News: CJ Exclusives

Salisbury voters to choose whether to lease money-hemorrhaging broadband system

Fibrant has been a financial drain on Salisbury taxpayers since its construction

Salisbury residents will vote Tuesday on whether to lease its city-owned broadband system to a private provider. Critics say it could be a case of making the best of a bad situation.

Salisbury officials want to lease the assets of Fibrant to Hotwire Communications — everything from the fiber to offices to vehicles — for 20 years beginning July 1, with Hotwire paying back the city a percentage of its revenue from its internet, video, and phone services.

Fibrant has been a financial drain on Salisbury taxpayers since its construction. Legacy providers AT&T and Time Warner reduced their rates after Fibrant began operations in 2008, which led to the municipal broadband network never meeting subscriber goals of 30 percent of city residents. The shortfall caused the city to borrow money from its water and sewer reserves for operating expenses. The city has been losing about $3 million per year operating Fibrant.

Between the initial bond and the loan from the reserve, Salisbury borrowed around $40 million for Fibrant, and still owes about $32 million. That’s because revenue from Fibrant has been so meager that for many years Salisbury was just paying the interest on the loans and not the principal.

Investor service Moody’s docked Salisbury’s bond rating after it raided the reserves to pay for Fibrant. That may particularly bite residents because the city would have to refinance $25 million of tax-exempt financing into taxable financing if it leases its system to a for-profit company. The interest rate is expected to increase from 2.06 percent to about 4 percent, which would add about $500,000 per year in interest costs initially, doubling the interest to about $1 million per annum.

Even offloading the operations to a private provider isn’t a guaranteed solution. Hotwire’s vice president of corporate development and government, Jonathan Bullock, told the Salisbury Post rent targets are $944,400 in 2019, after Hotwire runs the network for a full year, to $1.28 million in 2037. But those are just targets — rent numbers aren’t guaranteed.

Under the lease agreement, Hotwire would pay the city 30 percent of internet revenue and 10 percent of video and phone revenues, among other services.

Bullock told the Post prices “will go down or stay the same.”

In addition, Salisbury will pay Hotwire a management fee of $25,000 a month during a transition management period, according to the lease, which doesn’t specify when that period would end.

Joe Kane, technology policy associate for Washington, D.C.-based R Street Institute, told Carolina Journal the move to lease Fibrant to a private provider is probably the best solution, given the current situation.

“They obviously have to do something because they’re underwater,” he said. “Getting it into private hands is probably a good idea.”

City leaders blame the Great Recession in part for the failure of the network, and also point to a state law passed by the General Assembly in 2011 preventing municipal broadband networks from taking advantage of the power of government — and its bounty of taxpayer money — to gain a leg up on private providers.

That law included a provision requiring a vote of the people before making major changes to city broadband networks, necessitating Tuesday’s referendum.

David Williams, president of the Taxpayers Protection Alliance in Washington, D.C., said most systems not built on the backs of taxpayers have thrived in the past decade, despite the recession. He argues that for-profit companies have more know-how to operate such networks, leading to better success.

“They’ve backed themselves into the corner,” he said of Salisbury. “It’s a lose-lose situation.”

Asked about the best option for city leaders, Williams replied with a chuckle, “to jump in a Delorean.”

“Barring any ‘Back to the Future’ technology, the best option is to unload it,” he said.

Salisbury sent requests for proposals in January 2017, and received some interest from providers in buying Fibrant outright, but concluded “Hotwire’s proposal provided the best opportunity for the city to improve the finances of the Fibrant system, while ensuring continued high-quality communication services,” according to an informational page on the City of Salisbury website created to educate voters on the issue.

Those services include broadband download speeds of up to 10 gigabits per second, which make for nice marketing even as critics say such speeds are way more than what’s needed.

The Federal Communications Commission considers download speeds of 25 megabits per second — or 400 times slower than the max speed offered by Fibrant — as broadband.

“Ten gigs are insane,” Kane said. “No one is going to hit that speed the way the internet is used today.”

Streaming Netflix in high definition on one device, to use an example, requires about four megabits.

TPA created a website “Broadband Boondoggles”that examines the financial troubles of hundreds of taxpayer- or ratepayer-funded internet networks across the country.

MI-Connection, a government-owned network that serves Mooresville and Davidson, made TPA’s list of “Dirty Dozen,”12 of the biggest money drains on taxpayers — to the tune of $2 billion.

Last year, the first comprehensive study on the financial viability of government-owned  broadband networks in the U.S. found that just two of the 20 networks examined are expected to generate enough revenue during the life of the networks to recoup the money that taxpayers or ratepayers paid for the construction.

Municipal Fiber in the United States: An Empirical Assessment of Financial Performance, compiled by University of Pennsylvania Law School professor Christopher Yoo, along with co-author Timothy Pfenninger (a fellow at Penn Law’s Center for Technology, Innovation and Competition), paints a dark picture — 11 of the 20 projects assessed have a negative cash flow, many of them deeply in the red.

Even those in the positive aren’t in much better shape. Five of the nine generate returns are so tiny it would take more than a century to recover the cost to build the networks.

Salisbury was one of the networks examined in the study and was deemed never able to turn a profit. Yoo and Pfenninger’s research found that Fibrant cost $2,224 per Salisbury household to build, but was only generating an average revenue of $340 per household.

“We warned them about this before they even built it,” Williams said. “I hope this is a cautionary tale for other localities that want to get into this business.”

City leaders said if the referendum passes they don’t expect to require a property tax increase next year. But one might be necessary if the vote for the lease agreement fails to pay for the operating expense shortfall and debt service requirements of Fibrant.

Johnny Kampis is a contributor to Carolina Journal.