By Chip Baltimore, The Center Square
Aug 12, 2020
Two years ago, local government officials in Charles City began pursuing the creation of a municipal broadband system. At that time, it was acknowledged even by the pro-municipal broadband consultants that no other community in Iowa had successfully built such a system without also having a municipally-owned electrical utility to help subsidize a healthy part of the construction and/or operation of the broadband utility. With the documents that were supposed to be held out of public view, citizens are seeing why no other Iowa community has been successful.
In March 2019, the Charles City project was estimated to cost $12 million. The public was told the deal would require bonding of $12.4 million and would be repaid over 25 years using just the revenues generated by the broadband system. Using those figures, the consultants projected that roughly 42 percent of the community’s citizens and businesses would have to sign up to make it work.
Now it’s August 2020 and the system is projected to cost $18 million, with required bonding of up to $22 million. One must ask how the consultants missed the project cost projection by 50% and the bonding requirement by 77%. Despite numerous requests, the board refuses to release to the public the financial business plan (prepared by some of these same consultants) that might explain these discrepancies. However, it appears that the persons or entities being approached to finance this project aren’t liking whatever the business plan is revealing.
Although the plan all along has been to finance this project with revenue bonds to be repaid solely from the revenues generated by the broadband project, Board minutes from the Utility’s July 7, 2020, closed-session meeting show that the bond market apparently has no appetite for this risky project. The documents disclosed that the Board had even pursued a federally-backed loan from the United States Department of Agriculture, but that loan would require a 15-year payback instead of the 25-year payback as the feasibility studies originally projected, making that option economically unfeasible. The minutes finally revealed that the financing consultant is now pursing local banks and regional lenders for financing. But despite trying to arrange financing for a few months now, the financing consultant indicated at the July 28 Board meeting that he was still struggling to come up with a financing proposal that would work.
This all leaves the Charles City Telecommunications Utility and the City Council in a tough spot. Without a municipally-owned electric utility to subsidize a significant portion of the cost, the financing needle through which this increasingly costly project must be threaded is getting tinier and tinier. Even if the Telecommunications Utility by some miracle does get initial financing, the Utility will still have to get something along the lines of 70-80 percent of the entire internet market share just to break even. This is a risk that very few, if any, prudent banks or lenders will take on, especially over a 20- or 25-year repayment period.
And if the financing miracle doesn’t happen, Charles City’s taxpayers will pay dearly for this dead-end project. The city has already loaned the Utility more than $800,000 to pay the consultants that got them into this predicament in the first place. Those funds were initially paid to the city in the form of property taxes. If the Telecommunications Utility can’t get financing for this project, the city’s property taxpayers will have to eat that loan, because it’s quite clear the consultants won’t be giving their fees back.
This project was an extreme gamble from the very beginning. With the odds of financing and ultimate success becoming increasingly long, the smart play would be for the city to cut its losses and put an end to this boondoggle.
This is not an isolated incident. There have been suspicions of other systems having similar problems, but the information has always been hidden out of view. This document misstep in Charles City is a window into the financial mess that these systems create. States and localities should be very wary of building a broadband system that will wreak havoc on their finances.
This story was originally published by The Center Square.
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