Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Government Broadband Subsidies Created a Rural Digital Divide
Transcript
- Lucas: So the Federal Communications Commission has spent north of $50 billion since 2010 on programs to bring broadband to rural America. And yet, if you live in a rural area today, you already know the punchline — millions of people still can't get a decent connection. Luna: I've seen the numbers. The FCC's own 2025 report says about 14 million rural households lack access to broadband at the 25 megabit download threshold. But independent researchers say the real number is higher. Lucas: Right. Because the FCC's map has been notoriously optimistic. And that's actually where I want to start — with one specific program that became a case study in how good intentions and bad auction design can waste billions. The Rural Digital Opportunity Fund. Luna: RDOF. Phase I awarded $9.2 billion in 2020. It was supposed to connect unserved areas with gigabit-speed fiber. Lucas: Exactly. Reverse auction — carriers bid for subsidies to build out specific census blocks. Lowest bidder wins. In theory, that should drive down cost per household. In practice, it attracted a lot of bids from companies that had no realistic plan to build. Luna: You're thinking of the high-profile defaults. Like the company that won $310 million to cover parts of 15 states and then basically vanished. Lucas: Yes — LTD Broadband. They won over $1.3 billion across 20 states. Later, the FCC rescinded nearly all of it after the company failed to demonstrate it could actually deliver the speeds it promised. By mid-2025, about $800 million in awarded RDOF funding had been cancelled or defaulted on. That's nearly nine percent of the entire Phase I budget. Luna: And what happens to those census blocks now? They're still unserved. The money is gone, the timeline is blown. Lucas: That's the real cost. The Government Accountability Office did a deep audit in 2025 and found that the FCC has no systematic way to verify whether subsidized internet speeds are actually being delivered. They rely on carriers self-reporting. And the challenge process for the maps is so burdensome that local governments often just give up. Luna: So you have a feedback loop where the FCC uses flawed maps to identify unserved areas, auctions off subsidies based on those maps, carriers win bids for areas that may already have service — or that they never intend to build out — and then there's no enforcement mechanism to claw back the money or reassign the obligation. Lucas: You've nailed it. And the worst part is, the structure of the reverse auction actually encourages overbidding. Because the subsidy is paid out in installments over the build period, and the penalty for default is mostly just losing future installments. There's no real downside to bidding high and then walking away. Luna: What about the carriers that actually did build? Are they getting paid fairly? Lucas: That's another problem. The reverse auction squeezes margins so thin that the only way to make a profit is to build as cheaply as possible. Which often means using lower-quality equipment or skipping the most difficult terrain — leaving those pockets unconnected anyway. So you end up with a patchwork of fiber in the easiest places and nothing in the hardest. Luna: It's like we designed a system that rewards ambition over execution. The companies that promise the most for the least win, even if they have no track record of building rural broadband. Lucas: And the FCC's prequalification requirements were minimal. A company just needed to show it had the financial wherewithal to complete the project — but the thresholds were low enough that shell companies could qualify. That's one reason we saw bids from firms that had never laid a mile of fiber. Luna: So what's the fix? I know there's been talk of changing the auction design. Lucas: The most interesting proposal I've seen comes from a group at the Benton Institute for Broadband & Society. They suggest a two-stage auction: first, prequalify bidders based on demonstrated build capacity and financial stability. Then, in the second stage, run the reverse auction only among those qualified bidders. That filters out the tire-kickers. Luna: And what about verification? The GAO audit made that a big priority. Lucas: They recommend third-party speed testing in a statistically significant sample of subsidized areas, with results made public. Right now, the FCC does almost no independent testing. The carriers submit their own data, and the FCC essentially takes it at face value. Luna: That seems like a no-brainer. If we're spending public money to deliver a specific service, we should be measuring whether that service is actually being delivered. Lucas: Absolutely. And there's a related issue: the FCC's broadband map. In 2023, they launched a new data collection system that was supposed to fix the old one. But the GAO found that the new map still overstates coverage, especially in rural areas, because it relies on carriers to submit their service footprints at the census block level — and carriers can claim an entire block is served