The Fibrant Autopsy Part V: Examining the Hotwire Lease’s Moving Parts

Posted on April 22, 2018

Todd Paris, RFP Contributor and Salisbury Attorney

♦ Thirty or so years ago at UNC Law they taught that when drafting contracts it was best to use simple terms and be as concise and clear as possible so that if there were litigation, a judge or jury would not have problems understanding the stated intent of the parties. In practice, parties often start out with a simple agreement that necessarily becomes more complex as the attorneys try to plan for unforeseen events and properly protect their clients. David Post says this lease, “has a lot of moving parts.” The Fibrant-Hotwire lease is positively Rube Goldberg-esque as far as that goes. It’s about 150 pages including appendixes and is startling in its complexity.

A full brief of this contract is not possible in this format, but as I promised I have read it all at least five times and asked lots of questions. Here are the most important “moving parts,” some new information and my comments.

It is a twenty year lease though Hotwire can bail in ten day’s notice through the end of 2018 if certain conditions precedents are not met. These mainly involve the public voting to accept the lease and the new bonds being approved for re-finance and the State Treasurer signing off in the deal. Salisbury maintains ownership and the debt. I repeat, this deal does not pay off the debt. Hotwire does not pay the debts payments. Hotwire has renewal rights after 20 years and a right of first refusal if the city tries to sell the network. They get first crack at buying it.

In my interview with Jonathan Bullock, Hotwire Vice President told me that they had indications that State Treasurer Dale Folwell would approve the lease. The bond refinancing will probably work out as municipal bonds in North Carolina are backed by the full faith and credit of the entire state. Since we are now in bed with a private company, earnings on the new bonds for the investors will not be tax exempt and we must pay a more lucrative interest rate. The interest rate will go from around 3% to an unknown amount. I heard projections in the 5% to 6% range and this is a public guess from city staff. This will cost tax-payers around an estimated extra $500,000.00 per year for the life of the loan. The interest rate is undetermined. Tax-payers will not know this as they vote. Whatever the deal does, it probably has to save us at least 500K per year or we have not improved our position at all.

Hotwire will be responsible for almost all operational expenses. That’s salaries and maintenance and equipment repairs. A few years back, that was running about three million per year. I noticed a big exception. Hotwire knows about the “run and gun” lawsuit against the contractor that built Fibrant for failing to comply with the National Electric Safety Code. Rowan Free Press broke this story and that revelation forced the lawsuit to be filed, in my opinion. The city remains financially responsible for fixing that mess. In his interview with me, David Post declined to give me an amount, just saying there were a high figure and a low figure. The contractor did have to post a performance bond, so there is money available even if they went bankrupt however, payment is still dependent on winning or settling that suit. Judging by the Defendant’s answer, liability is not clear. The city may not get a dime. Voters will not know this liability as they vote on the lease. Hotwire’s Bullock told me the city indicated that this was covered by a bond and that it was close to being resolved. That remains to be seen. If we have to pay for this voters may see a tax increase anyway.

Bullock told me that when he first drove into town, that he could clearly see that the poles were not strung properly. Makes you wonder about who was minding the store for the city when this thing was erected. Bullock also revealed new information. The Fibrant income did not cover operating expenses this year and the shortfall was around $500.000.00. David Post confirmed it. Let me be specific. Fibrant’s income did not pay one penny of the debts and a half million dollars had to be taken from the operating fund to prop it up. That’s an equivalent expense to 5 police officers complete with a take-home cruiser.

Hotwire has full management powers, mainly unfettered by council. This means they set the rates. This has panicked some commenter’s in the local print media, who have predicted huge increases, however in the “free market,” the ceiling will be set by the competitors’ prices. If they charge more than Spectrum, Hotwire will lose market share and profits will suffer.

Free market – Wikipedia: In economics, a free market is an idealized system in which the prices for goods and services are determined by the open market and consumers, in which the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority.

