The money-hemorrhaging KentuckyWired needs another taxpayer bailout to keep it going, which has critics steaming.
The Kentucky Legislature’s joint budget conference committee discussed additional funding for the project during a meeting in March. KentuckyWired, intended to be a 3,200-mile middle-mile broadband network reaching across the state, has suffered a series of problems since its conception.
A budget that lawmakers revealed on Monday calls for nearly $500 million in tax increases, but did not include additional funding for KentuckyWired. The proposed budget gives Gov. Matt Bevin the authority to use surplus money to fund the program.
The project was originally expected to be finished this year, but only about 700 miles have been built and KentuckyWired is about two years behind schedule.
Jim Waters, president and CEO of the Bluegrass Institute for Public Policy Solutions, said the state needs to pull the plug on the project.
“The best thing to do when you’re digging yourself into a hole is to stop digging,” he said.
The original project cost about $324 million — a mix of state and federal funds, with issued bonds making up the bulk of the project (some $280 million) and taxpayers being on the hook for any shortfall.
But thanks to issues getting easements in public rights of way to lay the fiber and other delays, cost overruns have reached $188 million.
“There hasn’t been one single Kentuckian connected to high-speed broadband thanks to this project,” Waters said. “This is government at its worst.”
House Majority Caucus Chairman Kevin Bratcher (R-Louisville) told fellow legislators at the meeting to discuss KentuckyWired’s problems that “these numbers sound like something Tony Soprano would have his fingers in.”
What critics said was a bad idea from the start has only gotten worse over time.
A tainted bidding process took millions of expected federal funding out of the picture. Project leaders had hoped to capture $11 million in annual funds from the Federal Communication Commission’s E-Rate program by servicing some 1,100 government facilities in the state.
The financial model for KentuckyWired assumed the Kentucky Finance and Administration Cabinet would award the contract to the Kentucky Communications Network Authority, created to facilitate KentuckyWired. But private providers cried foul after Steve Rucker, former deputy secretary of the Kentucky Finance and Administration Cabinet, became executive director of KCNA. Rivals argued that KCNA now had an unfair advantage. The Finance Cabinet abandoned the bid process and Rucker resigned.
Project leaders also played the blame game in the delays, accusing providers like AT&T and Windstream of holding up the process of installing fiber on utility poles. But AT&T spokesman Joe Burgan told Watchdog.org in 2016 that his company entered into an agreement with KCNA for access to the poles four months before that association’s director, Chris Moore, blamed the companies for the delay in a meeting with legislators.
It turns out that KCNA didn’t file the paperwork with the Kentucky Public Service Commission to operate as a competitive local exchange carrier until three months after then-Gov. Steve Beshear signed an executive order creating the authority in 2015. Under state law, KCNA couldn’t negotiate for utility-pole access with existing carriers until completing that process.
Moore left his post after less than a year, and was replaced by Phillip Brown.
Fitch Ratings gave the bonds issued for KentuckyWired a mediocre BBB+ rating, and in December 2016 changed the outlook to negative due to construction delays and uncertainties surrounding the project.
Taxpayers Protection Alliance President David Williams warned that the initiative could prove a boondoggle in 2015.
“Let’s just pump the brakes a little bit here and make sure there aren’t any kind of weird things in this contract that would really expose taxpayers to more handouts,” Williams said then.
Senate Minority Leader Ray Jones (D-Pikeville) said at the broadband meeting that the $188 million would be less than the cost of future litigation if the state tried to get out of its contracts for the project. He noted, too, that Kentucky Wired is a cornerstone of Kentucky congressman Hal Rogers’ Shaping Our Appalachian Region (SOAR) initiative.
A staff member in Rogers’ Washington, D.C. office told Taxpayers Protection Alliance Foundation (TPAF) last year that the congressman who is pushing this public-funded broadband project does not even use email himself.
The inquiry was part of a Freedom of Information Act request to determine if Rogers and Bevin had discussed KentuckyWired via email between May 1, 2016 — around the time Bevin had indicated the state might pull back from the project some — and Sept. 16, 2016, when he held a press conference to say Kentucky was “fully committed” to the project.
Michael Alexander, Bevin’s deputy general counsel, told TPAF in an email that there were no emails to or from Bevin’s official account at firstname.lastname@example.org containing uses of the phrases “Kentucky Wired,” “KentuckyWired,” or “KYWired” between those dates.
As lawmakers debate the merits of the project, George S. Ford, chief economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies and an expert on municipal internet networks, is urging them to get out.
He noted that unlike general obligation bonds, revenue bonds — such as were sold for KentuckyWired — are secured by the revenue and assets of a specific project rather than tax generation. This makes them more prone to default. Bevin has expressed concern that a default on the revenue bonds could spill over to the state’s bond rating on its general obligation bonds.
But Ford pointed out that Moody’s downgraded Monticello, Minnesota’s general obligation debt only after it used general fund money to prop up its failing city-owned broadband project.
“In contrast to the Governor’s fears,” Ford wrote of Bevin, “any spillover to the state’s credit rating from a default on Kentucky Wired’s revenue bonds hinges on state support of the failed system from its General Fund, not a lack of it. Governor Bevin should make clear that the Kentucky Wired’s debt is on Kentucky Wired, not the state. Kentucky should get out—and get out now.”
Johnny Kampis is investigative reporter for the Taxpayers Protection Alliance Foundation.