What Price Taxpayer-Financed Broadband?

Published May 31, 2016

“We’re putting money in a sinking ship,” said William Theriot, vice-chairman of the City-Parish Council for Lafayette, Louisiana, in a recent interview. Theriot was referring to a recent outside audit of an entity called LUS Fiber, a government-owned network constructed by the city to provide broadband in competition with the private sector. It showed losses of $45,000 per day during the past fiscal year, putting the initiative about $28.8 million in the hole.

By way of background, in 2005 Lafayette voters approved a plan to borrow up to $125 million to build the government-owned network (GON) to provide broadband. LUS Fiber initially borrowed $110 million. It returned to the City-Parish Council last year for approval to borrow the remaining $15 million in voter-approved debt. LUS Fiber also currently owes $30 million to the city-owned Lafayette Utilities System, which provides water, sewer, and electric service, and is the parent entity for the GON. On top of that, LUS Fiber also took out a $5 million cash loan from the utilities system last year.

Despite these liabilities, LUS Fiber officials claim the GON is on track to turn a profit soon. Terry Huval, director of the Lafayette Utilities System, told the City-Parish Council after the audit’s publication that LUS Fiber is making enough money to cover operating expenses and some debt repayment and should be “fully self-sustaining in three years.”

However, Lafayette Council members remained concerned about LUS Fiber’s debt load. Theriot said, “We need to have a valid discussion now about LUS Fiber, and we need to make a decision as to whether this is something we need to continue funding.”

Costly Waste of Taxpayer Dollars
LUS Fiber is not the only example of a GON gone bad. For years, cities and counties across the United States have built GONs, claiming these systems are a cost-effective means to provide high-speed Internet access in places they say private sector broadband providers such as telephone and cable companies have ignored or do not serve adequately.

Like Lafayette, cities such as Burlington, Vermont; Mooresville, North Carolina; and Chattanooga, Tennessee, have built GONs, and the number continues to grow. In 2001, there were 16 GONs in nine states; by 2011 there were 108 systems in 33 states.

But as the number of GONs has increased, so have the problems. There is a growing body of evidence suggesting GONs like LUS Fiber are a costly waste of taxpayer dollars, draining valuable resources away from important local functions such as public safety, transportation, and education.

A new study by Andrew Moylan and Brent Mead of the National Taxpayers Union, a tax and budget reform advocacy group, found the debt loads connected with GONs tend to be substantial. Moylan and Mead write, “Though some dismiss the issue as a necessary part of the process of building a full-featured network, the fact of the matter is that servicing debt (i.e., making periodic principal and interest payments) can be quite expensive over the long term while posing a threat to the future finances of the city or county that incurs it.” (Disclosure: The author is a former employee of the National Taxpayers Union. He was not involved in the production of the aforementioned study.)

No Profits, Losing Money
How much debt are they talking about? Consider GONs in Tennessee. Research by Dr. Ronald Rizzuto of the University of Denver found nine networks in the state, including Chattanooga’s much-heralded GON, had incurred a combined $176.5 million in cumulative debt by 2010. Cities and counties across the country have reported their GONs have failed to turn profits or are losing money.

No one questions the importance of broadband to our 21st century economy. That is why the private sector has invested an estimated $250 billion in its networks in just the two-year period from 2008 to 2010. The Federal Communications Commission estimates 123 million out of the 130 million U.S. households, or 94.6 percent, have access to wired broadband service with at least 4 Mbps download and 1 Mbps upload speeds. Clearly, this is an economic success and a bright spot for the private sector, by any measure.

Given the size of the United States, gaps in coverage remain. Some argue GONs are necessary to fill these gaps, but as LUS Fiber and other localities’ experiences with GONs demonstrate, the cost to taxpayers is exceptionally high. Only by harnessing the demonstrated power of the marketplace can cities and counties avoid a fiscal capsize and realize nationwide broadband for all.

John Stephenson ([email protected]) is director of the Communications and Technology Task Force at the American Legislative Exchange Council. Learn more at http://www.alec.org/

Internet Info

“Audit: LUS Fiber Lost $45,000 a Day,” Nicolas Persac, The Advertiser.com, May 22, 2012: http://www.theadvertiser.com/article/20120523/NEWS01/205230338/Audit-LUS-Fiber-lost-45-000-day?odyssey=tab%7Ctopnews%7Ctext%7CFRONTPAGE&nclick_check=1

“Profit Seen for LUS Fiber,” Richard Burgess, The Advocate, June 13, 2012: http://theadvocate.com/home/3022326-125/profit-seen-for-lus-fiber

“Wired to Waste: NTU Policy Paper #129,” Andrew Moylan and Brent Mead, The National Taxpayers Union, April 9, 2012: http://news.heartland.org/policy-documents/wired-waste

“List of Independent Telcos and Municipalities Deploying Fiber to the Premises,” Broadband Communities Magazine: http://www.bbpmag.com/search.php

“Chattanooga Residents Get Internet Courtesy of Taxpayers,” Christopher Butler, Tennessee Watchdog.org, December 21, 2011: http://tennessee.watchdog.org/2011/12/21/chattanooga-residents-get-internet-courtesy-of-taxpayers/

“Broadband Investment From Trade Groups Tops $250 Billion,” Broadband for America, May 19, 2011: http://www.broadbandforamerica.com/blog/broadband-investment-trade-groups-tops-250-billion