STATE OF VERMONT

PUBLIC SERVICE BOARD

Petition of City of Burlington d/b/a Burlington
Telecom, for a certificate of public good to
operate a cable television system in the City of
Burlington, Vermont
)
)
)
)
Docket No. 7044



PREFILED TESTIMONY OF
ROBERT RUSTEN ON BEHALF OF
THE CITY OF BURLINGTON

March 28, 2014























Mr. Rusten is the City of Burlingtons Chief Administrative Officer. Mr. Rustens
testimony will describe the Citys current financial status relative to Burlington Telecom and its
plans for addressing Burlington Telecoms financial situation, the Citibank Settlement and the
importance of the Bridge Lease Financing. Mr. Rusten will also address the expected benefit to
Burlingtons credit rating of the settlement and resolution of the CPG violations in this
proceeding.


TABLE OF CONTENTS

1. Introduction ........................................................................................................................... 1
2. The Citys Current Financial Status Relative to Burlington Telecom ............................. 3
3. The Citibank Settlement and Bridge Lease Will Benefit the City and City Taxpayers . 9


EXHIBITS

Exhibit Petitioner RR-1 Citibank Settlement

Exhibit Petitioner RR-2 City Council Resolution Approving Citibank Settlement

Exhibit Petitioner RR-3 Citibank Complaint

Exhibit Petitioner RR-4 Moodys Rating Update (March 9, 2010)

Exhibit Petitioner RR-5 Moodys Rating Update (January 7, 2011)

Exhibit Petitioner RR-6 Moodys Rating Update (September 16, 2011)

Exhibit Petitioner RR-7 Moodys Rating Action (June 20, 2012)

Exhibit Petitioner RR-8 Chart of BT Borrowing Costs

Exhibit Petitioner RR-9 City Council Resolution Approving Bridge Financing




STATE OF VERMONT
PUBLIC SERVICE BOARD

Petition of City of Burlington d/b/a Burlington
Telecom, for a certificate of public good to
operate a cable television system in the City of
Burlington, Vermont
)
)
)
)
Docket No. 7044


