Wired to fail
How a little known agency mishandled several billion dollars of stimulus money trying to expand broadband coverage to rural communities.
7/28/15 5:15 AM EDT
Updated 7/28/15 5:32 PM EDT
The administrator of the little-known Rural Utilities Service had just finished announcing $3.5 billion in aid to expand high-speed Internet access to the hardest-to-reach areas of the country. The awards, part of the federal stimulus passed by Congress two years earlier, had been crucial to President Barack Obama’s blueprint for a recovery that would ensure farmers and remote businesses could compete in an increasingly global economy.
“These investments in broadband will connect nearly 7 million rural Americans,” Adelstein pledged in a report to Congress, “along with more than 360,000 businesses and more than 30,000 critical community institutions like schools, health care facilities and public safety agencies, to new or improved service.”
Judged against the agency’s 80-year track record, those numbers didn’t seem unrealistically ambitious. During the Great Depression, after all, RUS had loaned out millions of dollars to string electric lines to distant farms and small towns in parts of the country that private companies refused to serve — a bold and calculated risk that had transformed America in a single generation.
But more recently, RUS has strayed from its rural mission. Even the agency’s staunchest defenders in Congress have learned: When it came to funding broadband projects, RUS never found its footing in the digital age.
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Sometimes, RUS funded high-speed Internet in well-wired population centers. Sometimes, it chose not to make any loans at all. Sometimes, RUS broadband projects stumbled, or failed for want of proper management; loans went delinquent and some borrowers defaulted. Yet despite years of costly missteps that left millions of Americans stranded on the wrong side of the digital divide, a stable of friendly lawmakers swallowed their doubts about RUS and made sure the politically protected agency wasn’t cut out of the historic stimulus effort.
It should come as little surprise, then, that four years and four directors later, RUS has failed to deliver on Adelstein’s promise.
A POLITICO investigation has found that roughly half of the nearly 300 projects RUS approved as part of the 2009 Recovery Act have not yet drawn down the full amounts they were awarded. All RUS-funded infrastructure projects were supposed to have completed construction by the end of June, but the agency has declined to say whether these rural networks have been completed. More than 40 of the projects RUS initially approved never got started at all, raising questions about how RUS screened its applicants and made its decisions in the first place.
But a bigger, more critical deadline looms for those broadband projects still underway: If these networks do not draw all their cash by the end of September, they will have to forfeit what remains. In other words, they may altogether squander as much as $277 million in still-untapped federal funds, which can’t be spent elsewhere in other neglected rural communities.
And either way, scores of rural residents who should have benefited from better Internet access — a utility that many consider as essential as electricity — might continue to lack access to the sort of reliable, high-speed service that is common in America’s cities. Even RUS admits it’s not going to provide better service to the 7 million residents it once touted; instead, the number is in the hundreds of thousands.
The checkered performance of RUS offers an all-too-familiar story of an obscure federal agency that has grown despite documented failures, thanks in large part to its political patrons in Congress. The massive infusion of stimulus money, which required RUS to disperse record sums faster than it ever had before, further exposed its weaknesses — troubles that in many ways remain unaddressed, despite repeated warnings — even as RUS continues lending.
“We are left with a program that spent $3 billion,” Mark Goldstein, an investigator at the Government Accountability Office, told POLITICO, “and we really don’t know what became of it.”
It took a bigger economic crisis, more than eight decades earlier, to bring RUS into existence. The agency, known then as the Rural Electrification Administration, had been a centerpiece in President Franklin Delano Roosevelt’s historic New Deal. But the effort was controversial from the start. Private companies derided the government’s investments in rural energy as “Bolshevik” and “un-American,” but within several years, hundreds of public utilities were operating, and within 20 years, almost all U.S. farms had electricity. The model was so successful that REA shifted shortly after World War II to providing low-interest loans for rural telephone cooperatives.
Dwight D. Eisenhower entered the White House vowing to abolish REA, which he derided as “creeping socialism.” Within two years, however, even he was extolling the agency’s performance, praising its “great advances for rural America.” The program grew under Presidents John F. Kennedy and Lyndon B. Johnson; the latter in 1937 had led the formation of an electricity cooperative in the Texas Hill country. Richard M. Nixon again tried to kill it, arguing that the program had outgrown its usefulness and at that time served only “country clubs and dilettantes.” But an outraged farm bloc in Congress, led by senators such as George McGovern of South Dakota and Hubert Humphrey of Minnesota, forced Nixon to back down.
By the end of the 20th century, REA’s original electricity mission was more or less accomplished. And in 1994, REA and another agriculture program that had backed water and sewer projects were combined to form the Rural Utilities Service. Yet it was late in the Clinton administration that the agency’s portfolio expanded in a way that would be as dramatic — and ultimately, as controversial — as when it began.
Nations like Japan and South Korea had quickly achieved nearly universal and affordable broadband coverage, but the United States was lagging. “Internet access ought to be just as likely as telephone access,” President Bill Clinton said in April 2000. That year, Clinton’s budget included $102 million for a pilot broadband program to be administered by RUS, building on its previous telecom work.
