By DAVID BORAKS
DavidsonNews.net
Directors of the financially-strapped MI-Connection Communications System on Thursday approved a revised 2009-10 budget that reflects lower than expected revenues and requires a cash infusion from the system’s owners, the towns of Davidson and Mooresville. Officials from the towns said Thursday they can juggle their budgets to come up with the extra cash without layoffs or painful town budget cuts.
The new $17.1 million budget projects a year-end shortfall of $576,604, of which Davidson will pay about $180,000 and Mooresville about $396,000.
Davidson budget
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Davidson Town Manager Leamon Brice said after Thursday’s board meeting that he has identified about $276,000 in budget reductions, from across town departments. He’ll ask the Town Board to approve the budget reductions at its February meeting.
They include a savings on insurance premiums this year, putting on hold plans to design a parking deck on Jackson Street next to Town Hall, freezing hiring for two vacant positions (a police officer and a police department records clerk), cutting spending on supplies, putting off plans for an economic development study, putting off a public art project, and suspending its contract with its Washington lobbyist. He said the town also will not have to make a previously expected payment for debt service on another economic development venture: its partnership in the North Mecklenburg Business Park in Huntersville.
In recent weeks, Mr. Brice has been meeting with town employees to discuss the potential budget impact of a shortfall at MI-Connection. He had been warning that layoffs might be necessary. “We knew there was going to be some kind of gap, but we didn’t know what it was going to be,” he said Thursday. Now, with the actual number out, he knows he can accommodate the cable-system’s cash call without more painful cuts.
Mooresville likely will have an easier time covering its extra payment to the cable system. Mooresville finance director Maia Setzer said Thursday she expects to cover the $396,000 expense through a combination of budget reductions and the town’s cash reserves, known as the fund balance. “We can look through our current budget and see if we could find some reductions. More than likely my recommendation would be some of it from the fund balance and some of it from budget reductions,” she said.
Ms. Setzer said the cable system’s shortfall was “about what we expected.”
LACK OF GROWTH
MI-Connection’s shortfall is the result of several factors, including the weak economy and competition, which have hindered customer growth, and a big one-time charge stemming from a dispute with the state of North Carolina over whether the system is entitled to a refund of state sales taxes.
In the 2009-10 budget approved last June, MI-Connection had anticipated revenues of about $17.37 million. But system officials now are projecting revenues of $16.16 million, which General Manager Alan Hall blamed on the soft economy and lack of customer growth at the company.
“We now have six months of actuals and six months of new projections,” Mr. Hall told DavidsonNews.net, which provides a clearer picture of how the year will turn out.
Since Davidson and Mooresville bought the system in December 2007, MI-Connection has seen an overall loss of customers, which now number about 15,000. Some are financially strapped customers who are cutting back. Other losses have come when customers switched to cheaper satellite TV services. And still others have been lost when the owners of housing complexes have signed contracts with other providers, including those able to serve a national footprint.
The two towns have borrowed a total of $92.5 million to buy and upgrade the system since 2007. The upgrade has given MI-Connection a state-of-the-art network able to offer a “triple play” of digital TV, telephone and internet services. One bright spot over the past year has been existing customers’ willingness to add second and third services. That boosted average revenue per customer from $77.70 per month in December 2008 to $87.76 in December 2009.
Meanwhile, the system also has been adding commercial customers, which is a growing source of new revenues. But the revised budget approved Thursday does not actually add money for network improvements to reach new corporate customers. At $3.1 million for the year it is now smaller from the originally approved $3.6 million. Still, Mr. Hall said he expects the new budget to cover the costs of up to 17 large projects to extend the network to corporate customers and dozens of smaller projects, he said.
“That’s really where our key growth has been,” Mr. Hall said.
Asked whether the 2010-11 budget will have a shortfall, Mr. Hall said that the board has not yet approved a budget with a public number. (That won’t come until June.) “But I can tell you that we have a clear path to profitability and it relies on growing the business. When we get to certain market shares, we start earning money for the towns,” Mr. Hall said.
MI-Connection currently serves about 44 percent of homes its network passes, Mr. Hall told the board Thursday. He did not say where the break-even point comes.
Still unknown is what the 2010-11 budget might look like and how much, if any, shortfall the towns might have to make up. With principle payments of $2 million to $2.5 million coming due on some of the towns’ $92.5 million of borrowing, debt payments could approach $7 million next year. This year, interest payments will total $4.6 million.
