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City will pay more than $60 million

By Emily Ford
eford@salisburypost.com
SALISBURY — Building a fiber-optic telecommunications service like Fibrant is risky, just like building a water and sewer service, says an expert on municipal debt.
“Anytime you are pledging to build a revenue-generating service, there is always risk,” said Kara Millonzi, a UNC School of Government faculty member who specializes in municipal debt. “So many things could happen that are unanticipated.”
Salisbury is one of a handful of North Carolina communities with a city-owned broadband service.
While Salisbury may be rare in launching Fibrant, the city is no different than other communities undertaking projects with risk, she said.
“It’s not unusual that there is some risk that projections will not quite work out, particularly with revenue-generating projects,” Millonzi said. “We just haven’t seen a lot of broadband systems.”
While water and sewer service is a necessity provided only by the city, Internet, cable and phone service is not. Fibrant competes for customers with private companies like Time Warner Cable.
Current projections for Fibrant subscribers and revenues are not available from the city.
Fibrant financial documents do not spell out what happens if the utility doesn’t meet projections.
“There is a lot of room for discussion and leeway for the city about how they will pay back their debt,” Millonzi said.
Theoretically, the city could raise the property tax rate or water-sewer service fees, she said.
“That works under the law,” she said.
The city will use only Fibrant revenues to pay the debt, officials have said.
“At no time has anyone from the city, nor any document I have ever prepared, ever indicated that we planned to use water and sewer proceeds for the payment of this debt,” John Sofley, management services director, said in an email to the Post.
Including interest , the city will pay $60.6 million over 20 years to finance the construction of Fibrant.
With four reimbursements in the payment schedule, the city’s net debt service is $54 million.
The city issued a total of $35.86 million in bonds in 2008, including $33.56 million for Fibrant and $2.3 million for the general fund.
About $1.2 million went for renovations to municipal buildings, including the City Office Building, City Hall, three fire stations and the Plaza, as well as $725,000 for construction or renovation of three city parking lots.
Collateral for the loan includes the renovated buildings and 250 miles of fiber-optic lines.
“This portion of the debt is totally separate and is being paid separately from that for Fibrant,” Sofley said.
To build Fibrant, the city sold two series of Certificates of Participation, or COPS — one for $19.56 million and another for $16.3 million, according to the N.C. Department of State Treasurer.
Because COPS are asset-backed securities, not revenue bonds, state law allows the city to make debt payments from any available revenues.
“There is no statutory requirement where debt service payments on this debt must be paid from, but City Council has always planned to pay for the debt with the proceeds from Fibrant sales,” Sofley said.
Bond series A — $19.56 million — was sold publicly. Series B — $16.3 million — was sold privately to a bank, according to the state treasurer’s department.
The proceeds were deposited with BB&T, the city’s bond underwriter, which purchased a large portion of the debt, Sofley said.
The interest rate was fixed, with serial payments of principal over 20 years. The interest rates on the serial maturities of principal vary with the length of the maturities, Heather Strickland, deputy director of communications for the N.C. Department of State Treasurer, said in an email to the Post.
The shortest principal maturities have the lowest interest rates of 3.25 percent, and the longest maturities have interest rates of 5.625 percent, Strickland said.
Interest payments began March 1, 2009, and principal payments began March 1, 2010.
The payments and interest were structured to match expected revenues from Fibrant, Strickland said. The city pays about $2 million the first three years, then about $3.35 million annually for the next three years, and finally $3.06 million annually for the last decade of the loan.
Part of the bond issue included about $3 million in capitalized interest, or money to cover interest payments during construction and start-up of Fibrant.
The city also financed $3.36 million for a debt service reserve, as required by the debt documents. Investors often demand a reserve fund as security.
The city received reimbursements in 2009 and 2010 from the capitalized interest fund and will receive additional reimbursements in 2019 and 2029 from the reserve fund.
So far, the city has spent $30,203,850, including issuance costs, Sofley said. In addition to the debt service reserve fund, the city still has on hand $205,245 from bond proceeds, he said.
Contact reporter Emily Ford at 704-797-4264.

Where the money went:

Distribution of 2008 bond sale (amounts are approximate).
Fibrant: $26 million
Renovations to city buildings: $1 million
Parking lot improvements: $725,000
Capitalized interest: $3 million
(Fund to cover debt payments during start-up)
Debt service reserve fund: $3.3 million
(Back-up fund, reimbursed if not spent)
Costs related to issuing bonds:     $1 million
Total proceeds: $35.86 million
Total payments, including interest, through 2029: $60.6 million

Sources: N.C. Local Government Commission, City of Salisbury, Salisbury Public Facilities Corporation

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