Wednesday's ruling by Polk County District Judge Joel Novak is a victory for the plaintiffs and the taxpayers of Des Moines. But it was a classic Pyrrhic victory.

The court ordered the city to refund as much as $50 million or more in fees collected illegally, which almost certainly will mean higher property taxes, reduced services or both. And, since the fee also is paid by large energy users and by tax-exempt property owners, coming up with the refund may be especially painful for homeowners and small businesses. Meanwhile, the fee still is being collected in Des Moines because, earlier this year, the Iowa Legislature authorized cities to collect up to 5 percent in franchise fees.As the Greek King Pyrrhus said after suffering heavy losses to defeat the Romans in battle in 279 B.C., "Another such victory over the Romans, and we are undone."

Des Moines resident Lisa Kragnes sued the city in 2004 to halt a proposed increase in the city's franchise fee. The Iowa Supreme Court in 2006 ruled that cities can collect franchise fees from gas and electric bills, but only to cover the actual cost of regulating those franchises. The two questions before Judge Novak: How much of the fee the city had been collecting can be justified by such regulation; and, if that's too much, are taxpayers due a refund? His answers: The city was justified in collecting only about $3 million, while it had been collecting as much as four times that amount, and past overcharges must be refunded.

The city has made numerous miscalculations throughout this legal battle, not the least of which is that it violated the law. The judge's 49-page ruling is painful to read for anyone who believes in good government; the city lost this case on nearly every point. And, thanks to overconfidence that seemed unrealistic all along, it failed to suspend the fee or to set aside money as a contingency while the case was in dispute.

Still, while the judge was critical of most of the city's legal arguments, he pointed out the city has been responsible in using the franchise-fee revenue: "Not only did the city not have to increase property taxes, it enabled the city to enact one of the largest property-tax cuts in history. Furthermore, the revenue received from the increase in fees enabled the city to restore library hours, increase the number of firefighters and police substantially and provide low-income utility assistance to qualified persons, etc."

Unless the city is successful in an appeal, which seems unlikely, a refund of $50 million or more must be paid. That's more than a third of the city's general-fund budget for 2010. The city already faces a $5 million shortfall for the following budget year, on top of having made painful cuts to balance this year's budget.

Like other Iowa cities, Des Moines has struggled to find alternatives to the property tax, which is unpopular, difficult to comprehend and inequitable. The utility franchise fee is a reasonable alternative, in part because it captures revenue from tax-exempt organizations that pay no property taxes. The Polk County assessor figures that about 15 percent of the county's total tax base is exempt from property taxes, but it's much higher for Des Moines because the majority of tax-exempt institutions, including hospitals, are in the city. That is one explanation for the city's comparatively high property-tax rates compared to the suburbs, which makes it difficult for the city to compete for new residential and business development.

In authorizing utility-fee collections and eliminating the tie to franchise regulation, the Legislature recognized that cutting property taxes without starving local governments means providing alternative sources of revenue. That recognition came a bit late for Des Moines, however.
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