Facts About the Cedar Falls Municipal Broadband System
Most of the information about the Cedar Falls (Iowa) Municipal Communications Utility published in 2016 by an advocacy group called the Taxpayers Protection Alliance (TPA) is false. The rest is misleading.
The worst of the whoppers TPA published in 2016 are listed below, along with facts to correct the record about Cedar Falls’ community-owned broadband system, which is operated by Cedar Falls Utilities (CFU).
WHOPPER: The TPA report says “Despite the enormous cost of the Cedar Falls broadband network to the public, the project remains largely incomplete after 20 years of development.” This information is false.
FACT: Cedar Falls’ municipal network was built in 1995-1996. It has served every corner of Cedar Falls continuously since 1996. There is no cost “to the public,” because the service is not tax supported. Only citizens who subscribe to CFU broadband services pay for the network. Subscriber revenues fund operating and equipment costs, as well as principal and interest payments on money borrowed to finance major capital projects. A chart of the broadband utility’s profitability over the past 10 years is below.
WHOPPER: The TPA report says, “Many area residents who do have access to the network find it too expensive to use.” This information is false.
FACT: Consumers vote with their feet. In a city with about 15,500 dwellings and 1,500 business premises, CFU has more than 14,900 active fiber service points, making it the dominant provider in the market. Customers choose from a full menu of broadband, telephone and TV plans. The most popular residential broadband plan is 100 mbps download and 50 mbps upload, at $45.50/month. See CFU’s Service Plans and Top Five Reasons why subscribers choose CFU broadband.
WHOPPER: The TPA report says “Building the government-owned network required the city’s electric, water and gas company to take on $14.7 million in debt.” This information is false.
FACT: The municipal electric, gas and water utilities did not take on debt to finance the broadband system upgrade.
In 2009-2010, the Municipal Communications Utility issued $154 million in revenue bonds to finance a city-wide upgrade to FTTP. These bonds pledge Communications Utility revenue as the sole repayment source. The bonds are not guaranteed or backed by the city-owned electric, gas or water utilities, or by the taxpayers.
Subscriber revenue has funded annual payments on the Communications Utility revenue bonds, reducing this debt to just over $9 million as of January 1, 2017. While the bonds were issued with 15-year repayment schedules, CFU plans to pay them off early.
When the Utility was formed through a referendum in October, 1994, a separate ballot question (passed with a super-majority) authorized the City to issue $3 million in general obligation bonds as seed money to build the broadband network. Had the Communications Utility failed, this debt would have fallen on the taxpayers. That didn’t happen; all debt payments have been funded by Communications Utility earnings and none with tax money.
WHOPPER: The TPA implies impropriety by stating that “…officials in charge of the broadband service borrowed…from Cedar Falls electric and water utility customers without permission.” This information is false.
FACT: No money was borrowed without permission.
The Communications Utility borrowed $3 million from the Municipal Gas Utility’s unrestricted cash reserves as a source of financing for the FTTP upgrade project. Loans between municipal enterprises are permitted under Iowa law, and the financing was approved by the Utility’s Board of Trustees, the legal governing body that represents ratepayers.
The loan benefitted both Communications and Gas ratepayers. The Communications Utility pays interest at a higher rate than the Gas Utility could otherwise have earned on its cash reserves. Principal payments of $600,000 annually in 2013-2016 have reduced the current loan balance to $600,000. The remaining balance will be retired with the 2017 scheduled payment. Funds for debt service come from Communications Utility earnings.
WHOPPER: The TPA report says CFU’s “debt became so stifling that Moody’s downgraded the bond rating of Cedar Falls Utility from A1 to A3.” This statement is highly misleading.
FACT: Here the TPA falsely implies that Cedar Falls broadband is in financial trouble. In fact, the network has a consistent record of self-sustaining profitability. See the 10-year financial summary below.
Moody’s describes A-rated bonds2 as “upper-medium grade and subject to low credit risk,” so neither a rating of A1 or A3 indicates “stifling debt.” An update report Moody’s issued November 15, 2016 affirms CFU’s investment-grade A3 rating, and notes as strengths the Utility’s large market share, competitive pricing, solid debt coverage and technological advantage over competitors provided by fiber-optic infrastructure.5
WHAT ABOUT THAT FEDERAL GRANT? The TPA report says CFU “pocketed” a $1 million federal grant to expand the network’s footprint into rural areas outside Cedar Falls.
FACT: CFU received $843,641 in US Department of Agriculture funds. The grant reimbursed about 40% of the cost to extend broadband to unserved rural customers outside the city limits. TPA failed to mention that this one-time infrastructure grant had nothing to do with CFU’s status as a community-owned system. Nearly all of the $7.2 billion of rural broadband funding allocated by Congress in 2009 went to private, for-profit broadband providers. New FCC Chair Ajit Pai says closing the gap between rural and urban broadband availability is a continuing policy priority going forward, and additional incentives for private industry may be needed.
WHAT ABOUT CFU’S PRICES? The TPA report says CFU’s gigabit service is “unaffordable.”
FACTS: Nine of 10 residential subscribers in Cedar Falls1 choose CFU internet over service from the incumbent phone and cable companies. Apparently, the public finds the Utility’s services both affordable and preferred over competing providers.
TPA focused only on gigabit service, ignored the rest of CFU's service menu, and evidently assumed that if a customer doesn't take gigabit service, they take no CFU service at all. That's just silly.
CFU’s prices for fiber-to-the-premises internet services are lower across the board than the incumbent local provider, which uses cable modems. Since 2001 CFU has responded to consumer needs by increasing the speed of our most popular home and business internet plans from 4 mpbs (download) to 100 mbps. This core product costs $45.50/month for residential customers and $65 for businesses.
CFU added gigabit service in 2013 as a premium product at the top end of its complete menu of high-speed internet services. For the small (but growing) share of customers who require premium speed, our residential gigabit product is priced at $105. While this is lower than our local competitor’s price of $139.99 plus $10 for modem rental, it’s higher than Google fiber.
Google doesn’t say whether its consumer fiber services are profitable, and last year announced it is scaling back or abandoning plans to build new fiber networks. As a responsible public agency, CFU does not set prices below cost or abandon its service commitment to the community.
10 Year Financial Summary - Cedar Falls Municipal Communications Utility*
The 10-year trend of increasing revenues is due to both subscriber growth and higher revenue per subscriber. Profits were below trend in 2011-2013 during completion of the fiber to the premises (FTTP) upgrade, primarily because (a) certain FTTP project costs (primarily in-home wiring) were charged against current year income, rather than capitalized, and (b) CFU wrote off certain HFC system assets that were not fully depreciated at the time of the FTTP upgrade. After completion of the FTTP project, operating expenses declined and NOI as a percent of revenue rebounded to the previous trend line in 2014 - 2016.
1. Source: Market research conducted by University of Northern Iowa
2. Moody’s securities ratings reference document, page 5
3. Source: Audited financial statements for the Municipal Communications Utility of the City of Cedar Falls
4. Includes $1,915,000 of proceeds from 2009 Revenue Capital Loan Notes and $13,130,000 of proceeds from 2010 Revenue Capital Loan Notes issued by the Municipal Communications Utility of the City of Cedar Falls, IA
5. Moody’s Investors Service Credit Opinion, 15 November 2016, Cedar Falls Municipal Communications Utility, IA