MINUTES FOR THE STUDY SESSION
Tuesday, April 26, 2005 at 5:00 p.m.
CALL TO ORDER:
Mayor Morrison called the Study Session to order at 5:00 p.m. in the Civic Center Council Chambers.
Councilor Amarotico, Jackson and Silbiger were present. Councilor Hartzell arrived at 5:14 p.m. Councilor Hearn and Hardesty were absent.
City Administrator Gino Grimaldi gave a brief introduction and commented on the importance of this issue and the hard work done by Staff.
1. Reorganization of AFN.
Mr. Grimaldi explained that currently, one person has been doing two jobs. In the beginning, these two jobs fit nicely together; however now that we have a mature system, the knowledge, skills and abilities required to manage AFN has changed. Mr. Grimaldi stated that the City now needs one person who can focus their attention on marketing, as well as push AFN into more business ventures while maintaining the current ventures and keeping up to date with technology. It was noted that there is a significant amount of work in both the Electric and AFN organizations and it would be best to separate the two so that appropriate attention is paid to each. Mr. Grimaldi stated that Dick Wanderscheid would continue to head the Electric Department, and suggested that the City create a separate manager position for AFN.
Mr. Grimaldi noted that the financial aspects of AFN are currently split current split between the Electric/AFN Dept. and the Finance Dept. There is a substantial amount of information that has to flow back and forth between these departments, and because of this split, AFN has experienced difficulty in developing accurate projections and maintaining correct information. It was also noted that currently, the Finance Department has the first contact with customers, but it is then passed off to the Electric Department. Mr. Grimaldi suggested that this separation has caused AFN to lose some opportunities and stated that this problem could be fixed if AFN were placed directly under the Finance Director. He noted that this reorganization would cost approximately $40,000, which could be taken from the Central Service Fund.
Council questioned why AFN wouldn’t be placed under the direction of the City Administrator. Mr. Grimaldi stated that this was not recommended due to his current work load. He explained that this option would require additional time and energy spent on AFN and this would result in a reduction of energy spent on his other responsibilities.
Mr. Grimaldi requested that the Council come to a consensus on the organizational issue, which would allow staff to proceed with the recruitment for the manager position and begin implementing the modified organizational structure. He clarified that if a decision was not reached tonight, it would be the second meeting in May before the Council would have the opportunity to discuss this issue again.
Finance Director Lee Tuneberg briefly explained some the budget implications for forming this position. He stated that 30% of his time is charged to AFN through central services, which means that basically, AFN is paying for the time he spends on it. When they created the budget for this next fiscal year, they adjust this down to show a charge of 20%, since his workload will decrease with the hiring of an IT Director. With this savings, along with that from the removal of the Electric Director and the elimination of a vacant technician position, this is how the reorganization becomes relatively neutral.
It was clarified that much of this budgetary information would be discussed at the upcoming Budget Committee meeting.
Mr. Grimaldi clarified that Staff did not propose a temporary contract for this position because they have been operating under the assumption that the City would continue to provide these services.
The Mayor and Council expressed their support for the reorganization option presented by Staff.
2. Pro forma Discussion
Finance Director Lee Tuneberg explained that all pro formas are built on a certain set of assumptions and information; if you change one thing, the end result can change dramatically. He noted that Staff prepared a smaller cash flow model in order to see where the City was at each month, the model also recognizes the debt service that is due each month. Mr. Tuneberg stated that they held the cable television connections at a lower projection. He also noted that the model goes out 4 years and Staff compared this model to the budget in relation with the bonds. He stated that this model recognizes that staffing costs are increasing approximately 7% a year, materials and services by 5% and programming as much as 10% each year.
Mr. Tuneberg briefly explained the AFN Revenues, Expenses and Cash Flow charts presented in the packet material. He noted that the Ad Hoc Committee had not seen these exact charts and explained that they were not complete at the time initial data was provided to the Committee back in December. Mr. Tuneberg also clarified that this model does not represent a lot of history due to the build out being complete less than two year ago. He added that the past information they do have does not generate as much usable information as they would have liked.
