EDITOR’S NOTE: The following article by Davidson’s town manager is reprinted with permission from the Spring 2010 Town Message. which was published on Feb. 26, 2010.
By LEAMON BRICE
Davidson Town Manager
Those of you who have lived in the Lake Norman region for some time will recall when cable TV service was provided by Lake Side. At the time, we received only three or four more channels than we could pick up on a regular antenna and we paid as much as those in the region who received many more channels.
Lake Side sold to Prestige in 1992. Prestige promised an upgraded system and more channels, which we received. The number of channels, however, was still not as many as our neighbors and we paid almost as much as they paid. In 2000, Prestige asked to sell to Adelphia. Again, we were promised more channels and a reasonable price. Before the franchise agreement was issued to Adelphia by the area towns, a right of first refusal to purchase the system was included. As you all know, Adelphia came in, and although they upgraded the system, they did not give us as many channels as our neighbors, but still charged us as much.
In 2002, Adelphia went into bankruptcy. When Time-Warner proposed buying Adelphia, we were very pleased. At least until we started negotiating transfer of the franchise. The Adelphia franchise agreement included their provision of an I-NET (Institutional Network) to the town. An I-NET allows the local government access to a small portion of the fiber network to connect government facilities – including schools and intergovernmental agencies – and to connect local governments with one another, allowing video conferencing and joint training opportunities.
TROUBLES WITH TIME WARNER
When asked about the I-NET, Time Warner was quick to tell us they were not going to provide it; they were only going to upgrade our system to 750 megahertz and other additional channels. This sounded very much like the story we had heard three times before.
To avoid another round of too few channels, paying more, and having a provider who refused to honor the franchise agreement, the towns sought to exercise their right of first refusal to purchase the system. That authority was granted by the bankruptcy court and Time-Warner was assigned as the custodian of the system. They operated it until the towns of Mooresville and Davidson purchased it a little over two years ago.
Before purchasing, the towns hired a cable expert to prepare a business plan. The business plan indicated the towns could purchase the system and it would pay for itself, becoming profitable in four to five years. The towns wanted to make doubly sure they were on sound financial footing, so they hired another cable expert to review the business plan. The towns were assured again the plan was sound.
Before loaning money to purchase the system, the banks hired a third expert to review the plan. This consultant also found the plan to be financially sound.
Davidson and Mooresville together borrowed $80 million to purchase the system. Mooresville holds the actual debt. The cost paid per subscriber was $3,810. After the borrowing, but before the closing, Time-Warner, custodian of the system for one year, announced there were many more customers in the system than originally thought. As a result, the towns had to spend $12 million of the $80 million to buy those additional customers. This left less money for the upgrade of the system, so the towns borrowed an additional $12 million to complete the necessary improvements.
BUSINESS PLAN ASSUMPTIONS
The business plan called for a 5% growth rate each year. This included the 18 months spent borrowing the additional money and upgrading the system. During the year we were undergoing the upgrade, we were unable to add customers, thus falling short of the business plan goals.
We also lost one apartment complex to a national contract. Many customers were lost when MI-Connection began to require payment for services. We discovered that they had not paid their bills for many months. Finally, a few customers grew weary of construction in their neighborhoods during the upgrade and left MI-Connection.
The culmination of these events, coupled with the worst economy since the 1930s, left MI-Connection approximately 2,000 customers short of the goal established in the business plan. As a result, MI-Connection is running short of money when compared to the business plan, thus extending the break-even time frame.
The Towns of Davidson and Mooresville, by interlocal agreement, are required to make up any shortfalls. This fiscal year ending June 30, 2010, MI-Connection anticipates being $576,000 short, with $400,000 of this is due to the State of North Carolina’s refusal to refund sales tax expenditures. The Towns of Davidson and Mooresville will make up the difference.
A shortfall is anticipated in the next four to five years and the towns will also need to make up this shortfall. [EDITOR'S NOTE: Since the manager wrote this, MI-Connection has requested $6.4 million in the 2010-11 budget year, of which Davidson's share is $2 million.]
WE OWN IT; CAN’T SELL YET
Many individuals believe the town should have never purchased the system. Rightly or wrongly, that “horse is out of the barn.” The towns now own the system.
Others suggest the system be sold. This would be a good alternative, except going into this the towns knew that for a while they would owe more than the system was worth. This is a result of several things that occurred during the purchase of the system and the way the business plan was set up.
