February Fails: Government Broadband Boondoggles

Welcome to National Taxpayers Union’s “February FAILS” #febfails!

President Obama’s call to action on municipal broadband has more local governments trying to jump on the bandwagon, a path towards many expensive boondoggles that will cost taxpayers dearly. As NTU's own "Wired to Waste" study found, Government Owned Networks (GONs) have proven to be mismanaged, wasteful messes that do not erase the digital divide, but make it more costly.

February Fails will highlight these misadventures so there’s no excuse to make these mistakes again:

(February 27) Chattanooga, TN: Chattanooga branded itself the “Gigabit City” after launching its government-owned broadband network in 2010. The network cost $390 million to deploy and has 55,000 subscribers, for a $7,090 per subscriber cost.

  • Chattanooga charged some consumers more than $50,000 a month to use the network to its fullest capacity.
  • Chattanooga received a $111 million grant from the federal government; this sum equals a $2,000 per subscriber subsidy – yet Chattanooga’s prices are no better than packages offered by private ISPs.
  • Hoping to improve its competitive advantage, the GON was behind a scheme to raise fees on private providers.
  • Chattanooga’s network is only profitable because it is backed by the city’s utility network.
  • Chattanooga had its bond rating cut because of its GON.
  • Click here to read more about Chattanooga’s failure and the failures of nine other cities.

(February 26) Orlando, FL: Orlando’s downtown wireless district pilot project was launched in January 2004 and provided free internet access to computer users in certain areas of downtown.

  • System operated for 17 months at a cost of $1,800 a month.
  • Authorities thought the network would attract 200 users a day, but about 14 percent of that figure actually used it.
  • Experts blamed “poor implementation” for the failure.
  • Orlando wasn’t the only network to fail at a free Wi-Fi experiment. In 2012 after Seattle pulled a plug on its network, the Heartland Institute said it was just the latest in a “string” of municipal Wi-Fi failures.

(February 25) Florida: In August 2009, the newly-formed North Florida Broadband Authority (NFBA) Applied for a $30 million stimulus grant from the federal government to provide wireless Internet to low-income households in Florida.

  • The federal government shut off funding by August 2011 when it became clear the network had serious issues and was behind schedule.
  • Communities began leaving the system in 2012.
  • The North Florida Broadband Authority was sold to a private company in 2013.
  • According to the Lake City Journal, “Although NFBA put equipment on more than 90 towers in North Florida, the marketing side of the program failed to attract businesses to provide the service to users. NFBA lists four companies as customers.”

(February 24) Mooresville and Davidson, NC: MI-Connection is a government-owned Internet Service Provider in Mooresville and Davidson, NC. The system was acquired by the two towns in 2007. According to the Free State Foundation, “Purchase of the system required a massive start-up investment of approximately $80 million by Mooresville and Davidson. And the towns poured an additional $12.5 million into the system in 2008 to provide system upgrades.”

  • Davidson and Mooresville have had to provide significant subsidies to the network, including $6.3 million in 2013.
  • MI-Connection continues to lose about $1 million per quarter.
  • MI-Connection’s prices are only “slightly below” private companies’ prices.

(February 23) Lompoc, CA: The city of 42,000 started building this wi-fi network in 2000. It needed 4,000 subscribers to “break even.”

  • The network cost $3 million.
  • In 2012, “the system currently has 1,200 to 1,600 regular subscribers, hardly enough people to sustain an annual budget of nearly $400,000.”
  • City offices were the biggest customer.

(February 20) Marietta, GA: Marietta, Ga. was in the broadband business for about eight years. Their network was sold in 2004 to a private buyer. According to USA Today:

  • The network cost $35 million and was sold for $11.2 million.
  • The city network had about 180 subscribers, making the cost about $195,000 per subscriber.
  • Marietta’s mayor said there was “no way” the system ever could have been profitable because of the high costs of continual upgrades.

(February 19) Tacoma, WA: In April 1997, the Tacoma City Council voted to give Tacoma Public Utilities the authority it needed to begin building the Click! Network. In June 1998 Tacoma Public Utilities renamed its units and City Light became Tacoma Power. The network has about 18,000 Internet customers. Local reporters have asked the network to release certain documents, and it has refused.

(February 18) Lebanon, OH: The city has been in the broadband business since 1999. The city was looking for a buyer for the network in 2006.

  • The city increased electric rates in 2001 to cover broadband losses and authorized $14.8 million in mortgage revenues bonds as well.
  • After losing $268 per subscriber in 2004, the city turned to taxpayers for a bailout, asking for about $37 per household.
  • The city was nearly $10 million in debt as of 2011.
  • The network cost twice as much as expected.

(February 17) Lafayette, LA: LUS Fiber started by offering service only to government offices, but in 2005 voters approved a plan to expand the network. Having gone live in 2009, the network charges nearly $1,000 for its high-end service. New York Law School's municipal broadband analysis called the network’s financial future “uncertain.”

  • The network cost $125 million to expand.
  • Excluding startup costs, the network has cost $150 million, or more than $10,700 per subscriber.
  • The city has said the network should be self-sustaining by this year. Originally the city said 2012.

(February 16) ​Memphis, TN: Memphis Networx went online in 2001 with an initial investment of $28.6 million. A total of $32 million was committed to the network over the next seven years. A “wholesale model,” Networx leased its lines to other companies. Still, the network:

  • Never turned a profit.
  • Was sold at a significant loss in 2007 for approximately $11.5 million.
  • Was sued – by the city – for failing to pay its franchise fee. 

