City Hall Criticizes State 'Audit' of Burlington Telecom

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Late Tuesday, the Kiss Administration issued a 21-page rebuttal to last month's blistering review of Burlington Telecom and the city's oversight of the fledgling telecom.

The so-called "Larkin Report" was initiated in October 2009 by the Vermont Department of Public Service as the city sought relief from a few key conditions contained in its certificate of public good. This was when it was first revealed that the city had used $17 million in taxpayer funds to prop up BT over the course of several fiscal years.

The report, conducted by Larkin and Associates, was released December 10, 2010 and claimed that BT was in violation of Condition 60 of its CPG since its inception, and that BT overpaid for installation services and programming — perhaps twice as much. Condition 60 forbid the city from using any taxpayer funds unless they could be repaid within 60 days.

The report also questioned BT's long-term viability, and whether city officials had fully informed the public and city councilors about the extend of BT's financial problems.

The report was issued just days after the city told state regulators that it had backed out of its $33.5 million lease finance arrangement with CitiCapital and was seeking new financial and strategic partners. Consultants Dorman & Fawcett have been leading those talks and are one of several outside firms who have been brought in to help reorganize BT.

Mayor Bob Kiss and his administration took issue with the report as soon as it was released, but now they've provided additional details and documents they claim the consulting firm either missed, or failed to acknowledge.

"The Larkin report omits critical facts, contains inaccuracies, fails to verify assumptions and relies on dated information.  Moreover, Larkin did not engage person-to-person with key city staff or the city’s auditing firm and financial consultants," said Kiss in a memo to the city council. "While we have several concerns about the Larkin Report that needed to be addressed, our focus is to continue to move forward to preserve Burlington Telecom as an asset providing significant value to Burlington and potentially Vermont.”

On Thursday night, a special city council meeting will be held in City Hall Auditorium at 6:30 p.m. The meeting is being billed as a chance for the public to get information about the status and future of Burlington Telecom and have questions answered. Champlain College's vice president David Provost, who chaired the Burlington Telecom Blue Ribbon Commission, will facilitate the meeting. Residents will be given up to three minutes to speak, but are encouraged to submit questions in advance. Questions may be submitted in advance here.

Here is what the city had to say in response to Larkin's conclusions:

• Larkin’s methodology. In drawing its conclusions, Larkin failed to speak with the City’s independent auditors, Sullivan, Powers & Company, anyone from the City administration or Clerk-Treasurer’s Office, or the City’s financial advisers Dorman & Fawcett. In failing to do so, Larkin omitted key information that would have addressed or contradicted many of its concerns. This problem is exacerbated by Larkin’s failure to incorporate and assess information regarding significant progress for BT, available before the report was issued, clearly relevant to its conclusions.

• BT as a “going concern.” Larkin’s analysis of this issue neglects a crucial element — the City and CitiCapital’s mutual acknowledgment that the lease on BT’s equipment has been terminated. Because Larkin appears to misconstrue the nature of the lease agreement, their analysis does not contemplate that the lease payments may cease to be an obligation of BT. News of the City and CitiCapital’s acknowledgment of the lease’s termination was public and available to Larkin prior to the report’s issuance. Cash flow — or earnings before interest, taxes, depreciation and amortization ("EBITDA") — is the fundamental test of a business's viability. BT's cash flow, while modest, is positive.

• The City’s response to BT’s financial issues. Larkin makes several errors and omissions regarding the City’s identification and communication of BT’s financial issues. There is an extensive record on this subject available to Larkin but ignored. [In its response, the city provided minutes from several meetings in 2007 and 2008 which appear to indicate that city councilors were apprised of BT's financial problems, auth. note]

• Condition 60.

o Larkin’s claim that City officials became aware of the Condition 60 violation prior to November of 2008 is based solely on assumptions drawn from interpreting one workpaper created by Sullivan, Powers & Company during the FY2007 audit process. Larkin never spoke to Sullivan & Powers, or anyone with the City, or BT about this claim to verify it. Workpapers are kept confidential by Sullivan & Powers and were never shared with anyone at BT or the City during the FY2007 audit process or anytime prior to Larkin initiating its report more than a year ago. There was no discussion of a Condition 60 violation in the 2007 management letter issued by Sullivan & Powers in June of 2008.