First, the bankruptcy judge required the towns to pay several million dollars to provide a line to Time-Warner to connect its Charlotte system to the Statesville system. Thus, we paid for an asset that Time-Warner now owns. During the purchase, the towns argued the system was not worth $3,810 per customer; however, the bankruptcy judge ruled that the $3,810 was the price and that is what was paid. Some experts consulted believe the system is now worth a little less than $3,000 per customer.
The towns also borrowed $12 million more than anticipated to purchase customers, many of whom, unbeknownst to the towns, were non-paying customers. The towns borrowed additional money for operating capital in the first years while the business was being built.
All these things result in a significant negative net return if the system is sold now.
Some citizens have suggested that we simply default on our loans. That would have severe repercussions. First, the two towns wouldn’t be able to borrow again, and second, a default would affect bond ratings and interest rates for not only our towns, but for towns across North Carolina and the nation.
Many people, once they understand why the system was purchased and why it can’t be sold at this time, want to know how we can make the system profitable. MI-Connection, now a super 1-gigahertz system, offers new telephone service, the best internet service in the region, and high quality cable TV service. Penetration rates for telephone are very low, since it is a new service. Penetration rates for both internet and cable are well below the industry standards. If the penetration rates for telephone and internet were to approach industry standards, MI-Connection would be profitable and the option of selling would become viable.
SUBSIDIES UNAVOIDABLE
Until new customers sign up for telephone, internet, and cable services, the towns will be required to subsidize MI-Connection.
MI-Connection has recently gone through a number of changes, both on the MI-Connection board and at the state level. Since August 2009, the towns have appointed three new members to the MI-Connection board: Dawn Houston, Rick Howard, and John Venzon. In late October 2009, a new general manager, Alan Hall, was appointed. And Ellen Baker was appointed marketing director in November.
Since these appointments, MI-Connection has made great strides in identifying problems and taking actions to correct them. Alan and the new board have presented an amended budget that made several operational changes resulting in net savings.
Alan Hall and the new board are also providing more information to the public and Ellen Baker has created new marketing materials and product bundles since her arrival. MI-Connection now has a good team, excellent customer service, an even better product, and is locally owned. The towns have made a great effort to provide you, for the first time, a good communications product with good customer service, and we hope you will join the team.
RELATED LINKS
Feb. 26, 2010, Town of Davidson Spring 2010 Town Message, containing this article as well as other town finance-related information.
May 7, 2010, DavidsonNews.net, “Towns get their 2010-11 cable bill: $6.4 million.”
April 28, 2010, DavidsonNews.net, “MI-Connection says quarterly revenues grew 9.4%”
April 15, 2010, DavidsonNews.net, “MI-Connection board confirms a new chair”
March 17, 2010, WFAE-FM/WFAE.org, a look back at the Davidson-Mooresville purchase of the local cable system and its current situation.
March 12, 2010, “State concerned about financial problems at MI-Connection.”
June 3, 2007, “The advantages of local cable ownership.” Leamon Brice article from 2007, as towns were preparing to vote on the deal.
Read all of DavidsonNews.net’s coverage of the cable system, including the debate in 2006 and 2007 over the purchase, in the Cable TV category.
I want to thank DavidsonNews.net for providing such an excellent forum to discuss important community issues. Our town is clearly divided on the cable issue, and DavidsonNews.net is the best source for objective information about the matter, and many others.
It is fascinating to read back through the many articles that have been published regarding cable, particularly those from 2007 when the town board was deciding whether to purchase MI-Connection and when an election was being held for mayor and the board. That type of information is only available on DavidsonNews.net.
An informed electorate is essential to a democracy. Whether you agree with the decision to purchase MI-Connection or not, everyone should be informed about this vital issue, and the positions of our elected officials regarding MI-Connection (it is interesting to note how the positions of some have changed as the situation has deteriorated). DavidsonNews.net is the comprehensive source for this information.
David – keep up the great work! Citizens of Davidson: please support DavidsonNews.net, not just by reading it, but by making a financial contribution. It is a great investment.
[EDITOR'S NOTE: Many thanks, Rodney. Here's info on how to become a paying subscriber: http://davidsonnews.net/support/]
Leamon, thank you. The concise description of the MI history is invaluable. It is a benfit to the Town for you to have responded. Maybe others will follow suit. As Rodney, states, DavidsonNews has become a true provider for Town communication and I would encourage the Town to utilize it as such with the type of factual response provided by Leamon.