3. Capital Refresh Contingency Fund Discussion
Electric & Telecommunications Director Dick Wanderscheid stated that AFN’s budget for the current fiscal year has $120,000 set aside for capital improvements, and next year it will be $160,000. Mr. Wanderscheid explained that typically, this money is dedicated to new constriction and replacing equipment that fails, however if this is not needed, the department does not spend this money. Mr. Wanderscheid noted that it is the cable television service that is requiring new technology in order to stay current, not the cable modem service. He stated that the proposed budget for the next fiscal year does not include any funds for the potential roll-out of HDTV, video on-demand, or Tevo-like services. He stated that if the City wishes to offer any of these services, the budget will have to be amended to include this additional expense, which will affect the deficit and the amount of subsidy needed. Mr. Wanderscheid noted that it was clear that AFN’s competition is investing in new technology.
Mr. Wanderscheid clarified the difference between pay-per-view and video on-demand. He noted that pay-per-view does not result in a significant profit, but stated that offering this service was necessary to stay competitive.
Mr. Tuneberg stated that Staff’s recommendation is to start setting aside funds for these types of improvements. It would then be the IT Manager’s responsibility to determine which services to offer and to get them implemented. He added that regardless of where AFN is at in regards to revenue, it is important to start setting aside funds for opportunities to enhance the systems operations.
Council asked for clarification on how they should establish an adequate amount to set aside. Mr. Wanderscheid stated that he has crunched a lot of numbers and believes that AFN could do a HD package comparable to our competitions for $60,000-$70,000. He stated that the video on-demand service is more of an unknown at this point, but they typically cost about $150,000. Mr. Wanderscheid stated that it does not seem feasible to do all of these upgrades at once, and the City should determine which services would give them “the most bang for their buck”.
Due to time constraints, Mr. Grimaldi clarified that the pay-per-view issue would be addressed by the AFN Advisory Committee and further discussion regarding the capital refresh contingency fund would take place at the Budget Committee.
4. CATV Rate Discussion
Mr. Wanderscheid explained that AFN raised its rates in January, and at that time an agreement was made with the ISP’s that they would not raise the cable modem rates for another year. However Staff is proposing to raise the cable television rates by 10% in July and noted that this would need to be approved by the Council in May.
Staff is requesting Council’s direction regarding this issue.
Comment was made that AFN’s cable television rates were well below the market rate and support was given to raise the rates to market level.
Mayor Morrison questioned if cable television would ever make money. Mr. Tuneberg stated that he could not say if this was a perennial loser, but stated that the fact is that currently AFN is not charging enough to cover the direct costs, let alone the overhead. He stated that more analysis was needed to determine what the rates and number of customers would need to be for cable television to cover its own costs.
Mr. Grimaldi requested that the Council provide direction on whether Staff should proceed with proposing a rate increase to the Council in May, and whether the increase should be 10% or 30% (which would bring the rates up to market level).
Suggestion was made for the Council to be provided with the projected consequences for each of these figures. Mr. Grimaldi explained that his experience in terms of trying to predict what the market will do has not been successful, even though it was based on market research. He stated the only thing they could provide would be a sensitivity analysis.
Mr. Grimaldi clarified that Staff would bring the rate increase back to the Council in May or June, and would also provide the Council with 3 options and the potential impacts.
Suggestion was made for Staff to address the concept of bundling as well. Mr. Wanderscheid stated that the problem with this is that they do not know who their cable modem customers are, and have little control over the cable modem price. The only way to bundle is to provide a discount on the cable television rates.
5. Electric Utility Subsidy and Council Resolution Discussion
It was noted that this issue was brought forward by Councilor Silbiger.
Mr. Silbiger recommended that the Council make the decision regarding the subsidy rather than the Budget Committee. He stated that this is a Council decision that should be made by resolution.
Mr. Tuneberg stated that it would be appropriate to develop a policy for funding AFN for the next year. He stated that this would need to be determined before the budget is done and stated that the Council needed to reach a decision on whether this should be a loan that needs to be paid back or a subsidy. He noted that establishing the budget is done through resolution, however changing it after it has been adopted would require a supplemental budget process which includes a hearing.
Council agreed to have discussion and make this decision on whether to approve a subsidy at the upcoming Council Meeting.
6. Other Issues
Mr. Grimaldi suggested that the Council discuss the issue regarding predatory pricing at an Executive Session.
Comment was made that there was no information in regards to selling AFN. Councilor Silbiger noted that if AFN was sold, the City would still be required to pay off the debt service and stated that this was not a good idea. He added that they have been placed in a difficult situation, but needed to work towards the best possible solution.
ADJOURNED: Meeting adjourned at 6:45 p.m.
Barbara Christensen, City Recorder