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Cities Forced to Raise Property Taxes to Subsidize Fiber Optic Network

Groundbreaking

The objective of the $55 million RS Fiber Cooperative high-speed internet system looks intriguing on paper. Proponents pitch it as a world-class internet system designed to equip rural residents in 6,200 homes and farms to compete in the global information economy, retain and attract businesses and keep their kids closer to home.

What’s not to like?

In short, higher property taxes for residents of ten southern Minnesota cities in Renville and Sibley Counties. Due to a projected $1 million shortfall in revenue for RS Fiber that came out of the blue, property tax levies in those communities will escalate significantly in the next two years, maybe longer.

“It’s just an expensive way to be proven correct,” said Jim Kreft, former Mayor of Arlington who vetoed his city’s participation in RS Fiber in 2014. “And I think it’s too bad.”

Former mayor Jim Kreft

Ten cities and 17 townships in southern Minnesota formed a cooperative that issued $13.7 million in general obligation tax abatement bonds to get RS Fiber off the ground in 2015. The business plan called for raising an additional $42 million from private bank loans and investors to expand in the townships.

The fact that several providers already competing for market share in the area failed to make the numbers work to justify significant private investment in fiber optic lines only further energized  proponents.

“The phone companies have already said rural residents must settle for wireless or slow DSL technology and cable companies are not interested in serving them,” the RS Fiber website states to this day.

Yet clearer heads warned taxpayers would be on the hook someday if the network failed to meet the rosy projections for the public-private partnership.

“Government owned fiber projects can and do fail, just like they can and do succeed. When they fail, the financial responsibility usually falls on the taxpayer,” cautioned an analysis by the city of Arlington of RS Fiber v1.

Still, proponents expressed confidence RS Fiber would generate enough subscribers to protect local taxpayers in Buffalo Lake, Brownton, Fairfax, Gaylord, Gibbon, Green Isle, Lafayette, New Auburn, Stewart and Winthrop.

“RS Fiber’s customers will provide the revenues to repay principal and interest on the bonds, substantially reducing the possibility of increasing future property taxes to repay the bonds,” RS Fiber maintained in a 2014 news release.

The first phase of construction wrapped up in early 2018, connecting all ten cities to the fiber-to-the-home network and providing wireless service in rural areas. Some 2,000 residents signed on, more than 30 percent of available homes and businesses, yet short of the 3,000 subscriber break-even point.

Then in an August bombshell, RS Fiber announced discontinuation of bond payments for two years, requiring taxpayers to cover an anticipated $1 million shortfall as of February 2019.

“The subscriber growth on the network will determine when RS Fiber will be able to take back the payments from the cities,” stated a RS Fiber news release. “That determination will be looked at annually.”

The cities’ total payments spread over 2019-2020 vary from $55,600 in New Auburn (pop. 440) to $268,000 in Gaylord (pop. 2,220), where the preliminary tax levy increased 15 percent.

Proponents explain the shortfall came at an understandable point in the project, namely at the height of construction costs and beginning stages of customer sign-ups. They also blame cutthroat competition from rival providers, while downplaying the impact of higher property taxes.

“In Winthrop that works out to about $2,100 per home, or $105 a year, or $8.25 a month,” said long-time RS Fiber advocate Mark Erickson in an online column. “Amounts vary in each of the 10 communities because Minnesota has a complicated property tax structure, but everyone is in the same ballpark. Some a little more, others a little less.”

But private competitors have seized on the shortfall as vindication.

“What started as a grand plan to bring fiber optic service to every home, farm and business in the area has evolved into something far less and a financial burden on all taxpayers, whether you use RS Fiber services or not,” Minnesota Telecom Alliance President and CEO Brent Christensen wrote in an op-ed.

RS Fiber insists the network has evolved beyond “the high risk of a start-up company in construction mode” into a “customer acquisition phase” bound to bring greater growth.

“We know we’ve done the right thing and look forward to continuing with expansion of the service across our region,” said RS Fiber Board Chair Kevin Lauwagie in a news release.

And how are residents of Arlington doing without RS Fiber?

“I run a business. It’s not like I’m uploading photographs and documents all day long by any means,” said former Arlington Mayor Kreft. “But I have never honestly had one issue with my internet provider.”

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