For the use of city property, cable and telecommunications companies must pay cities a franchise fee—no different than paying rent for the use of land or a building. With so many complex and changing state and local franchise fee laws, combined with the difficulty of staying on top of franchise fee collection, cities sometimes unfortunately don’t collect the correct amount of revenue from these companies.
That’s when it’s handy to undergo a franchise fee payment compliance audit. With such a long name, this audit sounds unpleasant but is actually quite painless (especially with the help of GMA). So how does it work? Let’s find out.
- Send an official letter to the company that authorizes the auditor to collect information on the city’s behalf. GMA prepares a letter (printed on the city’s letterhead) that lets the company know that the auditor is authorized to perform the audit on the city’s behalf.
- The city collects and provides the last 36 months of franchise fee payment information to GMA. Generally, the companies send franchise fee payments on a quarterly basis, which means cities more than likely need to produce 12 one-page reports. Steps 1 and 2 are the most “intensive” parts of the city’s audit participation. Unlike a financial audit which might involve a lot of work by the city, a franchise fee payment compliance audit requires minimal city staff time.
- Collect detailed information from the company. GMA will contact the company and ask for specific information including revenues, financial statements, billing reports, and number of subscribers. This detailed information is essential for performing a thorough audit, and it helps to know precisely what to request from these companies. (As part of this step, a cable company may ask the city to sign a confidentiality agreement.)
- Analyze the information to ensure the company is properly paying any required fees. GMA examines the company data and compares it to the gross revenue definition found either in the city’s local or state franchise. While complex and technical, GMA essentially matches up different revenue categories to make sure that the company is paying on all of them.
- Address any gray areas. Sometimes, the company will interpret the definition of gross revenue differently than GMA. Clarifying these items is important, and if a city doesn’t know what questions to ask it will never know if the fees it is receiving are accurate. These amounts of money may be a small percentage, but if a city adds them up over the last 36 months (which is usually the timeframe of the audit), some significant money may be collected. And if the company starts paying correctly moving forward, a city now knows it is receiving the right amount.
- Take action on the findings. Once a city receives the audit information, it may find that the company is paying properly. That’s good. It means the city has validated that it is receiving the right amount. In most situations where the company owes money, GMA finds that the company will generally agree to pay a settlement and cut the city a check. (At that point, the city will generally have to sign a settlement agreement that says it won’t reaudit the same time period again.) A rarer outcome is when the company argues about the findings, but GMA handles that situation if it escalates.
Without performing such an audit, a city may be leaving money on the table. It’s considered a good business practice to periodically confirm that cable companies are complying with local or state issued franchises. While GMA does often find money to return to cities, it thankfully sees that most cities receive their fair share of fees because of the compliance ethic GMA has built with cable and telecommunication companies as a result of its work with franchise fee audits.
While a relatively simple process, a franchise fee payment compliance audit does bring up the occasional challenge and difficulty. Here are some tips to keep in mind.
- Requesting information from companies takes a lot of time. GMA finds that the exercise of requesting information from companies is often drawn out. GMA has to follow up a lot, and it’s not easy. In extreme cases, if companies fail to send the information, GMA may ask the city to send a letter to the company or bring the issue up at a Council meeting. This helps escalate the urgency at the company.
- Keep track of the company’s quarterly reports sent to the city. If a city is a member of GMA’s program, GMA encourages them to send us the quarterly reports received from the companies. While GMA won’t do an in-depth review, it will look and make sure the company paid the city at the right fee percentage and that the revenue categories are correct. Only cities receive these reports, so GMA cannot analyze this information unless a city sends it.
- Make sure a city staff member has responsibility for franchise fee payments. Generally, companies pay franchise fees on a quarterly basis. Make sure that someone at a city is keeping track of incoming payments. Things happen. Payments can get lost in the mail or an accounting person at the company could quit. Be on the lookout and make sure a city actually receives its payments.
- Post franchise fee payments to the right general ledger account. This is extremely important! GMA receives many calls from cities saying they didn’t get their check from the company. In the majority of those cases, the city actually did receive the payment but didn’t know where they posted it in their general ledger. Cities must be meticulous about keeping track of payments so that they can find them later.
- Stay aware of franchise fee trends. Since cities depend on any and all sources of revenue, they need to track how much money their city is receiving from these cable fees. Trends indicate that fewer people are subscribing to cable. Younger people are starting to skip cable altogether and get their entertainment from the Internet and others may prefer satellite television service (where cities don’t get franchise fees). Fewer cable customers mean shrinking revenue for cities. While cable franchise fees may generally be declining, it’s still possible to see fee increases from home shopping or movie rentals as the economy improves.
- Beware of a statute of limitations on collecting payment. Cities should not delay an audit. Since most cities are under state franchises, that means they can only review a cable company’s records once annually and recover underpayment for the last three years. If a city does not audit at least once every three years, then they may miss a year or two where errors may have occurred and they’re unable to recover the underpayment.