Community Developments Investments (November 2018)

Cooperative Connection: Banks Back RS Fiber to Bring Broadband to Rural Minnesota

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Timothy Herwig, District Community Affairs Officer, OCC

A technician works on a broadband network's electronics. (RS Fiber)

The RS Fiber Cooperative (RS Fiber) is bringing low-cost and high-speed fiber-optic broadband to an area of southwestern Minnesota that includes 10 cities and 17 townships in Renville, Sibley, and portions of Nicollet and McLeod counties. Serving more than 6,000 households, businesses and farms, schools, public and private institutions, and hospitals with Fiber-to-the-Home (FTTH) connectivity, the cooperative serves an area of over 700 square miles at a development cost of $53 million.

RS Fiber's success was made possible by a multilayered approach to financing involving banks; federal, state, and local governments; a community development financial institution; a private foundation; private equity investors; and member revenues. Playing a key role in the effort was First National Bank of Fairfax. The bank's $50,000 investment helped finance initial engineering and predevelopment work. The bank's capital was the catalyst for securing construction financing from other lenders. The bank made the investment using the public welfare investment (PWI) authority.1

"A high-speed, affordable, accessible, and reliable gigabit internet network, such as that provided by RS Fiber Cooperative, is not only essential for economic development, it is also essential for education, health care, and attracting and retaining people who want to live in the area," said Phil Keithahn, owner, chief executive officer, and president of ProGrowth Bank, which has branches in Gaylord, Mankato, and Nicollet, Minn., and the chief financial advisor to the RS Fiber Cooperative. "Internet access will increasingly become a ‘differentiator' for economic and housing development."

Running a business without quality internet access was difficult, said Dale Jackson, President of JTI, a Winthrop-based company providing electrical systems inspection, maintenance, and safety services to businesses.

"With our old system … it was very, very frustrating," Mr. Jackson said. "Access to fiber-optic broadband has speeded up our processes immensely. We are able to work so much quicker than we were before. …The ability for us to download files very, very quickly has given us a competitive edge by improving our customer service. It has been fantastic."

The goal for RS Fiber was clear. "We will build a fiber-optic network to every home who wants it to (ensure) they're connected to the internet at the speed of light," said Mark Erickson, the former Winthrop city manager who helped lead the formation of RS Fiber. "There's a lot of fiber in the current telecommunications network throughout the United States and throughout the world, but very few of them serve rural areas, extending fiber to the home or to the business in a wholesale operation."

Financing RS Fiber

"When we determined that phone providers and cable providers weren't interested in working with us, the 10 communities formed a Joint Powers Agreement Board," said Mr. Erickson. The first step was to fund RS Fiber through the newly created board, which issued a generally obligated tax abatement bond that raised $13.6 million2 in subordinated debt in two phases: $8.7 million allocated for phase one and $4.9 million for phase two of construction.

Typically, general obligation pledges by local governments result in a property tax increase that covers debt service requirements. In RS Fiber's case, the bond payments are covered by the cooperative's member fees. With a tax increase not needed, organizers found it easier to win support from local residents and businesses. Another plus for locals is projected property value increases of as much as $2,500 per home in cities and $10,000 per farm, according to Mr. Erickson. Increased property tax revenue is expected to help with debt repayment.

The bond, publicly sourced subordinated and private construction debt, grants and equity investments, and member payments financed the first phase of construction. RS Fiber began construction in 2015 and completed construction in 2017 when direct fiber access became available to homes, businesses, and community institutions in the 10 cities. This phase also constructed 13 broadcast towers providing wireless access to farms, businesses, and rural residents living in the 17 townships. The second phase of fiber-to-the farm construction is expected to be completed in 2021. Financing in addition to the bond has not been secured but is expected to come from similar sources.

The bond proceeds were instrumental in attracting construction financing from three local banks, including First National Bank of Fairfax. The bank, along with ProGrowth Bank of Gaylord, Minn., and CornerStone State Bank of Le Sueur, Minn., initially committed to co-fund a $3.75 million construction line of credit. They later increased the line of credit by $2.75 million, giving the project up to $6.5 million of construction credit. In addition, First National Bank of Fairfax bought preferred stock in RS Fiber under its PWI authority.

In addition to the bond and bank construction financing, loans and grants were also sourced from Rural Electric Economic Development (REED), a CDFI affiliated with the Renville-Sibley Cooperative Power Association. REED provided $1.5 million in debt financing, in addition to administering a $300,000 USDA Rural Economic Development Grant and $1.6 million USDA Rural Economic Development Loan. The $3.4 million in financing provided by REED was an essential part of the complex funding structure behind RS Fiber.

When asked to finance RS Fiber, First National Bank of Fairfax's officers debated their options and the risks of financing a start-up business. In the end, they recognized the business development and customer service benefits high-speed internet provides. They stepped up and asked, "What can we do to help?" said Robert Dickson, the bank's chief executive officer and cashier. "We can bring our customers and community broadband," Mr. Dickson said. "We can bring them something that will be equal to what anybody has who lives in Washington, D.C., or in Minneapolis."

Community Involvement a Critical Success Factor

"Our cooperative was created out of nothing," Mr. Erickson explained in "RS Fiber: Fertile Field for New Rural Internet Cooperative."3

The story of the RS Fiber Cooperative is about rural residents organizing to secure the future prosperity of their region and a place in the global economy.

Volunteers led more than 100 local meetings, sent more than 14,000 mailings, placed newspaper advertisements, and organized a door-to-door campaign to educate their neighbors and local businesses. Volunteers remained enthusiastic despite setbacks that could have derailed the project, believing the goal of quality internet access would ultimately pay off.

Other rural communities that need quality internet access can learn from RS Fiber's example.

"What I'm most proud of is the fact that 10 city councils from very small rural communities see the importance of the project right off the bat," Mr. Erickson said. "Seventeen very rural, conservative, skeptical, and cautious township boards also ‘got it' and voted to put their constituents' tax dollars on the line to make it happen."

For more information, contact Timothy Herwig at timothy.herwig@occ.treas.gov, and watch the OCC's video, "Bank Financing for Rural Broadband Initiatives" at www.occ.gov/rural.

1 12 USC 24(Eleventh), implemented by 12 CFR 24, provides the authority for national banks to make PWI. Under 12 CFR 24, which provides the standards and procedures that apply to these investments, national banks can make investments that primarily benefit low- and moderate income (LMI) individuals, LMI areas, areas targeted for redevelopment by a government entity, or investments that would otherwise receive consideration under the Community Reinvestment Act regulation as a "qualified investment," the primary purpose of which is community development.

2 In the first phase, 10 communities provided an $8.7 million bond; in the second phase, townships will provide a $4.9 million bond. Construction of phase two is scheduled for 2021.

3 Institute for Local Self-Reliance and Next Century Cities, April 18, 2016.

This publication is part of:

Collection: Community Developments Investments


Deputy Comptroller
Barry Wides

Staff Writers
Michael Carrier
Janet Fix
Timothy Herwig
Letty Ann Shapiro

Editorial and Design Staff
Dianne Davenport
Vincent Harris
Morey Rothberg

On the cover
Banks are helping to finance broadband development initiatives in rural communities across America that are struggling without reliable, high-speed internet access.

For questions or comments, call (202) 649-6420 or email communityaffairs@occ.treas.gov. This and previous editions are available on the OCC's website at www.occ.gov.

Disclaimer
Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.