Ten years ago, on Town Meeting Day 2000, Burlington voters authorized the first $6 million in bonds to create Burlington Telecom. City leaders promised that a state-of-the-art, publicly owned cable, Internet and telephone network would be cheaper and provide better service than its out-of-state competitors. At that time, they were Adelphia Cable, which is now owned by Comcast; and Verizon, which has since sold its landline business to FairPoint.
Burlington Telecom has mostly delivered on the promise, but it has come at a massive cost. Today, BT is fighting for its life. The enterprise is on the verge of a loan default that could leave Burlington taxpayers in the hole for $17 million, and potentially as much as $50 million. That could do a number on the city’s credit rating — and perhaps, the state of Vermont’s as well.
What turned a progressive municipal experiment — that has inspired many other communities to consider creating similar telecom systems — into a train wreck?
The most talked-about development is that Leopold, the city’s chief administrative officer, chose to violate state regulations by pumping $17 million in taxpayer money into BT over the course of two fiscal years. The violation began in early 2008 and councilors weren’t directly briefed about the extent of the problem until May 2009.
But Leopold claims he inherited vexing problems from Nulty, BT’s founding father and first general manager. Leopold and BT general manager Chris Burns maintain that Nulty grossly mismanaged the enterprise during his five-year tenure. BT was “very badly off financially” when Nulty resigned in October 2007, Leopold says, necessitating a rescue operation that he and Burns have since been struggling to carry out in the midst of a historic recession. The $17 million had to be borrowed from city coffers to pay bills because BT could not get private financing at a time of panic in the credit markets, Leopold says.
Nulty insists that BT was in good financial shape when he left and that Leopold and Burns subsequently steered it off a cliff. A combination of incompetence and subterfuge accounts for the crack-up, Nulty charges, describing Burns as “a poor manager” and accusing Leopold of using taxpayer funds that BT didn’t actually need.
Who’s telling the truth?
Players not directly associated with either the Nulty or Leopold camps say both are to blame, to some degree, for what happened to BT. Those passing such judgment include former Mayor Peter Clavelle, who served as BT’s midwife; former City Council President Kurt Wright, who received confidential BT reports from Leopold as chairman of the city’s board of finance; and members of citizens’ committees created to give advice to Burlington Telecom.
“Everybody has dirt on their hands,” declares Jan Schultz, a Progressive who serves on a BT advisory committee. Schultz includes the city council in that assessment. He notes the council received increasingly negative financial reports from Leopold throughout 2007 and 2008, “but they weren’t interested.” Schultz says the data were “complicated and councilors didn’t have the expertise to deal with it.”
If You Build It, Well…
BT’s problems are said to have originated with a massive overrun in the cost of constructing the city-owned fiber-optic network that today delivers landline phone service, high-speed Internet links and cable television to about 4800 Burlington households and businesses. The build out’s price tag was initially estimated at $22 million. The technologically advanced system, which has yet to reach about 15 percent of city homes, will ultimately cost at least $45 million to complete, Leopold figures.
All the while it was overshooting its anticipated expenses, BT was underachieving on the revenue side, Leopold adds. He says the number of subscribers was 25 percent below what had been projected for late 2007, producing a $1.3 million shortfall in BT’s anticipated revenues. In the month prior to Nulty’s exit, Burlington Telecom recorded a $206,000 net cash operating deficit, according to detailed sets of financial data that Leopold provided during an interview in his office last week. A tsunami of red ink was cresting and threatening to wash away BT, the Leopold-Burns narrative suggests.
In fact, one only has to look at the city’s financial report for 2007 — the one handed out to voters on Town Meeting Day — to see that Burlington Telecom owed $5 million to the so-called “cash pool” at the time and had roughly $300,000 in accounts receivable. Likewise, in a report to the city’s board of finance in November 2007, Leopold explained that BT’s capital expenses had been underestimated by $3.5 million — for that year alone.
Nulty, an economist who has worked for the U.S. Congress and the World Bank, rejects all of Leopold’s figures as well as the finding of the Blue Ribbon Committee assigned to assess the BT situation, which places the price of the build-out overrun at $15 million. Nulty says the cost of building BT’s network was only a couple of million dollars more than had been calculated, mainly due to the high price of the tunnel work required to bring fiber to hundreds of households. Burns, who was then in charge of engineering, oversaw the build out, Nulty notes. “Chris never said anything about overruns,” he says.
