Minutes of the Centerville City Council Special Meeting held Tuesday, April 29, 2008 at 7:00 p.m. in the Centerville City Council Chambers, 250 North Main Street, Centerville, Utah.

MEMBERS PRESENT
                                           Ronald G. Russell, Mayor
                                           Justin Y. Allen
                                           Ken Averett
                                           Paul Cutler
                                           Sherri Lyn Lindstrom
                                          Lawrence Wright

STAFF PRESENT
                                         Steve Thacker, City Manager
                                         Blaine Lutz, Assistant City Manager/Finance Director
                                         Randy Randall, Public Works Director
                                          Lisa Romney, City Attorney
                                         Connie Larson, Recording Secretary

VISITORS
                                Interested Citizens and representatives from UTOPIA
                                Joe Dougherty – Deseret News

PLEDGE OF ALLEGIANCE – Brayden Averett, Eagle Scout

OPENING COMMENT/LEGISLATIVE PRAYER   Councilman Ken Averett

UTAH TELECOMMUNICATIONS OPEN INFRASTRUCTURE AGENCY (UTOPIA)

Mayor Russell stated this meeting is a continuation from the meeting held April 22, 2008 regarding the UTOPIA refinance matter.

Receive follow up information regarding UTOPIA matters and proposed refinancing and pledge agreement; address and respond to City Council questions regarding related matters.

Councilwoman Lindstrom expressed frustration with the incumbents’ statement that they will provide the same type of service. She believes the level of service will be very different.

Councilman Allen asked whether the only options are to vote “no” and go into default, and the other option is to refinance.  He asked what the timeline would be to see what UTOPIA is worth in the open market, and if there is another solution to refinancing.  Alex Jensen, UTOPIA Board Chair, explained the two options that Councilman Allen mentioned are the only two choices.  Mr. Jensen said it may look appealing to delay the
refinancing, but there will not be sufficient revenue to continue operations under that scenario.  He explained if there is a default, the Debt Service Reserve Fund that has been set aside in the amount of about $10 million will be called on. The Trustee, Wells Fargo Bank, would take the money out of the escrow account and use it to pay Bank of America for the monthly debt service payments. There would be no revenue coming into the network to deploy and take advantage of the stranded investment.

Councilman Allen asked if the City defaults, who would have control over the revenues? Dave Shaw, General Council-UTOPIA, explained there are two lenders, Bank of America and RUS.  Bank of America is fully backed by the sales tax pledges.  RUS’s debt is not secured by sales tax pledges, but is secured by the revenues of the system.  Mr. Shaw said if the Bank of America debt service payment could not be made from revenues, the trustee would call on the sales tax pledges.  The RUS debt, however, is secured by the revenues of the system, and if they fail to continue to grow, it becomes difficult to make the interest and principal payments.  Mr. Shaw said RUS has the remedy of taking over the network; they can’t sell it or get rid of it, but they can operate it. He said a “no” vote would allow the Federal government to take control of the system and allow the Bank of America to draw upon the sales tax pledges.

Councilwoman Lindstrom said this leaves the City more vulnerable with a stranded system, and a decision to refinance guarantees more of a return on the dollar.  Mr. Shaw explained a decision to refinance, at the very least, guarantees two years of capitalized interest to pay all the debt service payments, so the tax pledges won’t be hit. He said this is a contingent liability, but the likelihood of tax money being used is decreased by going forward with the refinancing. Councilman Lawrence Wright asked if the RUS loan is defaulted will that trigger the bank loan that is guaranteed by the sales tax pledge agreement. Mr. Shaw explained the revenues secure RUS, and all of the revenues that come in would pay RUS first. This means Bank of America’s remedy is to call on the tax pledges. Councilman Wright said it seems RUS and UTOPIA should make an effort to find a solution to this problem. Mr. Shaw said there have been requests for RUS to meet with UTOPIA to find a solution, but they have refused to meet as of this date.  He said RUS has not acted like a traditional lender, but more as a project manager. Mr. Shaw said if the system was sold, the sale proceeds would go first to RUS.  Whatever is left would be applied to the Bank of America debt. Then the sales tax pledges would be called upon for the remainder of the debt, as needed, for the remaining 18 years. He said the current outstanding debt is $133 million.