TAX DISPUTE
Meanwhile, the original 2009-10 budget included a refund of $400,000 in state sales taxes, which MI-Connection says it’s entitled to because it is owned by the two tax-exempt town governments. (These are sales taxes the system paid on items / services it purchased.) But Mr. Hall said state tax officials recently ruled against the system’s request for a $400,000 refund of 2008 sales taxes paid. The revised budget now treats that $400,000 as an expense, at least until the dispute is resolved.
The system also could be liable for 2009 sales taxes. The fate of the tax payments won’t be known until MI-Connection either reaches a settlement with the state, resolves the dispute in a lawsuit, or persuades the state legislature to pass legislation specifying that it is exempt.
ALSO THURSDAY
Also at Thursday’s MI-Connection board meeting, at MI-Connection headquarters in Mooresville:
- Rick Howard joined the board as Mooresville’s third representative.
- The board approved the fiscal 2009-10 allocation of ownership and financial responsiblity between Mooresville and Davidson, based on the number of customers in each town as of June 30. Mooresville now owns a slightly smaller share, 68.75 percent, down from 69.46 percent. Davidson gains a fraction, to 31.25 percent from 30.54 percent. It’s those numbers that determine each town’s share of any profits or shortfalls.
- General Manager Alan Hall gave a December operations report that showed continued decline in overall number of customers but continued growth in sales of additional services to existing customers. The system showed a net loss of $581,000 in December 2009, 7.5 percent lower than a year earlier, when the loss totaled $625,000. Revenues were up 8.6 percent, to $1.33 million.
- Mr. Hall reported on the system’s decision last year not to subscribe to a special extra Winter Olympics programming package from NBC. He said the company had decided against the package because of its $17,000 annual cost over several years. The board affirmed his decision not to add the package, which would include sports such as curling and women’s hockey.
- The board also held a closed session to discuss an unspecified legal matter.
RELATED COVERAGE/LINKS
Jan. 26, 2010, “Will cable system’s financial woes hit town budget.”
See all of DavidsonNews.net‘s coverage of the local cable system under the “Cable TV” category.
Town of Davidson fact sheet on the cable system and effects on the town budget, CLICK HERE>
This article makes clear the short term prospects for MI Connection are very poor. What should concern citizens even more is the long term outlook is worse and ultimately points to financial disaster. By grossly overpaying for this asset to the tune of 2.5 times the going rate per cable subscriber, and by leveraging the deal to the hilt, the town now finds itself in a position where it has to reduce services in other areas in order to sustain the cable beast. What will they have to do next quarter or next year? Tax increases to pay for cable are just around the corner.
This situation was not caused by the poor economy. Facts are the cable industry is in decline. Sure, MI has done a good job of upgrading services and expanding their offering, but it isn’t enough to turn the tide of red ink and never can be.
In the long run competition from telecom companies with extremely deep pockets and better technologies will eclipse cable, making it obsolete with fiber optic offerings, internet TV and other newer technologies. The mom and pop providers like MI will be left in the dust, and the citizens of Davidson will be left with the bills.
Perhaps it’s time for a thorough investigation of the decision process that got the town in this mess in the first place. Additionally we should seek safeguards that insure the town council never puts us in this type of situation again.
When the idea of the town owning this entity was proposed I told one Board member of my opposition to it. After going round and round for some time debating the pros and cons we finally discussed the possibility of the town having to use tax money to feed the system. I remember being told “don’t worry, we have run all the numbers and this is a cash cow”.
At that time I figured out that this was about nothing other than the town getting their hands on what it perceived to be an incredible income stream. It was not, in my opinion, for any of the more idealistic reasons I was given.
For the record, I am a very satisfied MI-Connection customer; I have even upgraded to the “triple play”. Unfortunately I think the town is stuck with the ownership of this entity and it will cost us for years to come.
Hopefully we will at least have learned that the town should leave most services to the private sector.
I have very little that I can add to the outstanding comments by Joe Hutchens and Jay Neal. The MI purchase was and is a gross mismanagement of Davidson’s finances. The Town Council members that promoted and pushed for this debacle should be held accountable. In the future, a town ordnance must be established for substantial investments (say anything in excess of $1,000,000 to be spent over two or three years), requires the approval of its citizens by a vote of two-thirds majority.
This miscarriage of judgment further underscores the fact that our town council members need a business 101 course, not some worthless civics course. In fact, the only people that should run for an elected office are those that can demonstrate that they have met a payroll for at least one year.
Folks I am afraid the worst is yet to come. In Cornelius, AT&T Universe has significantly upgraded their system. We just switched from Dish (7 year customer) to ATT U, and love it. More channels less money, faster internet.
