Memorandum

City of Lawrence

City Manager’s Office

 

TO:

David L. Corliss, City Manager

 

FROM:

Diane Stoddard, Assistant City Manager

 

CC:

Cynthia Boecker, Assistant City Manager

Ron Hall, Director of Information Systems

Charles Soules, Director of Public Works

Ron Olin, Chief of Police

Mark Bradford, Fire Chief

 

Date:

February 28, 2008

 

RE:

Freenet Kids Proposal- Initial Evaluation

 

 

At the City Commission meeting on January 29, 2008, the Commission discussed the Freenet Kids proposal received from Lawrence Freenet.  To summarize, the proposal requests that the City guarantee a private bank loan of approximately $4.9 million for Freenet to complete enhancements to its wireless internet system in exchange for Freenet extending free internet service to kids in the community and also making its wireless system available for use by the City staff at no cost.  Additionally, Freenet proposes transferring some of its fiber optic cabling to the City.

 

Based on the direction at the January 29 meeting, City staff was requested to provide some preliminary information related to the proposal at the March 4, 2008 City Commission meeting.  The memorandum outlines several issues related to the Freenet Kids proposal, including a preliminary review of financial/legal issues, review of the potential benefits and risks to the City, and information about the City’s procurement procedures.   

 

 

Financial/Legal Issues:

As previously noted, Freenet seeks to have the City guarantee a private bank loan of approximately $4.9 million.  Freenet would use the proceeds from the loan to further enhance its wireless network within the City and extend the benefits outlined in its proposal.  The proposal indicates that Freenet would plan to have the various parties ahead of the City related to a guarantee:  Lawrence Freenet, Inc., Community Wireless Communications Co. and Joshua Montgomery personally. 

 

  • Bond Counsel evaluation:  City staff requested that the City’s bond counsel review the legality of the City guaranteeing the bank note as proposed by Freenet and the potential cash basis law issues under this proposal. Attached is a memo from Randy Irey, Gilmore & Bell, the City’s bond counsel.  Mr. Irey indicates that in order to accomplish what Freenet is requesting, the City would need to pass an ordinance under its home rule authority making a finding that guaranteeing the note was in the public interest.  The guarantee would be subject to the cash basis law.  The cash basis law requires that obligations of the City are budgeted from year to year.  Nearly all possible scenarios of guaranteeing the note require compliance with the cash basis law. This means the City will need to raise taxes or borrow funds to have the guarantee requirements met. However, Mr. Irey outlines two alternatives that present an exception to the cash basis law:  if an election is held and the issue is approved by the voters, or if the financing is part of a lease-purchase arrangement, which would require a different funding arrangement than presented in the proposal.   

 

The election alternative still requires that the City be financially responsible, if necessary, up to the guarantee amount of $4.9 million.  This is the equivalent of approximately 5.7 mills in property taxes. The lease-purchase agreement essentially requires that the City be financially obligated to the $4.9 million over the lease period, if the guarantee is called. 

 

In order to try to address potential cash basis issues, Mr. Montgomery has submitted to the City a letter that Freenet create a loan guarantee contingency fund that would have the cash sufficient to fund approximately one year of debt payments, or approximately $700,000.  This would address the cash basis issue.  However, a valid letter of credit for $700,000 would reduce the City’s total guarantee obligation to $4.2 million.

 

  • Risk evaluation:  While Freenet has indicated that the proposal is revenue neutral, the proposal as outlined would commit the City to the guarantee of a bank note.  This commitment involves a risk to the City should Freenet be unable to meet its obligations.  The exact extent of this risk is not known until a thorough examination of the financial standing of the three (3) entities ahead of the City in the guarantee and collateral involved in the transaction is conducted.  This has not been conducted by City staff.  City staff would suggest that if the City Commission would like to proceed with further evaluation of this proposal, that an independent third party be involved with the evaluation of the financial aspects of the proposal.  Such third party could fully evaluate financial statements, the value of collateral, and other aspects to review the potential risk to the City.  Further, such a third party could make recommendations to the City regarding protection of the City in such a transaction.   This type of review was recently conducted with the Oread hotel project.  City staff would propose that Freenet be responsible for the cost of such an evaluation but that the firm be selected by the City.  A firm, such as Springsted, may be able to complete such an analysis for approximately $3,000 - $5,000.  Discussions with Mr. Montgomery have indicated that they would be willing to fund this analysis.

 

  • Formal agreement:  City staff would suggest that a formal agreement would need to be in place with Freenet to ensure the accrual of benefits outlined in the proposal to both children of the community, as well as the City. This agreement should further describe the operational details of the proposal: Such an agreement would also need to outline other important aspects regarding the City’s position in guaranteeing the note, such as the letter of credit pledged by Community Wireless Communications Co.    