o Larkin’s analysis of BT’s compliance with Condition 60 since its inception appears to misunderstand the nature of the City’s access to the Koch and CitiCapital financing. Until 2007, BT had first Koch and later, CitiCapital financing funds available to repay advances from the cash pool. When BT’s CPG was issued, the record is clear that BT had funds available through the Koch financing that exceeded BT’s negative pooled cash balance. Contrary to the assertion by Larkin, there was no restriction on the use of these funds to meet BT’s debit to pooled cash (with the exception of the $1 million debt service reserve under the CitiCapital financing).

• Accounting issues. Larkin’s analysis demonstrates a lack of understanding of municipal accounting practices. The City’s accounting practices are consistent with established municipal accounting standards and most other Vermont municipalities. Larkin makes errors regarding pooled cash interest charged to BT, how expenses are booked, and timely posting of expenditures. Moreover, Larkin repeats issues raised in the City’s audit management letters that were addressed by BT six months to a year prior to the report’s issuance.

Download the city's full response here: Download CityRebuttaltoLarkin

Comments

[dale tillotson]

Of course nowhere here does it address the findings on page 47 of the Larkin audit that indicates that BT did not cooperate with them when they went to BT offices. So yes easy to say they audit is incomplete when BT did not cooperate, another way of wiggling around the fact the administration used 16.9 million out of the cash pool improperly.
Be careful when walking by city hall as snakes hibernate in the snow and crawl up an innocent victims leg, and get themselves internally inserted in a humans body to stay warm.
This my friends is what we call a snow snake.

[Little Boi]

Whatever Bob. When are you going to resign? This ain't about politics, Bob. This is about competence, so get lost.

You illegally flushed $17M worth of taxpayer funds down the toilet. You've delegated authority to a crook and defended his actions without apology. Your simple simon statements about moving forward and preserving the asset are tiresome and unhelpful.

So Bob, you've lost all charm - your time as Mayor has been an embarrassment to say the least. People, even those who voted for you, are dreading having another year of you as Mayor. The best thing you can do for the City and BT right now is to resign. Why are you not doing that? Don't you care about "moving forward?"

[Gay Bob]

I don't know where Dale nor Little Boi live, but apparently it's not in a Ward where there's a contested Councilor's seat. Otherwise I'm sure they'd be willing to attend meetings and voice their opinions where it counts.

[oy]

City politics is a sewer and Kiss is one of very few people who have tried to rise above it. As Kiss says, BT is a valuable asset and can and should be saved, but it has taken three times as long to deal with because the lowbrows who want to take the opportunity to bring down the mayor and his party. Whatever. What you're bringing down is something that's valuable to the city. BT wasn't a creation of Bob Kiss. It was voted on by the citizens of Burlington after it was presented as a great option to dumping our tax dollars to Comcast. Save it and you'll be smart. Keeping farting around and you'll get your wish about dumping the Mayor but you'll lose BT. Rant all you want but Kiss will still have his soul. Will you?

[frank frank]

I agree with OY.

Save BT.

Step one: Kiss & Leopold Resign
Step two: Sell BT
Step three: Sign up for BT

[Tim]

"Be careful when walking by city hall as snakes hibernate in the snow and crawl up an innocent victims leg, and get themselves internally inserted in a humans body to stay warm."
Dale that is one tortured metaphor.

"BT is a valuable asset and can and should be saved"
Oy can you point to some value? Even the cable beneath the streets is no longer owned by Burlington.
I don't think that it is partisan or unfair to say that Burlington Telecom has become a financial and political albatross, or that Progressives are going to be wearing it for years to come, to quote from the Beatles song:

Boy, you're gonna carry that weight
Carry that weight a long time

[Bill]

This farce continues to boggle my mind. Bob Kiss complained on VPR that there were 65 very difficult regulations that BT had to understand. 65 is too many for his febrile pea brain to comprehend at least not in a reasonable amount of time for a man who would call himself mayor.
65 regulations he rolled up the paper and shoved it into a hole and hoped that in time he would understand by osmosis but it didn't work.
Bob Kiss never asked the City attorney Schatz who is at his beck and call 24/7. to explain those pesky regulations he thought having them shoved in deep would make him understand.