I agree that we are faced with no other decision but to ride this “storm” out until other options become available. Now how do we do it? I had suggested an across the board cut to start with. We also need to look at other ways of generating income. In reference to the leaf pick up, the Town run compost pile might be one way to generate some income, being “green” and saving jobs. Even though not popular, we might look at a modest tax increase of say 1/2 cent. We have done temporary increases in the past to get over a hurdle and then dropped back the next year. I caution that the increase should not be looked at as a fund of money to spend but only as a temporary way to get out of a bind.
These are hard times and we have to make hard decisions. The MI decision may not be well liked but it exists and the only route to take is to deal with it. Our Town officials made a decision based upon info supplied to them. Now let’s offer suggestions and support to work out of this mess.
The Mi-Connection budget for 2011 will soon be released to the public for review. In their own words, even the baseline budget will be “aggressive” in its growth assumptions…and yet their two year actual results in acquiring new customers has not resulted in ANY new customers at all. Market studies indicate that as many as 1 in 8 cable customers will cancel their service in the coming year …or 1,900 of MI-Connection’s current total. So when they tell you, in the next week or so, that they will be growing by 3,000 to 4,000 new customers, realize that they must actually grow by nearly 5,000 or so to offset the anticipated customer losses. At this rate, in a year’s time they’ll be submitting customer growth projections that will DOUBLE the customer headcount. Any reasonable person can see that this is not going to happen and it should be the responsibility of Town Officials to demand accountability now!
Andy Stevens lives in Troutman
Not sure why but after reading this an old children’s rhyme popped in my head:
One consultant, two consultant, three consultant, four,
five consultant, six consultant, seven consultant, more,
Now we’re deep in debt and the consultants have hit the door,
Guess we better ditch our satellite TVs and head to the MI Connection Store!
I always respect Sandy’s opinions, particularly since he served as a town commissioner for many years. But, I do want to clarify one statement he made in the interest in making sure readers understand the magnitude of the situation.
Our budgeted revenue from property taxes in the current fiscal year ending June 30, 2010 is just over $4.4 million. The ‘cash call’ from MI-Connection is $2.0 million. Thus, we would have to raise property taxes by almost 50% to cover the subsidy.
The 1/2-cent property tax increase mentioned by Sandy would yield about $60,000, or roughly enough to subsidize MI-Connection for 12 days. Unfortunately, this situation is going to require more than a tweak in tax rates and/or expenses.
Although it is a year off, it will be interesting to see how our town government handles the upcoming Mecklenburg County property revaluation. A recent article in the Observer implied (through a somewhat clumsy graphic) that Davidson could see property valuation increases in the 30% range (this would certainly be realistic considering that the baseline is 2003). The article also said that local governments typically adjust tax rates so that revaluations are ‘revenue neutral.’
If our tax base valuation goes up by 30%, that alone would yield about $1.2 million in increased annual revenue. My guess is that our tax rate won’t be adjusted downward to compensate, but rather we’ll allow the higher valuation to flow directly into town coffers. This is one way for us to all pay more in taxes without elected officials having to raise tax rates in a local election year.
A short-term, one-time-only way of addressing the MI-Connection subsidy is to dip into our fund balance. Fund balance is government lingo for a rainy day fund. At the beginning of the fiscal year our fund balance was running at about 40% of our annual budget, or roughly $3 million. As a point of comparison other local NC municipalities that are similar to Davidson have fund balances that average 60% of annual budgets.
We could conceivably cover the current year shortfall by dipping into the fund balance, although there is a limitation to how much we can utilize. The state of North Carolina recommends that local governments maintain a fund balance of 8% of annual expenditures. I’m not sure whether dipping below 8% results in a polite reminder letter from Bev Perdue, or something more drastic. Still, we could take over $2 million out of our rainy day fund and still stay above 8%.
So, my conjecture is that we get through this year by taking our fund balance down to a minimum, and then in following years we use the increased revenue that will come from rising property tax valuations, and tax rates that are increased just slightly. This is just conjecture, but given that this is the approach that will be the least noticed by citizens I think it is likely to happen.
