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HomeMy WebLinkAbout2005-10-24 AFN Options Committee Draft Minutes and PacketAFN OPTIONS COMMITTEE MEETING OCTOBER 24, 2005 - PAGE 1 OF 4 CITY OF , L AFN Options Committee Meeting Draft Minutes October 24, 2005, 7:30am Siskiyou room, CDES Building, 51 Winburn Way CALL TO ORDER Michael Donovan called the AFN Options Committee meeting to order at 7:33 am on October 24, 2005 in the Siskiyou Room of the CDES Building, 51 Winburn Way Ashland, Oregon. ROLL CALL Committee members Barth, Collins, Donovan, Mace, Mackin, and Shultz were present. Councilor Russ Silbiger was present. STAFF PRESENT: GINO GRIMALDI, CITY ADMINISTRATOR LEE TUNEBERG, ADMINISTRATIVE SERVICES AND FINANCE DIRECTOR MICHAEL AINSWORTH, CABLE TV MANAGER C I N DY HANKS, PROJECT MANAGER BRYN MORRISON, ADMINISTRATIVE ASSISTANT REVIEW COMMITTEE MINUTES Approval of minutes dated October 17, 2005 Mace/Mackin ms to approve minutes as presented. All Ayes. COMMITTEE WORK SESSION The Committee discussed the charge directed to them by Council. They would like to put their energies into the most viable options that Council should review. The Committee discussed that they should narrow the previous eight options down from the last meeting. It was discussed that Council should be presented with the options not chosen as well with the rationale as to why they were not chosen as a viable option. Councilor Russ Silbiger specifically pointed to the option of Keep/Enhance and that it should be shown why if it is not chosen by the Committee as an option for Council. The Committee discussed assignments that they had worked on. Paul Collins, Rick Barth, Lee Tuneberg, and Richard Holbo met and discussed the Common Carrier option. Paul Collins and Rick Barth addressed the Committee on their assignment. They gave the goal of the common carrier was to create a local competitive market for AFN OPTIONS COMMITTEE MEETING OCTOBER 24, 2005 - PAGE 2 OF 4 services delivered over the AFN local distribution network. They added that citizens would retain ownership of AFN while services are owned by private enterprise. There would still be other networks so it would not mean that the City is the only player. They added that the keys still need to be the services. ISP's and Video are the bigger questions and what channels would the provider want to offer. They added that there has to be the motivation to do this option and the City would need to look at the competition, the costs that may increase as a result, and the possibility of a monopoly being created. They were not able to find a success comp for this option. The short term upside for this option is that the City would not have to put any money out, and the long term upside is that it would avoid inviting a monopoly to the City. The Committee discussed that the option is financially unstable and the revenue potential would be risky. The Committee discussed that if the City were to choose the Enhance option, the Common Carrier could be the path that they could chose for AFN. The Committee discussed that the options are not all risk free and the need to develop a different product and community support. Staff asked the Committee if further detailed research was needed for this option. The Committee chose to place this option as a fall back option and not as one of their first choices for their report to Council so no further research was needed. The Committee discussed the Keep and Enhance AFN option. Paul Mace, Committee member spoke to the research done. See attached. He pointed to the change, debt, financial differences, revenue opportunities, and the annual and future impact on the City and community finances. This option still leaves the City the debt service payments. This option assumes that for success, the new director would have to create more revenue. The liabilities would not change. The Committee asked staff for the savings to the community for AFN customers for lower rates and Charter customers. The Committee added that these figures are important to present to Council. Staff will provide. The positive and negative financial impacts on the community to this option were discussed. The Council would have to allow the new director to do what was needed and make decisions in a business like manner. The Committee questioned if results would be different if the director was not required to submit everything to Council and subject to government entity requirements. The Committee discussed that the operation of this option would be difficult. The Committee discussed the Spin Off option. Mr. Mace spoke to his research and handout provided. See attached. He pointed to the lower than market rate the City is proposing to hire the new director at and cautioned that the City would get what they pay for. Mr. Tuneberg spoke to the internal charges. The total budgeted for 2006 is $549,000 and Central Services is $486,000 of that. Mr. Mace asked Mr. Tuneberg for a breakout of the Central Service charges. Staff will provide. The $2.6 million figure as a total was correct, excluding the debt service. AFN OPTIONS COMMITTEE MEETING OCTOBER 24, 2005 - PAGE 3 OF 4 Regarding the Keep and Enhance option, Mr. Mace asked staff if the City would be prepared to allow the new AFN director to make decision on services in association on internal charges and if the new director would be able to approve contracts. Gino Grimaldi, City Administrator responded that the director would not. Mr. Tuneberg added that they will provide a comparison on cost if the entity went out and bought those services. Mr. Grimaldi asked for an evaluation on enhancement options. Mr. Mace responded that they could generate wonderful things that they could do, but could not point to anyone making money doing those things now. Mr. Grimaldi suggested looking at the industry and