The enterprise did sustain a $4.5 million loss of potential revenues due to Adelphia Cable’s nine-month state-level battle to prevent BT from becoming a competitor, Nulty notes. But BT was nonetheless poised to become profitable when he left, Nulty adds, calling that “an impressive performance for a startup.”
Leopold is lying about BT’s finances, Nulty contends. “This guy is under a criminal investigation that could possibly put him in jail,” Nulty alleges. “Of course he’s going to try to smear his predecessor.”
Nulty leveled similar charges in a memo to board members of East Central Vermont Community Fiber Network, Nulty’s current telecom project. As worrisome questions began to arise about similarities to BT, Nulty clarified for his bosses: “The problems in Burlington are not problems with the economics of BT itself, but of sloppy, bungled or improper behavior by the city administration.”
Leopold calls Nulty’s accusation that he could face a jail term “an incredibly ugly smear that has nothing to do with the facts.” Nulty has no evidence that Leopold is a target of the criminal probe recently initiated by the state, the city’s top financial officer says.
Nulty adds, “If I had made the kind of shambles of BT that Leopold says I did, why would I now be offering to put up my own money to try to save the thing?” Nulty is part of a recently formed nine-member group calling itself Reboot BT that has told Kiss it can rescue BT from bankruptcy if it is put in sole charge of the business. Members also say they are willing to invest in the bailout. Kiss has neither accepted nor rejected the “Gang of Nine”’s offer.
Guilt by Association?
The blame game between Leopold and Nulty explains a lot about what went wrong at BT. But others are implicated, too. In a report to the city council in December 2007 — six weeks after Nulty’s resignation — Leopold had warned that “the business and financial model we have been working with and the underlying assumptions behind it are not viable and have not been achieved.”
Fears of an impending crisis were never communicated to BT’s own management team then or in subsequent months, says Jeremy Patrie, who oversaw the operation’s technical side for eight years until his resignation last June. “If we were running a deficit such as that, it wasn’t communicated to us until pretty much a year after Nulty had left,” Patrie recounts. “We would have been told to button down all expenses, and we weren’t told that.”
In that same report to the council, Leopold noted that the budget-busting capital expenditures had enabled BT to make its network available to 15,500 Burlington households — 2000 more than had been projected. The build out is 90 percent complete, Leopold told the council then, using a figure that has since been revised to 85 percent.
In addition to aggressively marketing itself to those 15,500 households, BT should have been seeking opportunities outside Burlington, Nulty argues. He notes that the system’s techno “hub” on lower Church Street was designed to accommodate many more hookups than Burlington alone could ever supply. By 2007, several towns around the state were inspired by BT’s seemingly successful model to consider spinning their own fiber webs, and were potentially receptive to linking into the Burlington hub.
But Mayor Bob Kiss rejected that option, saying that BT should complete its own build out before prospecting for business outside the city. Nulty called Kiss’ veto a “huge mistake” and cited it in 2007 as the key cause for his decision to leave BT. Kiss has since reversed his stance. Even though the Burlington network isn’t much closer to completion today than it was in 2007, Kiss now suggests that salvation for BT lies partly in finding partners in other municipalities.
Nulty maintains that BT could be profitable, “if it were well managed,” solely by tapping the Burlington customer base. “Getting outside customers would be icing on the cake.”
Marketing was another weakness. BT wouldn’t be flirting with financial calamity today if Burns and Leopold had implemented a ready-to-roll advertising campaign, says former BT marketing chief Richard Donnelly, now a member of the Gang of Nine. By the end of 2007, Burlington Telecom had recorded a roughly 30 percent “take rate,” Donnelly calculates, referring to the proportion of potential customers who had signed up for services. A series of mailings and a door-to-door solicitation drive had been planned in conjunction with Methodikal, a Burlington marketing firm, with the goal of raising the take rate to 50 percent, Donnelly recounts.
Even if only 40 percent were persuaded to sign up, BT would have about 2000 additional subscribers today, with resulting revenues large enough to ensure “there wouldn’t be this crisis now,” Donnelly says.
The marketing pitch was to have a “buy-local” spin, with Burlington Telecom emphasizing its identity as a homegrown, community-controlled entity — in contrast to BT’s privately owned competitor Comcast, a conglomerate based in Philadelphia. “The marketing campaign was about branding BT and aligning it with a set of shared values,” says Donnelly, who now works for Efficiency Vermont, an energy- conservation utility.
