Fibrant in Focus: City’s network marred by financial struggles, opaque accounting

Published 12:10 am Monday, July 24, 2017

 Editor’s note: This article is the second in a series examining the creation, operations, effects of, future of and other matters related to the city’s fiber optic network known as Fibrant. See the entire series here.

By Josh Bergeron

SALISBURY — When Lane Bailey became the city manager in 2015, he believed the city’s fiber optic network was profitable.

Bailey said he based that belief on a statement by former Mayor Paul Woodson, who made the remark while Bailey was interviewing for the job. Meanwhile, council members at the time also believed it was profitable. However, Fibrant was not profitable when Bailey was hired, and it still is not.

City staff made Fibrant look profitable on paper, according to financial documents and interviews with former and current city officials. In reality, Fibrant drained more than $3 million per year from the city’s general fund.

“The general fund was doing direct funding of the Fibrant operations,” Bailey said. “There were things like the xyz router … unless you have a strong technical knowledge, you wouldn’t know whether that was for the city’s internet or for Fibrant, but we also had employees that were directly Fibrant operations exclusive that were funded in the general fund.”

Meanwhile, the city’s broadband services fund — created for Fibrant — saw expenses decrease. It was a symptom of Fibrant’s costs being moved into other areas. Some of the former and current city officials interviewed by the Salisbury Post attributed the decrease in expenditures to a cost-saving project.

Allowing $3 million in Fibrant operating costs to be paid for through the general fund didn’t improve the city’s financial health, Bailey said. When asked, Bailey said the intermingling of Fibrant and other funds only made the service look profitable when it was not.

He compared the city’s arrangement of Fibrant’s finances to a doctor telling a patient to consume a bitter-tasting pill as a cure without revealing the fact that the person has cancer.

“You can’t improve the financial performance of the utility if there’s a false impression that it’s just barely making money,” he said. “That’s why we need to be honest about where we are.”

Meanwhile, one City Council member said Fibrant’s problems include earlier elected officials failing to “get their hands dirty” and examine Fibrant.

“I think that prior City Councils just presumed that somebody else was taking care of the shop,” said Councilman David Post. “I don’t think they really dug into what was really happening. They’d probably be the first to tell you they were relying on the people that were running it.”

How did we get here?

Fibrant didn’t always appear profitable on paper.

In the 2009-2010 fiscal year — before the city’s new fiber optic network started selling services — the city’s designated fund for Fibrant showed a total of $700,000 in operating expenses. In the next fiscal year, Fibrant was just getting started, and the deficit between revenue and expenses was more than $1 million. The broadband services fund’s deficit increased to $3.4 million by the 2011-2012 fiscal year.

Not only did Salisbury spend more on Fibrant than it brought in, the designated fund for Fibrant didn’t meet initial budget projections. In the 2011-2012 fiscal year, Salisbury’s annual audit showed Fibrant falling $1.5 million short of budgeted revenues.

Fibrant’s failure to meet its budgeted revenues occurred roughly at the same time as local communities were feeling the full brunt of the Great Recession, a complication many current and former city officials cite.

“After 2008, at about the time we were rolling it out, the recession hit, and it couldn’t have been a worse time for us,” said former Mayor Susan Kluttz.

In 2003, the city’s poverty rate was 11.4 percent. In 2011, after the city started selling Fibrant services, the poverty rate skyrocketed to 21.5 percent.

The city saw more vacant houses, more jobless residents and falling incomes that have yet to recover.

Meanwhile, Republicans in the state legislature did not believe the municipal broadband should compete with private businesses. Salisbury officials, with a newly built fiber optic system, traveled to Raleigh frequently to face off against legislators and cable industry lobbyists.

“Now remember, we had just borrowed all the money. We had just spent the money putting in the system, and the only way we had to pay the money back was to run the system,” Kluttz said. “When this came up, we were in Raleigh daily and, I mean, we were fighting for our lives because they were talking about everybody, including Salisbury, and killing it.”

