by Howard Stephenson

Utah’s largest municipal telecom systems are proving that
government-owned telecom networks don’t work well. Sources indicate that
Provo is preparing to sell its iProvo network, likely at fire sale
prices. Meanwhile, UTOPIA announced this week that it is restructuring
its $181 million in debt so they can repay it over 33 years instead of
the original 20 years.

iProvo’s financial woes are well-documented. A project originally billed
as a revenue source for Provo and a means of making the city more
attractive to business, the project has instead required millions upon
millions of dollars in annual subsidies from the city. Proponents
predicted the project would operate in the black when the system had
10,000 subscribers, but iProvo passed that threshold, and this fiscal
year’s anticipated deficit of $1.8 million will exceed the $1.2 million
deficit iProvo experienced last year and which was paid for from other
city non-iProvo revenues.

Last December Mayor Billings, iProvo’s biggest cheerleader, announced
that Provo had hired several consultants to evaluate iProvo’s business
model, and recommend how best to get iProvo into the black. Those
consultant reports were expected in January, but still have not been
released, even in closed door meetings Mayor Billings held last week
with members of the Provo City Council. These closed door meetings and
the lack of the reports have led many insiders to conclude Mayor
Billings is trying to sell iProvo, perhaps to Dynamic City, the Swedish
company managing construction of UTOPIA’s municipal fiber network.

UTOPIA’s financial position appears even worse than iProvo’s. According
to their FY 2007 audit, only 6,161 homes and businesses, out of a
possible 37,160, subscribed to a UTOPIA service. That 16.6% take rate is
well below the minimum take rate of 20% UTOPIA indicated would be
necessary for the project to succeed. In addition, their 2007 audit
confirms the Taxpayers Association’s December 2007 finding that UTOPIA’s
operating deficit over the first three years is $37.9 million.

Presumably with these failures in mind, UTOPIA announced at their March
17 board meeting that they are restructuring their existing debt, and
taking on new debt. Instead of repaying the $181 million in bonds over
20 years, as originally planned, UTOPIA is now asking its pledging
members to extend their pledged commitments to 33 years. By extending
the term of their debt, UTOPIA anticipates freeing up capital to
continue build out, and to maintain their existing operations. In
addition, UTOPIA plans to assume between $4 million and $8 million in
additional debt, bringing their total debt to as much as $189 million.

Leaving aside the wisdom of ever extending a repayment schedule to free
up operating capital, UTOPIA’s 33 year repayment plan is well outside
industry norms. When private providers go into capital markets to build
fiber networks, they anticipate repaying the debt within 5 years. Beyond
that time frame the electronics in even “future-proof” fiber optics are
outdated. Even bonds for low-tech municipal sewers only extend 20 years.

Everyone knows that extending debt repayment schedules to free up
operating capital is a poor financial decision. In effect, UTOPIA wants
to pay its mortgage with a credit card. With credit markets already in
disarray, and investors moving towards the safest investment vehicles,
there are serious questions about whether UTOPIA will even be able to
sell these bonds. If not, will UTOPIA be forced to draw on the sales tax
pledges of its member cities? In the current volatile capital market,
that is an all too realistic possibility.

More to the point, should UTOPIA member cities risk even more sales tax
dollars by extending their pledges to 33 years for infrastructure which
private sector providers pay off in 5 years? City Council members in the
pledging cities understood when they joined UTOPIA that they were
risking their sales tax revenues needed to pay for police and fire
budgets. Those city councils will likely have to raise property taxes to
make up for the sales tax dollars going to UTOPIA, and those
Truth-in-Taxation hearings would undoubtedly be painful, but taxpayers
will be better served if UTOPIA cities pay their bills today since the
loans are already overextended. As the Utah Taxpayers Association
warned, they never should have jumped on the UTOPIA bandwagon to begin
with, but extending their exposure to UTOPIA’s failures for another 13
years only increases the amount of money taxpayers will lose.