Guest Commentary: Mailings have muddled message
February 9, 2012 at 7:49 am in Lake County News-Chronicle
The Minnesota Cable Communications Association (MCCA), whose current President is Bill Jensen of Mediacom, is behind a public relations campaign to discredit Lake County’s fiber-optic project. Continue Reading
I’m not sure which messages are more muddled with regard to this project.
Here is the take of an independent third party with some knowledge in this area:
DEMONIZING OF COMMERCIAL BUSINESS PROVIDERS IS INAPPROPRIATE:
First, the implication the major cable organizations have done nothing to bring high speed internet and video options to Lake County is simply not true. In fact, these companies have attempted to provide cost effective services resulting in competitive choices for consumers in Lake County. But, it is also true these companies have not chosen to offer services to certain outlying areas where the companies cannot generate cost effective returns. There are a number of options available to the county and the cable companies to address this minor market shortfall with cost-effective options. These options include substantially lower financial risks than inherent with a major county-wide sponsored project.
In fact, satellite and cell phone company video and internet services are available to nearly all folks in Lake County, whether or not they have access to cable lines. And, the ability of those providers to offer increased area coverage, higher speed bandwidth and broader commercial servicing packages is increasing daily.
INITIAL INVESTMENT COSTS/RISKS FOR THE BROADBAND/FIBER PROJECT:
“The $66.3 million award from the Department of Agriculture comes through its Broadband Initiatives Program. After other matching funds, the total will be about $70 million, Bergman said. The award breaks down as a $56.4 million loan and a $10 million grant. There will be about $3.5 million on municipal bonds issued, which would be paid back with operational revenues.” —Lake County News Chronicle, 9/16/2010
Next, adding Mr. Roiland’s numbers together: $56.5 million in borrowed Federal funds, $10 million in the form of a Federal grant, and $3.5 million from Lake County funds (the bond issuance was dropped in favor of direct subsidy with County dollars) totals $70 million. That is exactly what the cable consortium is claiming is the projected financial need for available funds to effect the project’s completion. It is confirmed by Commissioner Paul Bergman in the referenced quote above. I’m really not sure what Mr. Roiland is trying to assert with his comments that the project is actually $66.5 million.
And, by the way, the government funds are not provided without qualification, as seems to be implied by Mr. Roiland. Performance and other standards are integral with the funding, and if those standards are not met can result in penalties including loss of and required repayment of the grant monies to the federal government.
Further, if the project’s customer subscription cash flows do not meet the necessity to cover expenses, the County’s monetary contribution may not be able to be repaid. In fact, the cash flows must first be used to repay the government loan’s principle and interest payments, as well as cover the operating costs of the project, before the County can recover any of its costs.
The County’s contribution to the project is required to fund certain “start-up” costs not allowed to be paid by the government monies under the terms of the loan and grant agreements. Through approximately December of 2011, Lake County had expended around $700,000 in taxpayer money to fund its efforts to date on the broadband initiative. Additional Lake County monies will be required to keep the cash flows of the project positive until customer subscriptions can begin to cover the cost of the loan payments and certain other costs associated with the project.
REFERENDUM ISSUES:
Also of importance to note, is that Lake County directly participated in the planning and creation of a non-profit organization with whom to contract the broadband project management services. The idea was that this non-profit could be deemed to operate at arm’s length from the County, and be able to offer telephone services over the County’s infrastructure without the requirement for a public referendum.
The use of this non-profit organization was specifically intended to bypass the state statutory requirement to hold a public referendum when a government body proposed to establish a government-owned telephone service network. So, although Mr. Roiland may assert that technically the County has avoided the referendum requirement, the County has in fact always intended to offer and to profit from the presence of such a network on its infrastructure. I believe the cable consortium is asserting that a strict interpretation of the legal basis and intent for this move on the County’s part, may, in fact, still subject Lake County to the referendum requirement.
Why the concern over a referendum? There are two reasons:
A referendum would delay the implementation of the project plan, which could jeopardize funding if completion goals based on funding dates are not met; and
A referendum might result in a public defeat of the County’s overall pursuit of the broadband /fiber project.
