Tag Archives: ARPA

Broadband Grant Deadlines

The industry and the press have been laser-focused on BEAD grants for the last few years. It’s easy to forget that there are a lot of federal broadband grants that have been issued under other grant programs, many of which are facing completion deadlines. This includes grants from programs like CAF II, RDOF, ReConnect, the Capital Projects Fund, ARPA grants funded through SLFRF, NTIA middle-mile grants, and the NTIA Tribal Grants.

A lot of projects under these grants have a deadline to be completed this year or in 2027. Today’s blog looks at the consequences of not finishing a grant project by the legislative deadline.

The grants that face the most immediate deadlines at the end of 2026 include State grants that were funded by the Capital Projects Fund or through SLFRF. These grants would have been awarded through individual State broadband grant programs, but the underlying money came from federal legislation. ARPA grants might have also come from counties or cities. These grants have a hard completion deadline of December 31 of this year.

I’ve been hearing from State Broadband managers that the Federal government has no appetite for any extensions of this funding. This is not news, and they’ve been saying the same thing for the last year, but lately, they have been reminding states of this.

It’s been routine in the past for ISPs to get extensions for grant construction as long as they had a good story of why they needed the extra time. In today’s environment, there are a lot of reasons why construction might be delayed. It could be due to challenges in getting permits, rights-of-way, or easements. It might mean having problems getting onto poles because of recalcitrant pole owners. It might be due to supply chain problems in receiving needed materials. It might come from labor shortages that slow construction vendors. If the federal agencies behind the grants enforce the legislative deadlines, none of these excuses will matter.

Grant recipients need to do everything in their power to finish construction this year. With no extensions, any work done after the deadline will not be reimbursed. I’ve been hearing rumors that failure to complete a federal grant program on time might also make an ISP ineligible for any future federal broadband funding.

If hard deadlines are enforced, this could also be coupled with a hard deadline for submitting grant paperwork quickly. Most grant programs in the past have allowed grantees some leniency after construction is completed to submit invoices. Hard deadlines might result in rejection of invoices sent after the deadline. Most grants also require some kind of close-out reporting to document that the project construction is completed, and ISPs need to get any such report completed quickly.

Anybody working with a State Broadband Office needs to understand their specific requirements. For example, there might be states that want paperwork submitted and completed by the legislative deadline, meaning construction has to be completed even earlier than the end of the year. ISPs also need to push vendors to invoice for the grant-funded projects quickly to provide proof of the spending.

I am positive that some ISPs will be surprised if they don’t get reimbursed for work they have completed. Grant offices have sent out deadline warnings for years, but have often given routine exceptions for lateness. It sounds like, starting this year, that deadlines are firm with little or no room for exceptions.

Is There Enough BEAD Funding?

There is a tendency to think of high-cost areas – places where it’s expensive to build fiber as only being in remote places with tough terrain. As companies start filing BEAD grants we’re going to see a lot of other cases of high cost locations that I think are going to surprise State Broadband Grant offices. There are many reasons that drive up the cost of building a landline network.

Some places are high-cost by definition. For example, I know of a small town in Arizona that is fifty miles away from the nearest other people. Building fiber to this town means building middle-mile backhaul, which in this case is through tough terrain and faces the extra burden of aging poles.

The condition of poles can be a huge cost driver anywhere. I’ve worked with several rural communities where more than 90% of poles need major work to add fiber. This is clearly the fault of the electric company, but an ISP building fiber is expected to pay to rebuild the poles. The new FCC pole rules might make this a little better, but even those rules can’t make costs reasonable when all of the poles are bad.

In Appalachia, I’ve seen places where pole lines have not been maintained and the poles are now in the middle of the woods. For purposes of adding fiber, these poles might as well not exist.

The issue that is going to blindside a lot of grant offices is housing density, measured by the number of residences per mile of road. States have been operating state broadband grants that invited ISPs to seek funding to build the parts of counties with the highest route density. The same thing happened with federal broadband grants. ISPs carefully crafted grant areas where the construction costs were the most reasonable.

The billions spent by state broadband grants using CARES and ARPA money were awarded to the most densely populated rural areas. This was bound to happen with grant programs that expected fairly high matching contributions from ISPs. ISPs carefully carved out proposed grant areas that avoided high cost roads, and state grant rules rewarded grant applications that served the most locations per grant dollar. This was a smart use of state grant funds, but the end result of the many state grants is that the remaining rural locations in many counties are those places where costs are the highest.

