by Howard Stephenson
In October I wrote about UTOPIA, an 18-city consortium that intends to install a fiber-optic network connecting homes and businesses. I thought you might want to know that UTOPIA organizers have just announced the tentative financial risk of the project. Taxpayers in the eighteen UTOPIA cities may be required to pay up to $20 million per year for seventeen years if UTOPIA’s cost and revenue projections do not meet forecasts.
If my math is correct, the revised tentative financial risk for taxpayers amounts to a whopping $340 million.
This is quite a lot of money, especially in light of the original promise that taxpayers would have zero risk from UTOPIA.
At this point in the show, most smart investors would exit, stage left. But not the city councils of Salt Lake City, West Valley, Orem, Layton, Taylorsville, Murray, Roy, South Jordan, Midvale, Riverton, Cedar City, Brigham City, Centerville, Payson, Lindon, Tremonton, Cedar Hills, and Perry.
The $340 million figure is premised on the cities bearing 39% of the risk and private investors shouldering 61%. However, this split is still being negotiated, and the cities’ share of the risk may increase, which would mean that taxpayer exposure would increase beyond the $340 million.
This is one more reason to get out now.
Maximum Taxpayer Risk – Minimum Investor Risk
The agreement between UTOPIA and the financiers is structured so that private investors would not be exposed to risk until UTOPIA’s shortfall exceeded the amount the cities were required to cover. For example, if UTOPIA’s expenses exceeded revenues by $21 million in year three, taxpayers would be required to cover $20 million and the investors would be responsible for just $1 million.
UTOPIA’s risk exposure in the first three years of the twenty-year project would be reduced since the first two years’ interest will be capitalized and a debt reserve would be created for the third year.
UTOPIA’s Wall Street financiers are now insisting that further due diligence be performed before the project can proceed and are asking participating cities to appropriate an additional $250,000 to cover these and other costs.
In addition to your Taxpayers Association, another group of citizens is fighting UTOPIA. Their website is www.UtopiaNot.com . UtopiaNot says its purpose is to disseminate information regarding the true costs and risks associated with UTOPIA, mobilize citizens to oppose the project, and convince elected municipal leaders to vote against guaranteeing repayment of any bonds issued by UTOPIA. The group also hopes to convince lawmakers to enact legislation to prevent cities from guaranteeing the repayment of bonds issued by UTOPIA.
Provo City’s Plan
Provo City is planning its own version of UTOPIA called iProvo and intends to issue $40 million in bonds backed by sales tax revenues. Your Taxpayers Association sent a mailer to Provo taxpayers last week asking the following questions:
o Why is the city gambling with taxpayer money on a speculative venture when many private companies and cities have failed while attempting the same thing? Shouldn’t we as taxpayers be able to vote before risking $40 million of OUR money?
o Will city power rates and property taxes rise if the city projections aren’t met?
o How does the city plan on making up for the lost property taxes and sales taxes that private providers would otherwise pay? Won’t these losses impact other city services and reduce funding for Provo public schools?
o Why does Provo City think it can compete against experienced, internationally funded companies which have been operating in this arena for years? What happens if – after the $40 million is gambled—wireless technology is available from these competitors at cheaper rates? Who will then pay off the $40 million bond?
o If this plan is financially viable, why would the bond advisors refuse to issue based on telephone, cable, and Internet user fees? Why would the city council pledge existing sales tax revenues for bond repayment when sales taxes are already used for police, fire, and essential services?
Pledging the Same Revenues Twice
This last point is as outrageous as the $340 million taxpayer risk from UTOPIA. If the bond houses are not willing to accept user fees as the revenue stream to ensure repayment, how much confidence should taxpayers have in the viability of the project? Isn’t it just a little Enronesque to pledge city sales taxes for the repayment of bonds when those sales taxes are already being spent for essential services such as police and fire protection?
A Better Solution
Utah Taxpayers Association Vice President Mike Jerman has proposed an alternative to UTOPIA that eliminates taxpayer risk while expanding broadband to residences and businesses.
UTOPIA and iProvo supporters have argued that the private sector is not meeting customer broadband needs. Jerman argues that if this is indeed the case and if the customer benefits offered by UTOPIA and iProvo are truly needed, then the appropriate course of action would be for government to offer tax incentives to the private sector to fulfill these needs. Compared to UTOPIA and iProvo, this would be tax-neutral since both of these municipal ventures are tax-exempt. Additionally, incentives for the private sector to fulfill these needs transfers the risks from taxpayers to shareholders.
Mr. Jerman noted that no one knows what this market will look like in ten years or even twenty years from now as UTOPIA’s bonds are finally being paid off. He said allowing the free market to meet the needs of customers by incentivizing the private sector through sound tax policy without jeopardizing taxpayer dollars is the only logical approach.
The smart money is definitely not on UTOPIA. Taxpayers should insist that their city councils come to their senses.