PREFILED TESTIMONY OF
ROBERT RUSTEN ON BEHALF OF
THE CITY OF BURLINGTON

1. Introduction 1
Q1. Please state your name, occupation and business address. 2
A1. My name is Robert Rusten. In May, 2013 I was appointed Chief Administrative Officer 3
(CAO) of the City of Burlington, Vermont (Burlington or the City) by Mayor 4
Miro Weinberger. My business address is City Hall, 149 Church Street, Burlington, 5
Vermont 05401. Prior to becoming Burlingtons Chief Administrative Officer, I was the 6
deputy City Manager for the City of South Burlington. I also served for approximately 7
four years as the Town Manager for Wilmington, Vermont. Previously I served for 10 8
years in the Vermont House of Representatives, with the last six on the Ways and Means 9
Committee. One area of focus was in rewriting the States Education Finance Law, Act 10
60, the result of which was the enactment of Act 68. 11
12
Q2. Please describe the duties of the Chief Administrative Officer. 13
A2. The duties of the Chief Administrative Officer are set forth in the Charter for the City of 14
Burlington. As the Chief Administrative Officer, I am responsible for the same duties as 15
provided by state law for town clerks and for town treasurers. As part of my duties, I am 16
Docket No. 7044
Prefiled Testimony of Robert Rusten
March 28, 2014
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responsible for making payments of City obligations, bonded indebtedness, payroll and 1
managing the retirement benefits of City employees. The City Charter also provides that 2
the Chief Administrative officer is responsible for pledging the credit of the City for 3
bonded indebtedness when authorized or directed by the City Council. 4
5
Q3. What is the purpose of your testimony? 6
A3. I describe the Citys current financial situation relative to Burlington Telecom, the 7
Mediated Settlement Agreement (the Citibank Settlement) executed in Citibank v. City 8
of Burlington et al., Docket No. 2:11-cv-214 (D. Vt.) (the Citibank Action) generally, 9
and the importance of the bridge lease financing with Raymond C. Pecor, III (the Bridge 10
Lease Financing) to accomplish the settlement and restructure Burlington Telecoms 11
debt, attract an investor, and maximize repayment of general fund monies to the City. A 12
copy of the Citibank Settlement Agreement is attached as Exhibit Pet. RR-1. A copy of 13
the City Council Resolution Approving the Citibank Settlement Agreement is attached as 14
Exhibit Pet. RR-2. A copy of the Complaint filed by Citibank in the Citibank Action is 15
attached as Exhibit Pet. RR-3. I also address the Citys credit rating, the risk posed by 16
not moving forward with the Citibank Settlement and Bridge Lease Financing, and the 17
expected benefit to Burlingtons credit rating of the settlement and resolution of the CPG 18
violations in this proceeding. 19
20
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1
2. The Citys Current Financial Status Relative to Burlington Telecom 2
Q4. In your role as the Citys Chief Administrative Officer, do you participate in the issuance 3
of Burlingtons general obligation bonds and other forms of debt? 4
A4. Yes. Since becoming Burlingtons CAO, I, along with Assistant CAO for Finance 5
Richard Goodwin, have regularly worked on the issuance of Burlingtons general 6
obligations bonds, along with the issuance of bonds for the electric department, the 7
wastewater department, and the airport. I have also worked on the issuance of a number 8
of other short term borrowings. 9
10
Q5. Do you regularly review credit ratings assigned to Burlingtons general obligations bonds 11
and other forms of debt? 12
A5. Yes. 13
14
Q6. In your previous work, did you regularly get involved with the issuance of debt and the 15
credit ratings assigned to various obligations and bonds? 16
A6. Yes, in regards to the issuance of debt. As both the deputy City Manager for South 17
Burlington and the Town Manager for Wilmington, Vermont, I was regularly involved in 18
the issuance of debt. I am familiar with the process of bond ratings from Moodys 19
Investor Services Inc. and other credit rating firms. 20
21
Q7. What is the Citys current credit rating for its long term general obligation bonds? 22
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A7. Currently, Moodys has assigned the City of Burlingtons long term general obligation 1
bonds a rating of Baa3 with a negative outlook. 2
3
Q8. How does Moodys rate Burlingtons bonds? 4
A8. At the request of, and upon application for, a rating of a general bond issuance, Moodys 5
will review financial information submitted by Burlington and develop a rating based on 6
Moodys standard rating system. Sometimes, representatives of Moodys may visit 7
Burlington. The financial information considered includes, among other things, tax rates, 8
property values, economic conditions, liquidity, budgets and the Citys financial 9
statements along with pending or potential litigation against Burlington. Moodys will 10