Another factor that is driving up costs is the way that the FCC awarded RDOF. I’ve been talking for years about how the RDOF awards chopped many counties into swiss cheese serving areas, with seemingly random areas that got RDOF next to areas with the identical broadband options that didn’t. I’m working with a county where RDOF and State grants covered about 80% of rural residents. In doing so, RDOF left behind scattered pockets of the least dense homes. The cost to build the entire rural area that includes RDOF is around $6,000 per passing – a cost that could be comfortably handled by BEAD grants. However, the remaining 20% of locations have a cost per passing over $10,000.

Another major issue to consider is the degree to which inflation and BEAD grant rules are driving up the cost of construction. BEAD rules can easily add up to 30% to the cost of building a rural network due to factors like prevailing wages, letters of credit, and environmental studies. Most engineers I know estimate that inflation has increased costs by 15% to 20% since the date when BEAD grants were announced.

Finally, I think broadband offices are relying too heavily on using fixed wireless as the solution for high cost areas. There are places where fixed wireless is a good solution, but plenty of others where it is not. Areas with rough terrain can be a nightmare for a WISP that is required to reach every home. Some of the small pockets left behind by RDOF and other grants are isolated and not near any WISP markets – and no ISP wants to take on tiny pockets of customers that are far from existing networks.

Hopefully I’m being pessimistic, but I fear that states are often basing their estimates of how far BEAD grants will stretch based on the cost to build to rural areas with State broadband grants. When I look at real counties, I’m seeing that the areas that are left behind by earlier funding efforts are the most expensive places to reach. I cringe when I hear States that say that they have enough money to build fiber everywhere before they have received grant applications.

Grant Funds are Still Taxable

In October 2022, I wrote a blog about a bipartisan attempt to exempt broadband grant funding from being taxable income. Unfortunately, Congress has still not moved this legislation forward. Any company pursuing any federal, and most state grants need to be aware of the tax implications.

In 2022 there was an attempt to push this through during the lame-duck session between the old and new Congress being seated. When that failed, there was a bipartisan bill introduced in both the House and Senate in February 2023, and those bills are still languishing.

On the House side, Representatives Jimmy Panetta (D-CA) and Mike Kelly (R-PA) introduced H.R. 889 – The Broadband Grant Tax Treatment Act. On the Senate side, Senators Mark Warner (D-VA) and Jerry Moran (R-KS) introduced an identical bill, S.341. Both bills would amend the federal tax code so that grants received from the Infrastructure Investment and Jobs Act and the American Rescue Plan Act will not be considered to be taxable income.

This would cover any funding that ultimately derived from ARPA funding, and I have to assume that it covers both state and local government grant awards made using ARPA funding. This would also presumably exempt ReConnect and NTIA grants that were funded through those two federal laws. But it might not exempt ReConnect funds that were directly funded in an Agricultural bill. The tax exemption would be retroactive for eligible grants awarded in 2021 and 2022.

In the past, the IRS had the authority to excuse grants from being taxable, and the agency excused the taxes on grants made from the NTIA’s 2009 BTOP and BIP grants. But the IRS lost that authority in the 2018 Tax Cuts and Jobs Act. It now takes specific action from Congress to forgive tax on grant income.

Most grant revenue is taxable. This makes sense because the majority of government grants are made to cover salaries for people like researchers – such grants are taxed as personal income like any other source of payroll. But there is a good argument to be made that grants for infrastructure are different. The whole point of the current broadband grants is to build infrastructure. A huge portion of the IIJA funding goes towards the labor of building a broadband network, a road, a bridge, a dam – and those payrolls from the grant funding are fully taxable. Most of the materials used in the grants are supposed to be made in America, and the profits from selling those materials is also taxable.

Fully taxing the infrastructure grant money and then also taxing the payrolls of the folks who build the grant-funded project feels like double taxation to me. We don’t tax corporations on gross sales. Corporations only pay taxes on profits, but most of the tax from sales to corporations comes from the taxes on the salaries paid to employees.