Doug Paris, an assistant city manager at the time, said he worked with a coalition  to lessen the impact of the so called “level playing field” bill, which now allows Fibrant extensions to all Rowan County municipalities except Kannapolis. First, however, the towns must invite Fibrant to expand into the community. In contrast, the initial version of the bill limited the service area to Salisbury, and it enacted many other restrictions on Fibrant.

The General Assembly’s action negatively affected Fibrant more than the recession did, said Councilman Post. City Council initially planned for Fibrant to freely extend into neighboring cities — perhaps some in other counties — and provide internet service.

Trends such as “cord cutting” — not subscribing to satellite or cable TV services — and a decline in the number of people maintaining home phones also didn’t help.

There were mistakes, too, Post said. Salisbury city government should have finalized Fibrant contracts with public schools, local government entities and health care facilities before launching Fibrant, Post said. The city also hasn’t marketed the service properly, he said.

The city launched Fibrant in 2011, and officials hoped to secure 4,800 total subscribers by 2015 — a mark that still hasn’t been achieved.

Instead, Fibrant’s current customer base includes 430 commercial subscribers and about 2,800 residential subscribers.

Reducing duplication

As the Salisbury began to feel the effects of the recession, city staff worked to eliminate duplicate expenditures.

An example, Assistant City Manager John Sofley said, included combining the positions of a technician who managed city government’s network and a technician who managed Fibrant’s network. One of the two lost their job as a result.

When the Salisbury City Council met on June 11, 2013, for a budget workshop, then-City Manager Doug Paris touted the benefits of the recently completed project to reduce duplicate expenses in city government. The project saved millions of dollars, Paris said during the meeting.

It received praise from Karen Alexander, then a City Council member and now mayor. Alexander said she was impressed and proud of the work accomplished by city staff.

Then-Mayor Paul Woodson said citizens were surprised at the turnaround in the city and Fibrant, and he added that the work done by city staff was remarkable.

Paris touted the projects as eliminating the need for an interfund loan to pay for Fibrant operations, creating a new infrastructure services division that reduced overhead costs and increasing efficiency.

“It made perfect sense,” Woodson said about the project in a recent interview. “The city at that time was saying, ‘We’re gonna cross-train. We’ve got too many people in Fibrant,’ and the departments were completely split.”

That year — fiscal year 2013-2014 — was the first in which Fibrant was profitable, at least on paper.

Woodson called what occurred in the 2013-2014 fiscal year “cost-sharing.” Other former and current city officials used the same words.

“The understanding I had is that (employees) would be housed in the general fund, but they would be accounted for whenever they did Fibrant stuff,” said Councilman Brian Miller.

Former City Councilman Bill Burgin left the council before the year in question, but said it’s understandable that employees would be shared across departments and accounted for in the broadband services fund whenever doing work for Fibrant.

That did not occur, City Manager Bailey said.

‘You don’t have to be a genius to see that’

Regardless of the name for the 2013-2014 budget maneuver, it attracted questions from Post.

When he’s not focusing on city matters, Post works as an attorney. He’s also made a business out of turning around companies. He questioned a flip-flop in revenues and expenses that occurred in conjunction with the effort to eliminate duplication.

In the 2011-2012 fiscal year, Fibrant’s operating revenues were $2.6 million and its operating expenses were $4.4 million, according to that year’s audit.

One year later, operating revenues increased to $3.86 million and expenses were $3.29 million.

The next year — fiscal year 2013-2014 — Fibrant’s operating revenues were $4.43 million. Expenses were $2.96 million.

In the span of three years, Fibrant’s revenues increased by about $1.8 million and expenses decreased by about $1.4 million, according to city audits.

It doesn’t make sense, Post said.

“If your sales double, don’t your expenses go up? No, our expenses went down,” Post said. “You don’t have to be a genius to see that. You don’t have to be a (certified public accountant) to see that.”

A majority of council members who served following Fibrant’s creation have not been certified public accountants and none said they noticed the decrease in expenditures as revenues rose.

When faced with questions about the decrease, some former council members offloaded responsibility for analyzing the city’s financial statements to staff members.

“You got a manager, and you got a chief financial officer,” Woodson said. “We asked questions, OK? We were told they were cost sharing.  We don’t really have the ability to go out there, walk in and say show me (what’s going on).”

