WASHINGTON -- Cities and towns are trying to get on the information superhighway, and some may use tax-exempt bonds to pay their toll, according to local officials and lobbyists.
The sources said many local governments have decided not to wait for private companies to wire their areas for cable television and other telecommunications services; instead, they are building the necessary infrastructure themselves.
"There are a number of attempts across the country to do that," said David Jones, a lobbyist for the League of California Cities. "Some cities have looked into the future and seen there is potentially going to be an information underclass created, and their role as government and public servants is to see that that doesn't happen."
Frank Shafroth; the chief lobbyist for the National League of Cities, said he does not know how many localities are wiring themselves, but he believes many smaller towns may take the plunge because it may be hard to find private companies willing to spend the money to do so in such small markets.
"They think that no phone company or cable company is going to be really excited about making a huge capital investment to wire some rural area," said Shafroth, the director of policy and federal relations for the league.
Another reason city officials are interested in setting, up cable systems is "they think it's a strategic seller" that will lure businesses to their areas, Shafroth said. He cited La Grange, Ga., as an example.
Government officials in La Grange, which has a population of about 26,000, used city revenues recently to lay 18 miles of cable in the south side of the city covering mainly the business community.
La Grange is not providing services via the cable, but is leasing its capacity to private companies, said Joseph Maltese, the city's director of community and economic development. He said that what the city is doing is analogous to building a system of water pipelines and leasing the capacity to provide the water to private companies.
The city wants to expand its reach into the residential area, and so is considering acquiring the infrastructure of the local cable television operation, which has already wired those sections. Maltese said the city may issue tax-exempt bonds to make the purchase.
La Grange is building or acquiring the bare bones of a telecommunications network because "we ultimately see that La Grange will have to have a communications connection with each of our customers" for a variety of services, Maltese said. For example, with the proper equipment available, the technology exists for electric and gas companies to perform remote meter readings of utility boxes in homes.
"We don't want to be a service provider, we don't want to be in the telephone business, but we do want to have that pipeline for voice, data, or video available for business, industry, and residential uses," Maltese said.
Larger cities are also exploring the idea of building telecommunications infrastructure. Palo Alto, Calif., for example, is considering creating a communications utility, said Diana Neff, the city's director of information resources.
If the city were to go ahead with such a project, tax-exempt bonds would be an option the city would consider to finance the utility, Neff said.
Jones said he believes many cities would probably turn to tax-exempt financing to finance telecommunications projects.
"I think bonds may be a very viable approach," Jones said. "If you look at telecommunications as an infrastructure element, it would be like financing anything else" in the infrastructure area, said Jones.
But several bond lawyers said telecommunications projects could pose the same tax law problems that now exist for other types of infrastructure.
The primary obstacle to using tax-exempts would be the so-called 10% private-use test under federal law, which states that no more than 10% of the proceeds of a public-purpose tax-exempt bond issue may be used for the benefit of private business.
A city would have no difficulty issuing public-purpose bonds if it planned to own and operate a communications facility, lawyers said. But in many cases, cities may want to lease portions of their systems to private businesses, and that is where the tax law problems would crop up.
For many types of communications systems "you would have to have some kind of lease," said a Washington lawyer. In that case, "private-use issues would be squarely presented."