ST. LOUIS COUNTY PARTICIPATION:
With regard to the extension of the broadband project to portions of St. Louis County, this had to be done to justify the large sums of money involved in the federal funding requests. Without a larger demographic base from which to solicit customer participation, the project could have been deemed too risky to justify a reasonable assumption the project had a chance to achieve ongoing financial success. Including portions of St. Louis County provided a reduction in the size of the risk, but still doesn’t guarantee the ultimate financial viability of the project.
It is true that Lake County will benefit, if the project is successful, by having the sole right to additional base subscription revenues from St. Louis County residents using the broadband infrastructure. However, St. Louis County may benefit from sales tax and other such revenues required to be submitted for activities occurring within their county boundaries.
In fact, however, St. Louis County residents have nothing to lose by willing to consider being serviced by the project. If the project is successful, they will receive access to another set of choices for internet, video and telephone delivery. If, however, the project does run into financial challenges, the residents of St. Louis County have no exposure to financial risk. Unlike Lake County residents, whose property taxes, loan commitments and other financial resources are being used to support the broadband/fiber project, there is no recourse system in place for St. Louis County residents to be forced to underwrite or pay any expenses or losses incurred by Lake County. If the project fails or has other financial shortfalls, all the expense associated with providing infrastructure/services to St. Louis County will ultimately be borne by the residents of Lake County.
Based upon population numbers provided by Lake County to the Lake County News Chronicle, and published therein, the addition of the proposed St. Louis County residents could increase the customer subscription potential by an estimated 50%. Likewise, if financial challenges arise with the project, the risk to Lake County taxpayers increases by the same amount.
WHAT IS THE REAL COST/DURATION OF COUNTY FINANCIAL EXPOSURE:
The project pay-back, in today’s dollars, at a minimum are pretty simple (I’m leaving out the “lost opportunity/internal cost” of the Lake County funding money, and calling the interest rate on that funding equal to zero):
If the term of the federal government loan is 20 years, and the interest rate is 4%, the total amount to be paid back on a $56.4 million principle is a little over $82 million if paid in equal installments over the full 20 years.
The $10 million grant does not have to be repaid if the conditions of its use are met. But it is still part of the project cost.
The Lake County contribution of $3.5 million, if paid back in equal installments over the 20 year period with no interest, is $3.5 million.
The total project DEBT cost exposure over 20 years is therefore a little over $95.5 million. This is the debt exposure to Lake County taxpayers if anything goes wrong with the project, or federal funds use is not deemed to meet federal requirements. If the federal guidelines are met for use of their monies, the total debt exposure drops to a little above $85.5 million over 20 years.
The total FINANCIAL exposure will include additional amounts for operating costs and any shortfall from customer income sources which does not generate enough positive cash flow to cover debt repayment and operating costs.
If you include “lost opportunity costs”, lost “internal rates of return” for the county, and “lost return to US taxpayers” on the grant, the cost of the project’s financing easily exceeds $100 million.
CONCLUDING REMARKS:
The goal of universal access to cost effective and affordable high speed internet connectivity is laudable. The commitment to providing the same in universal access to telephone communications is also a highly desirable goal. Both of these objectives will benefit each member of our County, and move us all toward universal standards which will support better public safety, enhance our opportunities to become better educated people, and provide us access to commercially available offerings which can enhance the quality of our lives. The fact Lake County desires to have this access available to all its residents and businesses is a laudable and civic-minded goal.
However, the methods by which this goal is currently being pursued pose what appear to be unnecessary financial risks, and incorporate an apparent failure to proactively pursue working partnerships with established providers to reduce the public risk and also avoid duplication of already costly and existing infrastructure.
The current path has resulted in a public battle filled with innuendo; lack of accurate, transparent and proactive communication; accusation; failure of proper investigation; and some downright misleading information.
I would expect, with the hiring of new Lake County project management, these uncalled for circumstances would come to an end. It is in the best interest of the residents and taxpayers of the county for this to happen. It is also in the best interest of the residents and taxpayers for the County to respond to the need for honest and open communication with all the parties involved, and to properly and reasonably mitigate any financial exposure or project modification in the best interests of the taxpayers. And, to do this without sacrificing the services promised to the public, whether they be governmental, private or a combination of those efforts.
At this juncture, I expect a lot more from all the parties involved.
I don’t think that is too much to ask.
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I’ve been a Mediacom customer for many years and I plan on signing up for Lake Connections the day it becomes available in my neighborhood. Mediacom is a contemptible corporation providing substandard service at boutique prices while all the while holding the customer in complete disdain.
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