WEST VALLEY CITY — The UTOPIA fiber-optic network has suffered another major financial setback and could call on 10 of its 11 municipal partners to pay on sales-tax pledges within a year.
The Utah Telecommunications Open Infrastructure Agency refinanced all of its debt in 2008 to gain about $10 million, which was expected to pay for build-out of the system in targeted areas.
Almost exactly one year later, four of those target areas are being serviced — successfully — according to UTOPIA chief executive Todd Marriott, who was hired at the same time the refinance was going on. But complications in the national credit-swap market mean that member cities will likely have to pay before June 2010.
It happened because UTOPIA was forced to refinance using a 30-year, variable-rate bond, which it then tried to stabilize by contracting with a bank for credit swaps, with the net result being "a wash" for the fiber-optic company's finances, according to UTOPIA finance director Kirt Sudweeks. When Lehman Brothers declared bankruptcy and the credit markets went haywire last autumn, that deal fell apart, leaving UTOPIA with monthly interest payments between $50,000 and $300,000 higher than planned.
The cities were required to put away money just in case the refinance did not work out, but many local elected officials hoped the network would reach profitability quickly enough that their sales-tax pledges would never be called upon.
Marriott broke the news to the West Valley City Council during a tour of his offices Tuesday afternoon. The admission drew the ire of city Councilwoman Carolynn Burt, who complained that although West Valley City owes the biggest pledge, only about one-third of city residents and businesses can access UTOPIA fiber.
"That is a problem for me," Burt said.
Marriott explained that UTOPIA has been forced to operate in a very targeted way. Money can only be spent to complete fiber-optic rings in areas with both sufficient customer support and sufficient underlying infrastructure, he said.
The entire UTOPIA network, including the western two-thirds of West Valley City, could be finished in one to seven years, Marriott said.
The CEO also recommended that the West Valley City Council ignore "armchair critic" comments by the likes of the Utah Taxpayers Association, which recently published a newsletter article saying UTOPIA promised its cities the tax pledges would never be called upon.
Murray Mayor Dan Snarr explained his take on the situation in a monthly message to residents.
"At this point in time, no tax dollars have been used on this project," Snarr wrote. "That may change and we may need to help pay for some of the operations until there are enough customers to cover expenses. I firmly believe that this is a valuable service and that it allows us as a city to expand our opportunities, to work more efficiently and to save money."
Unfortunately for UTOPIA, credit-swap markets are still less stable than they were projected to be a year ago, and the fiber-optic company continues to spend more money on the variable-rate bonds than expected, Sudweeks said. The pool of money set aside to pay interest payments through next June is continually shrinking and could continue to do so, he said.
But it's not all bad news for Utah's sole fiber-optic municipal infrastructure project. UTOPIA persuaded around 30 percent of newly eligible customers to join within weeks of entering new markets. UTOPIA also has several new service providers that compete with one another to provide service directly to homes and businesses.
Continued progress could eventually result in positive cash flow so the only people paying for the network are those using it, said UTOPIA sales director Hugh Matheson.
"You've given us a humongous task to overcome," Marriott said. "We can do it."
Maximum amount cities could be forced to pay:
* Payson is only required to pay the amount it pledged in 2004 because the municipality opted out of the 2008 refinance.
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