North Carolina Taxpayers Face Bailout of Muni Broadband Service

North Carolina Taxpayers Face Bailout of Muni Broadband Service
June 9, 2010

City leaders in the North Carolina cities of Davidson and Mooresville recently informed residents that the $92.5 million cable TV and broadband system the towns own jointly will require an additional $6.4 million subsidy from taxpayers next year.

The need for additional funding, announced in May, follows a recent $576,000 cash call on the towns from the municipal network called M-I Connection (pronounced “My Connection”) to keep the system operating for the remainder of the current fiscal year.

Local officials and their consultants pitched the system to taxpayers as a nearly risk-free investment in 2007.

Bold Early Promises
“The potential growth of customers, and therefore profits, is astronomical,” Davidson Town Manager Leamon Brice declared in June 2007. Brice also answered one citizen question about the risks associated with the deal by saying that the town could be tempted to move broadband profits to the town's General Fund.

“But we can control that,” Brice said. In fact, the cash flow has gone in the opposite direction.

Still, such arguments about the moneymaking potential of running a cable system spurred the towns to deny transferring the old Adelphia franchise to Time Warner Cable when Adelphia went bankrupt. The towns opted instead to issue debt and take out loans to raise cash to operate the system themselves. Projections made to the Local Government Commission to win approval for the deal forecast 8 percent annual subscriber growth.

Subscriber Rate Remained Flat
Instead, subscriber growth has been flat to nonexistent. The latest figures show only 15,235 subscribers, several hundred fewer than in the Adelphia days. Even a 9.4 percent increase in first quarter 2010 revenue—driven by growth in telephone accounts—was erased by a 6.5 percent increase in expenses. This meant a $1.7 million loss for the quarter, dashing any hope of servicing the debt with revenues from subscribers.

“It’s sad. They should’ve seen this coming,” observes Raleigh telecom attorney Marcus Trathen, who is also counsel for the North Carolina Cable Telecommunications Association, which includes Time Warner Cable as a member.

“The situation with M-I Connection is especially unfortunate for the citizens of Mooresville and Davidson who never were afforded a chance to vote on whether to go into competition with private industry and incur this debt,” Trathen added. “When a city can’t let golf carts drive on public roads without going to the legislature, but a city can incur $92 million in debt to compete with private industry without so much as a vote of the local people, something’s wrong.”

Upgrades Proved Costly
The towns paid almost $6,000 per subscriber to acquire and upgrade an old and neglected system, dwarfing the $3,800 per subscriber value a bankruptcy judge set for the franchise in 2007. Town officials admit the current value only may be about $3,000 per subscriber, while Trathen pegs the system’s value at a mere $30 million—about $2,000 per subscriber.

As a result, Trathen says, the towns are stuck. They either must repay the system’s debt with general fund revenues or default on the loans. Brice recently spelled out the dire consequences of walking away from the M-I Connection debt.

“That would have severe repercussions,” Brice wrote in a town newsletter published in May. “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.”

Brice has suggested that the state might come in and take over town government and raise taxes to repay the debt.

Fishing for Funds
Right now, Davidson officials are focused on trying to figure out how to come up with the town’s $2 million share of the $6.4 million M-I Connection needs. Mooresville is responsible for the remaining $4.4 million, as it owns 68.75 percent of the system.

Davidson’s choices come down either tax increases or service cuts—options never mentioned when the cable deal was being put together.

At the same time, Davidson and Mooresville officials are lobbying town residents to sign up for M-I Connection in order to avoid those negative fiscal impacts. Davidson Commissioner Laurie Venzon has even suggested that civic duty compels residents to subscribe to M-I Connection.

“All we’re saying is support your local business,” Venzon said at a public meeting in May, according to DavidsonNews.net. “We’re not asking you to sign up for a crappy service. We’re not asking you to sign up for something that’s astronomically priced.

“I’m asking you to support it so that the revenue will be there, so we don’t have to increase taxes or make any more cuts,”

Davidson’s total budget is only about $7 million.

Jeff A. Taylor (jtaylor82@carolina.rr.com) edits the John Locke Foundation’s Meck Deck blog and is a contributor to Carolina Journal. Reprinted with permission.