Once touted as a national model for taxpayer-funded telecommunications systems, FiberNet Monticello has instead become a showcase for the high stakes involved when local government gets in the business of competing with private providers in the fast-evolving high tech world.
FiberNet can no longer afford to offer service priced at 15 percent less than the city’s private competitors. This was one of FiberNet’s original selling points. As the rivalry for customers heats up, city fliers appeal to residents’s civic pride with the slogan “because it’s your company” and on behalf of city employees “who put their hearts and souls into bringing you the best.”
In a recent interview with the Monticello Times, Mayor Clint Herbst even raised the possibility that “the city could just walk away from it and wash their hands of it and you’d get pennies on the dollar.” These comments were in response to what could happen if bondholders balked at renegotiating lower interest rates on $26 million in revenue bonds used to develop the system. “The worst case scenario would be if we sunk millions and millions of dollars into it and then walked away,” Herbst told the paper.
Financial documents filed for bondholders on February 15, 2012 underscore the urgency behind the city-wide marketing campaign. The filing shows FiberNet Monticello ran a $2.6 million loss in 2011, despite receiving a one-time $1.5 million legal settlement. City finance director Tom Kelly confirmed the unaudited figures. Cash from the city liquor store is being utilized to subsidize FiberNet operations with an understanding it will be repaid with interest.
The outlook doesn’t appear much better this year with the city projecting a nearly $3.5 million shortfall for the government-run telecom network. The deficit is based on an estimated $2.55 million in revenue and $5.9 million in expenditures in 2012, including $1.76 million in debt service.
As a start-up, FiberNet was projected to operate at a temporary loss while building a customer base for its triple play service. The newly released financial reports, however, indicate FiberNet Monticello lost ground in the last three months of 2011. The total number of FiberNet phone, internet and video customers fell by about 100 subscribers, a three percent decline. While FiberNet gained 86 phone customers from October through December, the city lost 81 internet and 111 video customers.
One thing is for certain—FiberNet is nowhere near being “self-sufficient” as a top city official and their telecom consultant once predicted. FiberNet’s overall number of subscribers remains well below original projections, even compensating for a lost year of service due to legal action. The number of customers for internet services comes the closest to meeting projections with 1,058 (1,737), while the number of video customers 1,423 (3,230) and phone customers 1,002 (3,388) amounts to less than half as many as projected.
While maintaining that FiberNet will be self-sustaining someday, Mayor Herbst told the Monticello Times “the reality is we shouldn’t be in the telecommunications business at all”. In a candid assessment of the taxpayer-backed venture, Herbst underscores the need to cut operating costs and do new projections to “see how much money it would take to keep this up and going.”
Herbst said the shortfall in 2011 caught the city council by surprise. “When we first did this, we made a promise to the community that we weren’t going to put money into it. We were a little bit shocked when money was going into the system,” the city leader said in the interview.
Besides putting pressure on bondholders, Herbst said the company that manages the system, Hiawatha Broadband Communications (HBC), must also produce savings. HBC currently receives $15,000 a month for its services, “similar to the contract we have with the county for police coverage,” Herbst said. “We’re buying their expertise.”
Although FiberNet was formed to foster competition, Herbst expressed surprise at how the marketplace worked in practice. “Everyone says when TDS began putting fiber in, why didn’t you quit? We couldn’t because once we agreed and signed for those bonds we were stuck for those bonds. If we had walked away, then the city would have had to come up with $26 million to pay these bondholders off. Once that happened, it was the point of no return,” Herbst told the paper.
“We’re trying to renegotiate the bonds, we’re just starting that process,” Monticello finance director Tom Kelly confirmed to FFM. “Needless to say with seven percent interest rates, the market has changed.”
The viability of FiberNet Monticello is being closely monitored by those in the telecom industry in and outside of Minnesota, due to the publicity and high expectations that accompanied the network’s debut.