Another Minnesota Broadband Stimulus Project Turns to Local Taxpayers

Cities bypass referendum despite existing Minnesota law

When bids were recently opened by the Southwest Minnesota Broadband Services (SMBS) consortium, proponents of the fiber optic stimulus project found out it was going to cost more than they bargained for--$1.7 million more. Suddenly, a venture that started out as a $12.8 million “government giveaway” became dependent upon local taxpayers for a bailout.

In the process, SMBS became the fourth federal stimulus broadband project in Minnesota to experience funding and implementation questions, concerns and controversy. (See FFM coverage of the Lake County fiber network, University of Minnesota computer labs, and Headwaters Tribal Community Centers computer labs).

Eight rural cities will own and operate SMBS, a 125-mile long fiber optic network that will offer telephone, video and internet service to some 3,300 residences and 350 businesses. Half of the $12.8 million federal stimulus funding came in the form of a grant, while the other half is a Rural Utilities Services (RUS) loan that SMBS officials say will be repaid through revenues from the network. Several private providers already offer high speed internet services in the area, but city and county officials insist their network will be faster and help retain local employers such as Toro.

Despite a lagging economy and difficult times for local government, five of the consortium’s small, rural communities have already anted up $1 million, loaning local tax dollars to the project as required by  federal law.. Contributions from local governments range from $520,000 from the city of Jackson (population 3,299) to $30,000 from Bingham Lake (population 126) -- an amount larger than the $27,487 in Local Government Aid (LGA) the city received in 2010.

To keep the project on track, SMBS officials came up with a digital two-for-one deal:  $1 million worth of “free” broadband services for Jackson County government buildings in exchange for a $500,000 advance payment for services courtesy of county taxpayers.  “It’s a win-win for both of us,” said Dan Olsen, SMBS general manager. “We got some upfront dollars for the services and they can get cost savings that nobody else was willing to provide for them.”

Proponents say SMBS will also be a winner for a six year old municipal telecom network operated by the nearby community of Windom, the original applicant for stimulus funding.  SMBS was designed to tie into and “leverage the initial success of the Windomnet network.” Windomnet is scheduled to receive an infusion of $40,000 from SMBS in 2011. ”To the city of Windom, it’s another big customer,” said Olsen, who now oversees both SMBS and Windomnet.

SMBS’ application for federal stimulus funding refers to Windomnet as a success story that “proves these networks can be built and remain competitive.” An audit provided to the Windom City Council on June 21st, however, found that Windomnet lost $661,301 in 2010 despite its reported revenues of about $1.8 million.  The audit indicates the Windom broadband network has $15.3 million in remaining long-term debt and additional liabilities on the city books.

Olsen attributed Windomnet’s losses largely to high depreciation rates, including nearly $690,000 last year. “We’re down here creating jobs. In this economy we’re trying to make it cash flow,” Olsen said.  “It’s a tough road ahead of us and we understand that, but this wasn’t supposed to be a cash cow for the city. The system overall, we’ll defend it.  You can tear anything apart.” 

None of the eight southwestern Minnesota communities involved have scheduled a referendum to give local taxpayers the opportunity to vote on whether to proceed with the government-run telecom project. State law requires local governments to receive 65 percent of votes cast in a referendum in order to own and operate a telephone exchange. In November, 2000 Windom voters approved a ballot question allowing the city to implement the Windomnet system with 67 percent support.  After seeking legal advice, SMBS officials intend to move ahead without turning to voters of the eight cities in the consortium for approval.

“That whole referendum question, some do it and some don’t,” Olsen said. ”That’s always been a hot potato in Minnesota.” 

Originally scheduled for completion in 2011, SMBS plans to begin construction by August 1.  Supporters expect the network to be up and running in 2012. Some 1,700 current local cable and internet subscribers have already signed up for some services.

While SMBS hopes to revamp its business plan by the end of the year, officials already have an aggressive marketing pitch. “Today’s incumbent service providers will not be able to provide the next-generation of broadband services that will keep this area competitive with the global marketplace. SMBS will own and operate the network, employees will be your friends and neighbors and dollars will stay in your communities,” according to the SMBS website.

                                                                        

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