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January 10, 2011

Burlington Telecom Continues to Drag Down City's Bond Rating

In what is becoming a routine event, the credit ratings agency Moody's has once again downgraded Burlington's bond ratings due to the fact that city leaders have failed to determine how Burlington Telecom will repay $16.9 million to the city's checkbook.

The credit ratings agency twice downgraded the city last year, along with other city-run entities including the Burlington International Airport. The credit downgrades affect about $87 million in debt and will make borrowing money more expensive each time the city goes to the market to borrow anew or refinance debt.

"The downgrade reflects our view that recovery of the outstanding $16.9 million balance due to the city's pooled cash account from Burlington Telecom (BT) is unlikely to occur over the medium-term, if at all," Moody's noted in its release, which was issued Friday. Mayor Bob Kiss' office released the information today.

Burlington Telecom continues to rack up costs for city taxpayers as consultants and lawyers attempt to chart its future. A meeting scheduled for this week to publicly discuss BT's current status has been postponed until January 26.

Read the full Moody's Ratings Release below.

APPROXIMATELY $87 MILLION OF OUTSTANDING PARITY DEBT AFFECTED

Municipality
VT

Opinion

NEW YORK, Jan 7, 2011 — Moody's Investors Service has downgraded to A3 from A2 the City of Burlington's (VT) general obligation bond rating, affecting approximately $87 million in outstanding parity debt. The bonds are secured by a general obligation unlimited tax pledge. Concurrently, Moody's has downgraded the city's outstanding A3-rated Certificates of Participation (COPs) to Baa1 and its outstanding Baa1-rated COPs to Baa2, affecting $4 million and $10.4 million in outstanding COPs, respectively.

RATINGS RATIONALE

The downgrade reflects our view that recovery of the outstanding $16.9 million balance due to the city's pooled cash account from Burlington Telecom (BT) is unlikely to occur over the medium-term, if at all. The rating action incorporates the city's reduced liquidity and reliance on cash flow borrowing resulting from the use of its pooled cash account to finance the expansion of BT. The A3 general obligation rating also factors the city's strength as the economic center of Vermont (G.O. rated Aaa/stable outlook), as well as its manageable debt profile and relatively stable General Fund operations.

The negative outlook reflects the possibility of further downward rating movement. While the city is actively pursuing a viable long-term solution for the telecommunications system there remains a high degree of uncertainty regarding future costs related to the BT issue as well as the city's ability to place the enterprise on a more sustainable path and ultimately repay the funds owed to the city's pooled cash account.

UNCERTAINTY REMAINS REGARDING PROSPECTS FOR REPAYMENT TO POOLED CASH FROM BURLINGTON TELECOM; CITY REMAINS RELIANT ON CASH FLOW BORROWING TO FUND OPERATIONS

The city's audited fiscal 2009 financial statements (as of June 30) include an amount of $15.05 million due to the city's pooled cash account from BT. Subsequently, this amount grew to approximately $16.9 million. Importantly, the amount due to the pooled cash account has not grown beyond this level as the city is currently prohibited from making any additional draws on the pooled cash account to fund BT obligations, following a Vermont Public Service Board ruling. The increase in the liability at the end of fiscal 2009 represents a substantial $7.3 million or 85% increase from the negative $8.6 million balance at the end of fiscal 2008 and a 212% increase since the end of fiscal 2007. The amount due from BT is the result of a prolonged period of support from the city's pooled cash account to fund the citywide build out of the telecommunications system, which remains behind schedule. Despite the city's efforts, the telecommunications system has been unsuccessful at generating the cash flows necessary to self-fund its capital and debt expenses or to achieve a realistic refinancing plan to repay the interfund loan due to the pooled cash account. The city has historically included the General Fund and the airport enterprise (rated Ba1/negative outlook), among other smaller accounts, in its pooled cash management program.

