A Success Story Without the Success

State Housing Authority No Model for Dubious New Broadband Scheme

To skeptics who question the wisdom of his proposal for state control of broadband deployment, Gov. John Engler offers as validation the success of Michigan's housing development program. But the similarities are slim and the benefits disputed.     

Whether government has a constructive role to play in the provision of Internet services is the subject of a hearing today before the Senate Energy and Technology Committee. The governor is pressing lawmakers for a hefty tax on telephone and cable lines with which to subsidize new broadband deployment. Also pending is legislation that would authorize the state to own and operate portions of the fiber-optic network.

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But that is a substantially different approach than the "model" repeatedly touted by the governor by way of a warranty. About the only resemblance between Mr. Engler's broadband scheme and the structure of the Michigan State Housing Development Authority (or MSHDA) is the misplaced notion underlying both that private investors have somehow failed to meet consumer demand.

The Legislature created MSHDA in 1966 to subsidize housing for low-income and moderate-income families, the elderly and handicapped. But Michigan has long ranked in the top-tier of states for home ownership, just as the state ranks a respectable 10th in the nation for the number of high-speed Internet lines.

MSHDA does not directly control the housing stock, as opposed to the governor's proposed state management of  broadband lines. Rather, the authority serves as the portal for the billions of dollars in federal housing assistance distributed annually among the states. Along with grants to various housing interests, MSHDA floats bonds to raise capital with which to finance cut-rate mortgages for individuals and developers.

The high credit rating of the state reduces the cost of borrowing, and a federal tax exemption makes the MSHDA bonds particularly attractive to investors.

Great care must be taken by MSHDA officials to avoid lending to risky projects - the failure of which could damage the state's credit rating and thus raise the cost of borrowing. Consequently, the housing subsidies are largely awarded to projects that are just as likely to draw the interest of private investors.

In contrast to the housing program, the risk of default for broadband ventures is likely much greater. A slew of private telecom firms already have lost billions of dollars by overestimating the demand for high-speed Internet access. And so dynamic is the current state of technology that the network favored by the state could very well become obsolete before construction is even completed.

Moreover, there is no assurance that the state will be granted a federal exemption for tax-free broadband bonds as it enjoys for the housing program. Lacking both the tax and credit leverage of the state, there is ample reason to question why lawmakers would authorize Lansing to compete unfairly against private lenders as well as to indulge in yet more corporate welfare.  

Even with its financial and regulatory advantages, MSHDA is hardly a model of efficiency. In 2000, for example, the authority reportedly spent $17 million on salaries and benefits for the equivalent of 250 full-time staff, and an additional $4.4 million on consultants. But less than 23 percent of that costly manpower was actually related to financing new housing. The authority's regulatory bureaucracy consumed the bulk.

By comparison, a federal housing tax credit program has financed seven times the housing volume with only a dozen staff.

MSHDA undoubtedly has helped some families who might otherwise have been judged unqualified by private mortgage lenders to purchase homes. But the program can hardly be considered a rousing success. Michigan's rate of home ownership has actually fallen since MSHDA was enacted, meaning that fewer families own their homes relative to the supply of housing stock. (The state's home vacancy rate, in fact, is the highest in the Midwest, according to U.S. Census figures.) Rental vacancy rates, meanwhile, have risen, indicating overcapacity. And while myriad factors affect the supply of and demand for housing, the current rates here belie the very premise of the MSHDA program.  

That Gov. Engler wants Michigan to optimize the many advantages of broadband is laudable. And to the extent that lawmakers reduce the tax and regulatory obstacles inhibiting broadband deployment, his vision will be realized. But Michigan will not benefit if lawmakers ignore the potential costs and consequences of the governor's broadband proposal.

"There is ample reason to question why lawmakers would authorize Lansing to compete unfairly against private lenders as well as to indulge in yet more corporate welfare."