Councilman Allen asked if the network was sold, how much reduction could the City hope to have in their sales tax pledge? Mr. Shaw said there is not a willing buyer at this time, and it is impossible to speculate how much it would cost. Councilman Averett asked if any research has been done on other networks that have defaulted. Mr. Shaw said he has not found any information on forgiving of RUS debt. Councilman Wright expressed concern about the uncertainties, and if there would be enough subscribers to make the system profitable. Councilman Cutler said he believes there will be more value in the network if it is sold two to three years from now, and that “fiber to home” networks are becoming more valuable over time. Councilman Wright said there should be                                      performance projections on what the net profit will be, and what the debt ratio will be at the end of the second year after the refinance. Todd Marriott said refinancing will significantly improve the orderable address numbers, specifically in Centerville.           

Tom Coverick, Director-Key Bank Capital Markets, explained in the current credit market, there is a run on banks for credit, and the call on commercial banks is tremendous. He said for UTOPIA, there is a credit commitment from Key Bank for this transaction that may not be there one year from now.  The current debt to Bank of America and RUS is approximately $135 million at five percent interest. Laura Lewis, Financial Advisor with Lewis Young, Robertson & Burningham, Inc., explained the existing debt with Bank of America was structured up to the limit of the current pledges. UTOPIA has made principal payments of $2 million, but the ability to continue to do so is not an option, and the debt is structured so the interest is monthly and the principal is quarterly. Ms. Lewis said on an annual basis, it will hit the maximum $10.09 million of the pledges for the remaining years on the pledge agreement. She said if interest payments are not made, UTOPIA will go into receivership and they cannot be sold. 

Mayor Russell said he assumes if the refinance is not done, Centerville will be paying $334,000 annually for the next 20 years or so. He also asked if an analysis was done on the revenues vs. expenses to determine if the refinance is done, is there a reasonable chance of having revenues at some point in time in excess of expenses to make the bond payments. Mayor Russell asked at what point is the expectation of enough revenues over expenses to make the bond payments on the new bonds. Ms. Lewis said that would be in two to three years, and the idea behind the increasing pledge is to match anticipated increasing revenues. 

Blaine Lutz, Assistant City Manager/Finance Director, explained his analysis of the City’s future capacity or ability to pay its pledges under both scenarios. He said the $334,000 per year is about five percent of the current was effective General Fund revenues. He believes the ability for the City to pay the debt will increase year by year.  There should not be any effect on public service levels, but funding for amenities and capital improvements would be affected.

ADJOURN FOR RECESS

At 8:15 p.m., the City Council adjourned for a recess.
 RETURN TO CITY COUNCIL MEETING

At 8:25 p.m., the City Council meeting was reconvened. 

Public hearing to receive further input from the public with respect to: (1) a proposed pledge of certain of the City’s sales and use tax revenues; and (2) any potential economic impact that the improvements, facilities or property financed in whole or in part with the proceeds of the Utah Telecommunications Open Infrastructure Agency (“UTOPIA”) Bonds may have on the private sector

Mayor Russell re-opened the public hearing for comments about the additional information the City Council has received.

George McEwan, 618 Willow Bend, Centerville, said he is angry that UTOPIA has been criminal with the funds they were given to manage to make the network possible, and the directors of UTOPIA need to be held accountable. He also said the City Council should have explained to the citizens how UTOPIA can benefit the west-side business park plan.  He also recommended a citizens oversight committee to improve accountability.

Mike Taylor, Inwest  Title Services, said his company has 12 offices in Utah, with 10-12 employees along the Wasatch Front.  Mr. Taylor said their office in Murray has UTOPIA service with a monthly bill of $130, compared to thousands of dollars they are paying elsewhere for telecom services. He said his company would consider an office in Centerville if UTOPIA was in the city.

Jesse Harris, 1120 Violet Dr., Sandy, said he currently operates a website that advocates for municipal broadbands. Mr. Harris explained Qwest Communications and its predecessors have benefited from $1.4 billion in State and Federal support, and with all of that help, Qwest Communications has failed to deliver the network.  He said Qwest Communications will not let anyone use their fiber infrastructure and has shut competitors out of the market.

