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Ensuring Utilities Pay Their Way

In the early 1980s, we pioneered the use of the Franchise Fee as a fee for the use of a city’s rights-of-way by the municipal utilities. Our insistence on the franchise fee as a fee and not a tax flew in the face of conventional wisdom at the time, which considered it a tax. Our approach gained more acceptance after the passage of California Proposition 4 which required that cities calculate their proceeds of taxes.

Nevertheless, just as the municipal finance profession was getting used to the idea of a franchise fee, the California voters retaliated with the passage of Proposition 218 which required that any transfer of monies from a utility fund to the general fund be based on a calculation of the services provided by the general fund. This issue was returned to my consciousness recently when a California finance director asked the CSMFO member forum whether anyone was using the franchise fee with their utilities.

The League of California Cities publication, Proposition 218 Implementation Guide, dated January of 1997 is pretty explicit in stating, on page 59, that The drafters of Proposition 218 have asserted that such transfers violate article XIIID, section 6(b)(1) and (2). It goes on to debate on the same page whether the drafters were correct but concludes by saying that even if it does apply that there would be no violation of Prop. 218 to the extent that …a public agency is able to articulate why the transfer is justified as part of the cost of providing the service, based on the enterprise’s or utility’s fair share of the costs incurred in receiving services from the agency’s general fund operations. Consequently, we will now refer to charges, not transfers.

Bad Charges

Over the years, we’ve seen several charges that could not pass the giggle test (i.e. can you make the case without starting to giggle at how silly it is). The worst examples were charges for police and/or fire services. Unless there is something unusual about your utility, there is little chance for it to be stolen or burn down.

Good Charges

General Administration. A charge for general city administration supported by a Total Cost Cost Allocation Plan (CAP) is a basic first step in recovering general fund costs from utilities. The Total Cost CAP includes the legislative body and administrative staff that support the legislative staff. The A-87 Compliant CAP excludes the legislative costs and should only be used for utility charges if local laws require it.

Specific Departmental Services. The following are common general fund services provided to utility funds:

You should insure that the utility funds have paid for these services.

Miscellaneous Benefits. Some cities still treat some or all staff related benefits in nondepartmental activities. All employee benefits including retiree benefits paid by the city should have their proportionate share paid by the utility funds.

Infrastructure Repair.
This is the most difficult cost to calculate as most utility lines are under the streets. Since it is rare for utility line repairs to be performed only when streets are being resurfaced, there is an impact to the integrity of streets whenever the surface is cut into. If you have a capital projects engineer who is responsible for street maintenance, that person should be able to identify the impact on the life of a street whenever utility maintenance is performed. This is a cost that is only beginning to be recognized. The former finance director of Garden Grove, Tony Andrade, did such a study before retiring.

It is still possible to recover general fund costs from utility funds only now the recovery must be based, at least in California, on quantifiable costs.