During the spring of 2020, the City of Lucas paid $56k to Magellan Advisors for a feasibility study for Lucas to start a Municipal Broadband Business to provide high speed internet to all residents of Lucas who are underserved or want an additional provider choice for their current internet services. This study became the catalyst for the Prop B ballot measure to authorize “$19,190,000 in bonds for a fiber optic broadband utility system to provide broadband internet service and the levying of a tax payment thereof.” 

To provide an independent view point on the issue, David Willams, President of The Taxpayers Protection Alliance (https://www.protectingtaxpayers.org/about/ ) and the team there reviewed the Magellan Study for Lucas, and the workshop document covering the same information.

After review and without further input, David sent the TPA’s independent review of Magellan’s Study for Lucas calling out unrealistic projections and extreme level of risk to the City of Lucas. The following is their direct, unedited report:

You and others in Lucas have great reason to be alarmed about this proposed project.  After reviewing the feasibility study done by Magellan, we see many points of potential problems if this project proceeds.  

The problems show up immediately in the origin of this project.  In October 2018, the City conducted a survey aimed at learning how residents felt about internet services in Lucas.  A grand total of 400 persons responded to a survey (out of a population of about 7,500), and allegedly 55% of the respondents purchase internet services with speeds of less than 20 Mbps.  But the important points of danger here are the questions that the survey didn’t ask: 

1) Are you buying a service that provides all the speed you need?

2) Are there greater speeds available in your location, or are you buying the fastest available?

3) If a higher speed was available, could you and would you purchase a higher speed internet service?

The answers to these underlying crucial questions are never provided.

Rather than base the project’s financial projections upon customer need or desire, the feasibility study instead backs into its projections by first calculating how much the overall project will cost, and then using an unknown number of scenarios to come up with a “breakeven” scenario in which 55% of the 2,458 residential premises would have to sign up for Gigabit-speed service at a rate of $115 per month over twenty years.  And that is just to break even.  

First of all, the “breakeven” price of $115 per month is nowhere near competitive with the incumbent providers.  Incumbent providers offer Gigabit-speed service at rates ranging from $49.99/month to $74.99/month, with one incumbent offering Gigabit-speed service for $54.99 per month for life.  This forces one to ask whether consumers are truly willing to pay nearly or more than double the price for the same speed of service over the course of twenty years.  Even Magellan Advisors was forced to acknowledge that this price is substantially higher than any project it has ever worked on all across the country.  And the feasibility study plainly explains why the rate is so high – the system is simply not sustainable at a lower rate.

Moreover, as the Magellan study admitted, the survey respondents were not asked if they needed or wanted Gigabit service. Speeds that still greatly exceed the FCC definition of minimum speeds but are less than Gigabit are available at vastly lower prices, ranging from $29.99 per month to $44.99 per month.  These rates are one-fourth to one-third of the proposed City breakeven rate, a not insignificant difference.

Second, even if one assumes that the high price is not a substantial deterrent, the “breakeven” take rate is still quite high.  To support the “reasonableness” of its projections, Magellan has cherry-picked some communities around Texas and the country that have higher take rates than 55%.  Those rates from those communities, however, are misleading.  According to a much more thorough study conducted by TPA, the weighted average take rate for communities with populations under 10,000 is only 35.8%,[1] nearly 20% less than the 55% take rate that must be attained for the Lucas project to be sustainable.

Moreover, Magellan’s cherry-picked communities are not representative of what is being proposed in Lucas.  For instance, Cedar Falls and Waverly, both in Iowa, have municipally-owned electric utilities that helped subsidize the cost of construction and operation of the municipal broadband utility.  Likewise, Chattanooga, Tennessee’s broadband utility is subsidized by its electric utility, and it received $110 million in federal funds to offset over 20% of the initial construction costs. And, Longmont, Colorado, is still of questionable sustainability as it struggles to pay off its debt – even though it too is subsidized by an electric utility.[2]

In conjunction with our first point above, it should also be noted that in each of these communities, the monthly price of service is substantially less than what is being projected for Lucas’ price.  Gigabit rates for those cities are as follows:

            Mont Belvieu = $75 per month;

            Cedar Falls = $64.50 per month;

            Waverly = $99.95 per month;

            Longmont = $69.95 per month; and

            Chattanooga = $67.99 per month.

Thus, using these cities as comparisons for what is reasonably attainable in terms of market share is blatantly ignorant of the obvious fact that the comparison communities are charging between 13-44% less than Magellan is projecting for Lucas.

Moreover, Magellan’s take rate projection of 55% is also misleading in that it doesn’t take into account a very simple demographic fact – Lucas has a poverty rate of 10.1%.[3]  These household will not likely be purchasing ANY internet service, let alone one that costs $115 per month.  Once these households are subtracted from the pool of available consumers, the needed take rate rises to 61.2%.  That means that six out of every ten available consumers would have to choose to pay more than or nearly double their existing internet rates for this project to be sustainable.  That is not a reasonable conclusion. 

In summary, Magellan’s projections are simply not realistic.  The projected price is too high and the projected take rate is unlikely.  The combination of these two factors make the sustainability of this project highly risky.

And risk is where the taxpayers of Lucas come in.  To finance this project, the proponents are asking residents to vote in a few weeks to approve issuance of $19.1 million of general obligation bonds.  General obligation bonds are repayable from the tax revenues generated by property taxes on all residential and commercial property in the City of Lucas.  Moreover, the additional $4.8 million of financing will be borrowed from the City’s reserve or other funds, also generated and supported by the City’s taxpayers.  Therefore, even if a taxpaying consumer decides to not choose the city’s internet service, that consumer will be paying for and subsidizing the municipally-owned broadband system.  

With an annual city budget of $7.1 million, the City of Lucas taxpayers are taking on the risk of substantially higher property taxes in the event that this $23.9 million boondoggle fails.  At a cost of more than three times the City’s annual budget, failure of this project stands to either bankrupt the City if it fails, require significant reductions in other City services, or substantially increase property taxes on all classes of property.  That extreme level of risk is what is at stake at the ballot box on November 3rd.

References:

[1]  https://www.protectingtaxpayers.org/wp-content/uploads/Broadband-Report-May-2020-1.pdf

[2] https://pagetwo.completecolorado.com/2019/06/18/municipal-broadband-success-rate-still-questionable-nearly-five-years-after-longmont-set-the-stage/

[3] http://www.city-data.com/city/Lucas-Texas.html