By DAVID BORAKS
DavidsonNews.net
MOORESVILLE – The MI-Connection communications system board Thursday heard a report from its outside auditor confirming that the system owned by the towns of Davidson and Mooresville lost $6.4 million in the 2009 fiscal year that ended June 30.
Meanwhile, Pete Teague of audit firm Dixon Hughes also raised a red flag, telling the board that as a government-owned entity, MI-Connection must acknowledge in its formal budget how it pays for ongoing losses – currently with borrowed money.
The audit report came during the system’s monthly meeting Thursday morning at MI-Connection headquarters.
The audited financial results confirmed and added details to a preliminary report that system officials delivered Aug. 31. (See DavidsonNews.net, Sept. 1, 2009, “A loss for 2009, but signs of growth at MI-Connection.”)
NEW RESULTS
The meeting include an update on results for October and the first four months of the 2010 fiscal year. Those results were a mix of positive and negative news:
- The system lost 23 customers during October, which general manager Alan Hall blamed primarily on residents moving from the area. But some also cited the economy, saying they could no longer afford the service. But the system has still shown a net gain in customer relationships since July 1.
- The system is continuing to have success selling additional products to existing customers. During October, another 103 customers bought phone service from MI-Connection, and 40 more bought high-speed internet access. “Our existing customers are buying more services,” Mr. Hall told the board.
- Mainly because of those trends, the average revenue per customer is continuing to climb, from $82.43 per customer in July to $87.21 in October.
- MI-Connection is continuing to gain small-business customers. “Our commercial business is strong,” Mr. Hall said. “We have six new commercial installs this month.”
While sales of additional products to existing customers are promising, the overall customer losses are a concern. “The better news would be if both numbers are climbing,” Mr. Hall acknowledged. Acting board chair John Kasberger agreed: “Ultimately, that’s what has to happen.”
The board on Thursday also discussed a new financial reporting process that some board members believe would bring the system more in line with the way businesses deliver results. Board member John Venzon of Davidson suggested the board should move toward an emphasis on quarterly results. He also said the towns and taxpayers should be viewed in the same way a business views its investors – with less emphasis on short-term (month-to-month) figures and more on long-term results.
The board also held a closed session to discuss an undisclosed personnel matter. And it put off two other items: 1) a proposed restatement of the 2010 budget to incorporate more ambitious goals, and 2) the nomination of officers, including a new chair, treasurer and secretary. Mr. Kasberger said the board likely would vote on officers in a telephone meeting in December.
BALANCED BUDGET REQUIRED
Davidson and Mooresville acquired the former Adelphia Communications cable network in December 2007, and have spent much of the past two years upgrading the system. They’ve borrowed – through the Town of Mooresville’s – $92.5 million to buy the system and upgrade equipment.
The $20 million-plus upgrade is partly responsible for the losses, but so are increased competition and the weak economy, which have contributed to a net decline in customers since the towns bought the system. In 2008 and again in 2009, the system board adopted budgets that showed losses. System officials have said publicly that they were funding the losses with borrowed money, but that tactic has not been reflected in the system budgets.
The towns, and Bristol Virginia Utilities (the company they’ve hired to operate the system) have been running it as a business. Showing the deficits in the budget wouldn’t be a problem if it were strictly a private business, Mr. Teague said. But state law requires government entities to adopt balanced budgets, he said.
“You have an extensive budget, and you knew that you were going to incur a loss, and your budget reflects that,” Mr. Teague said. “The problem with that, under the governmental rules, is that the budget wasn’t really designed to show, you know, here’s your revenues and other source, here’s your expenses or expenditures, and they balance. It didn’t really balance.”
“From a managerial standpoint, because of the type of this entity, that’s not really a problem,” Mr. Teague said. But because it is publicly owned, “From a General Statute standpoint, the state budget act, it is.”
“It’s not unusual in the governmental arena for you to have a budget where your estimated expenses … are going to exceed your estimated revenues,” Mr. Teague said. “The normal process there is you appropriate fund balance (savings) to cover that. Well you don’t have any fund balance to appropriate, so you wouldn’t legally be able to do that.”
“The only thing I can think of that you could do, to show as your source to make it balance, would be borrowings … because that really would be how you’ve funded it,” Mr. Teague said.
System and town officials have said MI-Connection has enough borrowed money remaining to cover losses this fiscal year. The big question mark facing the board over the next year will be how it can fund likely losses in future years, as well as future growth. Of immediate concern is the 2010-11 fiscal year, when the towns will have to begin making principal payments on their initial $80 million bond issue, which paid for the system and work on the upgrade.
Among critics of the towns’ ownership of the system are some who worry that continuing losses would require property tax increases. Town officials say that’s “not in our plans,” and have suggested the towns could use reserves or additional borrowing.
The revenue/expense statement in the audit report show that MI-Connection had operating revenues of $14.3 million in the year ending June 30, 2009. Expenses were $16.96 million, the largest parts of which went for programming ($5.3 million) and facility-based costs ($4.4 million).
