Legislative audit blasts UTOPIA's planning, use of bond funds

Published: Thursday, Aug. 2 2012 7:22 a.m. MDT

Network Operations Center Technicians Donald Seher, front, Manager Troy Thompson, standing, and Brian Merell, back seated, work in the NOC, Network Operations Center at Utopia, a fiber optic company Thursday, Oct. 20, 2011.

Scott G Winterton, Deseret News

SALT LAKE CITY — UTOPIA has spent nearly all of its $185 million in bond proceeds, though only 59 percent of that has gone toward building infrastructure for the municipal fiber-optics network, a legislative audit found.

The audit, conducted by the Office of the Utah Legislative Auditor General at the request of state lawmakers, blasts the Utah Telecommunication Open Infrastructure Agency for poor construction planning, costly mismanagement and unwise use of bond funds.

"Slow progress in building the network and a general lack of subscribers have forced UTOPIA to use a large portion of its bond proceeds to cover operating deficits and debt service costs," the audit states. "The use of debt to cover the cost of operations and debt service is symptomatic of an organization facing serious financial challenges."

The audit was presented to state lawmakers Wednesday morning in a meeting of the Legislative Management Committee's Audit Subcommittee.

Legislators asked for the audit, its preparers noted, so residents in the 11 UTOPIA member cities would know how the agency has used taxpayer funds. Lawmakers also wanted to review UTOPIA's general management practices.

In addition to identifying reasons for UTOPIA's financial challenges, the audit makes several recommendations to strengthen the agency's oversight and hold its staff and business partners accountable for results.

Kane Loader, Midvale's city manager and chairman of the UTOPIA board of directors, said the board agrees with the findings and recommendations in the audit.

"In fact, for most of the recommendations that have been made, we think we're on the right track to correcting those," Loader said.

He said the audit fails to mention the steps UTOPIA has taken since 2008 to address issues raised in the report.

"It points out the things we've basically already known," Loader said. "We're the ones who pointed out the shortcomings and the mistakes that were made in the past."

When UTOPIA was formed in 2002, the coalition of cities planned to build the broadband network in three years, with projections that the agency would be making money in five years, according to the audit.

Initially, the plan was to build the network in three phases — making the network available to 52,000 residents by 2004, 115,000 by 2006 and the full 141,000 addresses within the 11 member cities by 2007, the report states.

What was seen as a conservative subscription rate of 35 percent estimated UTOPIA would have 49,000 subscribers by 2007.

As of April 2012, UTOPIA was only available to 58,000 residents, with just 9,300 subscribers. Loader said the agency has since topped 10,000 subscribers.

UTOPIA has drastically changed since 2008, he said, from the construction and marketing decisions being made to those who make them.

"In the beginning, (UTOPIA) made the decision to build wherever it was easiest to build," Loader said. "Now, it's market-driven."

He says the board is confident that its new plan, developed over the past year, will attract enough subscribers for UTOPIA to break even by 2015.

Until then, UTOPIA member cities collectively must continue to make annual payments of nearly $13 million for debt service on the bonds. The cities pledged a portion of their sales tax revenues as security for the bonds, the report states.

"Frankly, the only way out of this for the cities is to build their way out," Loader said. "If they stopped today, they're still on the hook for $185 million."

Royce Van Tassell, vice president of the Utah Taxpayers Association, a longtime critic of UTOPIA, said that annual subsidy is unacceptable.

Van Tassell says it's time for UTOPIA to cut its losses, get out of the telecommunications business and sell its assets to the private sector.

"The worst reaction to this audit would be to throw even more good money after the bad money that has been wasted," he said.

Following a meeting Wednesday of the Audit Subcommittee of the Legislative Management Committee, Utah House Speaker Rebecca Lockhart, R-Provo, said among the main concerns she has regarding the audit findings is the financial impact the costly project could have on the taxpayers of member cities.

“There are concerns about the model, the management and some of the data that is in dispute with the auditor (regarding subscriber numbers),” she said. “Member cities are going to have to rise up and demand increased accountability and information from UTOPIA.”

Contributing: Jasen Lee

UTOPIA falls short of subscriber goals

In 2003, UTOPIA estimated its services would be available to all 141,000 addresses in its 11 member cities. Actual numbers show the agency has fallen well short of its goals.

GOAL

September 2007

Addresses: 141,000

Subscribers: 49,350

Subscription rate: 35 percent

ACTUAL

June 2007

Addresses: 37,160

Subscribers: 6,161

Subscription rate: 16.6 percent

June 2009

Addresses: 48,646

Subscribers: 8,009

Subscription rate: 16.5 percent

June 2011

Addresses: 56,000

Subscribers: 8,572

Subscription rate: 15.3 percent

April 2012

Addresses: 58,100

Subscribers: 9,340

Subscription rate: 16.1 percent

Source: Office of the Utah Legislative Auditor General

E-mail: jpage@desnews.com

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