CHICAGO - Des Moines plans to appeal a Polk County District Court ruling last week ordering it to refund a portion of its 5% franchise fee on electricity and gas service.
If the city is ultimately required to abide by the ruling, it could face an up to $50 million liability, according to lawyers for the plaintiffs in the lawsuit challenging the tax. Standard & Poor's issued a notice after the ruling last Thursday affirming the city's AAA rating and stable outlook, and analysts said the liability does not threaten the rating.
The city collects about $12.6 million annually from the tax. A class-action lawsuit launched five years ago challenged the tax. An IowaSupreme Court ruling three years ago said cities can collect such taxes but only to cover the cost of regulating utilities. Des Moines' cost is about $3 million.
Judge Joel Novak heard arguments in the case last November and in his ruling last week found that the city had overcharged residents by about $9 million per year and those revenues should be refunded. City officials have used the additional funds to cover general fund expenses, offsetting the need for high property tax increases.
State legislation approved last month allows cities to collect up to 5% in franchise fees, so the court ruling impacts only past years' collections. Des Moines officials told Standard & Poor's that if the appeal fails, the city could impose a property-tax tort levy or issue unlimited-tax general obligation judgment bonds. "Therefore, we believe there is no negative impact on credit quality," analysts wrote.
Des Moines Mayor T.M. Franklin Cownie said in a statement: "If this ruling is allowed to stand, the effect upon our taxpayers could be significant."