Jonathan Leopold was in charge anyway and Bob just wanted to hear about his rabbit farm.

It was unreasonable for Jonathan Leopold to understand the 65 regulations either Bob kept the papers away from Schatz and John in his hole.

Observing Leopold it appears that regulations from the state are just tough to get his mind around. It would be unreasonable for a man in charge of millions of dollars to bother with the rules. He was and is Jonathan Leopold aka Chuck Noris of city gubmint , he don't need no stinkin' rules.

Jonathan Leopold makes the rules. Hell Jonathan Leopold makes up his own accounting schemes red is black and deficits are assets Municipal accounting with the Leopold swagger.

Kiss and his entire bullpuckey response hinges on a defense I was negligent of the rules wont play in court.

All the talk of a cash flow positive company is just another negligent comment from a man who is not capable of understanding basic law.

NEGLIGENCE is NOT A DEFENSE it would be reasonable for a man tasked with operating a multi million dollar business to learn the rules or ask his staff lawyer to explain rules before loaning money with no collateral you idiot.

[Jimmy]

"You can't prove that we knew about Condition 60. Well OK, you have some proof, but not a lot."

I honestly don't understand the point of this memo. Everyone on the city council knows what happened. As Bill points out, it doesn't matter when they knew about Condition 60 (or the City Charter that forbade the $17m "loan," or the VT state law). The wrongdoing that was required to keep this stinkburger alive was egregious.

They seem proud that their crappy little company is "cash flow positive," even though they have to charge more than Comcast to do it, provide worse service, and do it using equipment that they don't own, all while carrying an eight figure debt that they can't make payments on. Forget the inescapable necessity of a telecom company to spend significant amounts to keep up with technology - amounts that they are implicitly admitting here that they don't have, and have no way to generate.

Oy, Kiss sold his soul a long time ago when he looked into cameras and said that there was no risk to taxpayers. He was lying to our faces then, and he knew it. He just seemed to forget that selling is supposed to involve getting something in return. All he's going to have is the legacy of being the bozo at the wheel when the City went bankrupt.

[Bill]

In this Case "EBITDA" = Earnings before we Tell dumb Ass (the truth) Hey Bob kiss dumbass you are running your business with stolen equipment!

Citi has a master lease agreement which Jonathan Leopold signed in which Section 11 states that any money you earn with their equipment is first used to satisfy the debt. Just because you declare the lease void does not let you continue using the equipment rent free. You have zero earnings dummy.

Those "earnings" should be held in escrow so we will be out the operating costs employee and other fixed office costs plus any money you have used to "run" Burlington telecom with the STOLEN equipment.

If you leased a banana stand and then you stopped paying for it and continued to operate the banana stand do you think the judge would allow you to keep the money dummy?

It is an embarrassment that this man is our Mayor his logic defies gravity.

[Cathy Resmer]

Just a reminder to keep it civil, please. I deleted a comment that we felt crossed the line.

[Tim]

"I keep a close watch on this heart of mine
I keep my eyes wide open all the time
I keep the ends out for the tie that binds
Because you're mine, I walk the line"

[Dick]

At this point the City Council and Bob Kiss are working together trying to sell BT to a private "partner" and retain a piece of the future BT in order to pay the $17Million Leopold illegally allocated. This fantasy is so absurd, I can't believe it gets printed.

Burlington has nothing to sell. CitiFinancial owns it all. But for the sake of discussion, let's suspend reality and say that Burlington found someone to buy replacement equipment as the Mayor and some councilors have seriously suggested and incredulously seem to be pursuing - why would investors need or want to cut the city in?

