Kentucky’s ambitious project to build a high-speed internet network across the state could fall through if the legislature does not approve funding this weekend to settle outstanding claims by contractors, according to a bond-rating service.
The administration of Gov. Matt Bevin worked out a deal to resolve unbudgeted costs to contractors on the Kentucky Wired project — and cut down some risk of more claims — but the legislature has not approved funding for the settlement.
Without such a deal, the broadband project could collapse, Fitch Ratings said in a report this week.
If the state does not keep its commitment to build the network, it could lead to a significant downgrade in Kentucky’s credit rating, Fitch said.
That would make it more expensive for the state to borrow money, and could also hurt its ability to put together public-private infrastructure partnerships.
“It’s a threat to the entire economy of the state,” said Phillip K. Brown, executive director of the Kentucky Communications Network Authority, which oversees the broadband project.
Sen. Chris McDaniel, a Republican who chairs the Senate budget committee and has been critical of the costs of the project, said earlier ratings on the bonds were based on faulty projections.
Kentucky Wired started in 2015 with the goal of extending high-speed internet across the state, where many residents do not have access to broadband.
The project — comprising 3,400 miles of fiber-optic cable, much of it strung on existing utility poles — would create an access point in each county to high-speed service, but local providers would have to extend service to individual customers.
It is a public-private project, with privately-issued bonds to pay for it and a private company, Macquarie Capital of Australia, building and operating it. Much of its revenue would come from providing internet service to state offices.
Supporters argue the project will provide critical benefits in economic development, education, telemedicine and other areas in an increasingly digital economy.
Fitch said the project was the first statewide effort in the country to build access to high-speed internet.
The original timetable called for the whole project to be done by late 2018, but that proved unrealistic, in part because of delays in getting permission to attach the cable to poles owned by telephone companies and others.
The contractor has made claims for payments related to those delays which were not part of the original project budget, and the state has to pay for some of those under the contract.
The state has paid about $8 million for those claims so far, using savings from changes in the project, such as incorporating systems owned by other providers into the network, Brown said.
However, the state faces additional potential claims of tens of millions of dollars.
State officials worked out a deal with the private-sector partners in the project to resolve the outstanding claims and reset the construction schedule to avoid additional claims.
The settlement called for completing the network by mid-2020, with incentives to finish even earlier and the ability to begin using some parts of the network before the whole thing was done, Brown said.
The settlement was to be financed through Senate Bill 223, which would have given the network authority the ability to borrow another $110 million for the project. Of that, $88 million would have gone to pay off outstanding claims and the rest would have been for contingencies.
That would have brought the total construction cost of the project to $342 million, Brown said.
The bill, though, has floundered in the Senate Appropriations and Revenue Committee.
Fitch Ratings said in a report this week that the failure of the legislature to authorize funding for the settlement through SB 223 or another mechanism “threatens the viability of the settlement agreement and the project itself.”
The Bevin Administration has warned that not making good on the contract to build the broadband network would hurt the state, leaving taxpayers potentially facing hundreds of millions in costs, but with no network to show for it and no revenue from it to pay those costs.
“Why wouldn’t we spend an extra $88 million and complete the network?” Brown said.
However, McDaniel, said he’s not convinced there would be adequate revenue from the network to justify the extra spending.
“I’ve seen numbers from this project time and time again that don’t come to fruition,” McDaniel said.
Critics of Kentucky Wired have argued state government should not be involved in providing a service that the private sector provides, though supporters say public backing is the only way to extend broadband availability to every corner of the state.
Brown said there’s no reason now to debate whether the state should have embarked on the deal in 2015 because the state is obligated.
In addition to not approving legislation to fund the settlement, the legislature did not set aside money in the General Fund to make payments the state owes Macquarie for operating the network and repaying the bonds, called availability payments.
However, legislators designated money in the state’s budget reserve fund, commonly called the rainy day fund, to make the payments to Macquarie.
Fitch said it considers that a “solid financial commitment” to the project.
Bevin noted a concern over the use of that reserve fund to pay known, on-going costs such as the broadband network, rather than keeping it intact for emergencies or unforeseen shortfalls.
That was one reason he gave in vetoing the budget.
The administration would like to see the legislature designate funding for the Kentucky Wired payments from the General Fund and approve the settlement funding outlined in SB 223, Brown said.
Friday and Saturday are the last two days of this year’s law-making session. McDaniel said he did not think legislators will approve money for the settlement.
“I’m not going to put more good Kentucky taxpayer dollars at risk,” he said.