Report Reveals Hidden Costs of Iowa Muni Broadband

Published November 1, 2005

Three of Iowa’s oldest municipal broadband systems continue to struggle to cover their costs years after they were predicted to be operating in the black, according to new report from The Heartland Institute.

“Iowa Municipal Telecommunications Systems: The Financial Track Record,” by Dr. Ronald J. Rizzuto, professor of finance at the University of Denver, documents that municipal systems in Cedar Falls, Muscatine, and Spencer, Iowa demonstrate a pattern of ongoing financial shortfalls. According to Rizzuto, costly but often hidden measures are taken by the municipalities to sustain these losing operations.

The report also demonstrates the entropy effect these systems have on utility and other municipal resources. The municipalities have found it necessary to spend more money on operations, capital expenditures, and interest than they can collect from customers. Even though all three systems have had cash surpluses, they remain heavily dependent on the local electric utility for financial resources. It is unlikely any of these systems will achieve the promised “stand-alone” status in the near future, Rizzuto concludes, because they are repeatedly forced to borrow or appropriate funds from the larger municipal utility to cover costs.

Rizzuto writes, “None of the utilities has achieved payback of its original investment. As of the end of 2004, Cedar Falls Utility was $3.1 million below payback. Likewise, Muscatine and Spencer were $25.6 million and $18.3 million, respectively, short of payback.”

Each city, Rizzuto found, has either had to raise rates or subsidize telecom operations with millions of dollars in intra-utility loans or transfers

For example, Rizzuto found Spencer Municipal Utilities has allocated $11.7 million in communications costs to its electric utility. Spencer Municipal Utilities has loaned the communications unit more than $8 million at a below-market interest rate of 4.5 percent.

Any savings residents saw from lower cable rates were likely more than offset by the higher rates for other utility services called upon to cover telecom costs. Moreover, since many more residents purchased electricity from the municipal utility than they did cable services, the higher electric rates amounted to “regressive redistribution” of wealth. In other words, through higher electric bills, lower-income households who chose not to purchase cable service subsidized the service for higher-income households.

Other costs of municipal broadband are more difficult to peg, Rizzuto suggests, because they represent lost opportunities. For example, when Spencer’s electric utility loaned money to the cable operation at below-market rates, the utility and its ratepayers were hurt because those funds could have been safely invested at rates that would have yielded better returns.

Cedar Falls

Cedar Falls Communications Utility (CFCU), the oldest of the three systems, continued to run deficits well beyond its start-up phase, Rizzuto found. Between 1997 and 2002, annual free cash flow deficits ranged between $993,102 and $253,652. To cover its costs, the utility had to borrow funds from affiliated utilities.

In 2003, CFCU had its first year of positive annual free cash flow–a slightly positive $2,498. In 2004, CFCU reverted back to a negative annual free cash flow. On a cumulative basis, CFCU has cost $10.5 million more than it has generated in revenues.

Effective January 1, 2005, according to Rizzuto, CFCU approved a rate increase that averaged 9 percent for basic cable customers, 10 percent for “Basic Plus” cable customers, and 15 percent for digital cable customers.


At first look, Spencer Communication Utility (SCU), a unit of Spencer Municipal Utility (SMU), is performing the best of all three cities. SCU’s revenues were insufficient to cover all costs from 1999 through 2002, Rizzuto reports, but annual free cash flow appeared to turn positive in 2003 and remained positive in 2004.

But when correlating the communication utility’s finances with those reported by Spencer Municipal Utility, Rizzuto found significant cost allocations that demonstrate the SCU’s financial dependence on its sister utility.

From 1998 to 2003, SMU’s electric utility allocated communications enterprise costs to itself rather than the communications utility. In 1998, for example, the electric utility paid $670,020 of the Phase One costs for the SCU. Between 1998 and 2002, the electric utility paid $9.5 million in capital costs for fiber and coaxial cable for the communications utility.

During 2001, the electric utility exchanged some assets with the communications utility. The electric utility sold the communications utility $790,000 in assets and, in turn, purchased $2.3 million of the communications utility’s assets. The net transaction was a transfer of nearly $1.6 million from the communications utility to the electric utility.

Rizzuto says the SMU financial statements do not provide any justification for the allocation of nearly $11.7 million in communications costs to the electric utility.


According to its annual financial reports, Muscatine Communications System (MCS) had to borrow money from Muscatine Power & Water to pay for operating costs for the first three years, the report states. Since 2001, however, the operation’s revenues have covered operating costs.

When non-operating costs, such capital expenditures and interest payments, are included, however, MCS has operated below breakeven every year until 2004, when it essentially broke even. A peak deficit occurred in 1999 when the utility’s costs were $8.45 million more than revenues. The deficit gradually shrunk as the utility raised cable and high-speed data rates to cover those costs.

As of the end of 2004, over the life of its operation, MCS had spent $33.1 million more than it had taken in. All of that money has been borrowed from the electric utility. “It is probably no coincidence that electric utility rates have increased recently in Muscatine and that the utility’s bond rating has been lowered as a result of its reduction in investment and cash reserves,” Rizzuto writes.

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News.

For more information …

The full text of Dr. Ronald J. Rizzuto’s Heartland Policy Study, “Iowa Municipal Telecommunications Systems: The Financial Track Record,” is available online at

Cash Flows for Municipal Broadband Utilities
in Cedar Falls, Muscatine and Spencer, Iowa
  Cedar Falls Muscatine Spencer
  Annual Free Cash Flow Cumulative Free Cash Flow Annual Free Cash Flow Cumulative Free Cash Flow Annual Free Cash Flow Cumulative Free Cash Flow
1995 (3,034,535) (3,034,535)        
1996 (4,170,184) (7,204,719)        
1997 (993,102) (8,197,821)        
1998 (689,291) (8,887,112) (4,227,932) (4,227,932)    
1999 (253,652) (9,140,764) (8,445,533) (12,673,465) (1,424,952) (1,424,952)
2000 (323,249) (9,464,013) (4,573,229) (17,246,694) (5,443,358) (6,867,850)
2001 (574,555) (10,038,568) (3,173,281) (20,419,975) (2,069,321) (8,937,171)
2002 (504,751) (10,543,319) (2,117,535) (22,527,525) (934,601) (9,871,722)
2003 2,498 (10,519,529) (10,563,160) (33,100,685) 310,225 (9,561,547)
2004 (2,717) (10,543,588) 120,385 (33,140,424) 804,828 (8,756,719)
Source: Iowa Municipal Telecommunications Systems: The Financial Track Record, citing annual financial reports from Cedar Falls Utility, Cedar Falls Communications Utility, Muscatine Power & Water, and Spencer Municipal Utility.