(February 12) Ashland OR: According to the American Consumer Institute, Ashland Fiber Network (AFN), launched in the late 1990s, suffered from higher-than-anticipated construction and operation costs. City departments covered the network’s shortfalls, but in August 2004 the city took out a $15.5 million bond to pay for the scheme. AFN didn’t cover any of its debt payments from 2005 to 2007.

  • The city charged electricity customers a $7.50 surcharge to cover losses.
  • Property taxes also have been used to cover AFN’s debt.
  • The network’s losses total about $480 per customer.

(February 11) Bristol, VA: According to the aforementioned New York University Law School study, Bristol’s network was launched in 2002 and serves more than 13,000 customers. The city has received state and federal grants to extend its network.

  • In total, Bristol’s network has cost more than $100 million.
  • Part of the network’s funding came from the late 1990s federal government settlement with tobacco companies.
  • Despite the help from the state and the federal government, it remains $70 million in debt.
  • Bristol has lost about $2,100 per customer.

(February 10) Monticello, MN: After discussing building its own network for five years, Monticello’s FiberNet was launched in 2010 and today has only 1,270 subscribers. It was financed initially with a bond of nearly $26.5 million from the city government. Packages range in price from $30 to about $100 per month. According to Minnesota Watchdog:

  • Monticello’s annual operating losses total about $450,000 a year.
  • The city uses revenues from its liquor operations to subsidize the network.
  • Monticello has defaulted on $21 million in bonds.

(February 9) Alameda, CA: Alameda voters approved a plan to offer telecommunications services to city residents in 1998. The government anticipated the network would increase revenues to the city-owned utility, and made plans to offer Internet services in 2001. Alameda Power & Telecom hoped to have high-speed access available to 8,000 households by January 2002. The city issued a $40 million bond to fund construction of its cable network. Cost overruns shifted the price tag closer to $85 million. According to Action Alameda News:

  • The telecom division was sold in November of 2008 for an estimated loss of $60 million.
  • As of 2009, there were still $20 to $30 million in lawsuits outstanding against the utility and the City of Alameda and the potential loss to taxpayers was estimated to be over $80 million.
  • FlashReport: “The City of Alameda made a big mistake, and it is going to cost the city’s taxpayers big bucks and big service-displacement headaches.”

(February 6​) Burlington, Vermont: Famous for its native sons Ben and Jerry, the city of Burlington tried its luck with municipal broadband in 2008 with an initial investment of $33.5 million. Things went downhill quickly from there. The city found itself embroiled in a lawsuit when it failed to pay back money to Citibank for the network. A former mayor also illegally borrowed $17 million from taxpayers. Burlington Telecom eventually reached an agreement with Citibank over its debt, but the deal required the city to sell the network to a private company for $6 million, which now owns Burlington Telecom’s equipment and leases it back to the city.

  • At its peak, Burlington Telecom had just 4,000 subscribers out of the potential 38,685 population – that’s about 10 percent – and the system charged higher rates ($50/$175 per month) than private sector competitor Comcast ($49.99/$89.99).
  • The agreement with Blue Water Holdings requires the city to sell the network after three years; if the network isn’t sold after four years, the city loses any say in selecting a buyer.
  • Despite all of this, Burlington Mayor Miro Weinberger is promoting the network through his re-election campaign, saying, “We have worked on this harder than anything that we’ve worked on in my first three years.”

(February 5) Wilson, North Carolina: According to New York University Law School's study on government broadban, the city provided $28 million in 2006 for the Wilson network. In 2008, the city approved  the issuance of $33.71 million worth of Certificates of Participation (COPs), typically used in lieu of bonds in an effort to circumvent debt limits. The City borrowed an additional $4.75 million from Wells Fargo in 2010. Ongoing construction costs cost the city approximately $1.2 million a year. The system has 6,000 subscribers, about 30 percent of the Wilson market.

  • In 2013, the total cost of operations was approximately $11.4 million, with an operating loss of $220,956. 
  • The COP agreement states that if revenue derived from the network is not enough to make payments, the city will use taxpayer money from the city’s General Fund to cover the obligations.
  • The network’s debt, $38 million, totals $6,300 per subscriber. 

(February 4) Groton, Connecticut: Groton built its cable and Internet system in the mid-2000s after the city council approved it in 2003. Parts of the network went live in 2004. Initial start-up costs were $16.9 million. The city borrowed $34.5 million between 2006 and 2008 to build and expand the network. Groton’s credit rating was downgraded because of the network.

  • The Groton system was losing over $2.5 million a year when it was sold in 2013 – the city had been subsidizing its operating expenses.
  • It was sold for $150,000 – representing a loss of more than $30 million.
  • The city remains with a nearly $27 million debt and will have to pay $2.5 million per year. It will take 14 years to pay it off.

(February 2) Provo, Utah: According to a study by New York University Law School, after finishing a pilot program involving 300 homes, the Provo City Council approved $39.5 million in tax revenue bonds to build an open access network. At the beginning of 2005, the network had just 2,400 subscribers, but that figure fell even lower to 1,600 by the end of the year! City officials propped it up several times with loans and other support. The network was sold in 2013.