Iowa's Municipal-Owned Communications Systems Should Serve as a Warning, Study Says

According to a new analysis by a nonprofit research organization, the weak financial performance of three Iowa municipal-owned broadband communications systems "should serve as a warning to other states and municipalities considering similar enterprises."

Data for the new study came from the annual reports of the municipal communications systems in Cedar Falls, Muscatine, and Spencer, Iowa. They are the largest systems in Iowa and "most likely to provide a sufficient scale of operation to test the economic viability of municipal wireline telecommunications providers," writes Ronald J. Rizzuto, Ph.D., a professor of finance at the University of Denver and author of the new report.

Rizzuto found:

• Cedar Falls' municipal communications system has operated with a negative annual free cash flow to equity in all but one year. Its internal rate of return is –7.24 percent, meaning it has been a poor investment for taxpayers and ratepayers.

• Muscatine's municipal system increased its total debt from $20.30 million in 1998 to $36.49 million in 2004. It is $25,554,984 below its payback point after seven years of operation, and its internal rate of return is –84.7 percent.

• Spencer's communications utility appeared to achieve positive annual free cash flow to equity in 2003 and 2004 after four years of deficits, but it has received large subsidies from Spencer's electric utility. Adjusting for these subsidies eliminates Spencer's surplus. The combined investment by the two utilities is $18,286,703 below its payback, and its internal rate of return is –45.79 percent.

Rizzuto acknowledges it is "theoretically possible" that rate savings and service improvements for cable, Internet, and telephony customers in the three communities may offset some or all of the deficits. But such rate savings "would have to be huge," he notes, to offset the deficits he documents. Moreover, Rizzuto asserts any such rate savings are probably offset by rate overcharges for electric, water, and natural gas utility customers.

The study was released on September 20 and can be downloaded for free at Heartland's Web site, http://www.heartland.org. Print copies can be ordered for $10 a copy by calling 312/377-4000.

Editor: The following individuals have received advance copies of this study and may be willing to comment on it and municipal broadband generally:

The Heartland Institute is a tax-exempt charitable organization organized under Section 501(c)3 of the Internal Revenue Code. This news release and the study it describes should not be construed as necessarily representing the views of The Heartland Institute nor as intended to aid or oppose passage of legislation.