Detail of the LGC letter. Download copies of documents below.
After letter raising concerns, board outlines plans to improve
By DAVID BORAKS
DavidsonNews.net
State officials say the MI-Connection cable system, owned by the towns of Mooresville and Davidson, has “serious financial problems” and “signs of financial weakness” that could keep it from meeting obligations to creditors, employees and taxpayers. In a letter to the MI-Connection board, the state Local Government Commission (LGC) of the state treasurer’s office says the board must take “corrective action.”
This week, the MI-Connection board responded in writing, acknowledging the commission’s concerns, explaining how the system’s troubles arose, and outlining steps it’s taking to stabilize its finances. The system’s letter, signed by the board’s citizen members, includes a “Corrective Action Plan” addressing problems with internal accounting controls and a financial plan showing how the board is cutting expenses and seeking new revenues.
Most of the issues raised in the commission’s Feb. 2 letter are not new. The LGC’s concerns are based on the system’s 2008-9 financial audit, which the board discussed at its Nov. 19 meeting. (See Nov. 19, 2009, “Auditor says cable system must show how it funds losses.”)
The system’s problems are well-known in both Mooresville and Davidson town halls, where elected officials have been discussing the system’s health and their decision to acquire it in December 2007. It was the subject of heated discussions at Mooresville’s recent Town Board retreat and at budget discussions in both towns.
LOSSES, BUDGET SHORTFALL
Davidson and Mooresville paid $60 million to buy the system and spent another $20 million to upgrade its cable lines and equipment. Altogether, they have borrowed $92.5 million to finance the system. The system has about 15,000 customers in the two towns plus Cornelius and parts of north Mecklenburg and south Iredell counties.
When the towns bought the former Adelphia Communications system in 2007, their initial projections envisioned it would pay for itself through 2012 or 2013, then start making money for them. Instead, the system’s losses continue ($6.4 million in 2008-9). And MI-Connection has turned to the towns for help, recently asking for $576,000 to cover a gap in its 2009-10 budget.
To cover the shortfall, Mooresville’s town board last week approved a $400,000 loan from town reserves. In February, Davidson trimmed its budget to come up with its $180,000 share, cuts that brought the layoff of one part-time employee at Town Hall and will keep the town from hiring a police officer and another full-time employee.
STATE WATCHING
The LGC’s Feb. 2 letter was signed by Sharon G. Edmundson, director of fiscal management in the State and Local Government Finance Division of the state treasurer’s office. The LGC is a state board that watches over local finances and borrowing.
The LGC approved both the towns’ October 2007 request to borrow $80 million for the system purchase (see Oct. 2, 2007, “Commission OKs cable financing”) and a second $12.5 million financing round in 2008. (See April 11, 2008, “Cable system seeks $12.5 million more.”)
The LGC said in its letter that it “noted signs of financial weakness because current liabilities exceeded liquid assets (cash, investments and receivables).” It said “the potential exists for cash flow problems to develop in meeting the system’s obligations to creditors, employees and citizens.”
“The board must take corrective action” to improve the system’s financial position, the letter said. The letter noted the auditors’ concern that the budget was not balanced and that the board had not approved budget amendments to account for expenditures that did not match the original budget.
MAKING CHANGES
MI-Connection officials say the board and the system’s third-party manager, Bristol Virginia Utilities, have already been taking steps to address the state’s concerns and to improve the system’s overall performance.
Since last year, the system has hired a new general manager and marketing staff, adopted budget amendments and enacted new accounting practices to improve internal controls. The system’s board also has several new members.
Several of those board members, including acting chairman John Kasberger of Mooresville, said the board’s letter outlines the system’s actions and they did not want to discuss it further. “At this point we’ll let the letter (MI-Connection’s response) stand for itself,” Mr. Kasberger told DavidsonNews.net. “We think it addresses the points made by the LGC.”
Davidson Town Manager Leamon Brice and Mooresville Finance Director Maia Setzer both said that so-called “audit letters” from the LGC are not uncommon. “That’s what they do,” Mr. Brice said. But he also said that he and Davidson Finance Director Eric Hardy have been watching the system’s finances closely.