often follow an application for a rating with additional specific questions about the status 11
of an important litigation or ask a question about an issue arising from Burlingtons 12
financial statements. Once Moodys has the information it believes is sufficient, it will 13
issue a credit rating for a specific obligation. Moodys will also update that rating based 14
upon changes in facts and circumstances. 15
16
Q9. What does a rating of Baa3 mean? 17
A9. Moodys publishes its ratings criteria for both long-term and short-term scales. As stated 18
by Moodys, these are forward-looking opinions of the relative credit risks of financial 19
obligations. For outstanding long term obligation bonds, like the type Burlington 20
typically issues, Moodys has different rating levels on a scale with Aaa being the highest 21
quality credit and C being the lowest. Moodys may assign a numerical modifier 1, 2, or 22
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3 to each generic rating classification from Aa through Caa. The modifier 1 indicates 1
that the obligation ranks in the higher end of its generic rating category; the modifier 2 2
indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of 3
that generic rating category. 4
5
On this scale Aaa to Baa3 are listed as investment grade. Baa3 is the lowest 6
investment grade rating. Moodys states that Baa3 ratings present a moderate long term 7
credit risk with certain speculative elements. Ratings below Baa3 are considered 8
speculative grade or junk bond status. 9
10
Q10. What does the negative assigned to the rating mean? 11
A10. Moodys may assign an outlook to a particular rating. There are four basic outlooks: 12
positive, negative, stable and developing. The Moodys outlook indicates the expected 13
direction of a credit rating in the medium term. A negative outlook indicates that 14
Moodys expects the credit rating to decline in the medium term. Burlingtons current 15
outlook is negative. If Moodys outlook were correct, Burlingtons credit rating would 16
decline into the speculative ratings. 17
18
Q11. How does the rating assigned by Moodys impact the Citys financial position? 19
A11. Our bond rating has serious implications beyond BT it impacts the entire City and City 20
Schools. The City of Burlington has current statutory authority, without the need for 21
additional voter approval, to issue $7,000,000 annually in long term general obligation 22
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debt. Of that amount, $2,000,000 is for capital projects for the Citys schools, $3,000,000 1
is for the Burlington Electric Departments capital projects, and $2,000,000 is for 2
Burlington General Funds capital projects. Over the past few years, Burlington has 3
issued the maximum amount allowed by the City Charter. 4
5
When issuing debt obligations, generally speaking, an entity with a higher credit rating 6
will pay a lower rate of interest for a similar obligation with the same maturity, security 7
and terms than one with a lower credit rating. My experience in the last sale by 8
Burlington of general obligation bonds suggests that if Burlingtons bond rating were to 9
fall below investment grade, a large pool of potential institutional purchasers would be 10
prohibited from purchasing Burlingtons bonds based on the investment guidelines such 11
institutional investors are required to follow (i.e., they can only purchase investment 12
grade bonds). 13
14
Q12. What was the Citys credit rating before Citibank filed its lawsuit? 15
A12. In March of 2010, after Burlington indicated that it would not be making lease payments 16
to Citibank and was expected to not appropriate funds to make lease payments for fiscal 17
year 2011, Moodys downgraded Burlington from an Aa3 to an A2 rating. (Exhibit Pet. 18
RR-4). In January 2011, Moodys downgraded Burlington to an A3 rating, which 19
Moodys affirmed after Citibank filed suit in September 2011. (Exhibits Pet. RR-5, 6). 20
In 2012, Burlington was downgraded to the current Baa3 level. At that time, the outlook 21
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was revised to negative based on uncertainty surrounding the outcome of the Citibank 1
Action and repayment of the loan to BT. (Exhibits Pet. RR-7). 2
3
Q13. What steps has Burlington taken since 2010 to ensure that City funds are not used to fund 4
Burlington Telecom? 5
A13. In the fall of 2010, the City opened a Burlington Telecom segregated depository account 6
into which all Burlington Telecom revenues are directly deposited. (Burlington Telecom 7
bills its customers on a monthly basis for all services.) The use of a depository account 8
for Burlington Telecom was a departure from past practice. Prior to establishing the 9
Burlington Telecom depository account, all revenues from Burlington Telecom were 10
deposited in the General Fund Main Operating Account. 11
12
It is now Burlingtons policy that all Enterprise Funds including the Airport, Water, 13
Wastewater, Burlington Electric, and Burlington Telecom have segregated depository 14