Bolstered by a 2001 Brookings Institution study that estimated widespread adoption of basic broadband could add $500 billion to the U.S. economy, Congress approved permanent funding for the program. In the eyes of allies like Montana Sen. Conrad Burns, robust, widespread Internet access “would be as important to the national destiny as the railroads in the 19th century. … Universal broadband should be the national priority … (the) same way as putting a man on the moon was.” And low-interest federal loans, he believed, were the best way to do it. “The RUS telecom program has never issued a bad loan in over 50 years,” Burns said. “The government has actually made money off of those loans.”
In 2004, President George W. Bush proposed that broadband coverage should be universally available within three years. His support touched a nerve with Iowa’s Sen. Tom Harkin, a powerful Democrat who knew that one of the government’s primary mechanisms for meeting that goal was not up to the task. At a confirmation hearing for James Andrew, who eventually would take over RUS under Bush, Harkin recalled an encounter with the president in which he confided that universal broadband would never happen if RUS didn’t start spending money.
“We put in $2 billion (to the farm bill) to do that,” the senator grumbled to Bush, “but the Department of Agriculture has been dragging its feet.” By making onerous demands on its applicants and keeping them waiting months for approval, Harkin said RUS had managed to leave $1.6 billion on the table.
“I don’t want to sound too cynical,” Harkin told Andrew, “but it almost sounds like the cable companies and the big phone companies have gotten to somebody and said, ‘We don’t want this program to work.’”
Harkin then delivered to Andrew a brief sermon on the mission of RUS: “We were not risk averse when we put telephone lines out to farmsteads and our small towns in America. We knew there was risk in doing that, but we managed it. RUS manages risk. And that is what I am asking in broadband, manage risk. Don’t be so risk averse that you say, ‘We cannot give a loan out there because we want to make 100 percent certain that the company we give it to will not default and will not fail. Some of them will …”
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President Clinton proposed the first dramatic expansion of the Rural Utilities Service to include broadband access. RUS was criticized repeatedly, however, for its management of loans and grants for broadband projects.
Hilda Gay Legg
TENURE: George W. Bush appointee, 2001 to 2005.
QUALIFICATIONS : Legg was president and CEO of the Center for Rural Development, which worked in Kentucky on telecommunications.
WHERE IS SHE NOW? Legg launched her own firm, Legg Strategies, helping others navigate the government’s thicket of telecom laws. She’s since become a consultant with Wiley Rein, and she has worked with clients seeking to obtain
“The challenge for a federal agency to take a piece of legislation written and approved by 535 members of Congress and interpret it into regulations … [then] achieve all the intentions of the legislation, and yet be a good solid financial and engineering loan, is not an easy task,” she said in a recent interview.
TENURE: Bush appointee. Served from September 2005 until Barack Obama took office in 2009.
QUALIFICATIONS: A Georgia native, Andrew spent 16 years representing his home state, then served as board president of the National Rural Electric Cooperative Association. (Andrew died in April.)
“Since I was sworn in as administrator, I have been working with our staff, looking at both the process and the structure of the broadband program,” he told Congress in May 2006. “With this review of all aspects of the broadband program, we will make the changes we can to make this program more user friendly while protecting the taxpayer investment in broadband deployment.”
TENURE: Obama appointee. Served from July 2009 to September 2012.
QUALIFICATIONS: Adelstein, a Democrat, served on the Federal Communications Commission as a commissioner from 2002 to 2009. Before that, he served as a Senate staffer, including a stint as a top aide to former Senate Majority Leader Tom Daschle.
WHERE IS HE NOW? Adelstein in 2012 became president of PCIA — the Wireless Infrastructure Association, a trade group.
“I am pleased to report that the program is working, with projects that are on schedule, on track and creating jobs in tribal communities and across rural America,” Adelstein told a Senate committee in June 2012.
TENURE: Padalino served as RUS acting administrator from September 2012 until May 2013, when he was named administrator. He departed in August 2014.
QUALIFICATIONS: Padalino arrived at USDA in 2009 and served in a number of leadership positions, including acting principal deputy counsel for the agency’s Office of General Counsel and chief of staff for Rural Development, which houses RUS.
WHERE IS HE NOW? After leaving USDA, Padalino returned to Kemp Smith, the Texas-based law firm where he practiced before his tenure at USDA.
“ There will be a default rate. There will be a handful of projects fully completed, as they were proposed,” he told POLITICO in April. “There will be projects that look fine on paper today, and in a couple of years, something will happen. That’s just the nature of the business.”
TENURE: Obama appointee. McBride became the 19th administrator of RUS in March 2015.
QUALIFICATIONS: McBride previously served as a senior staff member on the Senate Agriculture Committee for then-Chairwoman Debbie Stabenow.
“Because of the strengthened risk management practices instituted by USDA, there has not been a single Recovery Act project default to date,” he said in a statement.
