By Emily Ford
eford@salisburypost.com
SALISBURY — After learning Fibrant will borrow millions of dollars from other city funds, some local businessmen are calling for more transparency for the city’s new broadband service.
“People are starting to feel funny about this,” said Bill Wagoner, vice chairman of the Salisbury Planning Board and a commercial builder and contractor. “A lot of folks are saying how is this going, really?”
City Manager David Treme said the internal loans are a good business practice and save the city from high interest rates. He acknowledged the city needs to do a better job communicating about Fibrant.
The city’s largest ever one-time capital expense, Fibrant was built entirely with borrowed money.
Given that, the city should “bend over backward to match the enterprise with the communication,” said Wagoner, former chairman of the Rowan County Economic Development Commission. “We should go to extraordinary means to explain how it’s doing.”
Wagoner and others told the Post they were surprised, after studying the city’s 2011-12 budget, to learn Fibrant would borrow money from the city.
Through 2013, Fibrant is scheduled to borrow more than $7.5 million from other city funds, including the water and sewer capital reserve, at 1 percent interest. That’s on top of $33 million in bonds the city sold in 2008 to build the fiber-to-the-home network and Customer Service Center.
The city pitched Fibrant to taxpayers as an enterprise fund that would be separate from other city operations, said Carl Repsher, a Salisbury Planning Board member and retired chemical engineer.
“We are quite deliberately co-mingling funds,” he said. “There is concern among professionals in the city. Concern on a large scale.”
Repsher, who acknowledged he may run for City Council, said his criticism is not politically motivated. He is a Fibrant customer.
Bob Trundle, a commercial real estate broker, said he was already alarmed the price tag for Fibrant had surpassed $30 million when he learned of the additional loans.
While borrowing money internally is indicated as a “routine business practice,” the loans must be repaid, Trundle said.
And without more information from the city about subscriber and revenue projections, he said, that’s a concern.
Loaning fund reserves
This year, Fibrant will borrow $1.2 million from the water and sewer capital reserve fund. The loan doesn’t contradict the city’s pledge not to use water and sewer proceeds to pay for Fibrant, city officials said.
“We are not using current cash from water and sewer sales to fund Fibrant,” Treme said. “We are loaning fund reserves.”
Fibrant will pay it back at 1 percent interest, starting with $6,118 this year.
Fibrant can borrow money from three city funds — water and sewer, water and sewer capital reserve and the general fund, said John Sofley, assistant city manager for finance. Sofley said he hasn’t decided which fund will loan Fibrant an estimated $3.7 million in 2012.
In 2013, Fibrant will borrow roughly $2.6 million more from the city. The project is expected to be cash-flow positive the following year, Sofley said.
The internal loans will cover revenue losses during the first three years of operation. About 67 percent will go toward subscriber capital, or the cost of extending fiber-optic cable from the sidewalk to homes and businesses, Sofley said.
The remainder will go toward principal payments, or debt service, on the 2008 bonds.
It’s called an interfund loan, and Treme vigorously defended the practice during a recent budget workshop with City Council.
“I unabashedly stand here before you and say this is a good financial practice,” Treme said. “It worked in Wilson, N.C., and it will work in Salisbury, N.C.”
Salisbury has based Fibrant’s business model on Wilson’s model for Greenlight, another broadband network with more than 5,700 subscribers.
Whether people agree with the practice of interfund loans, Wagoner and Repsher said taxpayers should have known about them before now.
It’s an example of the city’s lack of communication about how it will pay for Fibrant, Wagoner said.
“I want to see a factual, unbiased presentation of all performance metrics of this business enterprise,” he said.
Such openness would serve the city well, he said.
“There’s a sense of trust that’s built up by sharing information,” Wagoner said.
Communication breakdown
The city should have done a better job communicating about Fibrant, Treme said.
“We should have been clearer,” he said.
He welcomed questions about the project from the public and pledged to give more information directly to residents.
“The best citizen is the best informed citizen, and we should make every effort to share every aspect of this project with the public,” Treme said.
