Burlington Chief Administrative Officer Bob Rusten testifies Tuesday at the state Public Service Board.
Aggressive questioning by state regulators on Tuesday revealed that Burlington officials did not try to determine the market value of the city-owned telecommunications network prior to agreeing to sell it to a local businessman for $6 million.
Burlington Chief Administrative Officer Bob Rusten acknowledged that the city had not consulted investment bankers, independent appraisers or bond underwriters in order to calculate how much Burlington Telecom might be worth. Rusten did not explain why such evaluations were not carried out.
The $6 million deal with Trey Pecor, owner of the Lake Champlain ferry system and a contributor to Mayor Miro Weinberger's political campaigns, is the linchpin in a pending settlement with Citibank intended to lighten the load of the BT albatross. Citibank agreed in February to accept $10.5 million to settle a $33.5 million suit it had brought against Burlington five years earlier. The bank had argued in federal court that the essentially insolvent telecom enterprise should be required either to return equipment it had leased from Citi or cover the claimed value of that property.
Although Pecor would become the de facto owner of BT, the utility's operations would be leased back to the city under the terms of the proposed deal. Burlington would in turn continue to cede day-to-day decision-making authority over BT to the Dorman and Fawcett financial advisory firm. The Citi settlement also calls for Burlington to seek another buyer for BT in the coming years, with Pecor, the city and the bank getting varying shares of the proceeds of an eventual purchase by another party.
City officials defended the bridge-financing arrangement with Pecor in daylong testimony Tuesday before the state's Public Service Board in Montpelier. The three-member board will decide in the coming weeks whether to approve the proposed sale, which is being financed by Merchants Bank.
In written testimony given to the PSB, Terry Dorman, a financial advisor to Burlington, described various efforts to resolve the situation. Dorman discussed the city's negotiations with Citibank and said the city also had explored the sale or refinancing of Burlington Telecom with more than "30 entities." Citibanks' lawsuit, Dorman said, had created uncertainty and prevented offers. Ultimately, he took two written proposals from investors to the City Council, which selected Pecor's as more advantageous to taxpayers.
Dorman and the mayor both "described the extensive and sustained work that the city did with a range of potential investors and lenders to test the market and secure as high a value for BT as the market would bear," according to Mike Kanarick, Weinberger's chief of staff.
It also emerged on Tuesday that the city had not sought to preserve public ownership of Burlington Telecom by asking local voters to approve a bond as an alternative means of financing the settlement with Citibank.
In addition, Rusten made no objection when a board member suggested there is little hope of recouping more than a small fraction of the $17 million in local taxpayer money lent to BT without authorization beginning in 2008. The administration of former Mayor Bob Kiss had secretly funneled those funds to the floundering utility in a desperate attempt to keep it afloat.
In explaining why the city did not choose the option of issuing a bond, Rusten told the board that Citibank would not have agreed to wait for a projected six to eight months to see if Burlington could secure that financing instrument. Kevin Fitzgerald, an attorney for Citi, confirmed in an interview during a break in proceedings that the bank has wanted the $10.5 million settlement to be concluded as quickly as possible.
Another reason for rejecting the bond option, suggested public-access television executive Lauren-Glenn Davitian, is that the Weinberger administration “isn't willing to use its political capital to preserve BT as a public asset.”
Davitian commented outside the hearing room as a leader of a coalition of public-access media groups that are trying to ensure that BT continues to work cooperatively with them. "BT has been good for public access," Davitian said. The grassroots media advocates warn that putting the telecom in private hands will eliminate public control over a technologically advanced and potentially highly valuable internet and cable TV network.
Weinberger likely calculated there would be a high risk of the Citi settlement unraveling if he asked Burlington voters to pour more money into the telecom business. The mayor has been striving since taking office more than two years ago to mop up a mess that has soiled the city's credit rating and polluted the local political atmosphere. And he has decided this can best be achieved by sharply diminishing, or ending, the city's role in running a telecommunications operation.
“Telecom, internet and video present unusual dynamics where business practices are constantly subjected to disruptive forces from changes in technology, market demands, and mergers and acquisitions," Weinberger wrote in comments to the Public Service Board earlier this month. "Exposing further taxpayer funds to speculation in this marketplace is simply not prudent."
His written testimony also said the current proposal is "the only viable solution we have found after two years of focused work and negotiations on this issue." He also said that state law, the city's charter and orders from the PSB prevented the city from spending any new tax dollars on Burlington Telecom.
In his testimony on Tuesday, Rusten said it wasn't clear that the city would be able to find takers for a bond pegged to an entity as wobbly as BT. But a Public Service Board representative pointed out that bond markets have demonstrated “strong demand for speculative-grade high-yield debt for several months,” and interest rates for those instruments have been dropping. And Rusten did not directly reply to a question as to why the city did not choose a financing option that might have imposed a 5 percent interest rate rather than the 7 percent the city will pay under the deal with Pecor.
BT has meanwhile achieved financial stability under the stewardship of the Dorman and Fawcett firm. BT could even be on the road to profitability—were it not for the money it owes Citi.
The utility might ultimately fetch a higher-than-previously-assumed price if the Public Service Board approves the deal.
Asked to comment on some of the complexities of the BT case, Rusten begged off at a few points during his two and a half hours testimony on Tuesday, telling interrogators that he is not a lawyer and has been the city's chief administrative officer for only the past year.
The high degree of importance that the Weinberger administration attaches to the board's deliberations was evidenced by the presence in the hearing room of numerous city officials as well as BT executives. Team Miro was also heavily lawyered-up, with city attorney Eileen Blackwood accompanied by outside counsels.
Updated 2:30 p.m. July 25 with additional details of testimony from Weinberger and Dorman.