I’m disappointed in the lack of factual accuracy in Leamon’s article. As a historical article it should get the facts right but does not. The cost paid per subscriber was not $3,810 as Leamon states but rather $5,967. ($92,500,000 divided by 15,500 subscribers.) This deal was completed at a time when cable systems were going for $2,600 to $3,200 per subscriber. Basically the town paid twice the going rate for a system that was in very poor shape. That raises the question “Why?” One must ask was there any impropriety with this deal? This deal deserves a complete investigation to determine if there was any wrongdoing.
Today, two years later, the system is worth maybe $2,000 per subscriber. That’s if you could find a buyer and there are not any buyers out there. If the town had purchased the system for the going rate it would be in much less trouble than it is. We need to ask, ”Who profited from this deal?”
These are tough questions for a town like Davidson which has never experienced anything of this nature. But $60,000,000 in value has been destroyed in two years. The system purchased for $92,500,000 is now worth maybe $32,000,000. At the rate we are going the value will be zero next year.
[EDITOR'S NOTE: Joe, let's be fair to Mr. Brice, even if we are not ready to forgive him. You imply that he is fabricating numbers. In fact, his per-subscriber number is accurate. That $3,810 is the price the bankruptcy judge set for the purchase. What you're arguing is a different way of looking at the town's investment - by total cost, purchase price plus renovations. That's fair, too, and by that view, yes, the town does have nearly $6,000 invested.]
Rodney makes excellent and logical points. His points are difficult to accept in this economy but hard decisions are necessary.
I do want to say that a cable system is not a necessity. The pleas to buy into the system just do not seem to sit right with me. I am not sure why, but if it was for fire, police, water, sewer or the service providing Public Works department, I would have no hesitation to jump on board.
I do notice a few items in the proposed budget that might be able to be trimmed:(from the posted Budget on-line)
a. Lobbyist $12,500
b. newsletter $5-20,000 (maybe work out a plan with Davidson News)
c. Transportation Consultant $20,000
d. Projecting $284,000 for Parks and Rec and $262,000 for “Other”
I continue to look at the good of the whole Town vs. the benefit to a few. I believe all these expenditures in the past have helped us to build a vibrant and livable Town. But things change and now we have to tighten up without sacrificing practical, whole Town services. When the economy changes we can always increase budget amounts as we have in the past.
I am sorry that I will not be able to attend the “Chat” tonight but hope that someone will ask the following questions:
1. What is the Town’s exit strategy for MI and when is the earliest it could be implemented? [EDITOR'S NOTE: See Mayor Woods' comments in today's commentary, “Mayor: What MI-Connection means to you – or should” in which he repeats his belief that once the town gets the system to financial health, can cons
2. In the current restructuring, what consideration was give to eliminating administrative positions vs “in the field workers”?
3. Are we going to continue our curbside loose leaf pick-up and if not, what reasons exist other than budget? [EDITOR'S NOTE: See our April 28 story about this. Ending curbside leaf pickups appears to be decided, though it won’t be final until the board votes on the budget next month.
I also encourage those that will attend, to attend with an open mind ready to listen but also ready to comment with reasonable and cogent positions; guided by their love of the Town and to do what is in the best interest of the whole Town.
Can’t help but giggle ….”we’re Davidson… we are better then you, and we are smarter too” I’d bet that Mr. Ralph W. Johnson is laughing from heaven at this situation.
Mr. Graham, as far as rising property values goes, I don’t know what you are smoking, but bring some by the house – I get off work at 6. I work for myself so I don’t have to worry about a drug test.
Rick Barton
Cornelius
Rodney Graham’s point of making use of the Town’s cash reserves would be one way to mitigate the effect of an immediate tax increase, but it could lead to other potential problems. After all, a rainy day fund is for rainy days. MI-Connection has been fortunate in its existence in that it has not endured a severe storm season, either winter or summer. Drive around Mi-Connection’s operating territory and you will see that a vast amount of it is aerial in nature…..on utility poles, under tree limbs, etc. A summer tropical storm or a severe winter ice storm could easily damage 3-5% of its existing plant without warning….and MI-Connection’s “bare bones” budget will have no reserves to immediately replace it. Take a look at the budgets prepared by successful utilities, such as EnergyUnited, and you will see they allocate funds in advance for such an event. Good news if the weather and damage doesn’t happen, but good planning in case they do! Damage to MI-Connection’s system in such a storm (even a small one) could easily cost $3-5 million to repair….and they won’t have the cash. Thus, the towns (Davidson and Mooresville) will need to plan cash reserves to cover such events as they are left “holding the bag”.