Kentucky Wired broadband project faces financial shortfall, Bevin administration says

FRANKFORT, Ky. (WDRB) – Kentucky Wired, the ambitious statewide broadband project begun by former Gov. Steve Beshear, faces a 39 percent shortfall in annual revenue needed to make bond payments because of a “tainted” procurement process at the tail end of the Beshear’s tenure, officials with Gov. Matt Bevin’s administration said Thursday.

The Bevin administration is moving forward with the broadband project despite a gap of about $11 million a year for which there is no apparent solution, said William Landrum, secretary of the Finance and Administration Cabinet.

“I am continuing to support the program as it stands currently,” Landrum told reporters Thursday. “…My intent is simply to take care of the taxpayers of Kentucky; it’s simply to ensure that the taxpayers’ wallets are not put at risk.”

The project involves a number of private companies such as Macquarie Capital of Australia that will share in the cost and risks associated with building more than 3,000 miles of fiber-optic lines throughout the state between now and 2018. It's expected to cost $324 million.

The state-owned broadband network is meant to bring faster connections at a lower cost and help connect under-served areas like eastern Kentucky.

Landrum outlined the challenge the state faces at a meeting of the Kentucky Communications Network Authority, a state agency Beshear created last year to oversee the project.

Landrum said the state sold $289 million worth of bonds to finance the broadband project last September with the understanding that about $11 million in federal money flowing to Kentucky's 173 school districts annually could serve as a guaranteed source of revenue for the project.

The state is required to make annual "availability payments" of about $28.5 million to the private partners in the project, an amount that escalates over time, deputy state budget director John Hicks said at Thursday’s meeting.

The bonds were sold with the understanding that the federal money, which comes from the FCC’s E-Rate program, could be used for part of that $28.5 million annual obligation, Landrum said. That’s what was “told to the legislators (and) to the bondholders,” he said.

But telecommunications providers, primarily AT&T, currently receive the money through a long-term contract awarded by the state.

The financing model for Kentucky Wired assumed that the state-controlled Kentucky Communications Network Authority would win the K-12 schools network contract, which is awarded by the Finance Cabinet, Landrum said.

Shortly after the bonds were sold, Steve Rucker, then deputy secretary of Beshear’s finance cabinet, became executive director of the Communications Network Authority, Landrum said.

But after the finance cabinet re-bid the contract in October, AT&T issued a formal protest letter saying the state’s own Communications Network Authority had an unfair advantage. AT&T cited, in part, Rucker’s earlier role in the cabinet charged with awarding the contract.

A little more than a week before Beshear left office, the finance cabinet abandoned the bid process and dismissed AT&T’s protest as moot, Landrum said.

Rucker, who had been scheduled to speak at Thursday’s meeting, has submitted his resignation for health reasons, said Scott Brinkman, the executive secretary of Bevin’s cabinet. Rucker was not able to be reached Thursday.

Now the state is in a bind, Landrum said, because any future procurement process on which the state-controlled network authority is a bidder would likely result in a similar protest and perhaps a lawsuit.

It will be “very difficult” for one arm of state government to award the schools connectivity contract to another arm of the state government in a truly competitive process, Landrum told reporters following the meeting.

Yet, the state was counting on the E-Rate money to keep up with the Kentucky Wired obligations, he said.

“The resulting absence of the K-12 revenue stream, I believe, has put taxpayers at risk,” Landrum said during the meeting.

Landrum would not directly answer a reporter’s question about whether the shortfall puts the broadband project’s future in jeopardy. He said his immediate priority is to cure the shortfall.

“That’s what I will be dealing with over the next several months, trying to figure out the best way forward,” he said.

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