City’s Telecom Boondoggle Still Costing Taxpayers Millions

City’s Telecom Boondoggle Still Costing Taxpayers Millions
February 19, 2014

After spending nearly $50 million on a telecommunications system less than 10 percent of the population uses, Burlington, Vermont is asking its taxpayers for $10.5 million more.

The city has an unpleasant choice: Dump the debt directly onto the tax rolls or defray some of it with an unlikely $6 million loan at interest rates inflated by a municipal credit rating downgraded three times because of all the borrowing for Burlington Telecom.

Although Burlington taxpayers will be living with and paying for the mistakes of its municipal government for years, highlighted by a notorious misappropriation of $16.9 million from the general fund, it could have been worse.

Bank Offers Settlement Deal

CitiBank, which made the initial $33 million loan on which the city defaulted, is asking Burlington to repay just $10.5 million.

The settlement must still be approved by the city council, a majority of whose members support the agreement, and the Vermont Public Service Board. Burlington Mayor Miro Weinberger has also voiced his support for the settlement.

Based on the settlement and the city’s past credit history, Moody’s Investors Service may reduce Burlington’s credit rating for a fourth time in the Burlington Telecom era, a downgrade that cost taxpayers $55,000 in added interest during the first year of new borrowing in 2013.

As early as August 2013, Moody’s warned, “Moody’s expects that any obligation borne by the General Fund could adversely affect the city’s credit profile.”

‘The Evidence Speaks for Itself’

“I think the evidence speaks for itself,” Andrew Moylan, a senior fellow at the Washington, DC-based R Street Institute, told Vermont Watchdog. “Funneling millions of dollars in funds into a failing business in violation of the city charter, repeatedly failing to meet its targets in terms of build out, and potentially imposing large costs on taxpayers when these systems are pitched as something that aren’t going to be a burden on taxpayers.”

This municipal foray began in 2007 when Burlington’s elected officials decided to finance public telecommunication where no system existed before. By 2009, the city had exhausted a $33 million loan from CitiBank.

Taxpayers were unaware until 2009 that the city was also burning through $16.9 million transferred without public knowledge or approval by Jonathan Leopold, the city’s chief administrative officer.

Leopold had violated Condition 60, a state law requiring approval from the Public Service Board before money could be withdrawn from general funds for such a telecom project.

General Fund Treated Like Loan Fund

At the time, Leopold argued the use of general funds was a kind of loan to be repaid when the city borrowed enough to replace it. The city council, however, refused to authorize the piling on of any new debt for Burlington Telecom.

Leopold resigned, but he wasn’t charged with committing any crime. Because he didn’t take money from the general fund for himself, the Vermont Superior Court found he had “invested” the mismanaged funds in the city’s existing infrastructure and wasn’t responsible for repaying any of it.

“Mr. Leopold acted at all times as an officer of the City. He authorized the expenditures from the pooled cash account in order to pay the expenses of BT. There was no ‘transaction’ between himself and the City which could support a claim of fraud,” the court concluded.

What were Burlington taxpayers buying with all this investment? As recently as Feb. 4, the Burlington Free Press reported Burlington Telecom had only 4,000 subscribers, or about 9.5 percent of the city’s total population. According to the National Broadband Map, the telecom company has the capacity to reach 38,500 residents, or about 90 percent of the city’s population.

Can’t Market System, Repay Loan

Expanding the subscriber base has so far proven unsuccessful, as the Burlington Free Press reported, because the city hasn’t the money to spend marketing the service.

Burlington also doesn’t have the money to repay its initial loan, hence CitiBank’s lawsuit and the subsequent settlement. City officials have spoken of a $6 million loan to pay off part of it, but they have refused to say who the lender is and describe the terms of the loan.

Those same officials have floated the idea of selling Burlington Telecom, but the costs of broadband and subscriber improvements required by law make a purchase prohibitively expensive.

‘None of This Was Necessary’

Current city officials see the settlement as a starting point to correct years of mistakes.

“I am pleased to announce to the people of Burlington that with this agreement, there is now for the first time a clear path to resolution of our BT challenges,” Weinberger said in a news release. “The agreement—once completed in the months ahead—will accomplish all the goals the City has pursued over the past two years.”

Moylan agrees the settlement likely forestalls an even worse disaster, but he notes local taxpayers are suffering from a string of very poor decisions by city leaders.

“The sad reality is that it could have been substantially worse for the city,” said Moylan, the former vice president of government affairs at the National Taxpayers Union. “That’s small consolation when none of this was necessary in the first place and all of it stems from what as a major mistake to get into a very expensive and difficult-to-manage project.”

 Jon Street (jstreet@watchdog.org) reports for Vermont Watchdog, where a version of this article first appeared.