what is reasonable for penetration to understand the upside potential for business. Mr. Mace responded that Council is not in the position to debate on what kind of services would make AFN valuable to the community and that should be up to the director. The Committee discussed options that will be eliminated. The only options left were Sell and Spin off. See attached. The Committee discussed that they don't see how AFN will be managed in Keep and Enhance, and Status quo and that was why they eliminated those options. The Committee discussed positives and negatives of the Lease option and that they see it as a fall back option. The Committee discussed the Spin Off option and the board of directors that should be chosen. The splitting apart of the construction and operation costs was discussed. It was discussed to split the $9 and 6.5 million and that the new entity should be given $700,000-$800,000 in initial capital and be responsible for paying it back. Then the City would assume that $9 million was a gift to the community. Mr. Mace stressed the community support that would be needed for this option. The contract should include that failure to meet the financial requirements would reverse the assets and control back to the City. Kevin Shultz and Don Mackin reported on their meeting with Gino Grimaldi on the Sell option. They met with a perspective purchaser of AFN and will have discussions with other interested parties soon. Their recommendation was if the City received an offer in the higher amount of the range specified in previous meetings, they should enter into a sale quickly. They did not receive specific number from the company, but the company did agree with the valuation range. They cautioned if the City pursues the Spin Off option first, they might lose leverage with buyers. The Committee discussed that the City should set in motion the process to establish the legal ground work to establish a board of directors for a non profit entity that would be interested in AFN. They should charge staff to enter into open negotiations for a sale as well and Council would have to choose which option to accept. The Committee discussed urging the Council to begin both processes simultaneously showing that they are prepared to make a decision. AFN OPTIONS COMMITTEE MEETING OCTOBER 24, 2005 - PAGE 4 OF 4 Members of the Committee will prepare a comparison matrix and narratives on both options. The Committee will meet again on Thursday, October 27 at 7:30 am. Kevin Shultz, Paul Collins, and Paul Mace will work together to develop the report that will go to Council. The Committee discussed with staff possibly presenting the report to Council on November 1st. Due to time requirements for the packet, they will defer until November 15t" to allow enough time for the report to be in the packet. The Committee decided to meet the week before the 15t" to review all documents that will be presented to Council. Chairman Michael Donovan would like to defer commenting to the press until the following week and will be the representative from the Committee that will speak to the press. NEXT MEETING(S) Next scheduled meeting October 27, 2005 at 7:30 am ADJOURNMENT The meeting was adjourned at 9:40 am. Respectfully Submitted, Bryn Morrison Administrative Assistant Administrative Services and Finance Department Keep and enhance AFN The Change: The City will retain AFN as a city department and will hire a new director who reports to the City Manager. The Debt: The City will continue to pay principal and interest on the $15.5M debt over the next 15 years. The Financial Differences: Expenses Public Enhanced Public Savings (loss) Programming 8001000 800,000 0 Personnel M mt 260,000 26000 0 Tech Staff 40000 40000 0 Marketing & Promotion 2101000 210,000 0 Central Services 4671000 46700 Other 4631000 46300 0 Total 20000 2001000 0 Debt service 1,400,000 1140000 0 Total Expenses 510001000 51000,000 Total Revenue 20000 20000 Net Operating Profit (loss) (I ,400,000) (I ,400,000) Net Annual cost to the City of this option: $15,500,000 plus interest over 15 years. Total Annual Savings: $0 Programming: none. The cost of programming scales with the subscriber base. Personnel: Hire a new director below market rate (currently proposed as $80 + benefits). Ashland city employees, covered by PERS, are typically calculated at salary plus 45-50%. Marketing and promotion: depends upon Direction from Council and City Manager with advice of new director. Central Services: no immediate change. In time, increases as revenue scales. Revenue opportunities: A number of revenue opportunities have been identified in the past. The most significant, outlined in the Navigant study, was a potential for $305,000 in additional revenues from retail ISP services. $100,000 is a more reasonable number. There is also an indication that comparable municipal services, such as that of Spanish Fork, Utah, can achieve 65% market penetration for cable. This could represent an additional $150,000 in gross revenue for the new entity. A more conservative estimate would be that existing revenue per customer could slowly rise towards a better number. However, there can be no assurance that these and other opportunities will be quickly converted to improved revenues, or will result in increased positive cash flow in the near term. Annual Impact of change on City of Ashland finances: ($1,400,000) debt service plus continued general obligation to cover any shortfall in revenue. Operating expenses: no savings. Rate increases scheduled for January will eliminate at least some, and perhaps all of the projected operating shortfall in 2005-06 while still leaving subscriber prices below valley and national averages in all but the premium tier. Central Services: City obligation scales with AFN revenue. Other City Services: negligible savings IN all