The City of Lompoc's Mayor, in a recent op-ed in the Lompoc Record, accused the Howard Jarvis Taxpayers Association and SBCTA of not understanding how city finances work. In his commentary, he makes the following statement:
"Both the Jarvis and SBCTA letters state that by entering into broadband the city will be taking money away from vital services like public safety, parks, library, etc. It appears that both organizations lack the basic knowledge of how city finances work. The $1.5 million that we are using to establish a Wi-Fi network is being borrowed from the utility department and is not new money - it is already in the bank." - Dick Dewees (Lompoc Record, May 18, 2005) -
In the first place, the city's utility department is not an investment bank. Therefore, it should not be dabbling in the venture capital business.
Moreover, the money the city's utility department is lending out is not being loaned by risk takers, investors, and/or depositors, which is typically the case when banks loan money. In this case, the money is being loaned by the utility's ratepayers so that the Lompoc City Council can pursue a non-essential government enterprise that we believe is better left to the private sector.
Secondly, in his op-ed, the Mayor says, "If, three to five years from now the city elects to offer high-speed Internet, cable television, and telephone services, the money for these services will be provided through the sale of municipal bonds."
We already know that the Mayor; the city council; the city's staff; and their million dollar out of town consultant, are fully intent on taking the good people of Lompoc down the road where providing a soon to be obsolete "fiber-to-the-home" (FTTH) broadband service is the ultimate goal.
Indeed, the WiFi, or Wireless Internet Utility (WIU), is only the first phase. The FTTH project is phase 2 and development is already under way and at an estimated cost of $27 million dollars for both phases. SBCTA and Jarvis will continue warning Lompoc's taxpayers that it is a rough road ahead and their misguided city council has no business taking them down this road in the first place.
The Mayor correctly points out that we (SBCTA/Jarvis) did not attend any of the "numerous" public meetings about municipalizing Lompoc's wireless/fiber broadband service. The reason is quite simple; we were not notified, or asked, to attend any of the numerous public meetings.
It is worth pointing out that the Mayor of Lompoc used to sit on the board of the Santa Barbara County Taxpayers Association. He resigned on May 13th due to our opposition to his pet project. Had he invited us to one of their numerous meetings we could have made our concerns known to him long ago. Who knows, maybe we could have saved Lompoc's taxpayers the $425,000 the city council has already agreed to pay their consultant.
I suspect we were not invited because they probably were not interested in hearing from the opponents of their broadband proposal, only the proponents (especially their out of town consultant). After all, in his op-ed, the Mayor states that the consultant warned them there would be opposition to this proposal. Did the Mayor ask the consultant who and where the opposition might come from?
But since the Mayor has dropped the gauntlet, I feel compelled to respond to his charge that we have no understanding of how city finances work. This is our understanding of how city finances work:
Taxpayers pay taxes to local government so the local government can deliver a few essential programs and services not readily available from any other source, such as: police protection, fire protection, code-enforcement, fixing and maintaining roads, filling potholes, trash collection/hauling, wastewater treatment, etc.
That same taxpayer can then go out and hire a private communications company - like COMCAST - to receive super-duper fast internet access that will allow them to surf the internet, chat online with friends and family, play games and download music, movies and pictures of their favorite musicians, actors and celebrities.
COMCAST makes money and hires people to service their customers; the company pays taxes (including payroll, income, and property); as well as other fees to the city; the city prospers and as a result so do the citizens. It is actually a good economic model...and has been working pretty well in this country for over 200 years.
But if the city decides to run COMCAST and other companies like it out of town in order to provide its citizens the same kind of non-essential services, such as broadband, and the citizens choose not to buy the service from the city, the city ends up losing money. Why is that? Because the city borrowed, the $27 million dollars required to roll out the "cool" non-essential service.
Also, what would happen if some citizens buy the cool new service but not enough, or not as many as originally projected? In other words, what happens if the city's out of town consultant is off in their customer projections? The city will find itself in serious risk of not earning enough to justify the cost. But how can that be? After all, it is a real cool broadband service that people are already claiming they want and many already use.
Here is why:
In order for the city to win, it must price the new - non-essential - government owned broadband service accurately. They must determine the total projected capital per customer service unit...i.e., the price per customer must be well understood well in advance. Has the City of Lompoc nailed this small detail down? If so, can they tell us what it is?
If the level of customer interest is positive (as i am sure it is), then the city will be able to project positive earnings before interest, taxes, depreciation, and amortization (EBITA). We suspect this is probably where Lompoc is. Currently, everything looks great and so they think the city is good to go...but is it?
What will happen if the projections on customer interest misses the mark and the city experiences softer than expected sales? By the way, this is something every private business experiences on occasion. Or to put it another way, what if the dog just doesn't like the dog food and some of the customers cancel their cool new service? You might ask AOL, CompuServe or Prodigy if this ever happens.
In fact, it can and will happen for a variety of reasons, but the most likely scenario for it happening is because of what we will call "the gales of creative destruction", i.e., because of innovation. Welcome to the brutal world of high tech.
Case in point: do the members of the Lompoc City Council realize we are less than a few months away from WiFi being rendered obsolete? This is true; get ready for WiMax because it is coming to a roof near you...within a year it will be in people’s living rooms and within two years, every new home computer will be equipped with a WiMax chip. WiFi, to put it gently, is already a dinosaur.
The so-called "fiber-to-the-home" service is not far behind and will soon become extinct as well.
If this happens, who cares? After all, the city can always cancel the cool new, er, old service, right? Absolutely, but the debt (and the Mayor is apparently predicting the use of tax-free municipal bonds to finance the FTTH phase) will still need to be paid back, with interest, and that means the general fund will be on the hook when the venture eventually goes sideways.
Could this happen? Wouldn't the city's hired consultant warn the city about this potentiality? Not if they want the contract. But in fact, it happens all the time, Minnesota's collectivist utopia notwithstanding.
And so here is really where it all comes full circle; if the city's general fund is encumbered because it is servicing tens of millions of dollars in unproductive debt, it will have less money available for police protection, fire protection, code-enforcement, road repair and maintenance, trash collection and hauling, waste-water treatment...and, oh yeah, I almost forgot; broadband!