Hotwire is held to fairly strict performance standard by the contract for fixing issues and resolving customer issues. Hotwire’s Bullock said that if these issues get bad enough the city might be able to get out of the contract. I do note the contract does appear to have a $1,000.00 per day penalty that can be imposed on Hotwire for not meeting those performance standards after five days. I do wonder if contract termination is even a real possibility after the city has signed off.

Where are we at now? If the new bonds do cost us an extra $500K per year and it’s losing $500K per year, (not counting the $3M annual debt payments) turning it over would probably be “a wash” in that regard. We are still stuck with the crushing debt.

Rent – Hotwire pays quarterly payments of a percentage of “Communication Service Revenue”. We get the following: Video Service 10%, Internet Service 30%, Voice Service 10%, Data Center Service 20%, subject to Section 4.5 Data Transport Service 25%, Dark Fiber Service 30%, and Other Services 10%, subject to Section 4.6.”

“Appendix 7 – Quarterly Rent Targets” is potential financial picture of this marriage to-come. There is no contract provision that guarantees the city these figures. We get just the percentages. However, the city can get out of the contract with Hotwire if it does not make these targets in 2 out of three quarters.

While the definition of “Communications Service Revenue” has been said to be something like “net” profits as this money only excludes, “(A) any amount collected by Hotwire for governmental excise, sales, or similar taxes and other governmental authorized fees and surcharges (such as local portability fees) that are invoiced to the customer or subscriber, (B) rent charged by Hotwire to a customer or subscriber for rental of equipment, and (C) non-recurring, one-time charges to a customer or subscriber.”

Hotwire’s Bullock says that they can make money here. He said that the cost and expense of wiring a whole city the size of Salisbury would have made it difficult otherwise, but with Hotwire not having to bear that expense nor the debt payments he is confident in being able to meet his contract terms.

If we were just starting from scratch investigating building a municipal broadband and a company came in and said that they would manage and run it and pay us a percentage of profits as long as we borrowed the money and wired the city, that probably would not be acceptable. However, that’s not where we are right now.

That’s the large “moving parts.” There are some other things you should know.

Salisbury has almost a 71 cent property tax rate. That’s among the highest in the state. David Post says that 12 cents of that is caused by Fibrant. David Post told me that there are 5 to 7 million dollars that will need to be spent soon to replace ageing Fibrant equipment in the next 5 years. Figure a one cent tax increase creates around $275,000.00 for the city. Tax increases would be likely. Hotwire assumes the equipment replacement costs expenses. Post says if the lease is not approved, that tax-payers can expect to spend 40 million dollars for a “no” vote, versus 20 million dollars from a “yes” vote, over the next ten years. The resulting tax rate will, in my humble opinion send folks fleeing the city and we will likely have the highest tax rate in the state. Before that happens, it would be better to shut it down cold and just pay the debt.

Fibrant is no longer covering its operating costs. It was negative 500K this year. It has never paid one penny of it’s debt through its income. All that came from the general fund that created a police department near collapse and streets that look like the asphalt version of patchwork quilts. All departments and all services have been negatively affected.

If you go broke and can’t pay your Hotwire bill, the city won’t turn off your water.

Make no mistake; the Hotwire Lease is a rescue mission. It might work or it might make things worse if it fails. I know full well that if the lease is approved by voters, local print media will no doubt trot out ex-Mayor Kluttz, and Woodson, Kennedy, Lewis and Burgin and some talking head will call them “visionaries” and everyone will celebrate this idea that nearly has, and may still financially ruin this city. If the lease is voted for and it later fails, the last and current council and staff will just point out that the citizens voted for it and thus be insulated from all blame. I note that there is a “Vote yes for the Fibrant lease” on ex-Mayor Susan Kluttz’s yard. It’s the least she can do.

Fibrant is an unequivocal financial disaster for the City of Salisbury. It can no longer support itself even if tax-payers pay the debt from the general fund. RFP and I just have to say it. We told you so! While the Hotwire Lease isn’t perfect, when one is selling a blind mule, you can’t expect to get top dollar.

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