City Council Agenda Packet 10-26-2015 SpecialAGENDA
SPECIAL WORKSHOP MEETING – MONTICELLO CITY COUNCIL
Monday, October 26, 2015 – 4:00 p.m.
Academy Room
Mayor: Brian Stumpf
Council Members: Charlotte Gabler, Lloyd Hilgart, Tom Perrault, Glen Posusta
Others: Jeff O’Neill, Rachel Leonard, FiberNet Advisory Board Members,
Department Heads
I. Identify the Goals of the Workshop
A. Direction to staff regarding FNM management structure
B. Additional direction at Council/FAB discretion
II. Options for Management Structure
A. Background on tax-exempt bond restrictions
B. Management can be structured to meet city needs/wishes
1. City Management
2. Management Services Contract with 3rd Party
III. Factors Influencing the Management Decision
A. Current State of FiberNet
1. Financial Trends
2. Subscriber Trends
3. Services
a) Internet
b) Telephone
c) Video
B. Definition of FNM success
1. Historical Goals of FiberNet
2. Current Goals
IV. Management Option Details
A. City Management
1. Control
2. Scale of Operations
3. Politics & Policy
4. Potential Profit
5. Capital Investment & Operational Costs
6. Growth
7. Independence
B. Management Services
1. Control
2. Scale of Operations
3. Politics & Policy
4. Potential Profit
5. Capital Investment & Operational Costs
6. Growth
7. Independence
V. Moving Forward
A. Operate the system at status quo as management is implemented
B. If Council selects City Management structure:
1. Determine type of services (2016)
a) Maintain current services
b) Consider change in services. Hire consultant to determine the mix.
2. Determine the type of manager based on the services (Can be part of
consultant study)
a) General Manager
b) Business manager and technical consultant
c) Additional options possible if there’s a significant reduction in
services
C. If Council selects Management Services structure:
1. Use city consultants to construct structure of contract
a) Determine the influence of the tax-exempt bonds on financial
arrangement
b) Determine level of city control over service provider
c) Determine level of financial responsibility and revenue share
2. Hire someone to write the RFP.
3. Use RFP process to hire a 3rd party management company.
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Kennedy 470 US Bank Plaza
200 South Sixth Street
Minneapolis MN 55402
&
Graven (612) 337-9300 telephone
(612) 337-9310 fax
http://www.kennedy-graven.com
C H A R T E R E D
M E M O R A N D U M
TO: Jeff O’Neill, Members of Monticello City Council
FROM: Martha Ingram
DATE: October 22, 2015
RE: Management Contracts
I understand that the City of Monticello is considering a potential management contract
for the City-owned fiber optic network (the “Network”), financed through the issuance of
tax-exempt bonds which are currently outstanding (the “Outstanding Bonds”). Because
the Outstanding Bonds are tax-exempt, any management contract would need to conform
to Treasury Regulations issued pursuant to § 141 of the Internal Revenue Code of 1986,
and most notably would need to meet the guidelines promulgated by the Internal Revenue
Service in Revenue Procedure 97-13 (“Rev. Proc. 97-13”) and later updates to these
guidelines, in order for the Outstanding Bonds to retain their tax-exempt status.
Below is a brief summary of the guidelines set forth in Rev. Proc. 97-13 regarding
any contract for management services or other use of any facility financed by tax -exempt
bonds. The general concept is that the facility must be owned by the public body, and
compensation to the “service provider” must be structured to prevent a transfer of the
risks and benefits of ownership from the City to service provider.
1. Reasonable Compensation. The service provider's compensation must be
reasonable.
2. No Part of the Compensation May be Based on Net Profits. None of the
service provider's compensation may be based on a share of net profits from the
operation of the facilities. Generally, compensation based on a percentage of
gross revenues, a capitation fee, or a per-unit fee, is not considered to be based on
the share of net profits. Capitation fee contracts include HMO-type arrangements
with service providers (not relevant in the context of the Network). A per-unit fee
means, for example, a stated dollar amount for each unit of service provided.
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3. Permitted Compensation Arrangements. The service provider's compensation
for services rendered must be pursuant to one of the following methods:
(a) at least 95 percent of annual compensation is based on a periodic fixed fee,
with a contract term not exceeding the lesser of 80 percent of the useful
life of the property or fifteen (15) years (the other 5 percent may be
structured as an incentive/productivity award).