But the marketing plan was aborted by Burns and Leopold, he adds. They wanted to focus on closing deals with likely customers rather than reaching out to the broad mass of prospective customers, Donnelly explains. The Burns-Leopold decision to kill the marketing campaign was “off the reservation of rationality,” Nulty adds. “It made zero sense.”
For his part, Burns says Donnelly “had the ability to market as he chose.” He claims Donnelly was fuzzy about the plan and his own performance. “It was hard to get an understanding of how many calls were being made, how many sales there were,” Burns recalls, saying, too, that Nulty “never created a formal sales team.”
Kiss says BT should have been striving harder to sign up Burlington businesses — an approach favored by Burns. The mayor estimates that only about 250 businesses — out of 2000 — are currently BT customers.
Such a priority would be misplaced and would also squander scarce resources, argues Patrie, the former operations chief. “The whole reason for BT was to serve Burlington residents,” Patrie says, recalling how dissatisfied homeowners were with Adelphia. Besides, he adds, “There’s a lot of competition in Burlington for the business telecom market.”
But Craig Settles, a California-based consultant to municipal telecom operations around the country, says such publicly controlled networks can succeed only if they sign up large businesses and institutions. The “churn” — or turnover rate — is too high among residential customers to ensure financial stability, Settles argues. “You’re in a world of hurt if you rely only on households,” he says.
Donnelly adds that he tried again in 2008 to launch a marketing campaign. It also “fizzled,” he says, because Burns and Leopold “weren’t responsive to it and lacked understanding of marketing in general.” The two were by then “totally focused on other things,” Donnelly says.
The Blue Ribbon Committee as well as outside consultants have noted that BT has never been marketed effectively. All concurred that the program needs a vision — and cash — in order to succeed. “I get three, four, five, six pieces from Comcast every week at home and at my office,” says former City Councilor Andy Montroll. “All I get from BT is my monthly bill.”
Management decisions have contributed to BT’s woes. Former workers say morale suffered when Nulty left, Burns took over as general manager, and Leopold got directly and deeply involved.
“The new management wanted to give BT a much more corporate structure,” Patrie says, explaining that involved “the compartmentalization of everything.” It was isolating, and “the sense of it being a team effort was lost.” Burns’ style left many BT employees with “the feeling that it was just a job, nothing more,” Patrie says. “And that’s particularly dangerous for a startup.”
Jacqueline Griffin, a former customer service representative, agrees that “under Chris Burns I was made to feel like an hourly employee. There was no communication at all.” If she sought to talk with Burns about some issue, she would be referred to someone else in management, Griffin adds. “It was just circle talk,” she says.
Nulty, by contrast, “was just so pleasant that you’d want to do anything for the guy,” Griffin declares. “He was also entirely focused on customers.”
Burns literally built barriers in BT’s office, Donnelly points out. Doors that Nulty had removed were put back in place when Burns took over, Donnelly says. “It was a noise issue,” Burns says in response. “And they were only half-doors, wood on the bottom and glass on top.”
When Griffin announced last July that she was quitting, Leopold called her into his office for a chat, she recounts. “He was asking me why, and then he started correcting my grammar,” Griffin says. “I was thinking, ‘God, you’re such a jerk.’”
A big problem plaguing BT from its inception, many sources say, has been the absence of expert oversight. As Patrie puts it, “No one at city hall had any background in running a telecom operation.”
Schultz, a member of a citizens’ advisory committee for BT, says the group never got the information it needed from Leopold and Burns to make meaningful assessments of its financial situation. “It became much more secretive after Nulty left,” Schultz says. “When he was in charge we felt we had access to information — or at least seemed to have access.” Schultz says he was “very frustrated” by Burns’ approach, suggesting, “It was a very serious mistake to hire an engineer to manage BT.” Despite his frustrations, Schultz says he has stayed involved with the advisory committee “out of loyalty to the Progressives.”
A commission should have been established to oversee BT in the same way that these citizens’ panels monitor the performance of city departments such as Burlington Electric, says Schultz, echoing the view of Democrats on the city council. “It’s not a transparent operation without a commission,” says Ed Adrian, a Ward 1 Democrat who led the council’s charge against Leopold’s handling of BT’s finances.
