIPAL REGULATORY AND TAXING POWERS. Any public utility furnishing the utility services enumerated in section 216B.02 or occupying streets, highways, or other public property within a municipality may be required to obtain a license, permit, right, or franchise in accordance with the terms, conditions, and limitations of regulatory acts of the municipality, including [...] the utility may be obligated by any municipality to pay to the municipality fees to raise revenue or defray increased municipal costs accruing as a result of utility operations, or both. The fee may include but is not limited to a sum of money based upon gross operating revenues or gross earnings from its operations in the municipality so long as the public utility shall continue to operate in the municipality, unless upon request of the public utility it is expressly released from the obligation at any time by such municipality. Notwithstanding the definition of "public utility" in section 216B.02, subdivision 4, a municipality may require payment of a fee under this section by a cooperative electric association [e.g., of relevance to Ramsey, Connexus is a Co-op] organized under chapter 308A that furnishes utility services within the municipality. [...] The authorization shall be over and above taxing limitations including, but not limited to, those of section 477A.016. Franchises granted pursuant to this section shall be exempt from the provisions of chapter 80C. For purposes of this section, a public utility shall include a cooperative electric association.

[bolding highlighting added within the quoted body of text] Sect 477A.016, in turn bars municipalities from imposing sales or income taxes; i.e., the "franchise fee" authorization clearly adopts something of a taxation perspective, regardless of calling it a "fee" and not a tax. Beyond that, reading statutes consistently in light of one another, and in light of past politics concerning what's a "fee" vs being a "tax," there is a definitive legislative provision within MS 645.44:

645.44 WORDS AND PHRASES DEFINED.
Subdivision 1.Scope. The following words, terms, and phrases used in Minnesota Statutes or any legislative act shall have the meanings given them in this section, unless another intention clearly appears.
[...]
Subd. 19.Fee and tax. (a) "Tax" means any fee, charge, exaction, or assessment imposed by a governmental entity on an individual, person, entity, transaction, good, service, or other thing. It excludes a price that an individual or entity chooses voluntarily to pay in return for receipt of goods or services provided by the governmental entity. A government good or service does not include access to or the authority to engage in private market transactions with a nongovernmental party, such as licenses to engage in a trade, profession, or business or to improve private property.
(b) For purposes of applying the laws of this state, a "fee," "charge," or other similar term that satisfies the functional requirements of paragraph (a) must be treated as a tax for all purposes, regardless of whether the statute or law names or describes it as a tax. The provisions of this subdivision do not exempt a person, corporation, organization, or entity from payment of a validly imposed fee, charge, exaction, or assessment, nor preempt or supersede limitations under law that apply to fees, charges, or assessments.
(c) This subdivision is not intended to extend or limit article 4, section 18, of the Minnesota Constitution.

Individual Ramsey citizens reading this post should note I am not an attorney nor an accountant, but that anybody can have opinions about laws and impacts, with a First Amendment right to state them publicly. However, expressing an opinion is not giving anyone advice, and tax advice should be sought individually from a duly licensed professional.

That said, my opinion is a good faith argument for deduction of "franchise fee" pass through amounts exists, and would be stronger if there is language in whatever ordinance is written that pass through as a tax equivalent is anticipated. Moreover, part of the omitted language in the above MS Sect. 216B.36 text is supportive of such "equivalence" fee to tax:

[...] in the event that a court of competent jurisdiction determines, or the parties by mutual agreement determine, that an existing license, permit, franchise, or other right has been abrogated or impaired by this chapter, or its execution, the municipality affected shall impose and the public utility shall collect an excise tax on the utility charges which from year to year yields an amount which is reasonably equivalent to that amount of revenue which then would be due as a fee, charges or other thing or service of value to the municipality under the franchise, license, or permit.

Things surely look to be nothing beyond pass-through ratepayer taxation (termed a "fee") with that proviso considered.

---------------------------

One needed caveat: Should the City Attorney opine on this question to advise either the Charter Commission or Council, that would be something done solely as a municipal function, not as something offered for reliance by individuals within the public who might be attending a public meeting where such an opinion may be a point of discussion.

Always get your own professionals, seek their advice, rely on what they say, and make a personal decision based upon that.

NEXT -----------------

Another ABC report paragraph is of interest:

A pro argument for assessments that was brought up is that in order to use general obligation bonds to fund the larger roads projects, the city must have a policy in place stating it will assess at least 20 percent of project costs to benefiting property owners. The city’s [existing] policy is to assess 50 percent of overlay project costs, but it does not assess for sealcoating.

While not knowing how that argument of a mandatory 20% special assessment mentioned in the first sentence of the above quote is grounded in law, and not bothering to even attempt to research the question, one big kicker in it all is "benefiting property owners."

What's the individualized benefit of a general road upkeep policy, citywide in scope and planned and implemented as such, simply because a part of the work is done at a particular time on a particular stretch of road on which, say, your home is located? Would your property climb in market value from that? Has the current 50% for overlay policy ever been challenged judicially as a constitutionally impermissible taking - in Ramsey - is there that judicial precedent?

How can routine road work benefit a particular property without some commensurate and measurable increase in the market value of the parcel, given that road upkeep planning and implementation is a long recognized public function for the benefit of all?

Everybody uses the roads, is, after all, a cliche: If the city lays out a road upkeep schedule, for the benefit of all citizens who may from time-to-time use the road grid, and adheres more or less to that schedule, everyone who uses the road grid benefits, so how do you make a Solomon's choice that defines assessment apportionment unambiguously and beyond judicial reversal? As expected, much has been litigated on this benefit question, with appraisers being certainly ones "benefitting," for certain, as retained expert witnesses of one side and the other in a battle of the experts.

Revenue bonds vs. General obligation bonds: A more fundamental question, presuming it true beyond doubt there is no loophole to the claimed need to assess 20 percent when general obligation bonds are to be issued, it seems the relevant answer to any such question is to set a franchise fee, earmark the revenue from it for a particular purpose, allow it to vary year to year to budget income and expenditures in balance keeping excess revenue in reserve and adjusting subsequent fees for shortfalls - indeed the franchise fee amounts can be adjusted on shorter than an annual basis, monthly or quarterly for example; and if bonding is required, issue revenue bonds earmarking future franchise fee income to service debt service and bond principal retirement?

Is there any legislated trap for the unwary in planning on issuing revenue bonds secured by future franchise fee revenue streams, assuming the current impasse on franchise fee revenue is resolved definitively?

Would there be a premium bond rate difference in that case, in comparison to general obligation bonding that would be prohibitive in a practical sense?

Absent a legal hurdle or prohibitive bonding cost differential, assessment need not be a part of a franchise fee financing arrangement for the road grid upkeep. Those considerations would be for the city attorney, city CFO, and bond counsel to answer; but at a guess it should be feasible. As always, the city can do whatever it wants unless there arises a court challenge and a judge then says, "No." Would a court challenge be likely? That's guesswork. Would a judge say yes or no? That's even more guesswork.

No comments: