Pages

Tuesday, October 08, 2013

RAMSEY - Are franchise fees at all legal for a charter city, in Minnesota, with a charter that is silent as to franchise fees?

Are Franchise Fees Even Legal?

If there is a specific authorizing statute, regarding municipal imposition of so-called "franchise fees," then there is the key question, what does the statute say, how broad are municipal powers, and a sub-question to that, must the fees be set in some "fair" manner with the statute defining limits of fairness?

No statute or charter provision has been advanced by the city to impose franchise fees, in effect a fixed dollar amount for connection - per connection, for gas connections and for electric power connections; with the income from that taxation to be allocated for taring and other road maintenance. Roughly that is it in a nutshll.

A most recent appellate decision, American Bank of St. Paul v. City of Minneapolis, 802 NW 2d 781 (Minn.App. 2011), aptly summarizes Minnesota law on assessments and taxes, and general police power vs. specific power to tax:

ANALYSIS

I.


American argues that the district court erred because it did not apply the special-benefit standard, which considers the degree to which the property's market-value increase, if any, is attributable to the improvement; rather, the district court considered the costs that the city incurred. The city counters that the district court's decision is consistent with the special-benefit standard. Alternatively, by notice of related appeal, the city argues that a different legal standard—one that depends on reasonableness rather than the property's market value—should apply to the removal or abatement of nuisances because that is not a traditional local improvement. Whether the district court applied the correct legal standard presents a question of law, which we review de novo. Thompson v. Thompson, 739 N.W.2d 424, 430 (Minn. App.2007).

A.

A public authority's power to levy a special assessment for improvements originates from its taxing power and is promulgated by legislative action. City of St. Louis Park v. Engell, 283 Minn. 309, 315, 168 N.W.2d 3, 7 (1969). This taxing power "is practically absolute," except for constitutionally imposed limitations. Id. Article 10, section 1, of the Minnesota Constitution provides: "Taxes shall be uniform upon the same class of subjects, and shall be levied and collected for public purposes. . . . The legislature may authorize municipal corporations to levy and collect assessments for local improvements upon property benefited thereby without regard to cash valuation." The Minnesota Supreme Court has interpreted this constitutional provision to require that special assessments "be uniform upon the same class of property, that they be confined to property specially benefited by the improvement, and that they do not exceed such special benefits." Quality Homes, Inc. v. Vill. of New Brighton, 289 Minn. 274, 280, 183 N.W.2d 555, 559 (1971) (quotation omitted). And Minn.Stat. § 429.051 (2010) provides that "[t]he cost of any improvement, or any part thereof, may be assessed upon property benefited by the improvement, based upon the benefits received." Accordingly, Minnesota has adopted a general rule that special benefits should be measured by considering the increase in the market value of the property attributable to the improvement. E.g., Engell, 283 Minn. at 316, 168 N.W.2d at 8; In re Superior St. in Duluth, 172 Minn. 554, 566, 216 N.W. 318, 323 (1927); State ex rel. Burger v. Dist. Court of Ramsey Cnty., 33 Minn. 295, 310, 23 N.W. 222, 229 (1885). Under this special-benefit standard:

(a) The land must receive a special benefit from the improvement being constructed, (b) the assessment must be uniform upon the same class of property, and (c) the assessment may not exceed the special benefit. Special benefit is measured by the increase in the market value of the land owing to the improvement.

Tri-State Land Co. v. City of Shoreview, 290 N.W.2d 775, 777 (Minn.1980) (quotation omitted).

In Country Joe, Inc. v. City of Eagan, [citation omitted in online case, see below specific to that case] however, the Minnesota Supreme Court recognized a distinction between revenue collected under the taxing power and regulatory service fees collected under the police power. 560 N.W.2d 681, 686 (Minn. 1997). The Country Joe court observed that the general police power does not extend to municipal revenue-raising measures and that, when "a city's true motivation was to raise revenue—and not merely to recover the costs of regulation—we have disregarded the fee label attached by a municipality and held that the charge in question was in fact a tax." Id. The Country Joe court concluded that Eagan's road-unit-connection charge was a tax because the city used the revenue to fund all major street construction and repairs. Id. at 686-87. Thus, the Country Joe court recognized that a city may collect regulatory service fees under the police power provided that the fees are not general revenue-raising measures.

Other jurisdictions have recognized this distinction. For example, Wisconsin has expressly provided for this distinction in its assessment statute:

The amount assessed against any property for any work or improvement which does not represent an exercise of the police power may not exceed the value of the benefits accruing to the property. If an assessment represents an exercise of the police power, the assessment shall be upon a reasonable basis as determined by the governing body of the city, town or village.

