NCPA - National Center for Policy Analysis

MUNICIPALITIES SHOULD STAY OUT OF THIS

February 9, 2006

Advocates of municipal broadband systems say they won't cost taxpayers anything. Don't believe it, says Joseph Bast, president of the Heartland Institute.

Consider:

  • Cedar Falls, Iowa, has had a municipally owned communications system for nine years. The system has covered its operating costs since the second year, but not its capital and finance costs. The Cedar Falls municipal communications system has had negative free cash flow every year but one. It is $3.1 million short of paying back what taxpayers have paid into it.
  • Muscatine, Iowa, has had a municipal communications system for six years. It's had negative free cash flow every year except 2004. It is $25.6 million short of payback.
  • Spencer, Iowa, has had a municipal communications utility since 1999. Spencer had negative free cash flow until 2003 and seems to have had a positive cash flow since then -- but Spencer's electric utility has paid more than $9 million in capital costs for construction of the communications utility, transferred $1.55 million in assets to the communications utility and loaned it $8 million at 4.5 percent interest (less than the 5.75 percent that the electric utility pays for its own bonds).
  • Finally, Bristol, Va., operates a municipal communications utility that it launched in 2002. It, too, is unlikely ever to achieve positive free cash flow. It was originally funded by a $15 million revenue bond issue and then re-funded in 2004 at $27.5 million. It has borrowed $14.9 million from the electric utility and has had operating losses (including cost of capital and interest) of $8.6 million so far.

These case studies are important because advocates of municipal broadband systems say they won't cost taxpayers anything, says Bast. Moreover, each of these communities claims that its municipal broadband system is breaking even.

Source: Joseph Bast, "Municipalities Should Stay Out of This," Star Telegram, February 5, 2006; Ronald J. Rizzuto, "Iowa's Municipal-Owned Communications Systems Should Serve as a Warning, Study Says," Heartland Institute, September 20, 2005; and Steven Titch, "A Study of the BUV OptiNet and Lafayette Utilities System Plan," Heartland Institute, June 20, 2005.

 

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