Patchwork UTOPIA: See UTOPIA's coverage in 11 cities
Each city has maps showing where the residents can sign up for Utopia.
UTOPIA: Fiber-optic nirvana or a nightmare with no way out?Technology • Eleven Utah cities are shackled by debt as the light-speed broadband network continues its decade long struggle to become a success.
At worst, the Utah Telecommunication Open Infrastructure Agency, or UTOPIA, is a half-billion dollar fiasco menacing city budgets in four counties.
UTOPIA already has obligated its backing municipalities to massive bond debt, spawning tax hikes, property liens and budgetary headaches in several cities. The network that promised to spur economic growth from Tremonton to Payson is barely 40 percent complete, and large portions of the grid remain offline. In one dire example, Perry has $2 million in UTOPIA lines laid under its streets, none of them operational.
UTOPIA has fewer than 10,000 subscribers, between a tenth and a quarter of its potential customer base. The low “take” rate has translated into nine consecutive years of operating losses — and counting.
While UTOPIA managers remain sunny on the municipal network’s outlook, recent revelations draw questions about its future into sharp relief:
Can UTOPIA pull itself out of a financial abyss and at least break even or should the cities cut their losses and sell the network’s assets for the high-tech equivalent of scrap as some critics suggest?
Whatever the answer, there appear to be few ways out.
—
Light-speed promises • UTOPIA uses fiber-optic instead of copper coaxial cables like Comcast, now Xfinity, or telephone wires like CenturyLink, formerly Qwest. Fiber transmits data through pulses of light, boasting speeds up to 100 times faster than competing technologies.
Originally conceived by 16 Utah cities but ultimately funded by only 11, the project was among America’s first open-access, fiber-to-the-home networks, an idea originally promoted to city sponsors as a moneymaking venture. A host of problems — overly rosy projections of customer demand, miscalculations on borrowing and construction strategies, poor choice of contractors, business-model flaws and, some say, flat-out mismanagement — have hobbled the public agency almost from its launch.
In fiscal 2011, UTOPIA lost $18.8 million, while a newly created sister agency shed an additional $916,236. As of June, UTOPIA’s bottom line — total assets minus liabilities — had drifted $120 million into the red.
Having already bound supporting cities to cover more than $475 million in potential debts with their sales tax revenue over the next three decades, UTOPIA has set up the Utah Infrastructure Agency, or UIA, to borrow more money. That new agency is halfway into issuing a second round of $60 million in debt, this time to be funded by future city franchise taxes — ostensibly to finish the UTOPIA network.
Yet a recent state audit found that rather than being used to build infrastructure, at least part of the new cash stream is being spent on UTOPIA’s prior debts and operating expenses.
“The use of debt to cover the cost of operations and debt service is symptomatic of an organization facing serious financial challenges,” auditors wrote in August.
The audit has reignited allegations of waste, shortsightedness, bad decisions and a lack of transparency at UTOPIA, as well as further shaking of confidence in the project.
“They have borrowed money to pay back money that they have borrowed,’’ said state Sen. John Valentine, R-Orem, who will push legislation to tighten UTOPIA’s accounting practices when state lawmakers convene in January. “It’s just getting deeper into debt that you can never get out of.’’
UTOPIA managers say they have new plans for digging out of the hole but won’t, as yet, make them public. They declined repeated interview requests from The Salt Lake Tribune.
—
Is there an off-ramp? • The nature of UTOPIA’s finances leaves cities no easy exits.
Over its 10-year history, UTOPIA has switched network-construction strategies many times. What remains is a fiber-optic grid nearly finished in some communities and just begun in others, with large swaths isolated or “stranded’’ from the rest.
Liquidating the network now — by selling it off in pieces to individual cities, telecommunications companies or existing Internet service providers — likely would yield pennies on the dollar, while doing little to lessen UTOPIA’s debts.
The original 11 founding municipalities are legally pledged to cover UTOPIA’s bonds, an initial $185 million liability that, if UTOPIA keeps bleeding, will cost cities more than $475 million in annual sales tax payments growing by 2 percent yearly, through 2040. UTOPIA owes another $16 million borrowed from member cities to cover various costs over the years. Eight cities have signed on for more UTOPIA-related debt, backing the additional $60 million in UIA borrowing by promising shares of future franchise tax revenue, levied on businesses.
And because of the way much of UTOPIA’s debt is structured, it is almost impossible to refinance, even if managers wanted to take advantage of today’s historic low interest rates.
In 2004, UTOPIA sought to borrow $85 million to pay off an earlier round of $30 million in debt and to raise added capital for laying more fiber cable. Ignoring advice from their bond attorney, senior agency managers sought a variable interest rate loan, instead of securing a fixed interest rate.
Documents indicate the variable-rate approach was pushed by officials with DynamicCity, a Lindon-based consulting firm that helped devise UTOPIA’s early network build-out plans. The loan gave what UTOPIA’s bond attorney Laura Lewis described as “a huge advantage’’ to Bank of America, which underwrote the transaction.
