Don't rush out debt for new technologies, issuers are told.

MINNEAPOLIS -- Local governments should think twice before using tax-exempt bonds to finance laying fiber-optic cables or other types of new technology to get them on the information superhighway, a rating agency official said last week.

The biggest drawback to using bonds for such projects is that today's cutting edge technology may be tomorrow's obsolete way of operating, said Marie Pisecki, a vice president with Moody's Investors Service.

"I think you want to do as much pay-as-you-go as you can, because you don't want to be stuck having taxpayers pay for something that's no longer being used. There's a real problem with that," Pisecki told participants in the National League of Cities' annual conference Saturday.

"Because the obsolescence issue is a real one, you want to limit what you do to what you can afford to do with cash, or what you can afford to do with a modest amount of bonding," she said.

Robert Bartlett, the mayor of Monrovia, Calif., said local governments must grapple with the question of how to fund such projects because telecommunications are becoming the "new infrastructure," compared with roads, bridges, and water systems, which he termed the "old infrastructure."

"The new infrastructure is the rapid deployment of telecommunications services," Bartlett said. "I don't just mean copper wire for voice and coaxial cable for video. I mean highspeed, high-capacity networks commonly referred to as broad band networks, capable of integrating voice, data, and video services along a single wire and sometimes without wire altogether."

Bartlett said he agreed with Pisecki that local governments should proceed cautiously with bond financing if they decide to wire themselves. "I don't think our citizens would like us to roll the dice, so to speak, and invest in an infrastructure that does look like it has a fairly short life span," he said.

There are other issues a city would have to wrestle with before issuing bonds for a telecommunications project, Pisecki said.

One is whether the city can afford the long-term maintenance costs for the telecommunications infrastructure it wants to build, she said. "Unless you lock in long-term contracts, people that you think are going to pay for this with user fees may in fact walk away from it and you're going to be stuck financing this out of your operating budget," she said.

Another concern is that a city, in developing telecommunications infrastructure to lure new businesses and residents, may end up doing just the opposite.

"As you raise the overall cost of living in your community, you may dampen economic development rather than encourage economic development, because it becomes a high-cost community," Pisecki said.

Another obstacle to using tax-exempt financing for telecommunications is the private-use problem, Pisecki said in an interview following her speech. Such projects often have a large private use component, which makes the use of bonds difficult because the tax law prohibits more than 10% of the proceeds of a public-purpose issue from being used to benefit private business. If that is the case, the issue is deemed a taxable private-activity bond.

"Taxability is problematic," Pisecki said.

Pisecki also said she has not yet encountered many local governments that have issued bonds for straight telecommunications projects. Some cities may sell bonds for such projects, but that use is not readily apparent because it is probably buried in proceeds for a larger general obligation issue.

Aside from financing questions, Bartlett said another issue that local governments will have to confront is regulatory control. Cities and towns need to be able to regulate companies that build or do business using telecommunications infrastructure, for two reasons: Governments have a duty to make sure services provided on the information superhighway are equally accessible to all citizens, and they need to enforce standards for customer service.

But if local governments do not step in and make sure they have that control now, they may lose it in the future, Bartlett said.

"As the technology moves forward, we stand to lose almost total regulatory control over the signals and what is happening in our own individual communities," he said.

"They're going to be beaming directly to our constituents, and unless we [make sure we are] receiving some compensation and some regulatory oversight, I think we're heading toward some very, very stormy clouds," he said.

Last year in fact, Congress came close to passing legislation that would have stripped local governments of the right to exert that control. In a speech Friday to the league, President Clinton said he has second throughts about the wisdom of the measure, given its effect on cities.

The legislation, which is likely to come up again next year, "was not an intended intrusion on the right of local government, but rather, the desire to build a true information superhighway with very few barriers to access all across America. There may be an argument for not doing that," Clinton said, adding that he wants to meet with local leaders "early, early next year so we can hear your concern about that."

Pisecki, meanwhile, cautioned local governments against relying on any regulatory control they are exerting now, such as requiring payment to the city in return for operating rights, to finance telecommunications projects over the long term.

Pisecki said that in other areas, most notably solid waste management and electric power, local governments have lost regulatory control. "There is a movement clearly away from regulations," she said. "There's no reason to think it wouldn't fall away" in the telecommunications area.

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