Gaylord Overlooks “Substantial Risks” to City in Approving Taxpayer-Backed Telecom Bonds

FFM Follow Up: City Council votes to publicly release previously withheld analysis of financial risks--

Despite a memo from the city’s bond counsel warning of “substantial risks”, the Gaylord City Council has voted to guarantee to pay up to 16.5 percent of the debt service on $77 million of revenue bonds should the proposed RS Fiber telecom network fail to pay for itself.

The bond risk analysis prepared for the city at a cost of $1,500 to taxpayers was initially withheld from the public under a presumption of attorney-client privilege. Upon a request from the Freedom Foundation of Minnesota, the Gaylord City Council voted to waive legal claims and release the memo to the public.

The recent suspension of bond payments by officials in Monticello, Minnesota on their FiberNet telecom network has increased scrutiny of similar taxpayer-backed projects. Proponents of RS Fiber expect the network to start paying for itself after three or four years. To guard against default, however, the eleven cities and two counties participating in RS Fiber will contribute on a proportionate basis to a $4.5 million Debt Service Reserve Fund.

The two-page document highlights the potential downside of participating in an enterprise that will compete directly with several private providers already in the marketplace. The memo produced by bond expert Stephen Rosholt at the city council’s request warns the agreement “nearly doubles the City’s outstanding debt commitments”.

The blunt memo raises fundamental questions about the deal and its potential impact on the city’s financial stability. The memo strongly suggested Gaylord officials consider these key details:
¨ A commitment to paying as much as 16.5 percent of the total debt service on up to $77 million in bonds, more than any other city in the consortium.
¨ The city’s “fiscal capacity” to make large debt payments given its “relatively large amount of outstanding debt”.
¨ The potential impact on Gaylord’s bond rating or access to financial markets should the city fail to appropriate the revenue to make debt payments. “It may also be the case that the fact of entering into the sort of commitment reflected by the Shortfall Agreement would have a negative impact.”
¨ The possibility of additional legal exposure “in connection with litigation that could arise out of the offering of the bonds by the Joint Powers Board”.

The bond counsel’s analysis raises another problematic point—the issue of whether the city has a legal obligation to hold a referendum in order for citizens to authorize participation in RS Fiber. The Rosholt memo notes that state law “requires passage of a referendum in order for a municipality to construct a new telephone exchange” as planned by RS Fiber proponents. State law requires a 65 percent supermajority in order for a telecom referendum to pass. None of the participating cities or counties in RS Fiber has held a referendum.

“We understand the Joint Powers Board believes that the statute does not apply where the (telephone) switching is handled elsewhere. We do not agree with that conclusion,” the analysis pointedly states. “The City should consider requesting that a legal opinion be directed to it addressing that issue.”

The most recent estimates indicate the cost for RS Fiber bonds may be $77 million, a ten percent increase from previous estimates. Groundbreaking was scheduled to occur in August, 2012 but has been postponed until at least next spring.

RS_Fiber_Bonding_Analysis_9-12.pdf

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