City Council held public discussions and hearings for years before launching the network, Treme said. Fibrant has been the most reported-on subject in his 25-year tenure, he said.
Yet, the city can do more, Treme said.
The city’s new marketing and communications team, led by Assistant City Manager Doug Paris, is revamping websites for the city and Fibrant and will post more financial information about Fibrant, Treme said.
The city’s public access TV channel, Access16, is another way to communicate directly with the public, without the filter of the newspaper, he said.
With technology now available to the city, “we have a bigger responsibility than we have had in the past to put this information out to the public ourselves,” Treme said.
Starting in October, staff will provide monthly financial reports to City Council, including revenues and expenditures for Fibrant. Sofley said he hasn’t decided if the reports will include debt service figures and will ask Council members for their input.
In May, some Council members asked for more information about Fibrant and said they felt ill-informed to answer questions from the public.
Council asked for an updated business plan May 3, which Sofley provided a month later. The 16-page document detailing projected rates, subscribers, revenue, and expenditures over the next five years will not be posted online, he said.
Sofley and Treme agreed the plan is a public document, which they said gives private cable companies an advantage over city-owned broadband systems. Fibrant’s competitors don’t share proprietary information.
“When the other person can look at your business plan, it makes you vulnerable,” Treme said. “But we have to operate like a city.”
Fibrant will overcome the disadvantage by offering better customer service, a homegrown network and superior technology, Treme said.
Paying back
Over 20 years, the city will pay $60.6 million in principal and interest on the 2008 bonds.
In a worst-case scenario, the city would raise property taxes to make debt payments for Fibrant.
While the city insists Fibrant will make all debt payments on time, the venture could stumble and need help from taxpayers, Wagoner said.
Regular and candid communication about Fibrant’s finances will build trust, and taxpayers should know the ups and downs, not just hear the good news, he said.
“If it’s doing great, hallelujah,” Waggoner said. “But if it does need help someday, you’ve prepared the people.”
Only announcing faster Internet speeds, new subscriber numbers or other accomplishments builds cynicism, he said. For residents to feel ownership of Fibrant, they need more transparency, he said.
Staff will provide a better reporting system not only to City Council but to the public, Treme said.
“We will do our best to provide a way to translate this financial information into something that is easily understood not only by businessmen but also citizens who may not have a financial background,” he said.
While interfund loans have stirred controversy, “they have never been secret, at least to us,” Treme said.
“These were not questions coming forth from the public,” he said. “Every time we reach a new stage, we have different questions to answer.”
Repsher said he spent several hours at City Hall looking through the budget and still couldn’t answer his questions.
“What are the overhead costs? Where does vehicle maintenance come from?” he said. “It’s just a matter of trying to understand where the money is.”
As Fibrant approaches its 1,000th subscriber, it’s also approaching $40.5 million in debt. There is no debt service schedule for the $7.5 million interfund loans, and the city did not estimate when Fibrant would finish repaying them.
“Citizens are concerned about the amount of money being spent,” Repsher said.
Internal loans to Fibrant from other city funds
2011: $1.23 million
2012: $3.7 million
2013: $2.61 million
Fibrant debt repayment schedule for next five years:
2011: Bonds — $818,259
Internal loan — $6,118
2012: Bonds — $1.74 million
Internal loan — $36,565
2013: Bonds — $3.06 million
Internal loan — $85,610
2014: Bonds — $3.06 million
Internal loans — $110,859
2015: Bonds — $3.06 million
Internal loans — $608,359
What is Fibrant?
The city’s new broadband network competes with private companies to provide Internet, cable TV and phone services.
Fibrant is a fiber-to-the-home system with the fastest Internet speeds in the state. Although Salisbury leaders studied municipal broadband for years before launching Fibrant, they have drawn criticism for selling $33 million in bonds without voter approval.
Fibrant also will borrow about $7.5 million from other city funds over three years.
Salisbury won a hard-fought exemption from a new state law that restricts how cities build and operate broadband systems. The new law requires a referendum before borrowing money for broadband.
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Contact reporter Emily Ford at 704-797-4264.