Council Communication

Resolution Authorizing a Subsidy From the Electric Fund to the Telecommunications Fund For Debt Service
Meeting Date:	May 3, 2005		Primary Staff Contact: Lee Tuneberg, 552-2003 tuneberl@ashland.or.us
Department:	Finance		Secondary Staff Contact: Dick Wanderscheid, 552-2061 wandersd@ashland.or.us
Contributing Departments:	Electric
Approval:	Gino Grimaldi

Statement: The first debt service payment from the August 2004 refinancing of AFN is due to be paid in July and staff is anticipating a cash shortfall of nearly $200,000 at June 30, 2005. Staff projects that revenue shortfalls and cost increases have resulted in the need for other monies to be generated for this debt service and a potential ongoing need into the future. This first payment must be initiated in the first few days of July to ensure a timely receipt of it to avoid late fees. Staff is requesting that the shortfall be covered via a subsidy from the Electric Fund.
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Background: From inception, AFN has relied on borrowing to meet financial obligation on both construction and operational levels. This culminated in a debt load of approximately $14,000,000 by end of FY 2003-04 and annual payments over $1,000,000 and growing. In August 2004 staff was successful in refinancing all internal and external debt based upon then current projections from an independent study of operational costs, revenues and proposed initiatives that were sufficient to generate ample revenue to pay AFN's way. The projected numbers have turned out to be "soft" meaning that the number of customers and the revenues generated through the initiatives have not been realized, causing a cash shortfall to meet obligations. Conservative estimates indicate that this condition will probably continue for years. In prior years, cash shortfalls were resolved by internal borrowing each year. The amount grew annually, initially representing inadequate funding for construction, then operational losses and a shift of external debt to internal debt. The total debt grew and was projected to increase and remain high so refinancing became a viable option. Refinancing did several things: 1. Simplified the debt into one source and one payment schedule. 2. Restored needed cash balances in the funds that had made the internal loan(s). 3. Simplified the budget by eliminating the annual process of borrowing and the doubling impact it had on the total budget amount. 4. Better aligned AFN's type of debt with the operations and resultant losses. 5. Gave AFN an opportunity to make progress on operational revenues as compared to expenses before this first payment was required. Operational revenues are close to covering operational expenses, excluding debt service (principle and interest) and depreciation (a non-cash item) but sufficient cash will be needed to pay for debt service. The proposed budget anticipates cash shortfalls but the amount needed each year will vary based upon a host of things including customer growth and revenue stability, staffing costs and increases in benefits, bandwidth and programming costs, annual operational capital costs and the need for updating technology. The city will need to decide how cash shortfalls are to be covered, whether returning to internal borrowing or providing some type of subsidy each year or as a policy over the length of time that AFN revenues do not cover all of AFN expenses including debt service. Staff looks to the Electric Fund to guarantee the Telecommunications Fund debt and operations in that AFN was launched from that fund, has close ties in its operations and all financings have identified electric revenues as "first in line" to guarantee the public that debt payments will be made. The recent financing did give the city latitude to use any other un-restricted revenues to pay debt but it seems to make most sense for the needed cash to come from this related industry.
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Related City Policies: There are no direct policies related to subsidies, especially for technology. However, there are examples of operational transfers between funds that are not paid back. A transfer is different from a subsidy except when it relates to an activity that does not generate sufficient revenues to cover costs. City cemetery operations is an example of this. Enterprises are expected to pay their own way, charging the amount needed for Ashland's operations and capital costs to ensure the viability of those necessary services. Rates set for those enterprises are not readily comparable or do they directly correlate to what is charged by other cities or in a competitive basis with another service provider. AFN represents a combination of technology needed by many businesses in the community and an added service provided on several levels to the general public. This makes its cash needs unique when compared to the other utilities operated by the city. The city's financial management policies include knowing the cost of the services provided and charging appropriately, accounting for services on a fund basis; maintaining fund integrity and cash balances to protect the credit rating of the city. Each year the city reviews the above and other fiscal policies through the budget and audit process. The city consciously adjusts financial practices to accomplish its overall financial goals and a subsidy can be one element assisting in compliance with viability. Additionally, covenants within all financing documents guarantee that the city will ensure that debt service requirements will be met, including AFN's.
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Council Options: Council adopt the attached resolution, approving the concept and process of a subsidy, or subsidies, from the Electric Fund to the Telecommunications Fund to provide cash by July, 2005 and January, 2006 for debt service as is needed. Council amend the resolution changing the source of cash, amount or timing of a subsidy to the Telecommunications Fund. Council defer action awaiting more information. Any Council action impacting the budget will need to be brought back to them in the form of a resolution for transfer of appropriations or supplemental budget in order for money to be transferred in any fashion.
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Staff Recommendation: Staff recommends that Council adopt a policy that AFN cash shortfalls for debt service and other items specified by Council be resolved via a subsidy from the Electric Fund to the Telecommunications Fund in the amount(s) needed until such time as revenues are sufficient enough to not require such support.
Possible Motions: Council moves to adopt the policy of funding AFN cash shortfalls with subsidies from the Electric Fund. OR No motion, Council prefers to defer this policy decision until a later time.
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Attachments: Resolution authorizing a subsidy