An argument can be made that grant revenue used for infrastructure isn’t taxable – but it involves an understanding of accounting to understand this. Corporations don’t get to immediately write-off the cost of building an asset. The cost of an asset, like a fiber network, is recognized as a tax deduction over time through depreciation. If a corporation depreciates a fiber network over thirty years, then it claims a little piece of the fiber asset as an expense for each of the thirty years.

But saying that an ISP will eventually get the money back ignores the practical impact of making infrastructure grants taxable. Grant money is given to ISPs as they build the network. If it takes three years to build a grant-funded fiber route, then the corporation gets the grant award spread over those three years. In each of those years the grant money is considered to be income. Assuming the corporation is already profitable, it will have to pay a 21% federal tax each year on the grant award. States with a state income tax will also expect the tax payment.

For sake of simplicity, let’s assume the total tax liability is 25%. If an ISP accepts a $40 million BEAD grant, it’s going to owe $10 million in taxes. Over the thirty years of deprecation its tax liability will theoretically get this money back, but the company will be required to write a big check to the tax authorities over each of the first three years. Note that taxes are more complex than this and that’s a simplified explanation.

That is a huge penalty for an ISP for taking grant funding. The company will have already made a 25% matching contribution to the grant project, which would be roughly be $13.3 million. In this simplified example, the ISP will have had to come up with $23.3 million to accept a $40 million grant.

This have huge implications for an ISP. First, while banks might fund the 25% grant matching, they are going to leery about funding the tax liability. ISPs in general don’t carry a lot of cash, so coming up with the tax liability is a big problem. This also makes the project a lot less profitable. My math shows that most rural grant projects are only minimally profitable even before considering this extra tax. BEAD grant areas, by definition, are sparsely populated, meaning there is not a huge amount of revenue generated. I honestly have not looked at a rural broadband project that could absorb this extra tax cost.

This extra taxation makes it a lot harder to justify taking a broadband grant. ISPs consider grant projects because they add customers and increase economy of scale. But nobody wants to take on a grant project that is a cash loser.

I can’t find any news about the topic. The House and Senate web sites show the bills still stuck in the Finance Committees. Perhaps this issue has been rolled into some other piece of legislation, but the folks I know who follow this haven’t heard about anything like that. If this legislation is still stuck in limbo, ISPs need to reach out to their congresspeople to reiterate the dire results of keeping these grants as taxable income. If this is not solved, it’s one more reason that many ISPs won’t be able to take BEAD grants. Only those ready to take on the extra tax liability can justify it – and most ISPs I know can’t afford this extra cost.

Final Treasury Rules for ARPA

The U.S. Department of the Treasury released the final rules applicable to using ARPA funding. This was the giant pile of $350 billion that was paid out to local governments, counties, and states to address issues related to the pandemic. These rules take effect on April 1, 2022. As usual, this is not a simple document and is 437 pages long.

There has been a lot of confusion in cities and counties about how they can use these funds. This final rule should answer any open questions about broadband because the final rules are clear about how these funds can be used. Following are the most important provisions of the final rules that relate to building broadband infrastructure.

Broadband Speed Tests. The Interim Treasury rules had included requirements that broadband could only be constructed to areas that were considered as unserved or underserved using the typical definitions of 25/3 Mbps or less to be unserved. The final rules eliminate any consideration of existing broadband speeds. The final rules allow broadband to be constructed to reach households and businesses with an identified need for additional broadband infrastructure investment.

There still must be a justification that the project addresses a problem highlighted by the pandemic. But rather than relying on speed as the justification, localities can consider broadband reliability, affordability, or access to a connection that meets or exceed symmetrical 100 Mbps. Localities can document this need using any available data, including local speed tests, federal or state data, interviews with residents and businesses in the affected areas, and just about any other way that proves there is an existing broadband need.

This is an important clarification because it means local governments don’t have to spend the energy interpreting and fighting incumbent ISPs and the FCC maps.

Matching Funds. As is usual, the rules are written by lawyers and are never crystal clear. Following is the specific language in the order specific to using ARPA as matching for other grants:

Given the final rule’s revised requirements on eligible areas for investment, the final rule also modifies the interim final rule’s requirements around duplication of resources. Since recipients must ensure that the objective of the broadband projects is to serve locations with an identified need for additional broadband investment, the final rule provides that, to the extent recipients are considering deploying broadband to locations where there are existing enforceable federal or state funding commitments for reliable service at speeds of at least 100 Mbps download speed and 20 Mbps upload speed, recipients must ensure that SLFRF funds are designed to address an identified need for additional broadband investment that is not met by existing federal or state funding commitments. Recipients must also ensure that SLFRF funds will not be used for costs that will be reimbursed by the other federal or state funding streams.

