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Salisbury risks taxpayer money on questionable fiber-optic system

JLF report examines problems with similar projects in other cities

Contact: Dr. Michael Sanera
919-828-3876
msanera@johnlocke.org

May 07, 2009

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RALEIGH -- Salisbury officials are "irresponsibly risking" taxpayer money on a $30 million fiber-optic cable system, according to a new John Locke Foundation Regional Brief. That system could force average taxpayers to "foot the bill for big business."

Click here to view and here to listen to Michael Sanera discussing this Regional Brief.

"The average residential customer gains little from this system," said report co-author Dr. Michael Sanera, JLF Research Director and Local Government Analyst. "Television and phone quality will not be appreciably better than private-sector competitors, and the highest speeds available through fiber technology will come with a price tag too high for most residential subscribers."

Approved last year, Salisbury's $30 million fiber-optic network for Internet, phone, and television service is scheduled to be complete in mid-2010. It will be available initially through 217 miles of fiber-optic cable connecting 14,000 homes and businesses, according to the report. The city is using 20-year bonds to pay for the system.

"The city council and staff have said repeatedly that subscription fees will cover the network's costs," Sanera said. "A version of this line has been used in city after city to ease taxpayer concerns over a city entering a new high-risk, high-tech business in competition with the private sector."

The truth is more complicated, Sanera said. "Although city officials intend for subscribers to pay for the system, the reality is city taxpayers are ultimately responsible for paying back the debt," he said. "If Salisbury fails to attract enough subscribers for the new system, the city has indicated that it would increase the property tax rate by 9.5 cents on every $100 of assessed property value to cover any shortfall. That would represent a 16 percent increase over the current tax rate."

Salisbury needs subscription fees from 28 percent of city residents to cover the system's full costs, Sanera said. He and co-author Katie Bethune, a JLF research intern, identify three reasons "to believe that the city has been overly optimistic" about reaching that 28 percent threshold.

First, it's not clear that residents will choose the fiber-optic service over private alternatives, Sanera said. "While fiber systems offer high speeds, many computer users favor laptop computers and are willing to trade lower speeds for the mobility of wireless Internet connections," he said. "Currently available wireless technology and the rapidly growing WiMax technology could make it very difficult for the city to live up to its 'paid by subscribers' promise, leaving property taxpayers to foot the bill."

Second, not all Salisbury households have computers, Sanera said. "The U.S. Census Bureau has estimated that 55 percent of North Carolina homeowners would have computers in 2007, and Salisbury has a lower median income than the state," he explained. "If we assume a computer ownership rate of about 50 percent, then 56 percent of households that own computers would need to sign up for Salisbury's fiber-optic system to pay for the entire cost."

The third reason to question Salisbury's numbers involves the track record of similar projects across the country, Sanera said. "From Lebanon, Ohio, to Provo, Utah, to Ashland, Oregon, city-operated fiber-optic cable systems in other parts of the country failed to attract enough subscribers to pay for their systems," he said. "To pay for ever-mounting deficits, these cities raised property taxes, increased utility rates, or both. Unable to stem the deficits, these cities eventually sold their systems to the private sector."

Taxpayers bear the burden of a system that seems targeted toward businesses, Sanera said. "From the start, city officials have justified the investment by touting its economic development prospects," he said. "Businesses alone are likely to seek the highest-speed, highest-priced service available through Salisbury's fiber-optic system."

If Salisbury follows the lead of other cities with city-owned fiber-optic systems, such as Wilson, prices for residential service will mirror private-sector prices while business customers will pay substantially lower rates than they would find in the private sector, Sanera said.

"A similar pricing scheme for Salisbury would mean that residential users paying market prices will be subsidizing companies that purchase high-speed Internet at prices well below its fair market value," he said. "Plus, if the city raises property taxes to pay for any revenue shortfall, residents who do not even use the fiber-optic network will be forced to subsidize businesses that are receiving deep discounts. This pricing scheme has more in common with corporate welfare than a city service run like a business."

There's no need to take irresponsible risks with Salisbury taxpayers' money, Sanera said. "The city should be managing its essential services before taking on such risky and expensive ventures with taxpayer money," he said. "Hopefully, Salisbury officials will be able to avoid the downfalls of other cities and benefit their citizens instead of increasing the burden to taxpayers."

Michael Sanera and Katie Bethune's Regional Brief, "Salisbury's Fiber-Optic Cable System: Another corporate welfare project paid for by average taxpayers," is available at the JLF Web site. For more information, please contact Sanera at (919) 828-3876 or msanera@johnlocke.org. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or mkokai@johnlocke.org.

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