Eleven Utah Cities in Big Debt from Muni Telecom Network

Eleven Utah Cities in Big Debt from Muni Telecom Network
December 13, 2010

Eleven Utah cities have banded together to provide taxpayer-backed telecom services through a fiber-optic network they call UTOPIA. Unfortunately, UTOPIA has put these cities in a debt dystopia as their leaders learn commercial success is a much more elusive target than they ever imagined.

UTOPIA, the Utah Telecommunications Open Infrastructure Agency, is a venture by the cities of Tremonton, Brigham City, Perry, Layton, Centerville, West Valley City, Murray, Midvale, Lindon, Orem, and Payson. It has been riddled with mismanagement and almost no progress to show for more than $500 million of taxpayer-backed bonds. Taxpayers in the member cities must pay the principal and interest on UTOPIA’s bonds if UTOPIA’s operating revenue is insufficient to make their bond payments.

High Costs, Few Customers
The cities have a combined population of 438,273, yet in the eight years since UTOPIA was formed it has attracted only 10,000 business and residential customers. With so few customers, the venture’s operating expenses have always exceeded its operating revenues.

As a former member not only of the Payson City Council but also of the UTOPIA Board of Directors, Brent Grotegut has seen the venture from the inside.

“UTOPIA refuses to accept accountability for their failure. Instead of embracing transparency, UTOPIA does not answer the simplest financial and operational questions, even when members of their Board are asking,” Grotegut says.

Three Bond Issues
Over the course of UTOPIA’s eight-year existence, the cities involved have issued bonds on three separate occasions. UTOPIA is now so far in debt that, according to its audited financial statements for 2009 (which does not include the last round of borrowing), subtracting its debts from its assets leaves UTOPIA $126 million in negative net assets. Another $20 million operating loss is projected for 2010.

When UTOPIA was first proposed, its backers worried the private sector would not provide the ultra-high-speed bandwidth they said was necessary for their communities to succeed in the global market. They created UTOPIA to run a fiber-optic cable to every home and business in their cities, arguing this connectivity would make their cities more attractive to businesses that consume bandwidth by the terabyte.

With so much high-speed bandwidth in their communities, UTOPIA and its member cities argued companies would flock to them.

In that heady atmosphere, they repeatedly claimed taxpayers would never have to redeem their backing of UTOPIA’s bonds because residents and businesses would sign up in droves. They said operating revenue would not only cover the cost of repaying the bonds but even become a new source of revenue to the member cities.

‘An Utter Disaster’
“UTOPIA has been an utter disaster,” says Steve Turley, a member of the Provo city council, which runs its own municipal network, iProvo. “Municipal telecom cost Provo taxpayers millions upon millions of dollars. But at least our community is now wired. UTOPIA just wastes money, and their taxpayers get nothing in return.”

As with virtually every other municipal telecom system in the country, the dreams of success have been dashed. Members of the city councils have repeatedly increased UTOPIA’s debt to keep the network operating and make a couple of more years of debt service payments.

‘Head in the Sand’
In theory, using revenue from new bonds to repay older bonds was supposed to give UTOPIA the time to attract enough subscribers to pay for the operational and debt service costs. In practice, every time UTOPIA has run out of operating capital and debt service from the last round of taxpayer-backed bonds, it has asked for another round of bonding.

“UTOPIA’s ‘head in the sand’ routine guarantees that they will be asking their member cities for a fourth, fifth, and sixth round of publicly backed bonding,” says Grotegut. “And like previous rounds, the next rounds will simply be designed to keep the lights on.”

In June 2009, UTOPIA announced its member cities would have to pay about $12 million per year towards UTOPIA’s bonds. Those payments began in February 2010 and will continue for 30 years.

Despite this public money, UTOPIA is still unable to cover operating expenses, let alone debt service obligations, out of operational revenue.

Three Cities’ Cautious Decision
In 2010 most of UTOPIA’s member cities entered into a third round of bonding for $62 million. This time, however, Payson, Tremonton, and Perry declined to participate. The remaining cities are soldiering on with the third round of taxpayer-backed bonds.

UTOPIA and its member cities hope this latest round of bonding will succeed where previous rounds have failed.

Despite the many financial problems and low demand for its services, UTOPIA has received numerous awards for its municipal telecom efforts, including the 2010 Cornerstone Award from Broadband Properties magazine. Emphasis on efforts, not results.

Howard Stephenson (howard@utahtaxpayers.org) is president of the Utah Taxpayers Association.