I read this to mean that ARPA (SLFRF) can be used for matching, but with some important caveats. There is a two-part test for using ARPA along with another grants. ARPA must address a need not met by the existing federal or state grants, and second, it must not duplicate any payments for the same infrastructure.

The second test is the easy one to make and applies universally to all matching grants. For example, if one grant pays for 50% of an asset, the matching can be used to pay for the remainder – but the two grants together can’t pay more than 100% of the cost of the asset.

But the first test is going to require some legal gymnastics. The obvious justification for using ARPA is that the project won’t work without it. But there are easier ways to make this work that more easily meet the final rules. If ARPA is used for assets not included in the original state or federal grant, there is no duplication. That might mean using ARPA to build to additional households or using the original grant to build last-mile but ARPA to build drops. Folks are going to have to get creative to use ARPA money as matching – and this language lays out how to do so.

Low-Income. The final rules require ARPA-funded ISPs to participate in the Affordable Connectivity Program.

Using ARPA Funding

I’m getting a lot of calls asking about ways that local ARPA (American Rescue Plan Act) funds can be used for broadband. Many of these questions are coming as the result of cities and counties being told they can’t use the funds to build broadband. In some cases, conservative local legal opinions are cautioning against using the money. We’ve heard of examples where big ISPs are telling communities they can’t use this money. In my state of North Carolina, the State Legislature has gone so far as to warn local governments that if they build infrastructure with ARPA that they won’t be eligible for state grant funding.

The reality is that the Department of Treasury has written the rules in such a way that communities have a huge amount of control over how they can use the ARPA funds. The only big overriding rule is that the funding must address some problem created by the pandemic – that’s an incredibly easy hurdle to cross with anything related to broadband. I’m not going to repeat the basic grant rules which are discussed in this earlier blog – but the blog is a good reminder that Treasury worked hard to make the funding easy to use.

I’m starting to hear some interesting stories from cities that want to use the money for broadband. Following are a few of the ideas that I know are being considered:

  • I know cities that are considering using ARPA money to bring broadband to public housing and to low-cost neighborhoods. These cities want to provide free or low-cost broadband to citizens who have not been able to afford broadband. This goes far past using the $30 discount from the Affordable Connectivity Program – $30 off cable company broadband connection is still out of reach for many homes.
  • There are cities using the money to create a wireless system to reach all students at home so that every student is guaranteed a connection for doing homework.
  • There are cities connecting to anchor institutions with fiber to reduce the ongoing cost of paying to connect city buildings.
  • I know cities that are looking to build fiber to business districts that have been devastated during the pandemic. Smaller communities aren’t going to fully recover from the pandemic until local merchants and local jobs are up and running again.
  • If you know of other ideas for using ARPA in cities, I’d love for you to describe them in the comments section of this blog.

Rural counties and small towns are mostly focused on bringing broadband to rural areas that have poor or no broadband. Rural communities are mostly partnering with local ISPs to bring better broadband.

  • I know several counties that are using ARPA money as matching funds for state and local grants. Communities are recognizing that the most powerful use for this money is to use it to attract larger grant funding from elsewhere. Many states are encouraging this. I saw a presentation recently from the Virginia grant office that encourages localities to layer local, state, and federal grants together to bring broadband to high-cost places.
  • I know a few communities that are taking the idea of collaboration to the next level past state and federal grants and are also attracting funding from schools and libraries, rural health care facilities, electric cooperatives to create the funding plan to bring broadband to every stakeholder.
  • I know of counties that plan to use the funding to directly build broadband to places they fear nobody else will serve.
  • I’ve also heard of a few cases of counties that are using the money to build middle-mile fiber with a partnership in place for an ISP to bring the funding to build the last-mile networks.

In all of the above cases, the ARPA money can be used for the engineering and feasibility study work needed to quantify the costs of a project.

My bottom-line advice is to ignore those who are telling you that this funding can’t be used for broadband. I think Treasury made it abundantly clear that communities get to call the shots about how they want to use the funding. Once this funding hits your coffers, it’s your money – as long as you follow a few simple guidelines.