Municipal broadband is a bad idea for cash-strapped towns

Some in the Biden administration are likely to advocate for municipal broadband networks. Always controversial, building these networks may be a particularly poor choice for most localities in the aftermath of the COVID-19 pandemic. Even if federal subsidy dollars become available, municipal broadband networks require significant ongoing capital investment to operate, often funded by issuing new debt. Cities have seen their tax revenues shrink with pandemic shutdowns, and taking on additional debt to support broadband networks will be difficult to justify. Add the lack of proven economic benefits from municipal networks, and these proposals look like an increasingly bad use of local resources.

State and local governments suffered an estimated $70 billion to $74 billion shortfall in tax revenues in 2020, according to Moody’s Analytics, which estimated future shortfalls to be over $200 billion in 2021 and $300 billion in 2022. Localities are making hard choices and trimming budgets for essential services. Some localities cross-subsidize municipal broadband with electric utility revenues, but electric utilities have also been hit by COVID-19. Total electricity use has declined this year, leading to an estimated $10 billion revenue shortfall in 2021 according to the National Rural Electric Cooperative Association.

Municipalities may seek to issue revenue bonds to fund their broadband projects, but a dollar borrowed for one purpose can make the next dollar borrowed more expensive. The cost of debt service has to be paid back continually based on uncertain rates of new subscriber uptake. Initial costs need to be paid back over time as well, with upfront costs in the tens of millions of dollars for buried and aerial deployments requiring equipment, electronics, and installation along with other overhead costs such as foundation, land, tower construction, permits, rights-of-way, construction equipment and labor, data center costs, engineering, easements, maintenance, and GIS mapping software and labor.

Buildout costs are high, and the benefits side of the ledger is scant. In a research paper released last year, I used FCC and Census Bureau data to analyze the effects of municipal networks on local broadband adoption, unemployment rates, and labor force participation. The presence of a municipal network did not appear to generate a statistically significant improvement on broadband adoption or in economic conditions. These results are consistent with the research of others. My findings do not show that municipal broadband will necessarily fail, but do show that the supposed benefits touted by advocates tend not to appear.

Some towns have successfully operated their own broadband networks, but success is not guaranteed. Failed efforts have generated long-term debt and asset sales to private owners. One local example currently in litigation is the BVU OptiNet network in Bristol, Virginia, which was sold in 2018 for $50 million to a privately held company, Sunset Digital, after the city spent over $100 million in subsidies and municipal bond funds on the public network. The city of Bristol is litigating to recover $6.5 million after audits revealed accounting discrepancies in internal loans from the electric division to the OptiNet division. As the Bristol case illustrates, if a municipal initiative doesn’t work, the city is stuck paying the bill without much to show, leaving it with debt that potentially harms the city’s ability to borrow going forward.

None of this scrutiny is meant to imply that broadband is not critical. It is. In some cases, a municipal network might yield benefits on the margin, such as in areas without other coverage, as long as the population understands the cost.

Localities should think carefully about their objectives when considering public networks and think about whether other, less costly, means of achieving those goals exist. For example, does the city want to lower broadband prices for low-income people? If so, then targeting subsidies and helping residents sign up for the FCC’s Lifeline program is likely to be much more cost-effective than building a municipal broadband network.

In the coming months, schools, pension funds, and other essential city services may face serious budget cuts. Adding new liabilities for public broadband is unlikely to be the best use of limited tax revenues.

Local officials should examine all of the analytical research on municipal broadband and avoid the impulse to begin these projects without careful consideration of long-term costs.

The private sector should continue to support universal broadband, and governments should aid them in doing so. The bottom line is that municipal broadband just does not make sense for many localities, especially cash-strapped towns.

Sarah Oh is senior fellow at the Technology Policy Institute.