News: CJ Exclusives

State lets Salisbury refinance debt for muni broadband system

May referendum approved lease to private company Hotwire Communications, which will assume debt

Bleeding money, unable to sign up enough subscribers, and incapable of investing in new technology to attract users, Salisbury’s beleaguered municipal broadband service is about to be leased to a private firm.

The N.C. Local Government Commission approved a deal Tuesday, July 10, allowing Salisbury to refinance the Fibrant system’s $26.5 million in bonds. They would be converted from municipal debt to a taxable structure so that third party, for-profit company Hotwire Communications could lease and operate the city’s assets.

The city’s broadband network has been a money pit. Salisbury borrowed about $40 million to launch the subscriber-based service, and still owes $33,093,603 on the debt, most of which was financed using certificates of participation — debt instruments that don’t require public approval. Even so, 81.5 percent of local voters approved the lease referendum May 8.

The system needed 30 percent of the city’s market, or about 4,500 subscribers, to meet annual debt payments. Shannon Moore, Salisbury finance director, told commission members the subscriber base fluctuates between 3,000 and 3,200.

The city has dipped into its water and sewer reserves to offset losses. The city often made only interest payments on its loans because it couldn’t afford to pay the principal.

As a result, national bond rating agency Moody’s Investor Services lowered the city’s bond rating, and rating agency Fitch issued a stern warning. Last year, the broadband fund started paying back money borrowed from the water and sewer fund.

Moore said the broadband service got $3.2 million in subsidies last fiscal year from the city’s general fund, and another $3 million is budgeted from the general fund to keep the broadband network afloat in 2019. The service has been losing about $3 million every year. Even after the handoff to Hotwire, the city will continue annual subsidies of about $1.1 million.

Commission staff said the city’s use of transfer funds from the general fund to subsidize the broadband network is a strong indication it doesn’t intend to pay those back to the general fund.

“I think it is probably very much a cautionary kind of story for local government,” commission member Edward Munn told Carolina Journal after the meeting.

Salisbury launched Fibrant as an economic development tool to aid existing companies, and attract new businesses, Munn said.

“They thought it would be able to cover all of its expenses plus, and it never really has. The city of Salisbury now is trying to make the best of a bad situation,” Munn said.

“If you go into a new business, and it’s a business that entails competition with private-sector companies, you need to be very careful,” Munn said. Municipal entities may not be flexible enough to invest in the latest technology or provide levels of customer service at a cost that ensures the service will pay for itself.

In Salisbury’s case, taxpayers, including the majority of residents who don’t subscribe to the system, ended up paying for the bad deal, he said. “The numbers may even be actually worse” because the city failed to allocate overhead or indirect service costs to the broadband fund.

Richard Marvin, a municipal public finance adviser with Stephens Inc., an investment banking financial advisor, said Salisbury opted to start its own broadband service in 2010 because it couldn’t lure internet service providers to the city.

Time Warner Spectrum, AT&T, and other internet companies entered the market after the city launched Fibrant, Marvin said. They offered lower prices, more expansive services, and more reliable delivery.  

Commission member Joshua Bass asked whether those same competitors are going to lower rates and compete even harder against Hotwire. Marvin agreed that was possible.

Moore said Hotwire will make a multimillion-dollar investment in new technology upgrades and content subscribers want, but the city couldn’t afford. Salisbury will get budget relief because city staff no longer will operate the system.

Hotwire has entered into lease agreements with multi-tenant and multi-dwelling communities such as senior and student housing and apartment and condominium complexes. It has a 150,000 subscribers overall in Texas, Florida, and Pennsylvania.

“We’re the only local government they’ve had a partnership with,” Moore said.

“We actually will get a percentage of the gross revenue that Hotwire bills” to customers, she said. The first year minimum lease payment would be $1.182 million in 2019 on projected revenue of $1.5 million. Hotwire has said it could retire the city’s debt by 2029. The lease allows the city to opt out of the contract if Hotwire doesn’t meet minimum lease payments.

Greg Gaskins, secretary of the Local Government Commission, said there’s an obvious concern if Hotwire does not meet target payments, reducing the amount of city support necessary to operate a private system, and it reverts to city control.

“The risk if the city takes that back is that they will pay a higher cost on the debt. So it is not a riskless opportunity,” Gaskins said.