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.
3 Comments
Lafayette gained some cachet as an early provider of municipal broadband. Would be a shame to see it become a casualty of this feckless administration.
Nick, you are absolutely correct! This is infuriating. It’s time for the citizens of Lafayette to raise their voices - enough is enough!
Geoff is only half correct. LUS Fibber is already insolvent, hidden by the only true innovation that the Durel administration brought to us: financial sleight of hand. The City of Lafayette's Utilities Dept (because that's what LUS and LUS Fiber are... simply the Utility Dept) has loaned money from Electric customer revenues to pay for Telecom revenue shortfalls for over a decade without any attempt or even agreement in place to pay it back. This amounts to tens of millions.
In addition, the upgrades are necessary but the expansions are not. LUS Fibber has not hooked up one under-served customer in it's entire existence in the City of Lafayette and it still won't with the expansions. Is LUS trying to go into Lafayette Parish (or any "parish areas" at all" to bring broadband to those who don't have options? The truly "under served"... Nope. Not concerned with that. They want to go into the "sweet spots" of other towns that already have options from other providers to get the easy revenue. They applied for ConnectLA's Gumbo fiber grants and were denied all applications because they don't care about helping people who are under served. They simply care about bottom line.
And the real problem is that they have done it all to themselves. They could be 100% in the black right now if they had charged market rates. But they insist on charging 15-20% below market rate such that no provider can make money. They can't, Cox can't, ATT can't, nobody can. That's why their finances are a wreck. Cox and ATT are so massive they can run at a break-even to play with LUS in the black-hole-sandbox they created, but LUS can't. If they try to expand and charge the same depressed rates, they will only hasten OUR demise.
I say "our" demise, because Geoff is correct that the finances are intertwined. To put a finer point on it, they are one and the same. There is no distinction between LUS Fibber dept, and LUS Electric debt. Not to the bond holders. Default is not an option. The consultants and engineers Geoff mentioned... well if LUS's financial troubles start to involve the bond holders, they hold financial baseball bats and shotguns. The come in, break your knees and make you charge the rates necessary to pay back the debt. They can and they will jack up Electrify, Water and Sewer rates to pay back Telecom debts.
Anyway, I'm glad this is getting attention. Thanks for writing the article, Geff and thanks to The Current for publishing it.