Remember, Burlington terminated the lease. Now CitiFinancial owns the fiber on the poles, th equipment at 200 Church and in the field, including in your home if you are a BT customer. They own the name and the revenue streams. The only fanasty the City of BTV can harbor is to replace the equipment because the bank ain't going to sell it to the folks who just said adios.

The idea is just so damn absurd and the councilors I spoke with are so freaked out by not have a way to get the $17 Million back they are clinging to the fantasy life boat. Councilors: there is no lifeboat - you are delusional.

This is a guess, but the best thing the City can do is to encourage any investors to negotiate directly with CitiFinancial to purchase BT assets. The City can then collect rent from their building at 200 Church. The building was purchased by BT but bizarrely not included as collateral in their Lease with CitiF. The building must be in the 40,000 sf range. What's the going rate for office space in downtown BTV. They can collect rent and say with a straight face that the money is coming back in through the long term lease with the new owners of BT.

Divorced from City Hall, BT gets a new lease on life, and thus has a fighting chance to rebuild its relationship with the residents of Burlington. Until that divorce, it will not happen. It is pure fantasy to think otherwise.

Councilors wake up.

[Jcarter]

What this all really is about can be simplified into two things.

A.) Bob Kiss is in over his head and has been since the start. Sanctuary City, Banning Guns in the City, the Veteran's Day Debacle, Kiss has has one gaffe after the other. He was elected after Leopold illegally had his stooge open the ballot boxes TWICE, was re-elected with less then 30% of the vote and has lied and argued semantics to cover up his incompetence. Kiss is incapable of admitting he was wrong and so he continues to pursue BTC hoping for a miracle.

B.) The City Council, most of them anyways, continue to pursue BT as well. They can't fathom looking at their constituents and acknowledge that they weren't on the ball and that led to 17 Million to be gone, a $33 Million debt to accumulate, the City to default on a loan, and the resulting downgrade to the Cities Credit Rating that is now costing the taxpayers Millions of more dollars on bonds.

Someone needs to stand up, have some stones and say, listen... BT has run it's course. The Council and Administration made mistakes. We acknowledge that and will learn from that. These are the changes and safeguards we will implement to ensure this type of thing will not happen in the future.

Instead we get the delay of various charter changes designed to give the public a voice, the twist in all this... it comes from a councilor running for Mayor. Wonder why she would like to ensure that the public can not hold the Mayor accountable?

[Tim]

I'd like to see an accounting of the 16.9 million dollars- did it pay for salaries, equipment, electricity, lawsuits, trips to Vegas, what?

Is it accounted for? Or is it simply gone?

[Jcarter]

Tim,

There were several instances specified in the Larkin report, most dealt with over/double billing. Sometimes as much as $1500 to install cable in a single home. However, the report was hindered in trying to account for money because BT never kept records that allowed for that type of analysis. It appears that their records looked like this

- Revenue $50,000
- Expenditures $45,000
- Balance $CashPool

Leopold and Kiss had this planned out well in advance as to how they could hide their thievery.

[Tim]

So, you're saying that they excercised about the same level of control over these funds as they did over the cashbox at the Perkins Pier?
Good grief.

[Jcarter]

A perfect illustration of how far Kiss' head is buried in the sand. From last nights meeting Kiss reiterated that the PiperJaffey deal would have saved BTC. Both representitives from Dorman and Fawcett as well as the Blue Ribbon Commission said that was absolutely false. With the BRC rep calling it what we all already know..."disturbing."

What is almost as disturbing is the assertion by D&F that BTC is now cash flow positive (except for the debt). My question to that is, all the revenue being generated , is it even BTC's? It's Citi's fiber, Citi's equipment, Citi's system. BTC owes them 33.5Million, how does anyone think that the monthly checks being written should go to the city? If someone else owns a convience store and pays for the store, supplies, etc and I simply ring them up and accept payment that hardly entitles me to that money.

Someone needs to stop this train wreck until it is determined what is and what isn't. The PSB needs to step up and place a phone call and say hey, what's going on here and then take the appropriate steps with BTV, Kiss, and Leopold. And they needs to stop the risk to the taxpayers of BTV to keep the ratepayers "safe".