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.

Getting Access to Federally Funded Fiber

Fiber CableWhen billions of the stimulus dollars were spent for telecom, a lot of the money went to projects that built middle-mile fiber. This is fiber that basically runs between towns and from county to county through rural areas. The stimulus money required the builder of these fiber networks to connect the handful of nearby anchor institution – schools, libraries and city halls – but the grant recipients weren’t required to connect anybody else.

One of the requirement of those grants was that any middle-mile fiber built with assistance from federal dollars must be made available at low costs to anybody that wants to use that fiber to serve the last mile. And that is a great policy because the ultimate goal for federal broadband dollars ought to be to solve the rural digital divide where rural homes have no access to broadband.

But before you can serve homes in rural areas there has to be a backbone fiber – a connection from a rural area to affordably connect to the Internet. There are still huge swaths of the country where getting that connection is prohibitively expensive, if it is available at all.

The FCC’s hope was that building these middle-mile fibers would lure other service providers to build the last mile. There has not been nearly as much such construction as was hoped for, but there is some. As an example, a fiber project in Cook County, Minnesota is connected to Minneapolis through a federally-funded middle mile fiber. Before that fiber was built there didn’t seem to be an affordable way to connect that remote county to the Internet. Around the country there are numerous communities that have taken advantage of this opportunity for cheap transport.

And now the FCC has decided to spend even more billions of federal money on fiber with the CAF II funds. This money is being given to ten large telcos, most noticeably CenturyLink, Frontier and AT&T. These companies will be receiving $9 billion to help pay for expanding broadband to rural areas that don’t have it today.

In my opinion this program is mostly a huge boondoogle in that the telcos only have to build broadband connections that reach 10 Mbps download speeds. In today’s world that is not broadband, and it certainly isn’t going to feel like broadband by the end of the six year time frame the companies have to make these expansions.

The only way these telcos are going to be able to affordably meet the CAF II goals is by expanding DSL into the rural areas. And to expand DSL they are going to have to build rural fiber routes to support the new DSL. Even if half of this money goes toward DSL electronics, that leaves a lot of federal dollars being spent for rural fiber. Even without considering the telco matching funds, this much money has to be funding more than 200,000 miles of new fiber, almost entirely in rural areas.

It perplexes me why the FCC didn’t impose the same requirements on this new federally-funded fiber as they did the middle-mile fiber built by stimulus funds. Why isn’t this new CAF II fiber being made available at a reasonable price to anybody that can then use it to bring real broadband to the rural areas? This might be the only way to salvage something with long-term value out of this huge waste of federal dollars.

Certainly the large telcos can’t claim any special exemption from such a rule because the many smaller telcos that built middle mile fiber with stimulus funding accepted the last-mile rules as a condition for taking that funding. The large telcos are going to use this free money to do a virtually worthless upgrade to DSL, and people in these rural areas deserve a chance to use these federally-funded facilities to get rural fiber.

This would require nothing more than a policy decision by the FCC. All federally-funded fiber ought to be made available to solve rural broadband. That was true for the stimulus funds. It ought to be made so for fiber built along Interstate highways. And it certainly should apply to the large telcos that are seeing a bump in their stock prices right now due to the ‘revenue’ they are receiving from the CAF II funds.