Missed Connections

Monticello, Minnesota (not Virginia) is facing a potential default of the bonds it issued for its broadband network (The subject was put to referendum in 2007 and it passed with a 74% majority in favor of the system.) -- a system once envisioned as a potential model for other local governments to follow, but it’s system that today is failing to generate enough revenues to service $26.4 million of tax-exempt revenue bonds issued in 2008, and it is challenged by stiff competition from private competitors that lowered their prices to keep customers. With the system’s revenues falling short, the trustee has been drawing from various bond reserves to cover debt service payments. Between July 2011 and June 2012, the city, which issued the bonds and owns the system, covered debt service by loaning the project money generated by its liquor sales operations. Under no obligation to make up the shortfalls, Monticello, located just north of the Twin Cities, informed the trustee of its intention to halt that practice in June as it sought out a restructuring. Without any agreement between bondholders and the city on a restructuring, and with the city in default on bond terms for failing to raise rates to a level sufficient to cover debt service, trustee Wells Fargo Bank NA last month obtained a court order allowing it to not make a payment last Saturday for $883,000: the trustee is preserving existing reserves to cover various expenses which could include a potential legal battle with the city. The city’s decision to stop supplementing debt service prompted the trustee’s decision to undertake a trust instruction proceeding in Hennepin County District Probate Court. Proceeds of the bond were used to finance the city’s costs of acquiring and construction a fiber optics broadband communications network to provide cable television, internet access, and telephone services to businesses and residents; but the system entered July with just one-third the number of customers projected in the bond offering documents. The system was mostly complete as of March, providing more than 1,000 voice lines, 1,000 video connections, and nearly 1,400 internet connections. While the city is not under obligation to repay the bonds from any source other than the system’s revenue, the indenture does require it to establish rates and charges from its users to cover debt repayment. City financial reports note that the city failed to comply with that provision for the fiscal year ending Dec. 31, 2011. Such a move would likely cause more customers to turn to the competition. The reports showed the system’s expenses exceeded revenues by more than $2.6 million in fiscal 2011. Monticello reported in its own notices posted on EMMA earlier this year that it was “actively undertaking all reasonable actions and exploring all available options to make the system” financially successful while continuing to provide high quality services to its customers. Monticello is exploring strategic options with the goal of reducing costs, improving revenues, restructuring or refinancing debt.