Dan Ditto, 504 West 1700 North Centerville, said there are no solid financial projections. He said there needs to be some transparency, and the community deserves to have open and honest discussions. Mr. Ditto doesn’t approve of the connection fee,               and the $10 million usable cash numbers don’t add up.  He said he doesn’t approve of the 32 years of financial commitment and believes there are other solutions that can be explored.

Beth Dayley, 738 North 400 East, Centerville, said she believes fiber optic is important for the future, and she believes refinancing is the better solution.  She said if fiber optics is not built, someone else will do it, and it will be far more expensive. 

Bradley Greger,                                                   , said he is an engineering professor at the University of Utah, and is in favor of UTOPIA, but he is concerned about the reliability of the business plan.  He feels that more information on subscriber rates, and better detailed financial projections should be provided.            

Kelly Bennett, 957 East Creek Hill Lane, Centerville, asked why taxpayer money was invested in a high-risk project when it was unknown what the outcome would be.  She asked the City Council to consider the constituents’ opinions.

Eric Isom, Qwest Communications Government Affairs Director, said it is a costly endeavor to take fiber optic into developed areas. He said UTOPIA underestimated                     costs, and overestimated take rates. Councilman Wright asked if UTOPIA was successful, would this impact employment for Qwest Communications.  Mr. Isom said if Qwest Communications were to abandon their own network, it would result in job losses at their company.

Howard Stevenson, State Senator and President of the Utah Taxpayers Association, said the City Council does not have all the independent financial analysis necessary to make a decision.  He said UTOPIA wants $3,000 for hook-ups, and it is unknown if this model will work. Mr. Stevenson said he believes most homeowners will not be willing to pay $3,000.  If refinancing is done, it should be within the current term, and not extend it to 30 years. 

Mayor Russell closed the public comment portion of the hearing after noting that written comments that were received since the last hearing are a part of the public hearing record and are available for public review.

Councilman Allen asked if there is a possibility the technology is going to be obsolete, is there prudence to increase the annual pledge amount to allow the ability to refinance within the current 18 to 20-year time frame?  Ms. Lewis said it is possible to increase the pledge, which would be $585,000 per year for Centerville for the remaining 18 years.

Councilman Averett said it was understood last week there would be a connection fee to new subscribers.  If there is no connection fee, where will the money come from for refinancing?  Councilman Cutler explained a marking plan was presented previously as a best practice that has proven to be financially successful in other wholesale municipal networks.  He said this is not the only option, and the options can be adjusted as UTOPIA goes to market and sees the reaction from customers.  The market will dictate what is the most successful.  Councilman Cutler said in order for all of the cities to be built out all the way, there must be additional capital from a successful financial model. The quickest way to obtain the additional capital is from a connection fee, where new areas fund the construction in exchange for significantly lower rates.  Councilman Averett asked if the connection fee is less than what is anticipated, what will make up the difference in revenue.  Councilman Cutler said execution of a reasonable marketing plan, plus successful execution of operations will bring more value and rescue the stranded investment and make it more valuable in a few years.

Mr. Alex Jensen explained UTOPIA has connection fees, as do the other competitors who have hidden fees. UTOPIA has to be self sustaining because of limited funding going forward. Councilman Wright asked at the end of the second year, how many subscribers will be required to be on line for UTOPIA to be viable after the refinancing.  Mr. Alex Jensen explained UTOPIA is a wholesale model, and UTOPIA is under attack because they are a threat to Qwest Communications. Councilman Wright asked how many customers are required to subscribe.  Councilman Cutler said it depends on the mix between residential and business subscribers. One of the purposes of UTOPIA was to provide economic development for businesses. Councilman Wright said it is anticipated it will cost $7 million to build out the rest of Centerville when there will be only $10 million generated from the refinancing. 