Wis. Stat. § 66.0703(1)(b) (2010); accord Genrich v. City of Rice Lake, 268 Wis.2d 233, 673 N.W.2d 361, 368 n. 7 (Wis.Ct.App. 2003). Other jurisdictions have addressed this distinction in caselaw. See Potts Constr. Co. v. N. Kootenai Water Dist., 141 Idaho 678, 681, 116 P.3d 8, 11 (2005) (citing Brewster v. City of Pocatello, 115 Idaho 502, 504-05, 768 P.2d 765, 767-68 (1988)) (observing that a fee is enacted under city's police power and assessed for public service directly rendered to a particular consumer, while a tax is forced contribution by the general public to meet public needs); Hooksett Drive-in Theatre, Inc. v. Hooksett, 110 N.H. 287, 266 A.2d 124, 126 (1970) (recognizing that "a sharp distinction" exists between city's taxing power for generating revenue and its police power for regulating matters relating to "the health, morals, safety, or general welfare of the community" (quotation omitted)); Parking Auth. of Trenton v. City of Trenton, 40 N.J. 251, 191 A.2d 289, 293 (1963) (stating that building permit fee is an exercise of municipal police power to defray cost of regulation and not a tax); City of Tullahoma v. Bedford Cnty., 938 S.W.2d 408, 412 (Tenn.1997) (observing that fees defray cost of providing service or benefit to particular person, while local taxes raise revenue to pay government's general debts). These other jurisdictions have required that a regulatory fee enacted under a city's police power bear a reasonable relationship to the regulatory expense. E.g., Brewster, 115 Idaho at 504, 768 P.2d at 767; Hooksett, 266 A.2d at 126.

American contends that the purpose of an assessment appeal would be undermined without application of the special-benefit standard because the city's assessment amount never could be challenged. We disagree. Assessments collected under the police power remain subject to fairness and due-process protections. For example, although a property owner cannot hire an alternative contractor to perform local improvements, such as repaving a road or constructing a sewer line, a city may provide a property owner who is subject to a regulatory service the option to perform and finance the work without the city's involvement. See Minn.Stat. § 429.101, subd. 1(b) (2010) (providing that city may place responsibility on property owner or occupant to do certain work personally). And cities must abide by municipal bidding laws and hire the lowest responsible bidder. Minn.Stat. § 429.041, subd. 2; MCO § 18.90. Moreover, a property owner may challenge the reasonableness of a regulatory service fee. E.g., Brewster, 115 Idaho at 504, 768 P.2d at 767 (requiring that service fee bear a reasonable relationship to regulatory expense); Hooksett, 266 A.2d at 126 (same).

Accordingly, we hold that an assessment collected under a city's police power is subject to a reasonableness standard rather than the special-benefit standard that applies to assessments collected under a city's taxing power.

B.

We next determine whether the assessment at issue here was imposed under the city's police power and is therefore subject to the reasonableness standard. The property's areaway interfered with Hennepin County's right-of-way and posed a safety hazard during the reconstruction of East Lake Street. This constitutes a nuisance that, under the city ordinance, the property owner is financially responsible for removing. See Minn.Stat. § 561.01 (2010) (defining nuisance as "[a]nything which is injurious to health, . . . or an obstruction to the free use of property"); MCO § 95.20 (2011) (providing that removing an obstruction and restoring a right-of-way "to a safe condition . . . will be at the sole expense of the property owner"); see also 13 Eugene McQuillin, The Law of Municipal Corporations § 37.16, at 87 (3d ed.2008) (citing Wallenberg v. City of Minneapolis, 111 Minn. 471, 127 N.W. 856 (1910)) ("In improving and regulating the use of streets there is both an obligation and power to keep them free from obstructions and unreasonable encroachments, and to remove summarily obstructions and nuisances.").

Minnesota statutes permit cities to collect assessments to defray the cost of regulatory services. For example, a city may collect "unpaid special charges" in the form of "a special assessment against the property benefited for all or any part of the cost" of, among other enumerated services, the removal of snow and ice from sidewalks, the removal of weeds and diseased trees, and the inspection of housing-code violations. Minn.Stat. § 429.101, subd. 1 (2010). Section 429.101 also permits a city to collect delinquent vacant-building-registration fees through special assessments. Id., subd. 1(12). Other Minnesota statutes authorize the state and local governments to collect unpaid service fees in the form of an assessment. E.g., Minn.Stat. §§ 89.56, subd. 3 (unpaid service fees for tree pest control), 444.075, subd. 3e (unpaid water and sewer bills), 443.015 (unpaid garbage bills) (2010). Under the distinction recognized in Country Joe and in other jurisdictions, these assessments are not collected to raise revenue under a city's taxing power; rather, they are collected to recover unpaid regulatory service fees under a city's police power. The cost of removing nuisances is among the regulatory service fees collectable by assessment. See Minn.Stat. § 429.101, subd. 1(a)(3) (providing that city may assess property for removing public health or safety hazards).