three of these categories, AFN already pays for any city services it consumes, such as use of electrical department personnel for maintenance or repair. In theory, there could an increase in City staff who currently serve in support AFN, if it grows. Debt Service: The $15.5M bonded debt to be repaid with interest over 15 years. Future Liabilities: Should the new entity fail to meet expenses, the City will make up the difference from the general fund or other fees. Other Financial Impacts on the community: Positive: • Because competition with Charter and others will be assured, community members can expect Ashland rates will remain below those charged other subscribers in the Rgue Valley. This has already resulted in $N.0 Million dollars in savings to AFN subscribers over the last 6 years and $N.0 savings to Ashland citizens who subscribe to charter. • Assuming the new entity adopts the new rate scheme, Ashland subscribers will continue to pay $N.OM less than subscribers outside the city limits. Negative: • AFN will remain subject to public meetings laws, public procurement and public process in general, severely constraining its competitive edge and increasing costs. • The new AFN director will become part of a management environment geared towards stewardship and maintenance, not competition and cost control. • As a public official, the new director may be constrained in their role of speaking as advocate of AFN's mission. • AFN will, by its nature, continue to consume disproportionately large amounts of attention from Council and Staff, relative to its size and budget. • If AFN chooses to compete with local ISPs by offering internet services, indications are one of the seven local ISPs, employing three people, may become untenable. • Based on the past rate differential, the under -market pricing for Charter subscribers in Ashland may come to an end. There is no telling what Charter will do. And there is no guarantee that AFN will not have raise rates. Other Benefits: The community will remain a competitive market for telecommunications. Retention of a single -billing relationship with City Utilities will enhance subscriber acquisition and churn Other Risks: • Debate, or lack thereof, about its AFN's very existence will remain a political issue for years to come. Citizens who object in principle will always, rightly, be able to make an issue of AFN, negatively impacting public perception and AFN's fortunes. • The new entity may fail to grow revenue faster than expenses, presenting budgetary challenges and eroding political support. • Charter may react in ways that leverage its deep pockets, affecting churn or attainment of subscriber growth targets. • Charter may be sold to a more effective competitor. • Other competitors may emerge, constraining profitability as well as growth. Spin-off AFN to Non-profit Corporation The Change: The City will create a not -for profit entity for providing telecommunications services for the Ashland Community as a public service. This new entity will have the city as a sole member, similar to the Community Hospital, with a board initially appointed by the Mayor and approved by the Council, but in succeeding years being self-perpetuating to prevent disruption and loss of focus. The board will hire a CEO and oversee performance. The Board and the CEO will be charged with leveraging the unique strategic marketing advantages of this entity: that decisions regarding programming and services remain under local control, guided by a public service motivation, not shareholder profit. The new entity will provide an annual report to the Mayor and Council outlining its performance in achieving its mission and the outlook for the year to come. The Debt: The new entity will assume the $6.5M of debt that resulted from operational expenses and initial debt payment. The city will include the $725,000 borrowed for initial debt service payment in the assets it transfers to the new entity, to provide adequate startup capital. The City will contribute the $9.OM in capital assets and construction costs to the new entity. The city will continue to assume responsibility for the annual bond payments of approximately $1.4M. The new entity will assume responsibility for annual interest payments on the $6.5M and will retire the principal within 20 years. The new entity will be required to maintain certain financial and service standards, failing which the assets shall revert to the city or to another agreed upon operating entity. The Financial Differences: Expenses Public Private Non -Profit Savings (loss) Programming 80000 80000 0 Personnel Mgmt 260,000 160,000 1001000 Tech Staff 400,000 40000 0 Marketing & Promotion 2101000 2001000 101000 Central Services -- Rent 501000 Legal 451000 Accountin 3 0,000 Misc. 75,000 467,000 200,000 2671000 Other 463,000 50900 (46,000) Total 2160000 21270,000 32600 Debt service 11400,000 325,000 L0751000 Total Expenses 51000,000 21595,000 Total Revenue 2160000 2160000 Net Operating Profit (loss) (1,400,000) 5 000 Net Annual cost to the City of this option: $9,000,000 plus interest over 15 years. Total Annual Savings for the new entity, attributable to being non-public, under new management, with the City contributing capital assets: $(2,405,000) allowing it to become break-even at current level of operations. Programming: none. The cost of programming scales with the subscriber base. Personnel: save $100,000. Hire a new CEO at market rate ($90-120K + benefits, depending upon experience). Outsource marketing. Make technical director full- time. Assuming current technical personnel can be induced to move from city to private entity, continuing PERS coverage may be required. (A fully -burdened private employee is typically calculated at salary plus 25-35%, where Ashland city employees, covered by PERS, are typically calculated at