RUS Funding of Project for Ski Area Raising New Questions

The Rural Utilities Service funded as part of its broadband stimulus program a project in Bretton Woods, N.H., which primarily will provide fiber to 400 ski chalets. That example is starting to make national news and was the basis of a CNN report last week. Some who have followed the NTIA and RUS programs tell as that with a second and final round of applications due starting Friday, many questions remain about the program. Meanwhile, a Treasury Department decision that grants will be subject to taxes is said likely to discourage some applicants.

The RUS followed its rules exactly in approving funding for the Bretton Woods project, said an RUS spokesman Friday. The project serves an affluent community, but Coos County where the ski resort is located has 9.7 percent unemployment and income there lags behind the rest of the state, he said. “What it boils down to is the Bretton Woods Telephone Co. has been there for a number of years and they have put together a very clear proposal, and in fact the whole mountain is underserved,” the spokesman said. “What we're doing is providing the Bretton Woods Telephone Co. with the funds to put in a system that’s going to be some 40 times faster. Not only will this be of benefit to their major customer, which happens to be the Mt. Washington Hotel and Resort, but it will also allow them to build out infrastructure … over the next number of years. The bottom line is anytime you do this, you're going to increase the tax base and that base is going to support the community as a whole."

NTIA and RUS were given a near impossible task, said an attorney who has advised several broadband stimulus applicants. “If you look, for example, at the Gates Foundation, they have several hundred people involved in giving away several billions of dollars per annum,” the lawyer said. “It actually takes a lot of very knowledgeable people and a depth of experience to give away a lot of money wisely. Congress basically gave NTIA and RUS an impossible job in that they were given huge amounts of money to give away in a quick timeframe. You just cannot build yourself up from being primarily a policy agency into what is essentially an investment bank overnight. I don’t fault the good faith of either entity."

The attorney predicted that some companies are discouraged enough at this point they will sit out the second round. “A lot of people worked very, very hard on round one, only to be told with kind of one-line letters late in the game, sorry, try again,” the source said. “If you have invested anywhere between $50,000 and $500,000 in getting these very complicated applications done, there’s a lot of discouragement."

Craig Settles of Success.com said the tax issue may scare away some applicants. “This will certainly become a pain unless someone in Congress steps in to add a tax exemption,” Settles said. “I think you will see Democrats become the anti-tax party in the name of facilitating economic development. Republicans, who by and large oppose the stimulus, will be in a bind. Their natural reaction is to rail against any taxes. They'll have private sector allies that are going to complain about the taxes while seeing this one as a way to cripple a program they hate.”

Companies who have already won will ask tax attorneys for advice on how much of the tax bite they can avoid through deductions, Settles said. “If the bite’s too large, they very well may walk away from the money,” he said. “The public-private partnerships are going to be in tricky position because they're both fish and fowl. I think it will depend on who’s the lead dog as to what their tax exposure will be. The nonprofits and government entities that won projects are the only ones really clear of this mess.” As for round two, “the private sector may be more inclined to stay away, public-private partnerships will likely do some major re-arranging of the partnership to gain maximum tax advantage, and the non-profits/government entities will participate or not … without being influenced by the tax question,” Settles said.

The tax implications may not be as negative as some expect, said attorney Jim Baller of Baller Herbst. The Treasury letter clarifies that Broadband Technologies Opportunities Program grants for capital expenses are not subject to federal income taxation, just grants for operating expenses, he said. “This coincides with the BTOP funding scheme for infrastructure projects, as grants are available only for capital expenses and not for operating expenses,” he said. “Furthermore, the letter officially confirms what seemed obvious before -- that governmental and non-profit entities are exempt from federal income taxes."

NTIA deserves credit more than criticism, said Public Knowledge Legal Director Harold Feld. Feld said he hasn’t followed the RUS program as closely. “There is never any lack of people willing to rush in and claim a project is a failure, the more so when there are dozens of agendas circulating,” Feld said. “From where I sit, NTIA accomplished a mammoth job starting with no infrastructure and a mound of instructions and, by and large, did well. In any program this large and complex, with so many competing goals and so much pressure to move applications quickly, there are bound to be glitches as the system rolls out, as well as one or two awards that opponents and disappointed applicants can seize on to discredit the program."

"I don’t question the good faith and the good intentions of those at NTIA and RUS administering the programs,” said Randolph May, president of the Free State Foundation. “What I question is the overly broad scope of the programs as conceived. By that I mean is the programs’ aims were too diffuse, and this makes it more difficult for a bureaucracy to ensure the funds are spent wisely."

Round two will attract more applications from larger carriers, predicted Gary Bolton, a vice president with AdTran, an equipment company that’s advising potential round two applicants. The first round of broadband stimulus applications was almost completely devoid of projects from Tier 1 and 2 service providers, he said. The main reason was the definition of remote and underserved areas in round one rules. Positive changes in round two rules could attract more quality projects and experienced operators, he said. Additionally, the net neutrality requirements in round two rules are consistent with those in the FCC’s National Broadband Plan, he said, which would lower the risks for potential Tier 1 and Tier 2 applicants.

Round two rules are wireless and WiMAX-friendly, said Robb Henshaw, director of marketing and communications at Proxim Wireless, which is advising potential round two applicants. Round two rules specified that WiMAX projects could be licensed or unlicensed, which will attract more WiMAX applicants, he said. Surprisingly “there’s very little wireless included in round one,” he said. Esme Vos, founder of muniwireless.com, believes that more round two grants will go to applicants with urban projects. The focus on unserved and underserved areas in round one prevented urban applicants from getting money, she said.