Notably, at negative $16.9 million the interfund borrowing represents a sizable 192% of the city's fiscal 2009 General Fund balance of $8.8 million and 218% of the combined General Fund and School Fund balance. Of note, the School Fund maintains an accumulated negative $1.06 million fund balance position. As noted in the city's 2009 audited financial statements, which received a qualified opinion, the amount due to the pooled cash account may be addressed for accounting purposes with a General Fund transfer if it cannot be demonstrated that the interfund loan will be fully or partially repaid within a reasonable time frame. Assuming the General Fund fully reflects this interfund loan and adjusting fund balance for the illiquid nature of the receivable, the city's Moody's adjusted General Fund reserve position declines to a weak negative 16% of General Fund revenues from its current positive level of 17.6% of revenues. Also, with reduced liquidity, the city remains heavily dependent on unrated tax anticipation note (TAN) borrowings to fund operations, regularly issuing the maximum amount of TANs allowable under its charter (25% of the tax levy) throughout the year, or approximately $16 million in fiscal 2009, to bridge cash shortfalls between quarterly property tax receipts.

Further, the city has terminated a $33.5 million lease with CitiCapital, which funded the build-out of the telecommunication system. The lease was terminated for non-appropriation of funds in 2011 following the full drawdown of the debt service reserve fund (DSRF). Lease payments were suspended in February 2010 following a state Public Service Board ruling preventing the city from utilizing any additional funds from its pooled cash account to fund telecommunications related obligations. Importantly, the circumstances of non-payment on the lease are due primarily to the ruling by the Vermont Public Service Board prohibiting the city from utilizing its pooled cash account to fund BT obligations rather than an unwillingness of the city to fund its lease obligations. CitiCapital has requested repossession of the leased assets. The city's options may include returning the existing equipment to Citi or purchasing replacement matching equipment. The replacement value of the equipment is estimated between $6-$8 million.

STABLE GENERAL FUND PERFORMANCE HELPS MITIGATE INSTABILITY OF TELECOM OPERATIONS

The city's draft financial statements indicate fiscal 2010 ended with an estimated $900,000 additional to General Fund balance, continuing the city's trend of positive General Fund operations. As previously reported, the school fund maintained a modest accumulated deficit through fiscal 2009. Draft fiscal 2010 School Fund figures are not yet available. The city's fiscal 2011 budget represents a modest 1.5% increase over the prior year and is balanced, in part, with a non-education tax rate increase of 1.1%. The budget does not incorporate the use of fund balance as a revenue source. The city's ability to maintain stable General and School Fund operations will be an important consideration in future rating reviews given our expectation of continued uncertainty regarding telecom operations.

STRONG HEALTH CARE AND HIGHER EDUCATION INSTITUTIONS ANCHOR STABLE TAX BASE

We anticipate Burlington's $3.9 billion tax base to remain stable over the near term given the diversity of the city's local economy, its regional importance, and the stabilizing effects of higher education and essential health care institutions. Health care, higher education and public sector employment represents approximately 36% of total jobs, including three of the city's five largest employers, Fletcher Allen Healthcare (rated Baa1/stable outlook), the University of Vermont (rated Aa3/negative outlook), and the U.S. government, which compose a combined 9,800 jobs, or 9% of the city's workforce. The region's private sector economy is anchored by Vermont's largest single employer, IBM (5,400 jobs- senior unsecured debt rated Aa3/stable outlook).

Outlook

Future rating actions will incorporate any material developments regarding the operating status of Burlington Telecom, specifically as they relate to the city's financial position. Additionally, given the city's reliance on cash flow borrowing, Moody's will continue to monitor the city's cash position, its ability to address qualifications in the audited financial statements, and meet day-to-day operating requirements and general fund debt service payments.

