Having exhausted all possible appeals, the city of Des Moines will have to refund tens of millions of dollars collected through “franchise fees” attached to residents’ utility bills between 2004 and 2009.  

Des Moines had collected “franchise fees” without incident since the 1960s, but in 2004 resident Lisa Kragnes and other plaintiffs filed a class-action lawsuit, claiming that the franchise fee was an illegal tax. A state law adopted in 2009 permits cities to collect such fees. The same year,

[A] Polk County District court judge ruled that Des Moines had overcharged utility customers based on the city’s real expenses involved in handling utility lines and infrastructure and must pay the money back – not only to Kragnes but all similarly situated Des Moines utility customers who had paid the fees since 2004.

After the June 2009 ruling, Des Moines officials asked the judge to apply the ruling only to Kragnes and exclude other city residents from the refunds. The judge denied the city’s request and that ruling was appealed to the Iowa Supreme Court.

In March of this year, the Iowa Supreme Court rejected the appeal from the city of Des Moines. That ruling (pdf) did not say how the city must go about refunding the 2004-2009 franchise fees, which have been estimated at $35 million to $40 million. The case went back to district court to adjudicate a process for refunding the money to city residents, but that legal action was stayed pending the city’s appeal to the U.S. Supreme Court.

Yesterday that court officially declined to hear the city’s appeal of the Iowa Supreme Court ruling, Radio Iowa’s Dar Danielson reported. Brad Schroeder, the attorney representing the plaintiffs in the class-action suit, said Kragnes feels “vindicated” that multiple courts have reached the same conclusion: “this is an illegal tax, you shouldn’t have done it and it needs to be paid back.”

It’s not clear how Des Moines will identify all the people entitled to refunds, or where the money to pay them back will come from. This year Iowa legislators approved a provision to allow the city to increase the franchise fee for seven years, if approved by referendum. That would have given Des Moines voters an opportunity to choose a higher franchise fee for everyone who pays a utility bill, as opposed to property tax increases that only affect some residents, or deep cuts in city services.

However, Governor Terry Branstad line-item vetoed that language, boxing in city officials.

It probably will be impossible to refund some $40 million without raising revenues. Des Moines’ operating budget for fiscal year 2012 was about $478 million; the city’s capital budget was about $131 million for the same fiscal year.