Is AT&T U-Verse expanding to Davidson? ( you can tell when you see a lot of digging on the roadside, in ATT’s right of way)? I follow Cornelius politics more then Davidson, but are there any town board members still serving on the board that voted for this? If there is a public backlash against M-I, people will switch for AT&T, Dish or Direct. What would the town do.
As for the state giving them a $400,000 tax refund, good luck with that. M-I can’t have it both ways, they want to charge customers for the sales tax, and then not have to fork it over to the state, as MI is owned by two towns. Best of luck to you.
EDITOR’s NOTE: I wanted to answer a couple of Rick’s questions: AT&T’s U-Verse is coming throughout the Charlotte region and as DavidsonNews.net has reported, it is available in some neighborhoods in Davidson.
As for the Davidson Town Board: Mayor John Woods and Commissioner Margo Williams were on the board in 2007 when the towns approved the purchase of MI-Connection. As an aside: Cornelius is entitled to send one non-voting member to meetings of the MI-Connection board. (I have not seen one there at the meetings I’ve attended.)
Rick suggests that if there’s “a backlash” against MI-Connection people might switch. I’m not sure what role politics should have in choosing a cable, internet or TV service – one way or the other. In any case it’s a good idea to look at the services side-by-side as you decide which is right for you. Here’s a quick look – but you’ll want to do your own homework:
In its most expensive packages, U-verse has a several-hundred-channel lineup and even international language programming available – from Arabic to Chinese. A basic package comparable to basic cable (70 channels) starts at $54 a month, plus $7 fee for each additional TV. DSL Internet (basic speed 1.5 mbps) is $33. Basic telephone is $35 a month. Altogether, the 3 services add up to $129/month.
For comparison: MI-Connection’s basic cable package (the 70+ package) is $52.49. A comparable internet package might be either 1 mbps at $20 or 3 mpbs at $30. Voice/telephone service is $50 a month, unless you also have cable ($43) or cable and internet ($35). So a bundle of roughly same three services is $108.
Those bundled prices may not be what you pay initially from either company – with the competition both AT&T and MI-Connection offer promotional pricing to new or upgrading customers. Both companies also offer a wide range of add-on TV packages and faster internet speeds. And customers should look carefully at the fine print from whichever provider they choose to make sure they understand any additional fees and how prices change after your promotional price ends.
I have seen or test-driven both cable and satellite service in Davidson, but I have not seen U-Verse. Anybody currently or formerly use U-Verse for TV? Let us know.
Rick’s comment about MI-Connection seeking a refund of sales taxes is interesting. I will look into that question – is this money consumers paid? I’ll let you know.
David: Thanks for your reply. I know our new deal with Universe is cheaper then what we were paying for Dish combined with ATT and Bell south. We never looked into M-I as they do not offer HRTV or TVG, the two horse racing channels, as we like to watch races and the pre-derby week coverage.
I think the folks that voted for this meant well, but got led down a path of good intentions. As far as the tax aspect goes, maybe MI wants a refund on the sales tax THEY paid on purchases of equipment, and that might be a valid point. But good luck getting that back from Raleigh.
Town manager Leamon Brice on sales tax:
Town manager Leamon Brice clarifies that MI-Connection is seeking reimbursement on sales taxes that it pays when it buys goods and services. This is NOT the same thing they charge customers.
As tax-exempt entities, the towns of Mooresville and Davidson are exempt from paying sales tax on items they purchase. As mentioned in the article, what’s happened is that the state Dept of Revenue is arguing that MI-Connection not entitled to a refund the way the towns would be if they bought something directly. The towns argue that since they are the owners of the system, the system itself should be tax exempt. MI-Connection is seeking a resolution.
Thanks again Dave. I thought that might be the case The law is intended to save the towns (tax exempt entitites) from paying sales tax on goods that they purchase for the day to day operation of the town. A shovel for the public works dept, folding chairs for town hall, etc
But in M-I’s case it is a for profit company, that the towns happen to have mistakenly invested in. Their competitors, Dish, Direct, ATT univerese pay sales tax on the goods that they buy, so why should not M-I pay that tax to? It give the town an unfair advantage over their competitors
The towns do not pay property tax on their vehicles, but I would think M-I pays prop tax on all those new trucks that they own or lease. Will M-I also use this argument to try to avoid paying their fair share of property tax on their vehicles and equipment?
But $400,000 in sale tax rebates are not going to save the taxpayers of Davidson from huge yearly cash calls, to prop up this failing business model.