Publication Date: Wednesday, May 05, 2004
TECHNOLOGY
Is fiber good for the pocketbook?
Is fiber good for the pocketbook?
(May 05, 2004) City to consider five funding options
by Bill D'Agostino
Is Palo Alto's fiber-optic dream worth risking foreclosure on City Hall?
Using 250 Hamilton Ave. as collateral is one of five options under consideration to finance the high-tech project.
The city is in the process of determining if it wants to build a $40 million system of fiber-optic cables to provide cable television and lighting-fast Internet access to residents and businesses. A key part of that decision, however, is deciding how best to finance it.
The project would be one of the largest investments from the city in recent years, and would place Palo Alto in direct competition with large companies like Comcast and SBC.
Proponents believe the city could provide cheaper rates and better service than the private companies, and hope profits would help the city finance other needed projects and services. Opponents worry about the financial risks to public dollars.
Two of the five plans would require property owners to pay a monthly fee to finance construction costs. A fourth would rely on a private investor. And a fifth would be backed by the project's revenues, though the city's ability to borrow money in the future could be damaged if it fails.
Most of the options, although not all, require the city to get permission from voters.
"This is fairly complicated because of the nature of the project," said Joe Saccio, the city's deputy director of administrative services.
One early plan -- floating a revenue bond that was backed by electricity rates -- was taken off the table after the city's lawyers determined it probably illegal under state law.
The interest rate is one the project's keys to making money over time. If the city's investment received interest rates of 8 percent, as opposed to the 6 percent assumed in an initial plan, the city would lose $16 million of revenue by year 20. That would wipe out much of the venture's projected profits.
The City's Utilities Advisory Commission is scheduled to discuss these options at its meeting May 5. The commission will make a recommendation to the City Council. The meeting begins at 7 p.m. inside the City Council Chambers (250 Hamilton Ave.).
The five plans under consideration are:
Plan A: Private investor
What is it?
This plan would rely on a private financier who would invest money into the city's project for the first few years. Then, the city would likely float a bond.
What are the pros?
It would require less money from the city upfront, and thus less risk.
What are the cons?
Finding a private investor interested will be challenging. The plan also has the highest interest rates of all the options, ranging from 7 percent to 14 percent. If it fails, and the city chooses to not pay the investor back, it could hurt the city in the future. The subsequent bond would require a two-thirds majority from voters, something the city would like to avoid.
Plan B: Certificate of Appreciation Plan
What is it?
The city would float a bond-like certificate, using a major city asset (like City Hall) as collateral.
What are the pros?
It would probably not require a vote. The related interest rates would be low, from 5.6 percent to 6.5 percent.
What are the cons?
The general fund -- which funds the majority of city services, from police to libraries -- would have to pay if there are major losses. Also, if the city loses money, it could possibly be forced to foreclose on whatever asset is placed up for collateral, although that is unlikely.
Plan C: Enterprise Debt Plan
What is it?
The city would create a separate fund. Palo Alto would float tax-exempt bonds, which would be backed by the fiber optic proposal's revues.
What are the pros?
Interest rates are low, from 5.6 percent to 8.25 percent. It would put the general fund at risk.
What are the cons?
It requires a two-thirds vote. If projections fail -- and the city defaults on the loan -- it could hurt the city's credit rating in the future.
Plan D: Property related fee
What is it?
This would assess every property owner in the city a tax to build the fiber-optic infrastructure. The fee would be separate from the monthly bill cable and Internet subscribers would pay. Only property owners, not registered voters, would get to vote. Owners would get one vote for every property they own in Palo Alto.
What are the pros?
It would likely require a simple majority of voters (more than 50 percent), although that still needs to be firmed up. Interest rates are fairly good, from 6.25 to 9.5 percent.
What are the cons?
Once the vote passes, no one can opt out of the monthly assessment fee. So even people who are not interested in having cable or Internet service from the city would be taxed. Renters night feel unfairly left out in the decision since they couldn't vote.
Plan E: Assessment District Plan
What is it?
Like in Plan D, every property owner homeowner in the city would be assessed a regular tax. However, the amount could be different, depending on how much "value" the property theoretically receives from the system. Again, only property owners would vote.
What are the pros?
It would only require a simple majority of voters. Interest rates are higher than in the original business plan, ranging from 6.25 percent to 9.5 percent.
What are the cons?
Again, no one can opt out of the tax and renters can't vote. Plus, the differing tax amounts could be challenged as unfair.
Staff writer Bill D'Agostino can be e-mailed at bdagostino@paweekly.com
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