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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. 468917v2 MNI MN190-151 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. 468917v2 MNI MN190-151 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 468917v2 MNI MN190-151 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. 468917v2 MNI MN190-151 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.