Consider Resolution No. 2008-12, authorizing and approving a pledge of City’s sales tax revenues; authorizing the execution of an amended and restated pledge and loan agreement; and related matters

Councilman Cutler made a motion to adopt Resolution No. 2008-12, a resolution authorizing and approving a pledge of sales tax revenue, authorizing the execution by the City of an amended and restated pledge and loan agreement, etc., and allow staff to make non-substantive changes to the resolution with the following conditions:

1. Centerville’s pledge approval is only valid if all of the remaining pledging  UTOPIA cities, except Payson, approve their revised pledge agreements.  If any one of the other nine cities, excluding Payson, does not approve the refinancing, then Centerville’s approval of the pledge agreement is withdrawn, and Centerville reserves the right to reconsider that pledge.  
2.      UTOPIA is required to hire an experienced telecom professional as Executive Director.
3. UTOPIA shall not enter into any contract with potential value of more than $250,000 with a partner, vendor, contractor, or service provider without the other party making available to UTOPIA staff and board (under NDA or other confidentiality requirements) audited financial statements to enable the board to evaluate financial stability and capacity of the party.

Findings:

1. If Centerville voted not to support this refinance, the sales tax pledge would immediately be called on at the rate of $334,000 per year, with no commitment to building infrastructure in Centerville.
2. UTOPIA has been financially damaged and operationally delayed by the Federal Government’s RUS program’s failure to keep commitments. This damage and delay has necessitated a refinancing of UTOPIA’s debt structure.
3. If RUS keeps their commitment on the Centerville contract they approved, without recourse to UTOPIA, the network construction will pass substantially all Centerville residences. If RUS continues to fail to honor their commitment to complete the contract, then Centerville will rely on UTOPIA’s draft capital improvement plan.
4. UTOPIA has a draft capital improvement plan that includes paying for work previously done by contractors in Centerville, completing the Centerville hub site and interconnects, and building a distribution ring in Centerville. The capital improvement plan would bring significant value to Centerville in excess of the difference of net present value between the previous 2004 pledge and the new 2008 pledge.
5. UTOPIA has agreed to provide a financial status report to UTOPIA board members that can be passed onto city staff and councils on a monthly or quarterly basis.
6. UTOPIA has a plan to make service available, tested and verified to at least one customer, which could be Centerville City, within 120 days of any refinance.
7. UTOPIA has agreed to investigate the feasibility of a private/public partnership to offer economical wireless internet to all Centerville areas, and report back to the Centerville Oversight Committee within 120 days.
8. Centerville City Council intends to form an Oversight Committee with representatives from both public and private sector to review the deployment of UTOPIA infrastructure and other telecommunications projects in Centerville. This could be new or part of the City’s IT Steering Committee.
9. UTOPIA’s deployment has positively impacted economic development, increased choice and competition among service providers, and directly led to lower prices and better service in cities where UTOPIA has been deployed.
10. High-quality telecommunications infrastructure is important for long-term economic development in Centerville. One of the key elements of the  Shorelands Commerce Park, Centerville’s planned west-side high-tech business park is UTOPIA infrastructure.
11. Extending and increasing the UTOPIA pledge amounts will increase the availability of high-quality communications infrastructure for Centerville residents.
12. Deployment of high-quality communications infrastructure is important to our economic competitiveness in the global economy. The United States is falling behind much of the world in terms of broadband deployment penetration.  According to the OECD, the United States has slipped to 15th among OECD nations, and 24th among all nations. 
 Councilwoman Lindstrom seconded the motion. 

Councilman Wright made an amended motion to not include the conditions and findings that were presented. He said some of the conditions have no value to the findings and they are not binding, and the original resolution needs to be considered.  Mayor Russell said it would be foolhardy to not include the vote of the other cities as one of the conditions, because if one of the other cities doesn’t do it, it poses more risk for Centerville. Motion died for lack of a second.

Mayor Russell said the decision to have UTOPIA was made several years ago, and now given the current circumstances, a decision must be made on what is the best scenario.  If a “no” decision is made, then it must be accepted that $334,000 will be paid each year for approximately 20 years, and nothing will be given in return.  If a “yes” decision is made, the City is obligated for an additional ten years, and increases the amount incrementally each year that must be paid. 

Councilman Cutler said he is in favor of the UTOPIA refinancing, because he believes there is more value to the citizens of Centerville financially and economically. He believes there is more value in staying in and finishing the job, than walking away and giving up.

