Minnesota Cities Magazine

Two-Way Street: Does Your City Impose Franchise Fees?

City Clerk-Treasurer
City of Bethel

Bethel is a small community in northern Anoka County. The city is one square mile with a population of 466. Our city government is also appropriately small. Bethel has two full-time employees—the city clerk-treasurer and public works-wastewater operator. We wear many hats!

Careful budgeting
We have a supportive City Council whose members truly care about the city. They all work very hard to keep spending to a minimum. They all treat the city’s money as if it was their own personal budget and bank account when it is time to approve spending. One small but helpful source of revenue for Bethel is franchise fees.

Fee on cable provider
If you ask members of our City Council why we collect franchise fees, they will answer, “Well, it has always been that way.” Here’s how it came to be: many years ago Midcontinent (which was U.S. Cable at the time), a cable television company, wanted to bring cable to Bethel.

The company approached the City Council and said the city could make money if it allowed U.S. Cable to provide the service to Bethel. Naturally, the councilmembers were intrigued. How would the city make money? The answer was franchise fees.

Important revenue source
Midcontinent collects approximately $2,500 per month for service in Bethel, and the company in turn pays the city 5 percent. That adds up to $125 per month, or $1,500 per year. This may not amount to very much money in some cities, but in Bethel, we are able to maintain the grounds of one of our city parks with the franchise fees we collect.

No extra fees for necessities
Cable television is the only service for which Bethel collects franchise fees. We could also collect franchise fees from our regular utilities, such as gas and electric, but we have chosen not to do that. Why? We feel these are basic necessities, and since the fee would be passed on to residents, we don’t want our residents to have to pay more for these services. We see cable as more of a luxury that is not needed to survive.

The Bethel City Council is proud of the fact that we can maintain our park grounds with the franchise fees we collect.

Finance Director
City of Forest Lake

Traditionally, Forest Lake (population 18,500) has financed local street improvements by levying unpopular special assessments. The City Council wanted new ideas for financing street improvements.

Task force created
The council appointed a task force to study the needs and financing options in 2012. The task force consisted of members of the public, city staff, and the mayor. The group discovered that the city’s current annual investment was not enough to keep the streets from further deteriorating. Once the level of funding was established, the task force discussed the pros and cons of financing mechanisms, and ultimately decided to implement franchise fees as a new source of funds.

Types of financing
One option the group discussed was special assessments. Increasingly, residents are more willing to challenge special assessments in court. Improvement costs have risen dramatically, and the cases have been difficult to defend, as property values seldom increase by the amount of the assessment.

The group also looked at a tax levy, which is levied against all classes of properties and is tax deductible for most people. However, the amount required would significantly raise the property tax rate. Property taxes were viewed by the task force as progressive, and there were concerns about the impact on commercial properties.

Muncipal state aid (MSA) is another source of funds, and it is constitutionally dedicated. The costs for state aid streets are 100 percent eligible for reimbursement, even if special assessments are also levied. However, these funds are necessary for improvements to the 20 percent of state aid streets in the city.

Franchise fee pros and cons
And, finally, the task force considered franchise fees, which are charged to utility providers in exchange for use of public right-of-way. The task force liked the idea of a flat fee per residence. The fees are easy to implement, and provide needed revenue diversification.

On the down side, implementing franchise fees does require coordination with the utility providers and it raises utility costs. A typical residential customer in Forest Lake can expect to see monthly charges of $4 on their electrical bill, and $3 on their gas bill, which some view as an additional tax. In the end, the City Council adopted a hybrid approach in 2013 by implementing franchise fees, continuing to levy the current amount of property tax contribution, and maintaining a minimum amount of special assessment funding.

Read the May-June 2014 issue of Minnesota Cities magazine

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