News Story

Farmington Officials Boldly Go Where Others Failed: Government Broadband

Taxpayers end up holding the bag when results fall short of promises

As more municipal officials around the nation embrace the concept of government-run or sponsored broadband services, Farmington and Farmington Hills may become the next cities to go into the business.

Their city councils began talking up the idea last year and created a task force to conduct a feasibility study. This group has since submitted its recommendations and the cities expect to put the proposal out to bid after reviewing it.

Joe LaRussa, a member of the Farmington City Council who is heading up the program, said the idea arose after residents asked for better broadband service options.

The cities created the task force after receiving social media comments “calling for more choice, better service, and lower prices for internet service,” LaRussa said. “Our field research revealed that fiber-based internet infrastructure was being prioritized in business corridors and bypassing neighborhoods and more remote areas of Farmington Hills. This led to further research on strategic options to meet the need for access to these networks for our residents.”

Farmington residents now can choose from three private sector broadband providers, in addition to several providers that cater specifically to businesses. LaRussa says none of them provide fiber to the home or offer symmetric high-speed upload and download speeds.

These are high-end features, however, and their limited availability may show that the speeds currently offered by private companies satisfy the needs of most residents.

“It seems odd that so many communities are attracting plenty of broadband competition but the Farmington Hills City Council thinks they don’t have enough providers,” said Theodore Bolema of the Institute for the Study of Economic Growth at Wichita State University. “Farmington Hills is a relatively affluent area that should be very attractive for private companies to come in and provide broadband. Perhaps the current providers are already adequately serving the Farmington Hills market.”

Bolema suggested what government officials in Farmington Hills could do if they conclude the city has too few broadband competitors and too-slow service. They could, he said, consider why private companies are willing to go into other cities but not into Farmington and Farmington Hills.

“The Farmington Hills City Council could look at whether they can lower regulatory barriers, expedite permitting and licensing, and assist private providers in obtaining rights-of-way,” he said. “Making it easier for private companies to come into Farmington Hills could be an inexpensive way to get more broadband access and faster speeds for their residents without the risk associated with paying for a government-run system.”

Government-run or sponsored broadband has a poor record in U.S. cities, according to a 2017 University of Pennsylvania Law School study on the financial viability of municipal fiber networks. In 11 of 20 projects studied, customer receipts did not keep up with expenses for operations and debt repayment. Many fell short by a substantial margin. At five of the nine projects where revenue did exceed expenses, the returns were so small that it would take more than a century to recover costs. And only two of the 20 projects analyzed earned enough to cover the costs during the useful life of the networks.

When the projects don’t pay their way, residents and taxpayers end up holding the bag. In Minnesota, for instance, 10 rural towns introduced public broadband networks but struggled to get enough people to sign up. Property taxes rose to make up for the $1 million shortfall in revenue.

“A lot of municipal broadband systems have failed, sometimes with devastating financial consequences for their cities,” Bolema explained. “Others touted as success stories are being subsidized by other city operations, like an electrical utility, or by other government funds. Some others serve only a small part of the city, like the downtown area, which usually is the area that was most likely to get private broadband service.”

But LaRussa said that studying public broadband projects in other cities will help Farmington and Farmington Hills avoid the same pitfalls.

“One finding from the successful implementations we studied was that they all avoided excessive network build-outs without adequate demand to ensure successful participation,” he said. “This is one of the things we want the consultants to study in detail. We want to understand how these projects were managed, communicated to the public, and what financing and ownership and operating models they used to be successful. Once we’re adequately informed, we can assess the benefits and risks of potentially taking on a project like this.”

Bolema said that government broadband can have several unintended consequences. One, failing systems place a strain on the city and distract city managers from other work. Two, conflicts of interest arise when a city is both the regulator and a participant in the broadband market. Three, cities lock themselves into costs by investing in broadband proposals based on 20 to 30 years of benefits from technologies that may be obsolete in 10 years. He advised Farmington and Farmington Hills to tread carefully.

“City officials should also be asking whether they can afford the financial risk and make sure they understand those risks so they don’t end up taking credit for launching a new system today and leaving their successors with a financial mess in a few years,” he said.

Bill Galvin, a member of the Farmington City Council, said he was concerned about the costs of building a broadband infrastructure.

“This is a significant upfront investment that has to be carried through all the way for the benefit of every citizen,” Galvin said in an email. “I anticipate competition from the private sector who have access to more capital and larger lobbyists.”

Galvin said that moving beyond the research and proposal phase will require funding, for which no source has yet been clearly identified.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.