(b) at least 80 percent of the annual compensation is based on a periodic fixed
fee, with a contract term not exceeding the lesser of 80% of the useful life
of the property or ten (10) years (the other 20 percent may be structured as
an incentive/productivity award).
(c) at least 50 percent of the annual compensation is based on a periodic fixed
fee, with a contract term not exceeding five (5) years. In this case, the
contract must be terminable by the City on reasonable notice, without
cause or penalty, at the end of the third year of the contract. (The 50
percent that is not a fixed fee may be based on a percentage of gross
revenues or a percentage of expenses, but not both.)
Alternatively, all of the compensation for services is based on a stated
amount, a periodic fixed fee, a capitation fee, a per-unit fee, or some
combination of these, with a contract term not exceeding five (5) years.
The compensation may include a percentage of gross revenues, adjusted
gross revenues, or expenses of the facility (but not both revenue and
expenses). In this type of contract, a tiered productivity award based on
quality of service will be treated as a stated amount or periodic fixed fee.
(d) in the case of certain contracts with a term not longer than three (3) years,
the compensation may be based on a per-unit fee or combination of a per-
unit fee and a periodic fixed fee and the contract must be cancelable after
two years, without cause or penalty.
(e) in the case of certain contracts with a term not longer than two (2) years,
the compensation may be based on a percentage of fees charged, provided
the contract is cancelable by the City after one year. This option is
available only for contracts under which the service provider primarily
provides services to third parties, or where the contract involves a facility
during a start-up period.
4. Incentives. In the case of ten and fifteen year contracts, described above, fees
will not fail to qualify as "fixed" even though there may be a one-time incentive
award during the term of the contract under which compensation is automatically
increased when a specific gross revenue (or expense target) is reached. The
award must be equal to a single, stated dollar amount. In the case of five year
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contracts, the rules have recently been loosened. Eligibility for a productivity
award may be based on quality of service rather than solely on increases in
revenues or decreases in expenses of the facility, as long as the amount of the
award is based solely on the level of performance achieved with respect to the
established quality benchmark.
5. No Related Parties or Common Control. Neither the City nor the service
provider may control more than 20 percent of the voting power of the other's
governing board.
6. Renewal options. Generally, renewal options are taken into account in
computing the term of the management contract. However, such options only are
counted if the service provider has a legally enforceable right to renew the
contract. Thus, options to extend at the discretion of the City, by mutual consent,
or automatic one-year renewals subject to cancellation notice, are not counted as
part of the term of the contract.
Based on the foregoing, an arrangement between the City and the private entity engaged
in operating the Network will not be private business use if:
1) The City itself owns the Network and does not lease it to the private
service provider;
2) The City receives all revenue derived from the Network, and
compensates the private service provider pursuant to a management
contract;
3) The payments to the private service provider pursuant to the
management contract include only reimbursement of direct expenses
attributable to the Network, which have been actually paid by the service
provider, as well as compensation pursuant to one of the "permissible
arrangements" set forth in Rev. Proc. 97-13, Section 5.03; and
4) The private service provider does not have an y role or relationship with
the City which substantially limits the City’s ability to exercise its rights
under the management contract, including cancellation, in accordance with
Rev. Proc. 97-13, Section 5.04.
Conclusion:
In order for the Outstanding Bonds issued for the Network to remain tax-exempt, the
Network must be owned by the City, which must retain the risks and benefits of
ownership. It may not be owned by the private service provider, or leased by the City to
the private service provider. The arrangement between the City and the private service
provider must take the form of a management contract subject to a “permissible
arrangement” as described in federal tax regulations.
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In general, federal tax regulations prohibit long-term contracts providing for
compensation based on a share of net profits from the operation of the bond-financed
property. Rev. Proc. 97-13 describes in detail the various permissible arrangements
under which a management contract will not constitute a private business use. Any
partnership between the City and a private business entity should be modeled on one of
these permissible arrangements.
I would be happy to review any proposed management contract terms to ensure
compliance with Rev. Proc. 97-13 and related rules. Let me know if you have any
questions.