Woodson said council members thought Fibrant was performing well, running like a business.

City Council believed that Fibrant was operating at a profit, said Mayor Pro Tem Maggie Blackwell and Brian Miller.

Asked about the change in expenses, Paris said it reflects savings from debt refinancing completed while he was city manager and the effort to reduce duplicate expenditures.

“That surprised me”

The decrease in Fibrant costs paid by the broadband fund and efforts to reduce duplicate expenditures, however, do not account for all of the more than $3 million, which included funding for Fibrant-exclusive items.

Former and current city officials offered few answers about how the more than $3 million made its way into the general fund.

Paris, who worked as Salisbury city manager until he was mutually terminated in 2014, said he could not explain how the broadband network came to pull more than $3 million per year from other parts of the city budget.

“As far as when Lane (Bailey) released the $3 million amount, that surprised me,” Paris said. “That’s too much, and they need to fix that.”

Paris implied that between his mutual termination in 2014 and 2017, another employee modified the city’s budget in a manner that shifted expenses out of Fibrant’s designated fund and into other parts of the budget.

Facing questions about whether Salisbury was funding Fibrant through means other than the dedicated fund, Blackwell asked Sofley a direct question about the matter in December 2014. Sofley, then interim city manager, said Fibrant received transfers from the city’s water and sewer fund and a “small transfer” from the general fund. He did not mention that the general fund was directly funding Fibrant operations.

In a recent interview, Sofley identified the 2013-2014 budget as when Fibrant money was shifted and said costs can increase over time. So, any costs that may have already been in the general fund could have ballooned to $3 million.

It’s common among cities with municipal broadband networks such as Fibrant to intermingle expenses, Sofley said. Some cities with municipal fiber optic networks — such as Wilson and Chattanooga, Tennessee —  also operate the local electric power distribution company. That’s something Salisbury does not have.

Bailey said he didn’t want to question decisions made before he became city manager but called past accounting practices a less transparent way to fill a deficit than a direct transfer.

The current year’s budget, for example, shows a transfer of $3.2 million into the Fibrant fund. Financial documents from 2013 to 2016 show no such transfer.

Finding a solution

Blackwell and Miller, who were interviewed by the Salisbury Post at the same time, said Bailey deserves credit for the work he has done to unravel Fibrant’s expenses. Bailey began digging into the city budget within months of becoming city manager and conducted what amounts to an internal, forensic audit, Miller said. That examination uncovered the previously unknown expenses in the general fund.

Miller and Blackwell freely admitted in a recent interview that the city made mistakes concerning Fibrant. Those mistakes include not properly marketing the service. Other negatives include the more than $30 million in debt Salisbury assumed in order to make Fiber to the Home — now Fibrant — a reality. The city projects its Fibrant-related debt will be paid off in 2029.

If Salisbury City Council members were aware of the true financial state of Fibrant at an earlier date, Blackwell and Miller said the council would have looked for a company to purchase, lease or manage the city’s fiber optic network before now. Currently, the city is in talks with two private companies about leasing or managing the service. Paris said Salisbury previously spoke with at least two potential suitors, but neither resulted in an offer.

Councilman Post, who has dedicated large amounts of time to analyzing Fibrant, also said the city made mistakes. He said that the Salisbury City Council in past years did not become as involved as it should have in the operations of Fibrant.

Post said he does not believe there was malfeasance among city staff or elected officials. Rather, he said, the City Council maintained an attitude of “somebody else will take care of it.” The city, generally, wanted to avoid bad news, Post said.

“In business, you have to get your hands dirty,” he said. “Nobody on City Council other than me — OK, that’s arrogant — but nobody other than me has gotten their hands dirty in Fibrant and really tried to understand what’s going on.”

He said when local government makes mistakes, it needs to tell the public about it. The public may “beat up” elected officials about it, but that’s part of the job, he said.

Coming Wednesday: how the creation of Fibrant, for better or worse, has affected the City of Salisbury and its residents.

Contact reporter Josh Bergeron at 704-797-4246