salary plus 45-50%.) Marketing and promotion: save $10,000. Outsource marketing and re -direct focus towards strategic competitive advantage: community service. There may be a much larger savings here, depending upon tactics adopted by the new management. Central Services: save $267,000. Rent public storefront, pay some fee for use of city facilities. Retain legal counsel with telecom background. Outsource accounting and payroll. Misc: assume unknown operational and administrative costs in first year. Other: spend $(37,000) Assumes spin-off is no better or worse than AFN at managing other operational costs, but that there are some additional operating costs in first year associated with setup of new entity. Revenue opportunities: A number of revenue opportunities have been identified in the past. The most significant, outlined in the Navigant study, was a potential for $305,000 in additional revenues from retail ISP services. $100,000 is a more reasonable number. There is also an indication that comparable municipal services, such as that of Spanish Fork, Utah, can achieve 65% market penetration for cable. This could represent an additional $150,000 in gross revenue for the new entity. A more conservative estimate would be that existing revenue per customer could slowly rise towards a better number. However, there can be no assurance that these and other opportunities will be quickly converted to improved revenues, or will result in increased positive cash flow in the near term. This plan must make sense based upon current revenues and expenses with significant incremental growth achieved over the next 3-5 years. Annual Impact of change on City of Ashland finances: ($1,075,000) continued obligations ($400,000 in the first year, rising to $1107500). Operating expenses: none. Rate increases scheduled for January will eliminate at least some, and perhaps all of the projected operating shortfall in 2005-06 while still leaving subscriber prices below valley and national averages in all but the premium tier. Central Services: negligible savings. Other City Services: negligible savings IN all three of these categories, AFN already pays for any city services it consumes, such as use of electrical department personnel for maintenance or repair. In theory, there could be reduction in City staff who currently serve in support AFN, but it is doubtful that will happen. These people will, according to staff, "be redirected to other purposes". Debt Service: The $9.OM capital cost of AFN should be contributed by the city to the new entity, much as it contributed the hospital's assets to the Community Hospital. The $6,500,000 of bonded operating expenses, including the $725,000 initial debt payment, which was also bonded as part of the $15.5M AFN debt, should be considered an obligation of the new entity. That $725,000 borrowed against the first bond payment should be contributed to the new entity as initial capitalization, to be repaid as follows. It should be responsible for annual interest payments to the city at an agreed upon rate, with principal to be retired within twenty years. At a 5% annual rate, that would mean a minimum contribution of $325,000. It also implies that Payments on the $1,400,000 annual bond payment will remain a City responsibility for the next 15 years, unless that debt is retired sooner. The net of those two figures is $1,075,000, which the city will have to make up from other revenue sources. On or before the twentieth anniversary of the agreement, the new entity will repay $6.5M in principal. Solvency requirements: The agreement, similar to the one between the City and the Community Hospital, should provide a clear mission statement and fiscal requirements. Failure to meet these requirements should, at the option of the City, trigger reversion of assets and control to the city, or transfer of control to a new entity agreeable to the City. Historically, such agreements would allow the City to resume control before potential obligations become unduly burdensome. Future Liabilities: Should the new entity fail to meet its solvency requirements or debt payments, all assets and obligations revert to the City. Other Financial Impacts on the community: Positive: 1 Because competition with Charter and others will be assured, community members can expect Ashland rates will remain below those charged other subscribers in the rogue valley. This has already resulted in $N.0 Million dollars in savings to AFN subscribers over the last 6 years and $N.0 savings to Ashland citizens who subscribe to charter. 2 Assuming the new entity adopts the new rate scheme, Ashland subscribers will continue to pay $N.OM less than subscribers outside the city limits. Negative: 1 If the new entity chooses to compete with local ISPs by offering internet services, indications are one of the seven local ISPs, employing three people, may become untenable. 2 Based on the past rate differential, the under -market pricing for Charter subscribers in Ashland may come to an end. There is not telling what Charter will do. And there is no guarantee that the new entity will not rai s e rate s . Other Benefits: The community will remain a competitive market for telecommunications. Separation from city will allow streamlined decision -making, leading to more effective competitive edge. Removal of decision making from immediate public scrutiny will give new competitive advantage. Other Risks: Loss of single -billing relationship with City Utilities may impact subscriber acquisition and churn. The new entity may fail to enlist sufficient Community support. Charter may react in ways that leverage its deep pockets, affecting churn or attainment of subscriber growth targets. Charter may be sold to a more effective competitor. Other competitors may emerge, constraining profitability as well as growth. y t