Image credits: Campbellsville University Photo by Christina Kern, Jefferson Energy Cooperative, AP and Getty
Andrew agreed with the senator, but there were plenty of internal problems plaguing the embattled agency, as a 2005 inspector general’s report revealed.
The spirit of the law always had been for RUS to target its broadband aid to the most remote, neglected rural towns. In the earliest years of the broadband program, administered chiefly at the time by Bush-appointee Hilda Legg, RUS seemed to believe it had a much broader mandate — and it wrote multiple sets of rules that permitted it to provide aid to “any definable tract of land where fewer than 20,000 people live.” That metric essentially allowed areas under development or near larger, suburban areas to receive federal cash.
In the end, the watchdog’s probe found, “64 communities near large cities received loans and grants totaling $103.4 million.” These networks, in a sense, were easier to build: They were located in denser communities, where a lower price tag for buildout and a higher demand for faster service made it easier to recover costs. But they weren’t in the rural, unserved areas where many in Congress wanted RUS to focus its attention.
Federal investigators also calculated that RUS had awarded more than $137 million in loans, despite incomplete or inaccurate applications. About $30 million of its loans “[were] in default due to inadequate servicing,” largely because the agency hadn’t developed strong oversight guidelines for its earliest loans — meaning the cash wasn’t “timely and thoroughly monitored.” And another $6.8 million in canceled broadband loans “was not put to use in a timely fashion and was therefore unavailable for future funding.”
With the election of Obama, broadband expansion gained another prominent champion, one who had been determined to use the federal stimulus to boost Internet investments “so that a small business in a rural town,” he said in a January 2009 speech, “can connect and compete with their counterparts anywhere in the world.”
Fiscal conservatives, already fighting what would become the $800 billion stimulus package, zeroed in on the broadband program, resurrecting the decades-old complaint that it was an improper intrusion by the federal government into the free market. But Harkin, and other prominent lawmakers from farm states, ensured that RUS still received several billion dollars from the American Recovery and Reinvestment Act.
“They’ve been involved in loans and loan guarantees and things like that since 1949,” Harkin said at the time, “so they know how to do these things.”
Except, RUS didn’t. Miserly and risk averse at times — and unfocused and overly generous at others — the rural regulator arrived at its monumental stimulus task with more questions than answers.
The Obama administration insisted on funding “shovel-ready” projects, but the broadband networks RUS had been asked to support would require considerable time to design, obtain permits to bury lines or hang them from poles, and address environmental concerns. Complicating things, the agency would have to award its billions of dollars without fully knowing what parts of the country needed the most help. An effort to map the communities with the worst high-speed connections, another requirement of the Recovery Act, would take years to complete — a cart-before-the-horse approach that stimulus skeptics ridiculed.
“I just fought and fought because, if you’re going to spend the taxpayers’ money, then you should spend it where nobody else will spend it,” recalled Rep. Greg Walden (R-Ore.) in a recent interview. He offered an amendment during an early markup of the Recovery Act, but Democrats, who felt mapping would slow investment, voted it down.
To top it all, there was another catch: RUS would have to commit to spending all the money by Sept. 30, 2010, and make sure construction on those projects were “substantially complete” no later than two years after getting the funds. The drop-dead deadline would be Sept. 30, 2015: After that, any unspent money would be taken back.
The $66-million project known as Lake Connections(1) in northeast Minnesota is typical of the many broadband projects funded by the Rural Utilities Service that have had difficulty finishing. Lake Connections has encountered delays from harsh winter weather as well as opposition from RUS officials in Washington, who cut off funds in October for several months, forcing the project to commit local tax dollars. In May, a contractor buried fiber optic cable (2), secured fiber optic connections at a remote control unit (3) and connected the line to a residential customer (4). M. Scott Mahaskey/Politico photos
Already shaky on execution, RUS began to tackle its monumental stimulus workload without a full-time administrator. On March 20, 2009, Obama nominated Adelstein, then a Democratic commissioner at the Federal Communications Commission, to lead the rural agency. The nomination came about a month after the Recovery Act became law.
Adelstein, a South Dakotan by birth, could appreciate the agency’s mission. And while serving at the FCC, he had worked closely on a number of initiatives to improve broadband access in unserved rural towns. But some wondered whether Adelstein, a former top aide to Sen. Tom Daschle (D-S.D.), was suited for the immense challenge the stimulus presented. To at least one former official who worked on the law, Adelstein appeared to be “very much a Hill staffer put in the role of a banker, [who] approached it more like a Hill staffer than banker.”
But Adelstein at least knew the stakes. Not only had he worked on the 2002 law that helped usher in a new broadband era for RUS, he heard an earful about it from the lawmakers who decided the fate of his nomination. “I do not think we are ever going to see that kind of money again,” lamented Harkin at a July 2009 hearing, which paved the way for Adelstein’s confirmation that summer. By the time Adelstein took the reins, though, RUS had already started writing the rules for its first stimulus awards. Moreover, he had arrived on the heels of another inspector general investigation, which found — yet again — that RUS “continued to make loans to [broadband] providers in areas with pre-existing service,” while neglecting needier rural towns.
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