In interviews late last year, Lewis told state auditors she clashed mightily with UTOPIA’s then-General Manager Paul Morris and DynamicCity representatives over their insistence on the deal. It was, Lewis said, “the only time I ever screamed at a client’’ and that she “objected as strongly as she ever has in her career.’’ The lawyer reportedly later infuriated Morris by attempting to take her concerns to UTOPIA’s board.
Managers went ahead anyway, even though the variable-rate borrowing came with another major string attached. Lenders locked UTOPIA into an interest rate swap, a complex debt instrument amounting to a hedge against dramatic swings in interest rates. With the huge drop in rates since then, the swap has, in effect, turned into a poison pill, requiring UTOPIA to swallow at least $52 million in penalties if it sought to refinance the loan.
—
City hopes and doubts • A core of prominent municipal leaders stands firm on UTOPIA’s future, for now. Layton Mayor Steve Curtis, for example, says the network has helped his city land businesses that otherwise would not have come, citing precision aerospace-components manufacturer Janicki Industries. With its network finished, Centerville has entertained building a high-tech business park nourished by UTOPIA bandwidth.
But cracks have developed in city support for the network. Three cities —Perry, Tremonton and Payson — withdrew from UTOPIA’s second round of borrowing. Orem leaders face vehement citizen opposition over property tax hikes related to UTOPIA costs.
Scores of Brigham City residents rebelled after learning that special-assessment liens had been placed on their properties to pay for UTOPIA hookups. Brigham City Mayor Dennis Fife was elected in 2009 on an openly anti-UTOPIA platform. With that city’s network more than 90 percent built, he now touts its benefits but remains deeply concerned about UTOPIA’s leadership and mounting debts.
“How much money do you keep putting after it?’’ he asked. “UTOPIA management is still taking some of the same approaches and still has some of its original board members.”
While refusing to comment publicly, UTOPIA Executive Director Todd Marriott and board Chairman Kane Loader, who also is Midvale’s city manager, have said in the past they have a five-year strategic plan that will enable the company to break even in 2016.
Auditors noted in their report that few have seen the details.
In a statement released to The Tribune, Loader and UIA Vice Chairman Alex Jensen, who is city manager for Layton, said they expect the plan to be ready soon for review by cities and the public. Discussing it before that, they said, “is premature.’’
“Our attention is focused on refining our plan for moving the network forward successfully, and we have no new information to report at this time,’’ UTOPIA’s managers said.
In a letter responding to the August audit, Loader pointed to major steps in the past three years addressing financial and management problems.
A new management team took over in mid-2008 and terminated contracts with prior consultants and contractors building the network. Day-to-day operations are now handled in-house, instead of being farmed out to various city officials. A new pricing structure for customers is in place to boost revenue per user, including charging a $2,750 installation fee instead of it being free. UTOPIA is setting up committees to allow more involvement from its member cities.
There are separate calls to tighten budget controls and for altering state laws that require UTOPIA to operate as a wholesaler, instead of being able to market and sell its bandwidth directly to end customers.
But key lawmakers, especially some whose districts encompass UTOPIA’s member cities, voice fears the audit may have exposed only part of the agency’s distress — and that more drastic action is needed.
“It feels like the direness of the situation is very much understated,” Rep. Jim Nielson, R-Bountiful, said during a legislative hearing in September. “I would have hoped for a more bold recommendation that says, ‘We should shut it down. We should find a way to get out of this.’ ”
That said, there are few options even for legislators. Defaulting on the bonds or a state bailout for UTOPIA cities appear highly unlikely.
“The Legislature will not have state taxpayers footing the bill for the foolish decision by the 11 cities that pledged their revenue to this venture,’’ said Royce Van Tassel, lobbyist for the Utah Taxpayers Association and perhaps UTOPIA’s staunchest critics.
One of Utah’s Internet pioneers has called for city ballots to let citizens decide if supporting UTOPIA’s build-out is worthwhile, likening network investments to big-ticket taxpayer expenditures on transportation, power and water systems — vital public facilities that are rarely profitable.
“Fiber optics are the endgame for all communications,’’ Pete Ashdown, founder of Salt Lake City-based XMission, Utah’s first Internet service provider, wrote in a recent open letter in support of UTOPIA. Voters, he said, “should decide whether open fiber networks should sit with roads, water and sewer as an essential and cohesive part of city infrastructure.’’
Tribune reporters Steven Oberbeck, Pamela Manson, Cathy McKitrick and Cimaron Neugebauer contributed to this story.
—
What is UTOPIA?
Short for Utah Telecommunication Open Infrastructure Agency, UTOPIA is a municipal fiber-optic Internet network for residents and businesses. Being built in 11 Utah cities, it has download and upload speeds up to 100 times faster than Xfinity’s cable Internet or CenturyLink’s DSL network. Customers buy broadband service from independent Internet service providers contracted with UTOPIA to use its open network.
No comments:
Post a Comment