What could move the rating UP (remove the negative outlook):

- Reduction or elimination of the amount due from BT to the pooled cash account

What could move the rating DOWN:

- Inability to make meaningful progress towards repayment of the interfund loan

- Lack of a viable plan to place the telecommunications system on a more sustainable path or growth on the negative net asset position of the Telecom Fund

- Lack of, or challenges attaining, market access to fund operations via tax anticipation notes

-Structurally imbalanced General or School Fund operations, reducing the city's financial flexibility

KEY STATISTICS:

2007 population (estimate, US Census): 38,531 (-0.9% since 2000)

Estimated student population: 12,000 (31% of population)

2009 Full valuation: $3.9 billion

2009 Full value per capita: $101,879

Per capita income (% of state, % of nation): $19,011 (92.2%, 88.1%)

Median family income (% of state, % of nation): $46,012 (94.6%, 91.9%)

Net Direct Debt burden: 1.0%

Amortization of principal (10 years): 60%

FY09 General Fund balance: $8.8 million (17.6% of General Fund revenues)

FY09 Undesignated General Fund balance: $4.8 million (9.6% of General Fund revenues)

FY09 Undesignated Operating Fund balance (City and School Funds combined): $3.2 million (3.1% of revenues)

Press release from Kiss stating that Moody's is full of shit in 3... 2...

Bet they wish they had done the financing with Piper Jaffrey over a year ago. We're paying for consultants and lawyers because the dolts on the council want to make political points. We'll I'm tired of paying for petty politics.

OY: it wouldn't have happened. PJ would have taken it to market and there it would have fallen apart as they tried to sell it. It wasn't a good deal for anyone - especially the taxpayers. The Council was right in stopping that. We'd be worse off now, believe it or not.

It wouldn't have made it to market. PJ hadn't done any due diligence when the concept was presented. BT didn't even have a business plan at that point. I don't mean they didn't have a good business plan, I mean they didn't have ANY business plan.

PJ never cared about BT's business plan. They were ready to loan the money to the city. What's BT got to do with that from their perspective?

PJ wasn't loaning anything. They were agreeing to underwrite the offering. Up to individual investors to decide whether to invest. PJ's deal was contingent on the "moral obligation" of the City to repay. Anyone who thinks PJ was going to solve this problem is way off base.

For those with short memories, from a BFP story at the time...

"In an e-mail Thursday to councilors and city officials, Paul said she had spoken with Piper Jaffray senior Vice President Jay Hromatka about the proposed BT borrowing. Hromatka said Piper Jaffray has not examined BT finances carefully but is concerned “about the city’s ability to repay the debt,” Paul wrote.

Leopold told councilors the city’s overall credit rating would act as the backing for the new financing. He said the city must do its own due diligence and be comfortable with its ability to repay the loan before entering into an agreement with Piper Jaffray."

Again, keep in mind that when the "blue ribbon" committee asked for a business plan, BT did not have one to give them. First they tried to give them pro formas, then when reminded that pro formas are not a business plan, they asked for additional time to go write one.

Beyond the obvious fact that PJ would have pulled out of this, the CC did the right thing in not taking on debt that BT couldn't demonstrate a path out of. According to whom? JONATHAN LEOPOLD.

isnt there supposed to be a 1,250,000 dollar surplus from the money we didn't spend to pave the roads?
Moodys only sees a general fund balance of 900k where the hell is the rest of that cash? We were not supposed to be spending the 350 on consultants and Mc Neil lawyering compliance or noncompliance issues as the case may be.

What happens to the rating when Leopold moves the cash pool "liar loan" from asset to liability? Kiss is swirling the drain.
And OY if you had no money to pay the Piper Jaffery last year and you borrowed more money you would just be further in debt and allow Leopold to steal even more money. You are an idiot and that's saying as nicely as I can.

Update on special BT meeting.
According to the Mayor and council at Monday's Jan 10 council meeting the new date for the special BT meeting is Thursday Jan. 27 at Contois, 6 pm.
Stay tuned for the format to be used for this meeting, that is as controversial as the damn BT mess itself.
Pile one controversy on top of another, what do you get?
16.9 million controversies.

This is WORSE than the Fletcher Allen debacle a few years ago. Criminal charges are a good idea.

step one: resign LIE-OPOLD
step two: resign KISS
step three: CitiFinancial sells BT assets for $10 MM
step four: City of Burlington signs lease with new owners for space at 200 Church, thius the slow repayment of the 17 million loaned

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