Who is accountable if the Lake County network fails?

Lake County is in the news again. The big question – Who is accountable for the RUS loan to build the local fiber network?

One answer is that the business plan includes repayment of the loan. So if all goes well, the network will pay for itself. That’s the plan. But if it doesn’t go well – then what?

I wrote last week about the Lake County issues addressed at the House Subcommittee on Communications and Technology. Allegations were made that someone at Lake County said that the RUS said that Lake County wouldn’t be required to repay the loan. Adelstein emphatically denied this, saying that definitely no one in the office would say such a thing.

This week Minnesota Cable Communications Association executive director, Michael Martin, has an editorial in the Duluth News Tribune that Contributes to the conversation…

If it’s too good to be true, it probably is. Unfortunately, that appears to be reality for Lake County taxpayers as it relates to the $70 million county broadband project.

There has been much discussion, some critical, of my Minnesota Cable Communications Association’s effort to educate residents about the true exposure to Lake County taxpayers. However, we can all agree it is critical to establish who ultimately is on the hook for the $56 million federal loan that makes the project possible. After all, $56 million amounts to almost $5,200 for every man, woman and child in Lake County.

In an op-ed in the Lake County News Chronicle on July 15, 2010, Lake County Commissioner Paul Bergman wrote, “None of these funding sources require any taxpayer guarantees, so the taxpayers of Lake and St. Louis counties will have no obligation if the utility fails. This is clearly stated in our application materials.”

Bergman’s claim is in direct conflict with the head of the federal agency responsible for distributing $66.4 million to Lake County for the fiber project. At a congressional oversight hearing in May on broadband stimulus loans and grants, Rural Utilities Service Administrator Jonathan Adelstein was asked point blank about the financing for the Lake County project — not just once, but twice.

I don’t know that this is where the allegations started. It’s helpful to look at more of that op-ed in the Lake County News Chronicle on July 15, 2010…

First let’s talk about the financing. The county is seeking funding through a federal government program: Rural Utility Service (RUS). RUS funding is like a non-recourse home mortgage loan, meaning if you do not make the payments, the home is foreclosed and becomes the property of the lender. Similarly, if the Broadband Initiative does not produce enough revenue to cover the loan payments the new utility would be foreclosed and become the property of the federal government. The federal government would then resell the utility to the highest bidder. Residents and businesses would then purchase their services from the new service provider.

The money from RUS can only be used to build the infrastructure not the operations part. So our funding proposal also requests money for day-to-day operation of the utility until it is able to generate sufficient revenues. For this money the county will issue subordinate county revenue bonds. With these bonds we pledge the revenue from the utility to make the payments on the revenue bonds, not taxpayer’s dollars.

None of these funding sources require any taxpayer guarantees so the taxpayers of both Lake and St. Louis County will have no obligation if the utility fails. This is clearly stated in our application materials.

It seems as if everyone is right – in their own way. I think it’s helpful to continue with the analogy of the mortgage. Are you required to pay back a mortgage? I think most of us would say yes; although we recognize that in extenuating circumstances that’s not the case. The bank can foreclose. As a homeowner you lose your investment and you taint your credit rating but you don’t have to pay it. Some folks looking at foreclosure will try to sell before it gets to that point; some will hold unto the property as long as possible, letting the bank resell.

It’s my understanding that the RUS loan is similar. Yes the county must repay. But before they asked for every citizen to write a check for $5000 to the RUS, the county and the RUS would make some decisions about how to minimize financial loss – while hopefully maximizing benefit to the county residents.

But again the Plan A is for the project to pay for itself. That is the plan that the RUS approved.

This entry was posted in MN, Policy, Rural by Ann Treacy. Bookmark the permalink.

About Ann Treacy

I have a Master’s Degree in Library and Information Science. I have been interested or involved in providing access to information through the Internet since 1994, when I worked for Minnesota’s first Internet service provider. I am pleased to be a part of the Blandin on Broadband Team. I also work with MN Coalition on Government Information, Minnesota Rural Partners, and the American Society for Information Science and Technology.

2 thoughts on “Who is accountable if the Lake County network fails?

  1. The statement “As a homeowner you lose your investment and you taint your credit rating but you don’t have to pay it.” is not correct for residential mortgages in Minnesota and most other states. When the foreclosure proceeds don’t cover the mortgage, the mortgagor can take action and get a deficiency judgement against the borrower. Of course, judgements vary from case to case, but you can easily lose more than just the house. (See Minnesota Statutes ~582.30).

    Some states have limits on the amount of a deficiency judgement, some states do not.

    The legal responsibility to the federal government if the Lake County project fails is probably best determined by having a qualified legal professional review the loan/mortgage documents.

  2. Steve – Thanks for the correction. It will be interesting to see what the legal professionals in Lake County decide is the best course of action – if they project is unsuccessful.

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