Wright and other Republicans joined Progressives on the city council in opposing a commission structure for BT. There were already two citizens’ groups watching BT, Wright says. And he and other council members were constantly warned by Leopold of the importance of keeping some BT financial information out of the public domain due to fears that Comcast would use it to steal customers, Wright adds.
The concept underpinning BT may itself be seriously flawed, Adrian suggests. He notes that Burlington Electric is able to function well financially because it enjoys a monopoly: Every home and business in Burlington must buy BED’s electricity. “You can’t have a non-monopoly utility model and expect it to do well in an environment of competitive telecom,” Adrian says. He adds that marketing BT as an ideologically attractive entity may not prove effective. “Most people don’t spend a lot of time thinking about the social ramifications of signing up with a particular telecom provider,” Adrian argues. “They’re mainly concerned about service and price.”
Civic pride might not be a great selling point these days, especially since BT has become a huge tax liability for the city — and its citizens. The irony? Despite all of BT’s difficulties, almost everyone in this saga acknowledges it’s a technologically superior network. They also agree it can still be successful. But how? Kiss doesn’t exactly inspire confidence. Ever the optimist, the mayor predicts, “It’s going to work out.”
What’s wrong with Burlington Telecom? The root of the problem is the $10,000-per-customer investment in its fiber-optic-to-the-home system. The funds necessary to service this capital investment are well beyond the level of per-subscriber revenue that BT or any other system could reasonably expect to generate. It’s like having bought too much house for the family budget. This is a structural problem — the business “nut,” if you will — that needs to be solved if BT is to survive.
How did BT get into this jam? There is plenty of blame to go around.
Former BT manager Tim Nulty’s estimates of the capital investment required for the system proved to have been way off from the beginning. His original 2005 estimate of $22 million was spent by January 2007. The additional $11 million financing secured in August 2007 was gone by Halloween, BT was already into the city’s pooled cash, and the system still wasn’t completed. Exit Mr. Nulty.
To add insult to injury, in 2008 the capital markets started to freeze up due to the financial crisis, making another refinancing impossible.
The Kiss administration compounded this problem by quietly self-financing BT with more draws from the city cash pool in hopes the capital markets would unfreeze. I say “quietly” because this was done with the tacit understanding of the city council’s finance board — whose members included former Republican and Democratic mayoral candidates Kurt Wright and Andy Montroll — in what could be described as a “don’t ask, don’t tell” agreement.
Reports to the finance board, budgets approved by the city council and audited financial statements all showed what was going on. It was just that nobody on the inside was advertising the fact. Meanwhile, BT got deeper and deeper into the cash pool. On December 17, 2007, the Kiss administration did report to the city council that construction costs were over estimate and BT needed a whole new business plan. But it was not until May 2009 that the administration finally initiated a full-blown discussion with the city council about the problem of BT’s high investment per customer, and the fact that it was out of compliance with the Certificate of Public Good condition imposed upon it by the Public Service Board. That should have happened in early 2008, shortly after Nulty left the stage and before the self-financing began in earnest.
Which leads us to the third part of the blame: In their bloodlust to settle old scores with the Progressives that date back to Bernie Sanders’ upset victory in 1981, the city council Democrats led a withering campaign against BT that went on for months, seemingly unmindful that BT is their own startup business. The Blue Ribbon Committee’s consultants expressed amazement that BT could even function in this climate.
Public Service Department Commissioner David O’Brien, a Republican, has had a strong supporting role in the BT bashing. His goal, apparently, is to be BT’s wrecking ball, to teach Burlington a lesson for the sin of public ownership. Only when BT failed to make its February lease-purchase payment did some city councilors finally start to sober up to the financial consequences of the destruction they thought they wanted.
So, what’s the solution?
To reduce that $10,000-per-customer debt ratio. The Blue Ribbon Committee recommended strategic partnering to substantially increase the customer base — both inside and outside Burlington — or to reduce the amount of embedded debt, or both. The second of the two charter changes authorizing Burlington to enter into the telecommunications field contemplates just such partnering. Precedent is found elsewhere, with the McNeil Generating Station; its ownership is shared jointly by Burlington Electric and investor-owned utilities.
But, for a constructive solution to emerge, the wrecking-ball politics have to end now, especially those of Commissioner O’Brien. Otherwise, the financial and economic consequences of failure will be nothing short of catastrophic, not only to Burlington and its taxpayers but also to the state. Vermont’s own credit rating is significantly affected by that of its largest city.