Neither our legal research nor the parties' citations direct us to any law that applies the special-benefit standard to assessments collected for the removal of a nuisance. Rather, Minnesota courts have 788*788 applied the special-benefit standard to local improvements that are readily distinguishable from the cost of removing a nuisance. For example, in Anderson v. City of Bemidji, Bemidji assessed various properties for the cost of constructing a sanitary sewer line through a neighborhood. 295 N.W.2d 555, 557 (Minn.1980). The Minnesota Supreme Court observed that assessments on "various properties [must] be roughly proportionate to the benefits accruing to each as a result of the improvement" to satisfy the Minnesota constitution's requirement that taxes be uniform. Id. at 559. The Anderson court held that the assessment, which was based on the proportionate length of the sewer line in front of each property in the neighborhood, was uniform and proportionately reflected the benefits conferred on each property by the sewer line. Id. at 557-58, 560-61. But unlike Anderson, in which the assessment raised revenue for the construction of a local improvement, a city does not assess a property for the removal of a nuisance in order to raise revenue. Rather, the purpose of a property assessment for nuisance removal is to defray the cost of the service of removing the nuisance.

The city's assessment for the areaway removal at issue here is for the removal of a nuisance and is more akin to a regulatory service fee than to a local improvement. [not a relevant distinction re Ramsey franchise fee matters because the fee is for general citywide road purposes, not site-specific][...] Thus, we conclude that the city's assessment of the cost of the areaway removal was a regulatory service fee imposed under the police power rather than a revenue-raising measure imposed under the taxing power.

Because the city's assessment for the areaway removal was a regulatory service fee rather than a tax, we apply the reasonableness standard articulated in Part I.A., supra. American stipulated to the cost of the service rendered. The record reflects that the assessment amount was proportionate to the cost of the service rendered; and the record contains no evidence that the cost was unreasonable or not reasonably related to the regulatory expense. Moreover, neither due-process nor fairness concerns are present here. When given the choice, the property owner chose to permit the city to perform the areaway removal rather than perform the work without the city's involvement. The city abided by the municipal bidding laws, hired the lowest responsible bidder, and deducted from the assessment any costs associated with the contractor's failure to fulfill its obligations. Accordingly, American is not entitled to relief.

We observe that, even if we apply the special-benefit standard here, American's challenge is unavailing. A city's assessment is presumed to be valid, and introduction of the assessment roll into evidence is prima facie proof that an assessment does not exceed any special benefit conferred on the property. Carlson-Lang Realty Co. v. City of Windom, 307 Minn. 368, 370, 240 N.W.2d 517, 519 (1976). The party challenging the assessment may overcome this presumption "by introducing competent evidence that the 789*789 assessment is greater than the increase in market value of the property due to the improvement." Id.; see also G.E. Qvale v. City of Willmar, 223 Minn. 51, 54, 25 N.W.2d 699, 702 (1946) (stating that party challenging assessment bears burden of proving invalidity of assessment). American argues that the district court erred by finding that American's uncontradicted evidence was not competent and by failing to weigh the evidence.

[...]

DECISION

An assessment collected under a city's police power is subject to a reasonableness standard rather than the special-benefit standard that applies to assessments collected under a city's taxing power. Because respondent's assessment for the removal of an areaway from appellant's property constitutes a regulatory service fee for the removal of a nuisance collected under the city's police power and it is reasonable and related to the regulatory expense, appellant is not entitled to relief. We decline to address appellant's evidentiary objections, which were not preserved for appellate review.

Ameerican Bank, 802 N.W.2d at 785-790.

Country Joe is the leading case; Country Joe, Inc. v. City of Eagan, 560 NW 2d 681 (Minn. 1997).

There, City of Eagan imposed a fixed, flat road connection fee [tax], per property connection to the road grid. With that tax directly intended to finance road upkeep and improvement; i.e., there was a direct connection-use nexus absent in what City of Ramsey staff/council is intending to impose on citizen-taxpayers, where the per connection flat fee is on power/gas, for roads, vs. City of Eagan's flat connection fee on road connections, tax revenue then to be used for roads. In effect, City of Eagan had a purer scheme.

