A Focus on Minnesota
By Kelly Horn, Municipal Advisor
In Minnesota, municipalities are faced with annual budgeting pressures related to rising costs of existing expenses, such as personnel and capital projects, along with funding new local initiatives and Federally and State mandated programs, such as paid family medical leave. Compounding the challenge, municipal budgets may be sensitive to reductions in existing revenue sources from the Federal or State level that are largely out of their control, such as local government aid. The message is clear, find a way to do more or the same with less, reduces services, cancel or delay projects, or identify additional funding sources. While increasing property taxes is always an option, there is often pressure from residents and elected officials to keep tax levy increases to a minimum. The funding must come from somewhere, making it important to know your options for new funding sources and ways to leverage increases in existing fees.
Existing Fees
As a matter of local policy, governments should periodically review general fee levels, such as permits or other charges for services, to ensure they remain aligned with inflation, service delivery costs, comparable local pricing, and overall fee structure and fairness. Many municipalities benefit from applying a standard annual adjustment amount to maintain predictability for budgeting and reduce the need for infrequent larger increases. Any adjustment that departs from the standard approach should be supported by a clear justification tied to fiscal conditions, cost changes, or policy objectives. Consider the budgetary pressures you are managing, identify a related fee, adjust, and be prepared to justify the change. Without these regular adjustments, local governments support the increasing costs of services once supported by fees without even realizing it.
Franchise Fees
Minnesota Statutes, section 216B.36 grants the legal authority to local government to require utilities that provide electric or gas services that utilize streets, highways, parks, or other public property within the municipality to obtain a license, permit, right, or franchise to operate there. The municipality may impose terms and conditions through the franchise, including fees intended to raise revenue or offset increased municipal costs associated with utility operations. In practice, these so-called franchise fees are generally negotiated as a contract and then adopted by the municipality through an ordinance.
Franchise fees may be structured in several ways, including as a percentage of utility revenues, an amount tied to production or usage units, or a flat monthly fee charged per customer account. Of these approaches, flat monthly account fees are often viewed as the most transparent and tend to provide municipalities with the most predictable revenue stream.
Because section 216B.36 authorizes franchise fees as a revenue-raising measure, municipalities may generally use the proceeds for any public purpose, most commonly for streets, sidewalks, parks, sustainability initiatives, and buildings or other public facilities. Public utilities typically pass these franchise fees through to customers, where they often appear on utility bills as a separate fee line item.
Storm Water Utility
Under Minnesota Statutes, section 444.075, a municipality may establish and operate a storm water utility and, where applicable, exercise that authority consistently with an adopted watershed plan under section 103B.231 or a local water management plan under section 103B.235. A storm water utility allows a municipality to shift eligible storm water costs from the general property tax levy to an enterprise funding model supported by user fees. The charges should be structured on a just and equitable basis tied to storm water runoff or demand placed on the system. An additional upside to storm water utility fee is tax-exempt properties will now be contributing to the cost of service they are benefiting from. These fees may support both operating and capital costs of the utility.
Street Light Utility
Minnesota Statutes, chapter 429 authorizes municipalities to install, replace, extend, and maintain streetlights and street lighting systems as local improvements. This allows municipalities to shift some lighting costs from the general property tax levy to a benefit-based funding approach for properties that receive the service, which also captures tax-exempt properties. Any charges or assessments should be allocated to benefiting properties on a just and equitable basis, and a municipality may structure them to reflect differing lighting needs through methods such as a flat fee, classifications by property type, or formulas based on property type and linear street frontage. Like the storm water utility fees, these charges may support both the operating and capital costs associated with street lighting activities.
Conduit Bond Fees
Local governments are often asked to act as conduit issuers of debt or bonds for private development projects under Minnesota statutes. Repayment in these transactions relies solely on borrower or project-specific revenues and local governments maintain no obligation to repay the bonds. Because the issuer assumes administrative responsibilities and some transactional burden, local governments commonly charge the issuer an administrative fee, often expressed as a percentage of the bond amount, provided the fee remains reasonable in relation to the services performed or the tax-exempt cost savings realized by the borrower. As public revenue, the fee may be used for any lawful governmental purpose. Local governments typically treat these fees as one-time revenues and apply them to capital projects.
Putting It All Together
Taken together, these options provide municipalities with practical tools to diversify or increase revenues, reduce reliance on the property tax levy, and better align costs with the services or benefits being provided. None of these approaches should be viewed as a one-size-fits-all solution, and each requires careful review of statutory authority, local policy goals, administrative feasibility, and community impact. However, by periodically evaluating existing fees and considering targeted revenue sources such as franchise fees, storm water utilities, street light utilities, and conduit bond fees, municipalities can strengthen long-term financial flexibility while maintaining a fair and transparent approach to funding public services. If you’re interested in learning more about these options and how they may help you meet your budgetary challenges your Ehlers municipal advisor can assist!
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