Does the Farm Bill Kill USDA Loans?

Today I feel like the Grinch, because I see the broadband provisions in the Farm Bill largely killing the USDA loan program and I don’t see anybody else writing about it. I’ve seen dozens of articles praising the new broadband programs created last week by the passage of the Farm Bill. To be fair, three of the announced programs are good news. The legislation created the following outright grants that, while small, are going to bring some solutions for rural broadband. The bill funds these three programs through 2023:

  • Funds the Community Connect grants at $50 million annually. These grants have been around for many years and distribute grants based upon an economic test, with grants intended for the poorest areas getting preference;
  • $10 million annually in a new program to fund middle mile fiber in rural areas;
  • $10 million annually for the grant program that was formerly called the “Rural Gigabit Network Pilot Program” but which has been relabeled as the “Innovative Broadband Advancement Program”. These grants are to be awarded to programs that demonstrate innovative technologies or methods of broadband deployment.

I’ve seen estimates that it might take as much as $60 billion in federal assistance to bring broadband everywhere in rural America and these three grants are barely a blip against the huge rural broadband shortfall – but they are better than nothing.

The flagship broadband announcement in the Farm Bill is the announcement that $350 million a per year will be given the existing USDA loan program, and that the loan awards can now also contain some portion of broadband grants, which might make it easier to build in high-cost areas.

But there is one killer provision of that new funding which I think might make it almost impossible to use. Any area receiving this funding can’t have more than 10% of households that can receive 10/1 Mbps broadband. That’s the same speed test that is being applied to the $600 million e-Connectivity grant program that I discussed in yesterday’s blog. This is a drastic change for USDA loans that currently can be awarded for areas where up to 85% of households can already get 10/1 Mbps broadband. Congress has decided to provide federal funding in the future only for those areas that have no broadband rather than spending money to upgrade inadequate broadband.

If the USDA strictly applies this 10% test I think it will become nearly impossible to get a USDA broadband loan starting in 2019. The 10% test will work for the e-Connectivity grants because ISPs can request funding for small pockets of homes that meet the 10% test. Companies that use the e-Connectivity grants to fund unserved homes can still use other funds to build the rest of a rural area.

But outright USDA loans don’t work that way. Anybody getting one of these loans has to pledge 100% of their company’s assets to the USDA and also give the USDA first lien over all other debt. Since other lenders won’t accept a second lien, then anybody going after a future loan from the program will have to get 100% of the funding from the USDA. And that’s where the 10% test will kill the loan program. There are very few places that still meet the 10% test – at least on paper. The big telcos are going to be claiming good DSL throughout rural America and in most places the big telco DSL is just good enough to cover more than 10% of homes in an area.

I’ve seen this legislation touted as a boon to rural electric cooperatives since many of them are considering building fiber to cover their whole service area. I would venture to say that there is no electric coop in the country that will pass the 10% test for their whole service area – and most of them don’t come even close.

An electric coop won’t be able to use the USDA money to build fiber everywhere – if they carve out USDA money to cover the areas that pass the 10% test, then nobody will loan them the money to build the rest. The 100% pledge and lien provisions of the USDA don’t allow for a secondary lender.

Huge swaths of rural America are now theoretically covered by the various CAF II programs, so those areas either now have 10/1 Mbps or are supposed to get it sometime over the next six years from the reverse auction awards. I believe all areas covered by CAF will be considered ineligible for these USDA loans.

I went back and read the law several times because I saw articles that got the facts of the new loan program wrong. The specific rules for the new programs can be found in the latest copy of the Farm bill, starting at Section 6101.

It’s obvious that the big telcos have gotten to the legislators who are writing this legislation. It looks like the 10% and 10/1 test will be the new norm for getting federal broadband funding. As each year goes by fewer and fewer places will qualify for this funding and monies will go unclaimed. Meanwhile, areas that have really crappy broadband, but where more than 10% of homes have fully inadequate 10/1 Mbps speeds will not be eligible for this funding. I saw articles where members of Congress are claiming that this bill will help to solve the rural broadband problem – but the actual provisions of the new USDA loan program tell a different story. This feels more like a sham than a plan to me.

Please see the attached comment that softens these comments. Turns out that 100 USDA loans in the future won’t have to pass the 10% test – that applies if an applicants wants any grant funding.