The Country Joe court held the scheme an unlawful exercise of power for the statutory city, and in doing so successively shot down arguments: that the road unit connection charge is a valid exercise of its implied municipal planning authority under Minn.Stat. ch. 462, the Municipal Planning Act (Id. at 683, et seq.); that the court of appeals erred in rejecting case law from other jurisdictions approving of similar charges as "impact fees" (Id. at 684, et seq.); and that the court of appeals erred in concluding that the road unit connection charge is an unlawful tax (Id. at 686, et seq.).

The Country Joe court concluded,

The taxing authority afforded municipalities under state law is delineated in Minn.Stat. § 412.251. Although Minn.Stat. § 412.251 specifies that municipalities are authorized to levy taxes for such far-reaching purposes as "provid[ing] musical entertainment to the public," "for band purposes," and "for the support of a municipal forest," we conclude there is nothing in the statute suggesting the authority to impose anything similar to a road unit connection charge. See Minn.Stat. § 412.251. Although paragraph 11 of Minn.Stat. § 412.251 operates as a catch-all provision, recognizing a city's authority to impose "other special taxes authorized by law," we conclude on the basis of our preceding analysis that the road unit connection charge is not so "authorized by law." Minn.Stat. § 412.251(11). Accordingly, we conclude that the road unit connection charge cannot find validity under the city's power of taxation.

Id. at 686-87. And if a road unit connection charge [a per hook-up fee] is problematic in terms of permissible city ways/means to tax for road purposes; how does that imply that an unrealted connection charge [a per hook-up] fee for power/gas connections, for road purposes would be judicially viewed; if challenged in court.

Yes, Ramsey previously imposed a franchise fee for road purposes, much as is now proposed. That does not mean it acted lawfully in doing so; it means it was done and nobody challenged it in court to see.

The Ramsey Charter Commission is set to consider franchise fees as a basic charter matter [Eagan in the Country Joe litigation was a statutory city then, not a charter city]. The prudent course of action at this point is for the City Attorney to consider County Joe and subsequent counter-authority, if any, since then, be it statutory or judicial in nature. In the course of such consideration, attaining an opinion from League of Minnesota Cities has been a city attorney precedent; and an AGO could also be sought but the expectation is it might take longer for an AGO. Once such a step of city attorney deliberation on the basic lawfulness of franchise fee imposition transpires, the matter can be brought back to the council or to the Charter Commission, as appropriate.

With the Charter Commission being subject to a special meeting called later in this month, no undue temporal hardship would exist if the council awaits the city attorney assessment of basic lawfullness of the franchise fee as the law and the city's charter now stand, with or without LMC help; so that precipitous error can be avoided, should the review of law suggest Contry Joe as explained above is correctly explained and still good governing law.

________________
This post was hastily prepared and is mainly for consideration by the city attorney and council, and the Charter Commission, where a number of members - at least two - are skilled, licensed, practicing attorneys - something I am not, in that I have never practiced or been licensed to practice law in Minnesota (my experience was in Washington, years ago). I apologize for typos, or if the post seems tedious and specialized, to general readers.


_________UPDATE__________
Regarding Charter Cities, Minn. Stat. Ch. 410 contains a single Section 410.09 regarding franchises, stating:

410.09 REGULATION OF FRANCHISES.

Such proposed charter may provide for regulating and controlling the exercise of privileges and franchises in or upon the streets and other public places of the city, whether granted by the city, by the legislature, or by any other authority; but no perpetual franchise or privilege shall ever be created, nor shall any exclusive franchise or privilege be granted, unless the proposed grant be first submitted to the voters of the city, and be approved by a majority of those voting thereon, nor in such case for a period of more than 25 years.

[italic emphasis added] Nothing about fees, or earmarking a franchise fee for a non-franchise use. Indeed, has the QCTV exclusive franchise to broadcast council meetings ever been put on a ballot, for voters to vote? Connexus? The broadband firm that wired the county? Zayo? This link says:

As part of the stimulus, the network is open to more than public facilities. Wireless providers looking for high-speed backhaul options and local businesses eager to shed the limitations of T1 or DSL connections also have access to the network, said Moore. Every entity that connects to the Anoka County Network also has seamless access to Zayo’s extensive nationwide and global network serving seven countries. Anoka County is leveraging those capabilities to bring more businesses to the area, said Moore. In addition to a business-friendly environment, Anoka County boasts of its rivers, lakes and other natural resources.

Does that mean Zayo has an exclusive franchise to allow homeowners or Ramsey business to connect to that fiber network? Did you ever see that question on a ballot? It is an interesting statute, how does Ramsey handle broadband in the near future when fiber to the home may be a utility issue?