The MI-Connection board’s letter to the LGC this week spells out in the clearest detail yet how the system has failed to meet expectations. Here’s a summary:
- The towns’ original business plan for the system assumed 8 1/2 to 9 percent annual subscriber growth. That was based on projections of overall economic growth and subscriber penetration numbers provided by former owner Adelphia to the bankruptcy court. Those figures turned out to be too low, and the economy soured, which has kept the system from growing, MI-Connection said.
- Not only is the system not growing, but it is also losing customers. MI-Connection said it had 4 percent fewer subscribers (676) than December 2007, when it had 15,826.
- Figures the towns were given in 2007 for both revenues and expenses proved inaccurate.
- The system was expected to lose money through 2013, the letter says. After that, it would begin generating “free cash flow” for the towns, even after debt payments. The letter to the LGC acknowledges that the system isn’t on track to meet those projections, though it does not offer new ones
MORE SUBSIDIES AHEAD
Both Mooresville and Davidson officials acknowledge that the system probably will require subsidies from the towns’ budgets in the coming years. Ms. Setzer, in Mooresville, says her town has savings to cover future cash calls from MI-Connection.
The situation is a bit more difficult in Davidson, which has a much smaller tax base and budget. Mr. Brice warned taxpayers in a recent town newsletter: “A shortfall is anticipated in the next four to five years and the towns will also need to make up this shortfall.” Until customer growth resumes, he wrote, “the towns will be required to subsidize MI-Connection.”
Just how painful things get for Davidson depends on how fast new customers begin signing up for MI-Connection, which faces stiff competition from phone and satellite services. Mr. Brice told DavidsonNews.net layoffs and other budget cuts remain a possibility as the town prepares its 2010-11 budget. “We’ll just try to find savings and be prepared for whatever we get,” he said.
CUTTING EXPENSES, ADDING REVENUES
Town and system officials say they have been working to get the system on track. Besides management changes and a marketing overhaul, MI-Connection has been cutting expenses. It has renegotiated its contract with Bristol Virginia Utilities, its hired system operator, and trimmed staff last summer. It also says it expects to save $50,000 a month by hiring staff instead of using outside contractors for installation work.
New revenues are also beginning to flow, in part by selling new products that weren’t possible on the old, obsolete system inherited from former operator Adelphia Communications.
MI-Connection says it is generating an additional $60,000 a month in revenues by starting to offer voice service. That number eventually should triple as the new product “matures,” MI-Connection says.
Meanwhile, MI-Connection is adding revenues in another new area that wasn’t part of the old system it bought: business accounts. In its letter to the LGC, the system says it is adding about 10 new commercial customers and about $1,500 revenues per month, and “we expected this number to double in the coming months.”
Large businesses are also a new target and a big revenue opportunity, MI-Connection says. The system has the ability to install fiber-optic cable directly to large businesses, which gives it a highly competitive product in the local market for high-speed data connections and high-capacity telephone trunk lines. “These products open up new and lucrative commercial markets serving large enterprise accounts that could not be served by our pre-rebuild infrastructure.”
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DOCUMENTS
Feb. 2, 2010, letter from Local Government Commission to MI-Connection board. (PDF)
March 8 letter from MI-Connection to the LGC. (PDF)
The powers that be knew from Day 1 that this venture was nothing more than their vanity for government expansion. Elected officials (and the appointed Town Manager of Davidson) chose not to listen to the voices of the governed, who overwhelmingly did NOT want government ownership of a private business enterprise. Now, they are left to dribble out the truth of the magnitude of the financial impact to the townspeople of Davidson and Mooresville. The $400,000 and $180,000 payments that have recently been approved will only grow worse as time goes on. What they have not told their constituents is that the bills will become orders of magnitude larger as principal repayments (which have not yet been necessary) plus interest will need to be paid, on an ongoing basis, for the next 20 years or more.
The recent audit by an outside evaluator suggested that MI-Connection needs to raise rates substantially to meet the standards of other well-managed businesses, … But will customers happily go along? I suspect that further rate increases will increase the rate of customer attrition.
Townspeople need to begin showing up at commission meetings and demand honest answers to these concerns. MI-Connection is not going to grow its way out of this debt morass and the taxpaying citizens need to be told the magnitude and time frame of their “investment.”
If the state were really concerned, they’d return the $400,000 they’re hanging on to.