Reader foresees ‘persistent and irresistible’ electric rates, property taxes under MEU

In my ongoing pilgrimage toward MEU enlightenment, as I read and ask questions and occasionally get answers on issues as disparate as revenue bonds versus general obligation bonds, assessed value versus taxable value, gross margin versus net margin, levy caps, assessment limitations and the ever-popular rollback rate, I think I have learned much, yet there is much that escapes me. If, at this moment, I had to choose a single word to describe what I’ve uncovered, that word would be “complexity.”

I refer, for instance, to the breathtaking complexity of our property tax system. With apologies to Sir Winston Churchill, the Iowa property tax regime is “a riddle wrapped in a mystery inside an enigma.” It is a labyrinth from which there is no escape, impenetrable, inscrutable. I find that reading about things like property taxes and municipalization is not unlike peeling the proverbial onion — remove one layer, resolve one mystery and another will present itself.

I’m pretty sure we’re all clear on the difference between property taxes and electric rates. So why talk about property taxes in the midst of an MEU debate? What do city of Decorah property taxes have to do with the municipalization of our electric utility? Plenty. Read on.

Like every other property owner in our fair city, I pay property taxes. I pay by check, twice each year, every year. Even those who don’t own their homes pay what could fairly be called indirect property taxes: a portion of the monthly rent received by the owner of the property — the landlord — will be used to satisfy the property tax owed by the property owner. A landlord will always consider certain expenses — notably property taxes, hazard insurance, repairs and maintenance — when setting rental rates. High property taxes increase housing costs for everybody, homeowners and renters alike, and play a significant role in the much-talked-about affordable housing shortage in Decorah. Property taxes can add hundreds of dollars per month to the cost of keeping a roof over your head.

In any case, there’s an orderly process for determining property tax owed; it is indeed complex and involves many moving parts and contributions from many participants. The most important moving part in the machine, it seems to me, is the levy rate. Expressed as dollars-per-thousand of value, or mills, the levy rate is simply a multiplier.

In simplest terms, net property tax due equals net taxable value multiplied by the levy rate. Based on property valuations — the Winneshiek County Assessor determines the assessed value of all real property in the county — and based on certified local budgets, the Winneshiek County Auditor determines levy rates and property taxes for all taxable property.

Using valuation data compiled by the Winneshiek County Assessor, and after receiving from various taxing authorities — e.g. Decorah City Council, Winneshiek County Board of Supervisors, Decorah School Board — their approved budgets for the fiscal year, the county auditor fixes the levy rates for each taxing authority at levels designed to generate tax revenue sufficient to support the spending commitments included in each budget.

Property taxes don’t necessarily rise when property valuations rise. In fact property taxes can increase even when property values fall. The taxable value of my home could drop by 10 percent year-over-year, but my property tax liability could at the same time rise by 10 percent year-over-year. This is due to the effective power of the levy rate. At a time of declining property values — e.g. the Panic of 2008-09 — local taxing authorities have the option of adjusting the levy rate upward to ensure that tax revenue will be sufficient to support their spending plans.

The State of Iowa does not set levy rates for local taxing authorities. The state has moved recently to restrict the growth of local property tax levies. Passed by the Iowa Legislature with broad support from Democrats and Republicans, signed into law by Governor Reynolds on May 4, 2023, House File 718 caps property tax levy rates for Iowa cities and counties.

House File 718 is relatively new law, and some of its provisions are to be phased in gradually. As for the efficacy of HF 718 in restraining the growth of property taxes, time will tell. In the final analysis, however, levy rates — and property taxes — are and always have been a function of public spending. If the city of Decorah plans to increase spending by 10 percent year-over-year, tax revenue must also increase by 10 percent year-over-year, as it did in Fiscal 2022, when city property taxes spiked by over half-a-million dollars, from $5,024,984 (Fiscal 2021) to $5,539,545 (Fiscal 2022) an increase of 10.24 percent. Likewise, the city of Decorah tax levy jumped 41.94 percent between 2017 and 2024 because city spending went up at a similar rate.

So how is any of this relevant to the present MEU discussion? Read on.

If, on March 4, voters authorize the city of Decorah “to establish a municipally-owned electric utility,” next steps will not be inexpensive and will include things like commissioning a “feasibility study,” litigation and legal fees. The money spent at this point in the process would be drawn from the property tax bucket and, I would imagine, from the so-called franchise fee bucket. If the city’s legal fees and other expenditures rise above a certain level, the city may be forced to raise cash by borrowing. Taxpayers would be asked to approve new debt in the form of general obligation bonds, which would need the support of 60 percent of voters.

If in the end the Iowa Utility Commission decides that the formation of an MEU, “Decorah Power,” is indeed in the best interest of the public, then the city of Decorah would need to purchase the system, i.e. the city would be given an opportunity to “buy out” Alliant Energy, a deal that would include the purchase of Alliant assets and, in a sense, the service area itself. Such a purchase would require financing, since the sticker price, as determined by the IUC, would likely include eight digits to the left of the decimal. In this case, the city of Decorah would issue debt in the form of revenue bonds, which would not require voter authorization.

The debt incurred by the issuance of revenue bonds would be paid entirely from revenue generated by Decorah Power. In fact the revenue generated by Decorah Power will need to be prodigious indeed, sufficient to pay bondholders, principal plus interest, sufficient for the purchase of electricity on the wholesale market, and sufficient to repair and maintain the system, as needed. Unlike general obligation bonds, which are secured by the credit and taxing power of the city of Decorah, revenue bonds would be backed exclusively by the revenue generated by Decorah Power. The repayment of revenue bonds would rely entirely on the financial success of the MEU. Revenue bonds are generally considered riskier than general obligation bonds, and as a result would in most cases carry a relatively higher interest rate.

If Decorah Power is to be tasked with the burden of paying principal and interest to service what will surely be millions of dollars in revenue bond debt, plus the cost of purchasing electricity for resale to its customers, plus the cost of operating and maintaining the “system,” the network and grid, without difficulty I can imagine that upward pressure on our electric rates — and, inevitably, city property taxes — will be persistent and irresistible.

One final clarification, please: While I am opposed to the formation of a municipal electric utility, I am not opposed, and never have been opposed, to putting the MEU question to a vote. I am an incorrigible, lifelong, small-d democrat, and believe strongly in majority rule.