accounts. With the exception of Burlington Electric Department, Burlington currently 15
issues all checks for payroll, payables, and capital expenditures for Enterprise Funds such 16
as Burlington Telecom from the General Fund Main Operating Account. On a monthly 17
basis, Burlington then makes whole the General Fund Main Operating Account by 18
transferring from the segregated depository accounts the amount paid on their behalf 19
from the General Fund Main Operating Account. This process ensures that all expenses 20
incurred by Burlington Telecom, and paid by the Citys main operating account, are 21
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reimbursed within 60 days or less. This timely payment of expenses and reimbursement 1
to the City is in compliance with Condition 60. 2
3
As discussed in Mr. Dormans testimony, under the Bridge Lease Financing, a new 4
segregated operating account will be established at Merchants Bank. At that time, all 5
Burlington Telecom operating expenses will be paid directly from the Merchants Bank 6
Burlington Telecom operating account and will no longer be paid from the Citys General 7
Fund Main Operating Account. This is an important step towards Burlington Telecom 8
operating on as close to a stand-alone basis as possible. 9
10
Q14. Please confirm that since October 2010, BT has had sufficient revenue to cover all 11
operating expenses of the system. 12
A14. Yes, since October 2010, Burlington Telecom has had enough revenue to cover its 13
expenses. 14
15
Q15. Please confirm that since December 2010, Burlington Telecom has reimbursed the City 16
within two months of the Citys expenditure for any expenses incurred or payments made 17
by the City in support of services that Burlington Telecom provides to non-City entities. 18
A15. Yes, since at least December 2010, Burlington has complied with this requirement in 19
Condition 60 of the CPG by reimbursing the Citys General Fund Main Operating 20
Account for any expenses paid by the City since October 2010 in support of services that 21
BT provides to non-City entities. 22
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1
Q16. Will any General Fund revenue be used in connection with the Citibank Settlement? 2
A16. It is likely that some General Fund revenue will be used to make certain payments in 3
connection with the Citibank Settlement. The use of such funds will not be for 4
Burlington Telecom operating expenses but will instead be for settlement purposes and 5
for minimizing the losses of, and consequences for, the City and its taxpayers related to 6
the past financial management of Burlington Telecom. (See Hearing Officers Report on 7
BTs Motion for Dec. Ruling Regarding Certain Payments, 7044 Nov. 8, 2011 and Board 8
Discussion and Order, Nov, 23, 2011). The City will supplement this testimony. 9
10
3. The Citibank Settlement and Bridge Lease Will Benefit the City and City 11
Taxpayers 12
Q17. Please explain how the Citibank Settlement and the bridge financing are expected to 13
impact the Citys bond rating and its short and long term financial situation. 14
A17. For the past three years, Burlington has worked diligently to restore Burlington Telecom 15
to a positive cash flow, restructure its financial position and locate potential investors and 16
resolve the outstanding Citibank Action and CPG violations found by the Board in this 17
docket. The Administrations long-stated BT goals have been to: 18
Protect taxpayers from further BT-related losses; 19
Maintain BT service for its more than 4,000 customers; 20
Preserve BT as a telecommunications competitor to maintain affordable Internet, 21
cable, and telephone services for Burlington residents, businesses, and most 22
importantly safety services provided by the police and fire departments; 23
Restore Burlingtons credit rating; and 24
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Secure, if possible, the opportunity for recovery of a portion of the $16.9 million 1
spent by the City prior to 2010. 2
3
With the Citibank Settlement, the $33.5 million Citibank Action will be dismissed in 4
exchange for a $10.5 million settlement payment to Citibank. Of that amount, 5
$1,468,915 has been paid by McNeil, Leddy & Sheahan, the Citys co-defendant in the 6
Citibank Action, and/or its insurance carrier. Burlingtons share of the $10.5 million 7
settlement amount is $9,031,085 consisting of the $6 million Bridge Lease Financing, 8
$1.3 million of which may be in the form of a participation in the bridge financing or a 9
direct payment from Burlington, and other payments from BT revenue discussed in 10
paragraph 4 of the Citibank Settlement (Exhibit Pet. RR-1) and in detail in Mr. Dormans 11
testimony. A copy of the City Resolution Approving the Bridge Financing from 12
Raymond C. Pecor, III is attached as Exhibit Pet. RR-9. 13
14
The Citibank Settlement also contemplates that the $6 million bridge financing will be a 15
bridge to an eventual arms-length sale of Burlington Telecom to a private entity. 16