Restricting RUS Funding

The major large ISP lobbyists have asked Congress to block the use of Rural Utility Service (RUS) funding to overbuild areas that have only rudimentary broadband today. The heads of the National Cable & Telecommunications Association, the American Cable Association, USTelecom and the ITTA – the major lobbyists for the big ISPs – wrote a joint letter to the chair of the Senate Agricultural Committee. The letter requests that the upcoming Farm Bill restrict funding from the RUS to be only used for overbuilding to rural areas where at least 90% of homes don’t have access to 10/1 broadband. There are almost no such places left in the country, at least on paper, so this would effectively gut RUS funding from being used to improve rural broadband.

In the original CAF II program the FCC gave the big telcos billions of dollars to upgrade a lot of rural areas to speeds of at least 10/1 Mbps. In the upcoming CAF II reverse auction the places that weren’t included in the original CAF II program are slated to get upgrades to the same 10/1 Mbps speed. On paper this means there will be few  places that don’t have access to 10/1 Mbps broadband. Even where the telcos have supposedly upgraded to 10/1 there are likely to be large number of homes that don’t even get that rudimentary speed. Unfortunately the big telcos control the rural agenda since they are the ones that report consumer speeds on the broadband maps – and those maps are going to show that the telcos did a good job with upgrades, even when they didn’t.

Meanwhile these same big telcos have made it clear that they aren’t going to be investing in rural America.

  • CenturyLink’s new CEO recently said the company was no longer going to invest in infrastructure with low returns, meaning that they won’t be making any more investments in their last mile networks.
  • AT&T and Verizon both have asked the FCC to make it easier for them to walk away from rural copper lines, and both companies are pursuing a fixed cellular solution for providing rural voice and broadband.

These giant telcos are not willing to invest in their own networks – but they also don’t want anybody else building there. These companies took billions in free federal money to nudge rural broadband speeds up to a crappy 10/1 Mbps, and they are now basically telling the people that live in these areas that 10/1 Mbps is all of the broadband they will ever need or are ever going to get.

The RUS money is largely being used by smaller independent telcos, rural electric cooperatives and Indian tribes that want to invest in better broadband in rural America. A lot of RUS funding is being used to build fiber, the ultimate broadband upgrade. I imagine a number of companies bidding in the CAF II auction are planning on using RUS funding to complete those builds – but if this makes it into the Farm bill  that won’t be possible.

The only other entities interested in building rural fiber are rural governments. In states where it’s allowed they are looking for broadband solutions for their rural towns and counties and are often willing to make significant investments to make sure that their communities don’t get left behind. Most rural communities don’t want to be ISPs and they are helping to fund public / private partnerships with these same small telcos and electric coops to get better broadband – and those partners often look to the RUS to complete the funding.

The big telcos have political smarts and are trying to get this buried into the Farm Bill – something that will inevitably pass. This will allow politicians to vote for this provision while not having gone on record as siding with the big telcos. But make no mistake about it – any politician that supports this idea is choosing the big telcos over their rural constituents. Politicians only need to visit any rural part of their state to understand that broadband is now at the top of the priority list for most rural communities. These communities understand that those places that don’t soon get broadband are going to become economically irrelevant and will eventually wither away.

This letter was prompted by the fact that Congress recently awarded $600 million for expansion of rural broadband through the Ray Baum’s Act of 2018 that reauthorized the FCC budget. Those funds will be administered by the RUS. I predicted when that bill was passed that the big telcos would look for a way to make sure that most of that new money goes to them. It looks like I’m right, because if the Farm Bill passes with the requested change, then little or none of the $600 million will be of use to anybody else for building better broadband.

I hope that the small telcos and electric cooperatives react promptly and loudly to this proposed bill amendment, because it effectively guts RUS funding. This funding has been used for decades for overbuilding better broadband networks in areas served by the big telcos – and this one change would kill that.

I spend a lot of time talking about the ‘rural broadband problem’. But as I look at this lobbying effort I need to start talking about the ‘big telco problem’. All of the rural places that still don’t have good broadband are served by these big telcos. The rest of telcos and other companies that operate in rural America are finding solutions for better rural broadband. These big telcos have refused to reinvest the billions of profits they have made back into rural America and are now trying to make sure that nobody else makes those investments. The big telcos want to milk every last penny they can out of rural America.