Ohio, Vermont showcase successful municipal network financing

• Financing municipal broadband networks is no cakewalk, with opposition from incumbents and interest groups adding to the difficulties
• But community leaders in Ohio and Vermont say they’ve succeeded in running financially stable networks
• Hiring the right expertise is key if municipalities want to maximize their chances at success getting financing

Like most internet service providers, municipalities face their fair share of challenges when building broadband networks. Particularly, they need to convince financiers that it’s a worthwhile investment.

Constant opposition from incumbents and lobbying groups doesn’t help matters. A recent study from ITIF claimed public broadband networks have “poor financing models,” noting most of the municipalities it analyzed earned less than their operating costs.

Of course, landing financing is no cakewalk for municipalities, said Laura Lewis, principal and co-owner of LRB Public Finance Advisors, at a webinar hosted by the American Association for Public Broadband and the Institute for Local Self Reliance. But communities “just have to keep at it.”

“You don’t have to do the financing all at once. It is expensive but it can be phased,” said Lewis, who’s served as a financial advisor for several municipal networks, including UTOPIA Fiber.

Securing funds is especially tricky when the incumbents don’t want to play ball. Ernie Staten, Public Service Department Director for the City of Fairlawn, Ohio, said when Fairlawn asked some local ISPs if they were interested in a partnership to build a citywide network, they basically laughed at the idea.

So, Fairlawn decided to finance the network itself, which cost $10.1 million for the outside plant and some small data centers, Staten said. “The way we decided to pay for it was unique. We considered it necessary infrastructure.”

The city classified broadband just like a road, sewer or water line, so it was able to take funding out of its infrastructure budget to finance the network. Consequently, Fairlawn’s public service department upped its maintenance on the utilities, so it wouldn’t have to pour additional funds to construct new roads and whatnot. By doing that, the city “basically broke even” and currently services 71% of Fairlawn addresses.

“It’s been a good thing that they did laugh at us because of what we built,” said Staten.

Meanwhile in Vermont, community-owned broadband is all the rage thanks to the state’s communications union districts (CUDs). A CUD is an organization of two or more towns that collaborate to build communications infrastructure.

F.X. Flinn, governing board chair at CUD ECFiber, noted it wasn’t easy at first to get municipal revenue bonds (more on how those work here) for its broadband network. This was in the early 2010s, and investment bankers then didn’t quite get the concept of a Vermont interlocal contract.

Bankers told ECFiber, “if you were say, a sewer district, we could issue the bonds more or less immediately,” Flinn said. “I remember hearing this at the board meeting and raising my hand and saying, well why can’t we be a sewer district?”

What ended up happening was ECFiber pushed the state to pass legislation that would classify it as a telecommunications district. The rest was history, as Vermont passed that law in 2015 and later spurred the creation of eight other CUDs.

Once the law was squared away, ECFiber was able to borrow $7.5 million to expand its network and fill its connectivity gaps. Flinn noted ECFiber last year “made financial history” in becoming the first municipality to obtain an S&P rating for its bonds.

CUDs have no taxing power, so the only revenue ECFiber has is from connecting people.

“Those revenues are pledged first and foremost by paying bonds. We’re paying about $5 million a year in debt service,” Flinn explained. The bonds require ECFiber to show a net profit of $6.25 million annually. Thus far, “things are pretty stable.”

Municipal broadband’s recipe for success

Asked what a community can do to put itself in the best position to secure financing, Lewis said the most important thing is to hire “experienced professionals” in areas where the municipality may lack expertise.

“You may have like the fiber guru sitting in a desk somewhere, but that’s relatively few and far between,” she said.

Municipalities also shouldn’t shy away from hiring folks even if they can’t pay them much right off the bat. Many professionals like bond counsel, financial advisors and underwriters will work with local governments “with the idea that they will get paid when the financing gets completed.”

At a minimum, a community needs to have “reliable initial construction cost estimates” for the approximate number of residential and commercial locations it aims to connect. From there, it can decide whether to tackle the project on its own or by partnering with other municipalities.

“If you’re a community of 1,000 homes maybe you would need to consider doing something where you join with other cities or the county or whatever is in your area,” Lewis concluded.