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Tuesday
Sep272011

New Mexico Study Depicts Life without USF

“Substantial” Economic Impact of Eliminating USF: Job, Income and Tax Loss in NM

The New Mexico Exchange Carriers Group (NMECG) released an economic impact study to illustrate how jobs, income and tax revenue in the state would be harmed by drastic changes to the Universal Service Fund. Earlier this summer, a similar study was conducted in Kansas, which also concluded that eliminating USF support for RLECs would have a ripple effect of negative consequences in the state. The NMECG study, conducted by New Mexico State University’s Arrowhead Center, found that eliminating $35.4m in USF would ultimately result in the loss of 3,146 jobs, $200.3m in personal income and $13.6m in tax revenue over a ten year period (2012-2021). According to NMECG, “the estimated impacts are substantial,” and would most significantly hurt rural areas of the state.

NMECG provided some background and demographic information about its 11 RLEC members—these companies have 31,542 access lines covering 80,281 square miles. The NM RLECs have deployed 5,000 miles of fiber, employ 518 people and pay $23.5m in wages annually. 90% of their lines are broadband-capable, and they cover an average of 1.8 access lines per square mile. NMECG comments that “significant rural to urban migration has been a pattern in New Mexico (and nationally) since the early part of the 20th century,” and “New Mexico’s non-metropolitan counties generally exhibit a stagnant or declining population base with low income and high poverty rates.” Population density across the state ranges from 0.5 people per square mile in Catron County to 567 people per square mile in Bernalillo County. Unemployment overall in New Mexico, at 8.4%, is lower than the national rate, but some rural counties have very high unemployment (18.7% in Luna County and 15.7% in Mora County).

The study utilized economic impact analysis “to measure the net change in economic activity in a given geographic area that results from an exogenous change in economic activity,” in this case, the elimination of USF support to 11 RLECs. NMECG explains, “The main idea behind economic impact analysis is that one more (less) dollar spent in a local or regional economy results in greater than one dollar in economic activity in the area.” The authors used an input-output model, REMI PI+, “designed to capture the effects of a change in one industry on other industries and households.”

The $34.5m in USF support makes up about 32% of the NM RLEC’s revenue, and “the estimation approach taken in this report reduces the USF revenue source by the reported amount beginning in calendar year 2012.” NMECG anticipates that 99 telecommunications industry and 261 private sector jobs would be lost in the first year alone. In the first five-year period (2012-2016), a total of 452 telecommunications and 1,315 private sector jobs would be eliminated. By the second five-year period (2017-2021), the rate of job loss would be slightly less as a result of “industry adjustment to the loss of USF funds.” At the end of the ten year period, NMECG estimates that 805 telecommunications jobs would be lost at a rate of about 80 jobs per year, and 2,400 other private sector jobs would be lost.

I think it is interesting to note that the NM RLECs only employ 518 people, but the study estimates that 805 telecommunications industry jobs would be lost over 10 years. They do not explain if this means that literally every NM RLEC job will vanish (and then some), or if the “telecommunications jobs” at risk in the state extend to non-RLEC jobs in manufacturing, construction, customer support, wireless retail, etc. The study also does not explain if, or how, these lost jobs could be replaced within the state’s broader telecommunications technology and information communications industry. Furthermore, the study presumes that USF funds would be eliminated completely, without any replacement mechanism for lost access revenue or CAF funding for broadband. Although the RLEC industry is anticipating reductions to USF support, it is quite a stretch to assume that all USF funding will disappear abruptly in the next year, and not be replaced at all over the next 10 years. Perhaps the NMECG was just trying to prepare for the worst possible outcome of USF reform?

Regardless of the input used in this economic model, it is still important to understand how USF supports more than just telephone lines in high cost areas, and the NMECG study definitely depicts a dire situation in the state if USF were to vanish. A similar June 2011 study by Wichita State University, Kansas Rural Local Exchange Carriers: Assessing the Impact of the National Broadband Plan concluded that the FCC’s proposed modifications to USF would result in annual funding reductions of $28.7m between 2012 and 2016 for a total of a $143.5m decrease in USF for 35 RLECs. The Kansas study explains, “The proposed loss of over $143m of USF will require Kansas RLECs to dramatically change their operations and likely cause defaults on loan obligations owed to the federal government and other lending institutions.” The Kansas RLECs would lose an estimated 140 jobs and $29m in wages, and the total state impact would be 367 jobs and over $51m in wages by 2016.

The results of this study also signal that it might not be a bad idea for RLECs to start looking for other sources of revenue to make up for that 30% + chunk derived from USF and ICC. Even if USF is not eliminated completely, reductions are almost guaranteed especially in the access revenue component if access rates are reduced to a uniform $0.0007 rate, which is likely. Even with the best possible outcome in the new USF rules, RLECs should expect to have to make cutbacks in the next few years.  Planning, preparation and a forward-looking mentality definitely wouldn’t hurt at this point.

The NMECG study, The Potential Economic Impact of the National Broadband Plan on the New Mexico Exchange Carriers Group, is available here.

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