17
Q18. How is this settlement path expected to impact the Citys bond rating status? 18
A18. There are indications that a resolution of the Citibank lawsuit, and the development of a 19
path forward to resolve the issues pending before this Board, would be viewed favorably 20
by Moodys. In its March 9, 2010 Rating Update, Moodys noted that future rating 21
action will depend on the citys ability to produce a viable plan to place the 22
telecommunications system on a more sustainable path and provide additional detail on 23
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the prospects for the system to meet its obligations, including repayment of the interfund 1
loan. (Exhibit Pet. RR-4 at 2). In its 2012 downgrade, Moodys listed the Citibank 2
lawsuit and the potential exposure to a judgment as a risk. 3
4
Specifically, in the downgrade to Baa3 Moodys wrote: 5
On September 2, 2011, Citibank filed a lawsuit against the city following the non- 6
appropriation and subsequent termination of the BT lease. While the impact of 7
this lawsuit on the citys General Fund is unclear, given the current regulatory 8
environment and city charter provisions, Moodys expects that any obligation 9
borne by the General Fund may adversely affect the citys credit profile. 10
Additionally, the lawsuit is likely to hamper any plans by the city to formulate a 11
viable long-term solution for the telecommunications and the repayment of funds 12
owed to its pooled cash account. 13
14
(Exhibit Pet. RR-7 at 1). 15
16
Moodys also listed three challenges facing Burlington: (1) potential exposure of the 17
general fund to any judgment or settlement resulting from the recent lawsuit (2) long- 18
term viability of BT which would ultimately result in the repayment of funds, and (3) 19
operating deficits in the Citys water and wastewater funds resulting on additional drains 20
on pooled cash. (Id.) It should be noted that the water and wastewater fund deficits were 21
eliminated as of June 30, 2013. 22
23
Moodys expressly stated that the credit rating would go up if Burlington (1) reduced or 24
eliminated the amount due from BT to the pooled cash account, (2) prevailed in the 25
Citibank lawsuit, (3) significantly reduced enterprise fund exposure to the General Fund 26
and reduced reliance on pooled cash, and (4) reduced reliance on short-term cash flow 27
instruments. (Id. at 4). 28
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1
The implementation of the Citibank Settlement Agreement and the Bridge Lease 2
Financing effectively address the first two issues. Together, they present the only viable 3
plan available to reduce the amount due from to Burlington from BT by ensuring that BT 4
may be sold to a private entity. A future sale of BT will also preclude any future risk to 5
the taxpayers from BT. Furthermore, the Citibank Settlement eliminates the threat that 6
Burlington could be found liable and face a significant financial judgment in court. It 7
further ensures that BT will remain a viable entity and allow the City to recover some of 8
the money spent on BT. This has been an issue for Moodys as well. 9
10
I also note that Burlington has worked hard over the past few years to address the other 11
weaknesses cited by Moodys. As reflected in Mr. Barracloughs testimony, BT has been 12
managed to a positive cash flow position since October 2010. Moreover, the segregated 13
operating account that will be established under the new Bridge Lease Financing 14
eliminates the practice of Burlington making payments for BT out of its General Fund 15
Operating Account. Following the closing, all BT operating expenses will be paid 16
directly from a new segregated operating account at Merchants Bank. 17
18
Q19. Would an improved credit rating provide a financial benefit to Burlington? 19
A19: Yes. A stronger credit rating means that Burlington would have a lower rate of interest 20
when it issues general obligation bonds than it currently has. Given the capital needs of 21
the schools, the electric department, and other City departments, an improved credit 22
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Prefiled Testimony of Robert Rusten
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rating should result in lower borrowing costs to the City. For example, a change from a 1
Baa3 credit rating to an A credit rating would result in, under current estimates, a 1.7% in 2
lower interest rate. (Exhibit Pet. RR-8). 3
4
Q20. Can you quantify the savings to Burlington, in dollars, if Moodys were to upgrade 5
Burlingtons credit rating based upon resolution of the Citibank lawsuit and CPG 6
violations? 7
A20. Yes. As you can see from the chart created by Asstistnat CAO Goodwin and attached as 8
Exhibit Pet. RR-8 to my testimony, as the credit rating improves, the true interest cost on 9
the borrowing decreases. At a Baa3 with a negative outlook, debt is issued with a 10
5.7485% interest rate. The annual debt service on that debt is $608,731 and the total 11
