For the second time in two years, Mayor-President Josh Guillory is ignoring the advice of the experts we pay to guide LUS Fiber. This time that arrogance is putting LUS Fiber on a path to bankruptcy.
In the coming year, LUS Fiber is budgeted to spend millions on expansions and make a discretionary payment into the city general fund for the first time ever. According to the Fiber consulting engineer’s most recent annual comprehensive report, Fiber can’t afford to do that.
This fiscal irresponsibility not only threatens Fiber’s resilience and ability to service the city of Lafayette, it also threatens Fiber’s very existence.
First, some background. Both LUS and LUS Fiber have contracts with bondholders — institutions that buy their debt — requiring consulting engineers to protect their investments. The utilities carry hundreds of millions in debt between them, and their financial fates are intertwined. But that expert advice is meaningless if Guillory ignores it.
Guillory first ignored expert advice when he appointed Ryan Meche to be LUS Fiber’s director over the consulting engineer’s concern about Meche’s qualifications. He misled the City Council about the engineer’s recommendations and then fired that consulting engineer. Since then dozens of employees have left LUS Fiber, including all of its managers, according to sources close to Fiber.
Now Guillory’s ignoring that expert advice again.
For starters, he’s balancing the city’s checkbook by raiding Fiber’s piggybank. In the next fiscal year, Fiber will pay $3.2 million in in-lieu-of-tax payments, a contribution it doesn’t have to make. Without it, city government would run a $3+ million deficit next year.
In-lieu-of-tax payments — most call it ILOT — are a bit of a misnomer. While state law requires Fiber to pay imputed taxes to level the playing field with private operators, paying ILOT is optional. It’s more akin to distributing profits. (LUS sends around $25 million to the city general fund each year; it’s why we call it the goose that laid the golden egg.)
In other words, it’s a choice — a choice Fiber can’t yet afford to make, according to the experts we pay to protect it. In its report, the consulting engineer clearly states that Fiber’s margins are not yet large enough to make any ILOT payment.
Guillory’s decision to balance the city’s budget with ILOT sets Fiber on track to zero out its reserves in three years. This would make LUS Fiber extremely vulnerable to any shortfalls in revenue or unexpected expenses. And would significantly limit its ability to finish building out the city of Lafayette or to fix damage caused by storms.
This is a risky move by itself. And it’s even riskier when we take into account the direct costs of Fiber’s grant-funded expansions in Evangeline and Vermilion parishes, which are not yet accounted for in Fiber’s budget.
Meche has implied to the City Council that the Ville Platte expansion wouldn’t cost LUS Fiber any money, but that’s not true. Fiber’s five-year pro forma, submitted in its application for the federal grant awarded earlier this year, runs significant deficits for the first four years.
The $19.8 million grant awarded with national fanfare by the National Telecommunications and Information Administration will only pay to run fiber down the streets. Connecting each home falls on LUS Fiber. In its first year, this one expansion is projected to require a $5 million out-of-pocket expense — more than double the $2 million that the consulting engineer says LUS Fiber can afford for all of its expansions next year. Over the next four years, that subsidy totals more than $11 million. And this spending is on top of the $2.4 million that’s already in Fiber’s budget for outside plant expansion.
Meanwhile, the Vermilion Parish expansion, funded by a state broadband program, will cost LUS Fiber another $1 million to $2 million in matching funds — to connect less than 300 homes.
Between the ILOT payments and out-of-market expansions, Fiber is slated to spend roughly $25 million more over the next four years than the consulting engineer says it can responsibly afford. Factoring in the expansions, LUS Fiber could run out of its reserves by the end of next year and be operating a deficit.
The fastest way to bankrupt a fiber network is to expand too quickly. That’s because it’s relatively expensive to connect customers, and it can take years before those connections generate enough revenue to pay back the install costs. Even with the state and federal grants, that’s still true.
The administration has promoted these expansions as a big boost for Fiber’s revenue, while ignoring what it will do to its margins.
Take the Ville Platte expansion. According to Fiber’s pro forma, that expansion won’t turn a profit for five years, and even then just a $750,000 annual return. At that rate, it would take another 15 years to pay back what Fiber spent.
Let’s not lose sight of something very important about LUS Fiber. The network was built for the benefit of Lafayette city residents. Yet these ILOT payments and expansions could bankrupt Fiber before it’s finished building out the city of Lafayette. Plus, the moves are major risks to the Lafayette citizens who own LUS Fiber.
If Fiber is unable to make debt payments, according to its bonds the network must immediately be shut down, and control of the network and remaining debt would transfer to LUS. From there LUS rates would increase to cover the debt payments. In other words, these are risks LUS ratepayers would be on the hook for — even if you don’t have Fiber.
True to form, the administration has not addressed these issues with the City Council or the public honestly and transparently. Ignoring expert advice is bad enough. Doing so at the public’s risk is beyond irresponsible; it’s negligent.