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Rural Minnesota County Built a Fiber Network, but Now Taxpayers Face Huge Bills

Some gaps in a new deal between Lake County and Lake Connections could cause the federal government and local taxpayers to lose up to $45 million.

(TNS) — While getting out from under a $48.5 million debt for less than $5 million seems like a sweetheart deal for Lake County, Minn., and the winning bidder, local property taxpayers are still on the hook for more than $25 million.

When the Lake County Board of Commissioners voted last week to approve a $3.5 million purchase agreement for Lake Connections, the county's municipal broadband Internet project, there were some gasps that the federal government and taxpayers could lose up to $45 million in the deal.

Pinpoint Holdings in Lincoln, Neb., submitted the bid for the network, which will serve as the minimum purchase price for Lake Connections in an auction-style sale to be conducted over the next few months.

However, $45 million spread over the entire nation could be just the beginning of the pain for local taxpayers. According to the county's 2016 financial statement prepared by the Minnesota Auditor's Office — the latest statement available — the county's broadband enterprise fund owes more than $14.3 million to the general fund and $3.3 million to the Health and Human Services fund.

In addition, the county bonded for $7.24 million in April to settle its debts with Rohl Networks and MP Nexlevel, the two main contractors on the Lake Connections project. The 15-year bond's 3.17 percent interest rate means the county will owe an additional $2 million in interest and will owe an average annual payment of $610,000 — roughly the same amount the county has dedicated to supporting the broadband network over the past few years.

The broadband project encountered numerous hiccups and cost overruns during and after construction, forcing the county to dip into its general and health and human services funds to make up the difference in its broadband fund.

But if the county's funds dedicated to the network remain at current levels, the county will still be more than $17 million in the hole when the bond is paid off.

In 2010, the board received a $56 million loan and $10 million grant from the Department of Agriculture's Rural Utilities Service (RUS) to construct the network. Over three years, more than 1,200 miles of a fiber network was built in Lake County and parts of eastern St. Louis County.

Most of the network was completed in June 2015, and the focus shifted to connecting eligible customers to the network with the county pledging $15 million of its own money to fund "drops" — home connections — that also included a $3.5 million grant from the Federal Communications Commission.

In June 2017, the county entered into a deferral agreement with RUS for principal and interest on the condition the county sell the network to a private company or entity. Two months later, the county executed a memorandum of understanding with RUS in which RUS agreed to accept to the sale price of Lake Connections in full satisfaction of the county's debt for construction of the network.

At the time of the deferral agreement, the county owed approximately $48.5 million on the RUS loan. If Pinpoint's bid is the winning bid, the federal government will receive $3.5 million to satisfy the balance of the loan.

David Williams, president of the Washington-based Taxpayer Protection Alliance (TPA), said other municipal broadband projects around the country have had similar results as Lake Connections, with taxpayers often footing the bill.

TPA opposes public funding of infrastructure projects like Lake Connections and advocates private funding to build such projects. Many government officials hear about broadband and believe it's a good idea, but tend to rush into the project without a solid business model, according to Williams.

"It's really a crapshoot," he said. "Most of these places end up going under and having to sell for pennies on the dollar. I don't care if a private company goes in and loses money. I care if taxpayers go in and lose money. That's why this is so sensitive to people. They should be fixing potholes and helping with public safety, not funding broadband systems."

No Other Option

Rich Sve, one of two current Lake County commissioners who have served on the board throughout the Lake Connections project, said the county encountered problems it never considered during the project, but no private Internet service provider was willing to invest in bringing broadband Internet to the rural parts of Lake County.

"I think one of the things you have to remember is ... we started this project off and we encountered all kinds of obstacles that we never thought we were going to have," Sve said. "But as the end result, if the county had not stepped up to move in the direction of putting broadband throughout the county, it wouldn't have happened. No other provider was going to build a broadband network with the speeds and capabilities that we have for our rural constituency."

Lake Connections has been a benefit to both individuals and businesses within the county.

Sve said that before Lake Connections was available, Granite Gear, an outdoor supply company based in Two Harbors, had to upload its orders in the middle of the night because there wasn't enough bandwidth to do so during the day.

Patrick Krekelberg, owner of product development firm Krekeltronics, relocated his business from St. Paul to rural Two Harbors because of the availability of Lake Connections service.

Sve said many people are considering the availability of the high-speed Internet service when they purchase homes in Lake County.

Sve admitted the board has made some mistakes during the construction and implementation of the network over the years, but the network is the envy of many rural Minnesota counties still struggling to get Internet access to their communities.

"It would be wonderful starting over knowing what we didn't know then, but we don't have that luxury," he said. "There are other counties still clamoring and scratching and clawing to get served."

©2018 the Lake County News-Chronicle (Two Harbors, Minn.) Distributed by Tribune Content Agency, LLC.