interest cost is about $4.6MM. If the credit rating were to approve to A3, we estimate the 12
interest rate would drop to 4.0157% and Burlington would save over $1.5MM over the 13
course of the debt in true interest costs over the life of the financing. 14
15
Q21. Does the Baa3 credit rating affect other borrowings for the City? 16
A21. Yes, Burlington has had in the past annual short term borrowings for working capital. 17
Primarily, Burlington has borrowed money for working capital in advance of the 18
collection of tax revenues. Moodys credit ratings also affect the interest Burlington pays 19
on these short term borrowings in the same way it affects the long term borrowing 20
interest rates. So an improved credit rating could reduce the interest expense on short 21
term borrowing as well. 22
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1
One short term borrowing mechanism the City uses is a line of credit (LOC). Our current 2
LOC for our tax anticipation borrowings calls for an increase of 4% as a default rate if 3
the Burlingtons credit rating were to fall below the Baa3 rating. That is, Burlington is to 4
maintain at least an investment grade rating. If Burlington drops below that rate, the 5
lender could declare Burlington to be in default. It should be noted that our current rate 6
on our LOC is less than 2.5%. 7
8
Q22. Would there be other savings to Burlington, in dollars, if Moodys were to upgrade 9
Burlingtons credit rating upon resolution of the Citibank lawsuit? 10
A22. Yes. Burlington has voter approval for approximately $6.05 million in borrowing for 11
waterfront north and bike path improvements as part of a Tax Increment Financing 12
Project along the Citys waterfront. Burlington has not yet issued such bonds. In 13
addition, the City voters recently voted to approve an addition $9.6 million in additional 14
bonded debt for waterfront improvements with the Burlington Tax Increment Financing 15
District. A stronger credit rating will result in lower interest rates when Burlington seeks 16
to incur such indebtedness. Furthermore, as a requirements of our bond covenants, we 17
must communicate to bond holders any change in our ratings made by our credit rating 18
agencies within 30 days. 19
20
Moreover, Burlington is analyzing its current outstanding bonds seeking ways to lower 21
our debt service. If the credit rating were to improve, Burlington may seek to refinance 22
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some of its outstanding bonds to lower its debt service costs. Such a refinancing involves 1
issuing long term refunding bonds to pay off the higher interest rate bonds. The interest 2
rates that would be set for such refunding bonds are determined, among other things such 3
as market conditions, on the credit rating for the refunding bonds. A stronger credit 4
rating should equate to lower interest rates. These are all benefits that will flow to the 5
City and its taxpayers through the reduced debt service payments. An improved credit 6
rating is an important element to help achieve such savings. 7
8
Q23. Does Moodys indicate what would happen to Burlingtons credit rating if Burlington 9
were to face an adverse judgment in the Citibank lawsuit? 10
A23. Yes. Moodys reports are concerned about the impact an adverse judgment would have 11
on Burlingtons financial position. As Moodys previously explained any obligation 12
[related to BT] borne by the General Fund may adversely affect the citys credit profile. 13
Any monetary judgment against Burlington related to BT may have to be paid from the 14
general fund of Burlington. Thus, if Burlington were to receive an adverse judgment, 15
Moodys would likely downgrade Burlingtons credit from investment grade to 16
speculative. 17
18
Q24. Please explain the significance of the Citys request that the Board find that Burlington 19
has cured all past CPG violations. 20
A24. It is the Citys position that a finding that it has cured all past CPG violations is critical to 21
its ability to direct a sale of the system. There is a significant risk that potential buyers 22
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will be reluctant to purchase a system with ongoing CPG violations. Furthermore, it is 1
important that the City be able to report to potential lenders for other City borrowings 2
that there are no ongoing violations of any permits within the City. 3
4
Both the Citys credit rating and lenders analysis of the Citys financial stability will 5
impact the interest rates the City is offered. If Moodys and lenders believe that not all 6
past CPG violations have been cured this will likely either increase the interest rates 7
being offered and/or limit the number of lenders making such offers. Additionally, due to 8
the Citys past financial history any indication that we are still in violation will likely 9
impact the Citys economic development potential, lessen our ability to attract capital, 10
and impact our ability to attract high quality employees. 11