December 3, 2005

AFN sale isn’t cure for debts

Even at top end of expected price, millions remain city’s responsibility

By Vickie Aldous
Ashland Daily Tidings

Although counter-intuitive, the City of Ashland would save little money from selling the debt-ridden Ashland Fiber Network — even for top dollar — compared to continuing current operations.

That’s largely because AFN, like all city departments, has been shouldering a share of the costs for accounting, legal work, billing, human resources, administration and other services used by departments. AFN’s annual contribution for that work, known as “central services” in city budget parlance, is $460,000.

If AFN were sold, other city departments would have to make up that amount. The city would likely not cut any central services staff, with the possible exception of one utility billing clerk, according to Ashland Finance Director Lee Tuneberg. That’s because many central services staff members are facing a backlog of work, he said.

“Our time would be freed up to work on the backlog,” said Tuneberg, who estimated he and several other non-AFN staff members are spending half of their time grappling with AFN issues.

AFN’s staff could be eliminated if it were sold, ending those personnel costs. But the television and Internet revenues that cover those costs also would disappear, leading to no change in the city’s bottom line.

In addition to having to make up for the $460,000 AFN now contributes for central services, the city also would have to make payments on whatever remained of AFN’s $15.5 million debt.

The AFN Options Committee estimated AFN could be sold for $5 million to $10 million — leaving the city with, respectively, $10.5 million in remaining debt or $5.5 million in debt.

The city pays an average of about $755,000 annually in interest-only payments on the $15.5 million debt, assuming a 5-percent interest rate. Payments on both the interest and principal of the loan begin in July 2007.

If AFN were sold for $10 million, the city would still be paying $255,000 annually for interest plus, it would have to make up $460,000 in central services charges now paid by AFN. The total cost of $715,000 yields modest savings compared to the current cost of $755,000.

Those savings would evaporate if AFN were sold for $5 million and the city had an annual average interest payment of $525,000, and still had to make up the central services charges. Then the annual cost would be $985,000.

Spinning off AFN as a nonprofit would leave annual interest and central services costs of $910,000 because the AFN Options Committee believes the nonprofit could only survive saddled with $6.5 million of the $15.5 million loan.

Committee member Paul Mace said members are aware that the $460,000 in central services costs covered by AFN would not disappear if the cable television and high-speed Internet service were sold.

“On the day it’s sold does the city save money? The answer is no,” Mace said.

The committee has recommended the Ashland City Council pursue a two-pronged strategy and work on both selling AFN and spinning it off. The strategy could net a higher price for AFN, but if it were not sold, plans would be in place to set it up as a nonprofit. Most councilors indicated support for the plan at a Tuesday night study session.

Although selling or spinning off AFN would not save money over current operations, Mace said doing so would shield the city from future risk and the possibility that AFN could go deeper in the hole.

“It’s a way of limiting the costs — not eliminating the costs,” he said.

Many local high-tech experts and customers believe AFN would have to make major investments in services such as high-definition television in order to keep pace with market pressures.

Mace warned councilors that AFN — which is operating at about a break-even point excluding its debt payments — could see erosion of its market share as companies roll out competing wireless Internet services in Ashland and telephone and cell phone companies add new telecommunications products.

But Ashland government watchdog Art Bullock believes it would be foolish to sell AFN because the revenue the enterprise generates would vanish while costs such as central services would remain.

“People think when they sell AFN, all the costs go away. That’s not the case,” Bullock said. He said the city also would continue to shell out money to pay for its internal computer system that now operates on AFN. It would either have to keep staff on board to maintain the system, or would have to pay AFN’s buyer for those services.

Tuneberg said the city currently pays AFN $5,000 per month for city use of AFN’s infrastructure. That amount, or possibly less, could be paid to an outside provider, he said.

Mace said the city could negotiate with AFN’s buyer or the nonprofit spin-off to provide city computer services for a fee or for free.

“It is so small relative to the overall deal that it certainly could be negotiated satisfactorily,” he said.

Staff writer Vickie Aldous can be reached at 479-8199 or valdous@dailytidings.com.