Administrative expenses were $2.7 million. And depreciation and amortization were $2.7 million. Altogether, the system had an operating loss of $2.6 million for the year. After interest payments and a modest amount of interest income, the overall loss was $6.43 million.
The audited statement also showed that the system’s net assets after its first two years are now at a negative $8.9 million – which represents the total losses for the first two years.
PREVIOUS COVERAGE
See all DavidsonNews.net’s previous coverage of MI-Connection in our Cable TV category.
DOCUMENTS
Download a copy of the 2009 audited financial statement. (PDF) Note: the document is marked “draft” but the auditor Mr. Teague said the final copy would have only minor changes.
Download a copy of the auditors’ letter to the MI-Connection board, in which they raised the balanced budget issue, as well as minor concerns about recordkeeping. (PDF)
The situation with our cable system is spiraling out of financial control. Loses are at $8.9 million for the first two years of operation. The original projections were for 10 years of negative cash flows. The purchase of the system made no sense at the time and even less now.
Town board members who supported this decision need to publicly own up this colossal mistake. Only by starting with the truth, ugly as it is, can we begin to fashion a way out of this mess. Anyway you look at it the cost to Davidson’s taxpayers will be severe. What a shame. What a horrible legacy for the politicians who supported this decision against public opinion.
I estimate the current value of this system in the range of $40,000,000 to $46,000,000, or less than half the amount the towns paid for it just two years ago. But of course no one is buying in the current economic environment. WE ARE STUCK!
EDITOR’S NOTE: The towns of Davidson and Mooresville paid $59.7 million for the system in December 2007. Since then, they have spent more than $20 million on upgrades, including new lines and equipment.
As someone who resides in Mooresville, I’m glad to know there are those in Davidson who have equally negative views of MI-Connection. Interestingly, I didn’t find an article on the Mooresville Tribune‘s website related to the auditor’s report. I happened upon this one, and am glad to see that one of the local papers is willing to put the information out there. Our mayor and our at-large representative were voted out because of this issue. MI-Connection is a fiasco and both towns are going to suffer because our elected officials took off more than we can chew.
Sell the thing now.
Larry Green
Mooresville
EDITOR’S NOTE: The Mooresville Tribune did publish an article after Thursday’s meeting. The newspaper does not immediately post articles to its website.
I understood before MI-connection was to be bought there would be NO taxpayer money involved. The cable system would be paid entirely from the funds it would collect. Also a selling point was that buying the system would reduce the subscriber’s cost. As to the first point has any taxpayer money been used or are the finances of the cable system entirely separate? And where did the money come from to pay such a large deficit? Secondly I am a subscriber of DirectTV, I thought since Mi-Connection was offering more for even less cost I would switch. But in comparing the two, Mi-Connection is more expensive. What gives?
William Vinson
Davidson
EDITOR’S NOTE: MI-Connection is a separately incorporated business. Its operating finances are separate from the budgets of the two towns. The purchase and equipment upgrades were not paid for with taxpayer funds, but with borrowing guaranteed by the towns. Deficits so far have been funded through the system’s own reserves – money remaining from the borrowing.
The towns are the MI-Connection’s owners (and primary investors) and if the system were to deplete those reserves and run short of cash, it would be the towns’ responsibility to cover any shortage. That’s expected to happen in the 2010-11 fiscal year (barring an unexpected growth spurt), when they must begin principal payments on the debt. Will they have to raise property taxes? Officials from both Davidson and Mooresville have said no. Instead, they say they would consider other options, including additional borrowing.
Read more about the system’s financial system, including town officials’ comments about potential future cash infusions, in our Sept. 1, 2009, report “A loss for 2009, but signs of growth at MI-Connection.”
Additional borrowing by the towns to satisfy the operational needs of our failing cable franchise is de facto taxation in that it negatively impacts our town’s ability to borrow funds for other things municipalities should be doing, like filling pot holes.
The only way to improve the fiscal strength of MI Connection is to raise subscription rates. Of course once you do that you lose customers to the competition.
WE ARE STUCK! Time Warner played our town councils like a drum and the taxpayers, who did not have a vote, are the losers. This situation is going to get a whole lot worse so be prepared for more bad news over the coming months and years.
Hey Editor — thanks for the note — but if the Tribune can find a way to post online twice about the high school coach resigning I would think they could find a way to post a story which directly impacts the entire town of Mooresville.
Also, no matter how you look at it the taxpayers are paying for the monies being dumped into Mi-Connection. If our town borrows money or is involved in borrowing money, the tax payers are ultimately held responsible. So it seems implausible to say that this hasn’t been funded by taxpayer money. We, the towns, are the borrowers and as such we, the citizens, are paying this fiasco.
Regardless, this is a perfect example of why government should not be involved in private industry. ToM can’t even manage a golf course and make a profit — what on earth makes us think they can own a cable company and make a profit. There is no other publicly owned company like this in the state which is making a profit. There are, however, many similar communities who started a venture similar to this one and eventually learned it was not a good thing for government to be part of. End result, they told those agencies at a loss. The government didn’t lose — the taxpayers lost.