The lesson of Burlington Telecom: Private business and public government don’t mix

As the sale of Burlington Telecom looms, the City Council has left the door open for a public-private partnership, with the city retaining up to 40 percent ownership. Proponents appear to have overlooked the central lesson of the Burlington Telecom fiasco, however: private business and public government don’t mix. While new management is in place at the internet service provider, root problems remain. A public-private partnership would not solve but only add to them.

Burlington Telecom crashed and nearly brought the city down with it for three reasons. First, it has no ready source of capital. The city is prohibited from providing funds or pledging the credit of taxpayers. The last time around, the organization secured financing from CitiCapital only because the city provided a legal opinion misrepresenting that point. After the CitiCapital funds were exhausted, Burlington Telecom began secretly raiding the city’s “cash pool” after it was unable to obtain additional financing elsewhere. It could not, and still cannot, repay the $16.9 million taken illegally.

Second, there is a fundamental conflict between the transparency required for a government to remain accountable to its constituents, and the confidentiality required for a private business to compete. In the name of confidentiality, the Mayor Bob Kiss administration kept city councilors, state regulators and the public in the dark about BT’s finances. Nor did it disclose the fact that the telecom was routinely violating provisions of its certificate of public good designed to protect Burlington taxpayers. Although the city’s auditor warned that the city was not heeding regulatory requirements, the Kiss administration kept that warning to itself. When city councilors were eventually informed, they were told in executive session so they could not tell state regulators or the public.

Third, unlike business people, politicians want to get re-elected. They are not wont to reveal bad news before an election. The Kiss administration did not disclose Burlington Telecom’s problems to the public or to city councilors (two of whom were running against Kiss for mayor) until after the March, 2009 election — even though the chief financial officer, mayor and city attorney all knew about these problems by November 2008. At that point, according to the city’s outside attorney, Burlington Telecom had illegally taken about $10 million from the city’s “cash pool.” By the time state regulators and the public were told in September 2009, BT had taken $6.9 million more — leaving a total debt of $16.9 million which remains unpaid today.

Finally, of all the competitive markets a municipality might enter, telecommunications is one of the most challenging. As Mayor Weinberger stated in written comments to the Public Service Board in 2014, “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. Exposing taxpayer funds to speculation in this marketplace is simply not prudent.”

Those root problems remain. Although Dorman & Fawcett has done commendable work in keeping the telecom afloat since 2010, its financial picture may not be as bright as it appears. For one thing, Dorman & Fawcett itself has deferred its compensation (more than $400,000/year at 7 percent interest) until it is sold. Moreover, the organization is virtually certain to need additional capital in the future, either to replace and upgrade equipment, expand service (service remains unavailable to about 20 percent of Burlington residents) or deal with unforeseen financial difficulties.

Where will such capital come from? As owners of a 40 percent interest, will taxpayers and city councilors be entitled to see a business plan and complete audited financial statements, prepared in accordance with GAAP, before any such borrowing? And how will taxpayers be certain that funds do not come from city coffers? Again, audited financial statements are essential, but so are full and open public meetings where taxpayers can have their questions answered on the record (no more “executive sessions”).

Public officials who knowingly spend public funds in violation of laws and regulations designed to protect taxpayers must be subject to liability for any loss that results. While that seems fundamental, the Mayor Miro Weinberger administration argued against it in the case against Jonathan Leopold, and the Vermont Supreme Court agreed. Remarkably, the Court said public officials do not owe taxpayers a fiduciary duty with respect to their funds.

A public-private partnership raises additional concerns. If the city joins with a private entity which will own 60 percent of the new company, the city will be left as a minority shareholder with no power to control BT’s direction or policy. Even if the 60 percent partner is initially sympathetic to the city’s goals, nothing prevents it from selling — or being forced to sell — its shares to a new entity more interested in making a profit than serving Burlington residents. (Remember how Burlington College’s land wound up in the hands of a developer, even though the Catholic Diocese sold it to the college to keep it open?) Because minority shareholders in a close corporation are essentially powerless, their shares are worth significantly less than the majority’s. The difference is known as a “minority discount,” and it is generally steep. Given these realities, why is it in the city’s interest to retain an equity interest rather than selling outright?

On the other hand, if the city retains a 40 percent ownership with the remainder owned by small individual investors, the city will become the controlling shareholder as a practical matter. It will then face an additional conflict between its loyalty to such investors and its obligations to residents of the city. The interests of those two groups may well differ. Serving two masters will only complicate Burlington’s already-complex efforts to operate BT as a for-profit enterprise.

Last time around, the city’s foray into telecommunications ended up costing Burlington taxpayers $16.9 million (not counting a number of feasibility studies beforehand) — despite promises by politicians and guarantees by state law that taxpayers would not be at risk. When push came to shove, both the promises and the legal guarantees proved illusory.

Absent an independent source of capital not based on a taxpayer guarantee, books and records open to inspection by the public and its representatives at all times, open meetings where finances are disclosed and residents can get questions answered, annual audits based on generally accepted accounting principles available to the public, and liability when city officials deliberately violate laws and regulations designed to protect taxpayers, the same thing could happen again. Or, the city could simply bow out.

Image courtesy of Burlington Telecom

2 thoughts on “The lesson of Burlington Telecom: Private business and public government don’t mix

  1. Burlington Telecom needs to be sold as the City has no business , being in business
    as a private entity !!

    When “SOLD” any and all profit needs to be placed in a special fund for the tax payers
    due to the fact that City Government inappropriately took the money ” shameful “.

    Mayor Bob Kiss and Jonathan Leopold = $16.9M they should be sitting in Jail and why
    would any one trust the current City Government , cut from the same cloth !!

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