Private activity bonds for broadband: A potential new solution

The $1.2 trillion Infrastructure Investment and Jobs Act President Biden signed into law in November contains several worthy funding programs for broadband infrastructure.

For example, the IIJA sets aside over $42 billion for states to build local broadband networks in their unserved and underserved communities, many of them in rural areas. It also allocates $14 billion to continue to subsidize provision of broadband service to low-income residents; in this way inner city students can do their homework on their connected laptops at home, and elderly patients in rural areas can visit virtually with their doctors.

Clearly, the IIJA has several well-known broadband funding programs. But one, the $600 million broadband private activity bond program, has often been overlooked in discussions of funding for rural broadband.

John Reardon and Matthias Edrich, Kutak Rock, LLP

Generally speaking, private activity bonds, or PABs, allow private service providers to borrow funds from bond investors at tax-exempt rates to finance “qualified broadband projects” as defined in the new law. While PABs are issued by a governmental entity, the proceeds can be loaned to private service providers who would ultimately be liable for repayment of the PABs.

A qualified broadband project is one in which the PAB applicant provides broadband service in an eligible census block group area that has speeds of not less than 100 megabits per second (mbps) for downloads and 20 mbps for uploads. In addition, once the PAB applicant finishes its buildout, it must be able to show that 90% of the residences and businesses that are able to receive the applicant’s new signal could not have received access to slower 25/3 mbps broadband before the PAB was issued.

Broadband PABs are a good idea overall, but the broadband PAB program has a few nuances to understand.

First, a would-be borrower under the broadband PAB program must determine how many residences in its target area already have access to basic broadband service. This does not mean the residents subscribe to the service, it just means they possibly could get it. And that basic broadband service is not defined to include either the cellular service or the satellite service that so many people in rural areas rely upon today for their texts, emails, social media, and even entertainment.

Instead, the basic broadband service which the Infrastructure Act requires is defined as “fixed terrestrial service,” which is internet service coming from an incumbent like Comcast or Fios, or even a local wireless internet service provider, or WISP.

A broadband PAB applicant must first ascertain the universe of fixed terrestrial wireless services in a given “census block” area. This is another nuance where unwitting providers could be led astray. Currently the FCC has a map that shows who provides what service in each “census block,” but the map does not reveal how many homes are capable of getting that service, and depends on self-reporting by providers and, in some cases, has been found to be lacking in accuracy. The FCC is updating its broadband map for census blocks, and we expect a better version to be released in the first half of 2022.

If a prospective PAB borrower determines that there is a potentially viable qualified broadband project in an underserved area, it can then approach the appropriate governmental entity about issuing PABs. To be potentially viable, an underserved area is a census block area where 50% or more of residents do not have access to at least 25/3 mbps broadband from a non-satellite, non-cellular company.

Before issuing any PABs, the governmental issuer must provide 90 days’ notice to all providers of service in the area of the project telling them the scope of the project. While not clearly stated in the Infrastructure Act, presumably the recipient of this letter has 90 days to respond to the notice, and either (1) verify that the PAB applicant is correct: the incumbent company has little or no service and does not plan to offer service in that area, or (2) inform the governmental issuer that in fact the incumbent does offer service, so that 50% of the intended area could get it if they wanted it.

Once the PAB applicant completes its buildout, it must show that 90% of the residents and businesses in the eligible area that now get 100/20 mbps could not get 25/3 mbps service before the buildout.

The Infrastructure Act is not clear concerning what would happen if the PAB borrower built a 100/20 mbps network only to have 89% of the residences and businesses get better service, rather than 90% of them. Furthermore, the current statutory provisions do not anticipate any sort of remedial actions to correct for post-issuance violations such as unexpected decreases in service speeds.

We suggest that documentation of coverage areas before and after construction will be key and require involvement by reliable telecom engineers and experienced broadband and bond attorneys to avoid confusion or challenges later on and to properly structure transaction documents to address post-issuance non-compliance risks that may impact the tax-exempt status of the PAB. Close attention should also be given to any future regulatory developments by the Treasury Department — future guidance clarifying the provisions relating to broadband bonds is expected.

Finally, a significant limitation to the broadband PAB program is the availability of volume cap in any given year. Volume cap is a federal annual limit, allocated to each state, on the issuance of tax-exempt bonds such as broadband PABs. Volume cap is shared among many other categories of bonds, including bonds for housing and certain industrial facilities. In recent years and in certain states, volume cap has become scarce, in part because of the high demand for tax-exempt housing bonds that can use up significant amounts of volume cap. To make the broadband PAB program more useful, Congress should have increased the annual volume cap limits as part of the Infrastructure Act. Unfortunately, no such increase was provided.

In sum, the broadband PAB program is a potentially valuable tool for rural communities and the commercial entities that wish to serve them. Further regulatory guidance is needed for this program, and understanding the nuances of the rules is an important factor before planting a stake in the ground and putting a transmitter on the air.

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