 

  • Funding Priorities:  The City Commission would need to weigh the potential risk of expending funds on this project with other funding priorities.  As the Commission is aware, the budget situation continues to be very tight and City staff anticipates difficult decisions regarding funding priorities will have to be made during the 2009 budget process.   

 

Purchasing Issues:

The City of Lawrence has adopted Purchasing Procedures.  The purchasing procedures call for competitive bidding of all services in excess of $15,000.  The procedures have exceptions for noncompetitive selection in certain instances, such as sole supplier.  While acceptance of this proposal may not necessarily have to comply with the City’s purchasing procedures, Sunflower Broadband did raise the issue of desiring to bid on the types of services proposed to be provided to the City under the Freenet proposal.

 

Additionally, it may be important to consider that Freenet is not the sole wireless provider in the community and, the benefits of the project aside, the City’s guarantee of a bank note for Freenet may, at the very least, be perceived as assisting Freenet’s business over other such wireless providers.

 

Defining the Need:

  • While the Freenet proposal provides some general information about the digital divide, there is not specific information on the number of students in Lawrence who may be served by the project.  While it is unknown whether Lawrence mirrors national statistics, a U.S. Census Bureau report from 2003 on computer and internet usage in the U.S. indicates that approximately fifty-fiver pecent (55%) of people in the U.S. have internet access.  Of those who do not have it, the primary reason was that they do not want it, or didn’t need it.  Other reasons listed related to financial issues. 

 

Potential benefits to the City: 

·        Intelligent Transportation Systems (ITS):  The City is currently working toward the development of its ITS architecture. ITS is a broad range of technologies that integrate into the transportation infrastructure to relieve congestion, improve safety, and enhance efficiency of the transportation system.  The architecture could be compared to T2030. The architecture establishes goals, identifies needs, priorities, and technologies that can be used to achieve the goals. One aspect of the ITS architecture is the application of wireless and wire line communications-based information and electronics technologies that integrate into the transportation infrastructure to relieve congestion, improve safety, and enhance efficiency of the transportation system.

 

In 2008 the City has received a grant for the implementation of an ITS project from the Kansas Department of Transportation (KDOT). The project includes the installation of conduit, fiber optic cable, and hardware for the coordination of the signals along 6th Street from Massachusetts Street to Iowa Street. Project plans /details have not been completed. The estimated project cost is $500,000 with fifty percent (50%) or $250,000 being funded by KDOT.

A component of the Freenet project is the installation of fiber-optic cable within certain areas of the City. Based on the information provided by Freenet, it appears that one of the routes is along 6th Street.  Freenet proposes installation of at least 96 strands of fiber as part of its project. Further, Freenet proposes dedicating half of their fiber installation to the City

It is possible that the Freenet project could help the City’s ITS project.  However, there are a number of details that would need to be worked out, such as whether the area that Freenet would propose the City owning the fiber would coincide with where the City planned on implementing ITS. The timing of the installation may be an issue to the City.  There is only one opportunity to pull fiber through the conduit, and the City’s ITS project alone may require 144 strands for traffic.  Therefore, timing, budget availability, and those types of issues need to be considered.  Also, the fiber specifications for the Freenet project are not known.  None of these details have been discussed to date. 

·        Wireless access for City employees:   The City has explored over the years various options related to enabling wireless access for City employees in the field.  Enabling such access at no cost to the City would be a positive benefit to the City and a significant cost savings to the City.  However, there may be some departments that would not benefit from the project.  For example, the Police Department has indicated concerns with security, the cost to equip patrol cars for connectivity, and the inability to access the web outside the City area.  As a result, the Police Department is currently testing several wireless phone data cards. 

 

·        700 MHz public safety spectrum:  During the City Commission meeting, the issue of the 700 MHz public safety spectrum was raised.  A portion of the 700 MHz spectrum was recently reserved by the Federal Communications Commission (FCC) for use by public safety agencies in an effort to create a nationwide broadband network for public safety that will be interoperable between agencies. While the reservation of this spectrum is only the first step and equipment is needed to enable public safety agencies to access the spectrum, it is likely that future wireless systems implemented by the Police and Fire/Medical Departments would need compatibility with this spectrum. 

 

Action Requested: The City Commission should provide direction to staff. 

It appears that the following options exist:

  1. Seek consultants to conduct a financial evaluation of the proposal. . 
  2. Issue an RFP for wireless services that allows any interested vendor to submit proposals.
  3. Consider this proposal with other capital improvement plan items during the budget process in July 2008.
  4. Take no further action.
  5. Develop other alternatives that may be desired by the City Commission.