Councilman Wright said originally he was excited for UTOPIA, as he works from home, and is in favor of high speed internet. His concerns are with the capability for UTOPIA to be profitable in lieu of the considerable risk the City is being asked to take on. He said the concept of UTOPIA is wonderful, but there are deep concerns that have been expressed by the community in taking on additional debt created by approving the proposal.   UTOPIA has come to represent a pioneering effort by bringing technologies that encourage economic growth and other benefits that many consider to be of value to the community. Councilman Wright said he is focusing on whether UTOPIA can be profitable based on the numbers and what is required for them to perform at a high enough level to be successful. A vote against the refinance is not a vote against UTOPIA; it is a vote against the refinance proposal, and a vote to pursue other options. The City has been led to believe that UTOPIA will fail without refinancing, but Councilman Wright said the chances of failure are greater because of the debt ratio associated with the proposal and the $1.4 million in monthly interest payments beginning two years after the approval of the loan, and close to $24 million and additional principal added to the $185 million loan for the recapitalization of interest into principal for the two-year period after the loan. The RUS loan is $21 million, and more money will be spent during the first two years after the approval of the refinance of the loan than is owed to RUS. Councilman Wright stated voting for the refinance is adding fuel to an option that only forestalls the existing problem by increasing in size and orders of magnitude a dilemma that the City will be stuck with for a long time. A vote against the refinancing proposal is a vote to help UTOPIA find other options to succeed.

Councilwoman Lindstrom said she believes there is much potential for UTOPIA to work and that it can bring back revenue to the City and bring back a better return on the dollars if eventually it is sold.  She said a “no” vote at this point is irresponsible on top of mistakes that have been made to this point. She said people have told her not to raise taxes, but taxes will not be raised, as this is a sales tax pledge. Councilwoman Lindstrom said this is a long-range idea, and a vote of “yes” will support this concept. UTOPIA is critical for the economic development of Centerville and region, and it is vital to have this technology in the global climate.

Councilman Averett said he finds it difficult to support this plan because of a lack of a financial plan and marketing plan. He said he cannot support the refinance plan because of the previous mismanagement of UTOPIA, and the lack of a disclosed financial and marketing plan. He said another $4 million cannot be reinvested based on verbal representations, and “trust me” verbiage from management. He is concerned about UTOPIA’s failure to secure top tier providers to the network, as there are only four providers when there should be four times that amount. There is concern about out the subscription rate, as there have been four years to market UTOPIA, yet there is only a 15 percent take rate. Councilman Averett is concerned about the marketing plan, as a marketing plan that requires an upfront fee will not work in this financial climate, or in this community.  He said this is a financially conservative and fiscal state, and this plan will not work. Councilman Averett said he has numerous emails and many constituents have contacted him, and the response is 10-1 against the financing plan. He said the Centerville residents have spoken and he is listening to them.

Councilwoman Lindstrom said she was told that incompetent or irresponsible service providers can do as much damage to UTOPIA, as not having enough service providers. The unique type of the market is what UTOPIA needs to capture.  She said these service providers would come on board as the network grows, and as the customers come on board. 

Councilman Allen said he resents the mismanagement by those entrusted with this project, and he is angry that the tax dollars were not better used.  He said he is skeptical whether UTOPIA is going to work, but paying $334,000 for 20 years for nothing is also not an acceptable option.  He said he hoped articulating a solution would be possible to avoid a default, but that has not happened. Councilman Allen said it is with reservation that he will support the refinancing, but with reservations that the money will be there to install fiber to the homes in the city. He said if in the future the infrastructure will have increased value for a sale to the private sector, then the citizens of Centerville and the Business Park will have benefited, and it will be worth the increased risk of the sales tax dollars, rather than paying for 18 years for nothing.   

The motion was passed by a vote of (3-2).  Council members Wright and Averett were the dissenting votes. 

Councilman Cutler will write a letter for Council members to sign, asking RUS to meet with UTOPIA to resolve their differences. 

At 10:05 p.m., Councilman Allen made a motion to adjourn.  Councilwoman Lindstrom seconded the motion, which was passed by unanimous vote.

_______________________________   _______________________
      Marilyn Holje, City Recorder                               Date Approved

________________________________
     Connie Larson, City Recorder