A Performance Audit of the Utah Telecommunication Open ...

Uncollected revenuesfrom retail providershave cost UTOPIA $3million.If retailers had paid all they owed, UTOPIA’s operating deficitswould have been much smaller during the past three years. Withnearly $3.1 million left unpaid, the retailers and UTOPIA haveimposed a significant financial burden on UTOPIA’s member cities.UTOPIA has shown a great interest in developing a group of retailproviders for its open access network. This desire to develop its retailpartners may have led the agency to be overly patient with retailerswho failed to pay their network fees. In addition, UTOPIA staffreport they were reluctant to drop some delinquent providers becauseUTOPIA could not afford the cost of replacing the providers’proprietary set-top equipment. They also report reluctance to dropproviders because of difficulty in finding other providers who wouldoffer video on the UTOPIA network.In our view, UTOPIA should have taken quicker action to transferclients away from retailers who failed to pay their bills and reassignthose clients to other more reliable providers. By not responding morequickly to delinquent retail providers, UTOPIA may have incentivizedits providers to postpone paying their debts. One provider in goodstanding with UTOPIA said he believed the agency’s lack of actiontoward delinquent providers has been unfair to his organization and toother more responsible service providers because it puts them at acompetitive disadvantage. Had UTOPIA taken a more aggressivestance, we believe the agency could have reduced its operating deficitsand the financial burden now placed on its member cities.The Use of Interest Rate Swaps Prevented UTOPIA fromTaking Advantage of the Decline in Interest Rates. WhenUTOPIA issued its first bonds in 2004, its bond underwriterencouraged the board to approve a set of variable rate bonds in orderto obtain a reduced interest rate. UTOPIA’s financial advisor reportsthe underwriter also insisted on an interest rate swap agreement ifUTOPIA sought a variable rate loan.UTOPIA’s method ofbond financing hurt itsability to takeadvantage of changingmarket conditions andrefinance at lowerinterest rates.According to the minutes of the July 20, 2006 board meeting, theboard was told that “swaps are designed to reduce debt and risk andresult in lower cost of borrowing.” The savings from the use of theswap agreement were predicted to be $7 million. According toUTOPIA’s financial advisor, the interest rate swap agreement wouldonly be an impediment if interest rates were to drop significantly andif it became necessary to refinance the agency’s debt.- 28 -A Performance Audit of the Utah Telecommunication Open Infrastructure Agency (August 2012)