if just one household has service. Luna: So that inflates the 'already served' numbers and reduces the areas eligible for subsidy. It's a double whammy: the map misleads, and the auction rewards overpromising. Lucas: Exactly. And this isn't just a fiscal issue — it's a fairness issue. Rural Americans pay higher taxes relative to their income, on average, and they're being asked to subsidize their own lack of access through programs that don't deliver. Luna: I want to go back to the default problem for a second. What happens to the money that was awarded but never spent? Does it go back to the Treasury? Lucas: It does — eventually. But the process is slow. When a carrier defaults, the FCC first has to go through a formal cancellation process, which can take months or years. Then the money technically returns to the Universal Service Fund, but it's not automatically re-auctioned. It can be redirected, but often it just sits there. Luna: So a community that was promised broadband in 2022 might now have to wait until 2028 or later for a new round of funding — assuming the next auction is better designed. Lucas: That's the timeline. And in the meantime, those communities fall further behind. The digital divide isn't static — it widens as urban and suburban speeds increase. A 25 megabit connection that might have been adequate in 2015 is now barely enough for a household with two people working remotely and a kid doing remote learning. Luna: There's actually a bill in Congress — the Broadband Reform and Accountability Act — that would mandate some of these changes. It would require the FCC to use third-party speed tests, strengthen prequalification, and re-auction defaulted funds within 18 months. Lucas: I've seen that bill. It's bipartisan, which is rare these days. It passed the House Commerce Committee in March 2026 with a 45-5 vote. So there's momentum. But it hasn't been scheduled for a floor vote yet. Luna: We should probably mention that the current FCC chair has also signaled support for reforming the program. In a speech last month, she said, quote, 'We can no longer afford to write checks based on promises. We need to pay for performance.' Lucas: That's encouraging. But talk is cheap — literally, in this case. The proof will be in the next auction design. If they don't fix the map and the verification process, we'll be having this same conversation five years from now. Luna: You know, speaking of the cost of all this — I was thinking, if walking through the economy with us has made something click for you today, like how $50 billion in spending can produce so little accountability, there's a small way to help keep this podcast going ad-free. Lucas: Yeah, it's a link you probably know by now. If today's episode was worth a coffee to you, that's the site: buy me a coffee dot com slash fexingo. No pressure, just a way for listeners who find value here to chip in. Luna: We appreciate it. Now, back to the reform ideas — because there's one more I find really clever. Lucas: What's that? Luna: Some advocates are pushing for a 'use it or lose it' clause on subsidies. If a carrier hasn't started construction within 18 months of the award, the funding is automatically revoked and put back into the pool for the next auction. Lucas: That would be a game-changer. It would force carriers to actually begin work, or else lose the money. And it would accelerate the reallocation process. Right now, the FCC has to go through a lengthy default proceeding. An automatic trigger would be much faster. Luna: It would also discourage speculative bidding. If you know you have to start building within 18 months, you're not going to bid on areas you can't actually serve. Lucas: Right. And you could pair that with a performance bond requirement — say, 10 percent of the award posted as a bond that's forfeited if you default. That would cover the administrative cost of re-auctioning and give carriers real skin in the game. Luna: So the blueprint is there. Better maps, better prequalification, independent verification, automatic revocation, performance bonds. It's just a question of political will. Lucas: And money. Even if you fix the design, you still need to appropriate enough funding to actually reach all the unserved areas. The current programs have never been fully funded. The Congressional Budget Office estimated in 2025 that closing the rural digital divide would require an additional $20 to $30 billion in targeted spending. Luna: That's a lot. But compared to what we've already spent without results, it might be the cheaper option in the long run. Lucas: Exactly. The lesson of the last decade is that throwing money at a problem without fixing the delivery mechanism just wastes money. The RDOF experience should be a case study in every public administration program — how not to run a subsidy auction. Luna: And maybe the next generation of policymakers will actually study it. Lucas: We can hope. In the meantime, if you live in a rural area and you're still waiting for broadband, you're not alone — and you're right to be frustrated. The system has failed you. But there is a growing consensus on what needs to change.