Monticello Stops Bond Payments on Troubled Municipal Telecom

      Is city headed toward default of $26 million in bonds?

    The City of Monticello has notified bondholders that it plans to stop repayment of $26 million in bonds for the troubled FiberNet Monticello telecom system, due to a shortfall in operating revenue from telecom subscribers. This development marks the most dramatic step yet in the downturn for what was once a nationally touted municipal telecom model. The decision to suspend bond payments appears to be unprecedented for a local government telecom system in Minnesota.

“Net revenues of the System are not sufficient to pay both operation costs and debt service payments on the Bonds,” according to a June 6, 2012 memo signed by Jeff O’Neill, City Administrator. He also emphasized that the prospectus for the revenue bonds issued for FiberNet included a disclaimer that “Purchase of the Bonds involves a high degree of risk.”

The notification follows a city warning to bondholders in March that it sought to renegotiate the terms of its financial obligations, including interest payments of $882,668 in June and $943,670 in August. The city issued a first quarter 2012 report last month showing a flat-lined customer base and projecting an annual loss of $2.1 million for this year. The city has acknowledged using funds from its municipal liquor store operations to keep the FiberNet system financially afloat since July, 2011.

“After reviewing the financial performance of the System, the City has decided to discontinue making supplemental payments for debt service as of June 1, 2012. There is a debt service reserve fund that is available to make debt service payments for the near future in the event that net revenues of the System are insufficient to fund debt service payments,” according to the city memo.

Last week Hiawatha Broadband Communications (HBC), the company retained to manage and operate FiberNet for a fee of $15,000 per month, gave notice to the city that it was pulling out of the project in 90 days. “HBC had concerns about being able to continue to manage the project in accordance with HBC principles,” said Gary Evans, HBC President and CEO.

Evans has acknowledged that questions about FiberNet Monticello’s downturn could have an impact on other projects. In an interview with the Freedom Foundation of Minnesota last week, Evans said he had reached out to the proponents of RS Fiber, a $70 million project under consideration in Renville and Sibley counties. Sources say the joint powers board of RS Fiber will be meeting with Evans tonight in Winthrop to discuss HBC’s role in FiberNet Monticello.

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