John Franco is former chair of the Burlington Electric Commission. As assistant city attorney under former Mayor Bernie Sanders, he represented Burlington in its 1984 Public Service Board application for a municipally owned cable television system.
Well, that’s another fine mess you’ve gotten me into.
— Oliver Hardy
There are two things that should concern us about the fine mess that Burlington Telecom has gotten the taxpayers of Burlington into. One is how it happened. The other is how to get out of it.
It’s not just the benefit of hindsight that tells us the City of Burlington should not have become involved in the risky, capital-intensive task of providing telecommunication services to the residents and businesses of the city. Rather, it’s the simple insight that the government should provide some services, and that others are best provided by the private sector.
The key functions of government are to provide services that are not adequately provided by the private sector — a legal system to protect people and property, police and defense services, roads and sidewalks, clean air, to name a few of what economists broadly term “public goods.” When the government starts providing services that the private sector can and does provide — including, in BT’s case, telecommunication services — it must take on the risks and problems that firms in the private sector confront all the time.
These include how to engineer, design and produce the product; how to market it; how to finance it; and how to manage the people and capital needed to produce it. In a nutshell, these all involve risks and rewards. The reward for doing all of these successfully is a profit. The risk is losing all or part of your investment, and failure or bankruptcy.
Burlington Telecom failed at nearly all of these. Management underestimated the costs of hooking up all businesses and residences to the fiber-optic system it wanted to build. It failed to do a good job marketing its product to customers who had other provider choices. It overpaid for many of the products and services it bought from suppliers. Its business plan failed to anticipate ways to enhance revenues. Its financing was solely based on debt, with no contingency for raising more capital. These are all very real, very common problems that businesses in the private sector face every day.
In Burlington, the prevailing zeitgeist is that the private sector brings benefits to people by creating jobs — but that’s about the only benefit from businesses. Businesses also earn profits and, without profits, which may seem to have no social benefit, prices would be lower. It’s just a short leap to conclude that if the government can easily provide the same service, it might as well deliver those services at a lower price to the city’s residents than profit-seeking firms offer.
The problem is that nothing in that line of reasoning deals with risks or what happens if the business plan needs to be quickly adapted to changing circumstances. In the worst case, what happens if the business plan fails? Who gets stuck holding the bill?
With BT, there was no need for, or thought about, enticing private equity (read that as profits) into the mix of financing. The city would just borrow $33 million, build a state-of-the-art fiber-optic system, and Burlington customers would benefit from low prices and high quality. What could be simpler?
Unfortunately, building and running a business is not simple. And the risks of running a business — as Burlington taxpayers are soon to find out — can be large. At a minimum, let’s hope a lesson is learned from this experience.
Looking forward, what should the city do? Both consultant reports and the Blue Ribbon Committee came to the same conclusion: The only solution, short of city taxpayers shoveling more money into BT, is to look for a private-sector partner to put its capital at risk, and therefore to share in any potential future BT profits.
No partner is likely to absorb the entire debt load that BT has incurred — the original $33 million plus the $17 million BT has borrowed from the city. That means someone is going to be left holding $17 million worth of paper that’s not worth $17 million.
In finance jargon, someone is going to have to take a haircut. There will, no doubt, be a protracted legal battle over who that someone is. Most likely, it will be the taxpayers of Burlington who will pay the price of getting out of this fine mess.
Art Woolf is an associate professor of economics at the University of Vermont. He was state economist for Governor Madeleine Kunin and, in 1991, cofounded the Vermont Economy Newsletter. He blogs on Vermont policy issues at www.vermonttiger.com.
Can Google Save Burlington Telecom?
Google is getting into the telecom biz — the company recently announced a plan to develop fiber networks in one or more trial communities that would “deliver Internet speeds more than 100 times faster than what most Americans have access to today, over 1 gigabit per second, fiber-to-the-home connections.” Google is accepting applications from municipalities interested in participating in its program by March 26. Mayor Bob Kiss told WCAX that the partnership would likely not solve the financial issues BT is facing, but the “Burlington for Google Fiber” group on Facebook has nearly 300 fans who seem to like the idea. The city is holding a public meeting to talk about the potential Google partnership on Thursday, March 4, from 6:30-8 p.m. in Burlington City Hall Auditorium.