[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



  PROBLEMS WITH THE E-RATE PROGRAM: GAO REVIEW OF FCC MANAGEMENT AND 
                               OVERSIGHT

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 16, 2005

                               __________

                            Serial No. 109-7

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


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                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas                 JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida             Ranking Member
  Vice Chairman                      HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky               SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia             BART GORDON, Tennessee
BARBARA CUBIN, Wyoming               BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman           GENE GREEN, Texas
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  HILDA L. SOLIS, California
LEE TERRY, Nebraska                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            JAY INSLEE, Washington
MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho          MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee

                      Bud Albright, Staff Director

      James D. Barnette, Deputy Staff Director and General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

              Subcommittee on Oversight and Investigations

                    ED WHITFIELD, Kentucky, Chairman

CLIFF STEARNS, Florida               BART STUPAK, Michigan
CHARLES W. ``CHIP'' PICKERING,         Ranking Member
Mississippi                          DIANA DeGETTE, Colorado
CHARLES F. BASS, New Hampshire       JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  JAY INSLEE, Washington
MIKE FERGUSON, New Jersey            TAMMY BALDWIN, Wisconsin
MICHAEL C. BURGESS, Texas            HENRY A. WAXMAN, California
MARSHA BLACKBURN, Tennessee          JOHN D. DINGELL, Michigan,
JOE BARTON, Texas,                     (Ex Officio)
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Bennett, Thomas D., Assistant Inspector General for USF 
      Oversight, Federal Communications Commission...............    27
    Carlisle, Jeffrey, Chief, Wireline Competition Bureau, 
      Federal Communications Commission..........................    17
    Goldstein, Mark L., Physical Infrastructure Issues, 
      Government Accountability Office...........................     6
Additional material submitted for the record:
    Bennett, Thomas D., Assistant Inspector General for USF 
      Oversight, Federal Communications Commission, letter dated 
      April 21, 2005, enclosing response for the record..........    62
    Carlisle, Jeffrey, Chief, Wireline Competition Bureau, 
      Federal Communications Commission, letter dated May 12, 
      2005, enclosing response for the record....................    63

                                 (iii)

  

 
  PROBLEMS WITH THE E-RATE PROGRAM: GAO REVIEW OF FCC MANAGEMENT AND 
                               OVERSIGHT

                              ----------                              


                       WEDNESDAY, MARCH 16, 2005

                  House of Representatives,
                  Committee on Energy and Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:03 p.m., in 
room 2123 of the Rayburn House Office Building, Hon. Ed 
Whitfield (chairman) presiding.
    Members present: Representatives Whitfield, Burgess, Black-
burn, Stupak, Inslee, and Baldwin.
    Also present: Representative Engel.
    Staff present: Mark Paoletta, chief counsel; Tom Feddo, 
majority counsel; Peter Spencer, majority professional staff; 
Jaylyn Jensen, senior legislative analyst; David Nelson, 
minority investigator and economist; Edith Hollman, minority 
counsel; Jessica McNeice, research assistant; and David Vogel, 
staff assistant.
    Mr. Whitfield. I would like to call this hearing to order 
and welcome all of you to the Oversight and Investigations 
Subcommittee hearing on problems with the E-Rate program, the 
GAC review of FCC management and oversight. Today's hearing 
will examine the Federal Communications Commission's management 
and oversight of the E-Rate program. This subcommittee has done 
much to expose for Congress a range of problems in the E-Rate 
program management--problems that raise questions about the 
program's effectiveness and whether the Nation's taxpayers can 
be assured their tax dollar has been used efficiently.
    During the past session of Congress, this subcommittee 
conducted an extensive investigation of the E-Rate program. 
Through this work, which was highlighted in three informative 
hearings last summer and fall, the subcommittee identified a 
number of expensive failures in the program. The subcommittee 
spotlight exposed tens of millions of dollars in wasted E-Rate 
spending. We saw ceiling-high pallets of useless wireless 
equipment, sitting shrink-wrapped in a warehouse, and we 
learned that the beneficiaries of that equipment, Puerto Rican 
schoolchildren, had been deprived of any real benefit of E-
Rate, despite the program sending more than $100 million to 
Puerto Rico's schools.
    We learned of wasted opportunities in Texas where, for 
instance, the El Paso Independent School District was convinced 
by an E-Rate vendor--IBM in that situation--that it could use 
$60 million in E-Rate funds for a single school year for about 
50 schools. Twenty-four million dollars of this was spent on an 
operation meant just to maintain the network. That district 
soon found itself over its head in technology as it watched 
millions of dollars of planning and preparation, including the 
entire maintenance operation, simply disappear when funds dried 
up after authorities discovered it had participated in an anti-
competitive process. The district struggles to this day to get 
its E-Rate program back in order.
    We saw the deceit spread by true--for lack of a better 
term--E-Rate crooks, who sought to line their pockets in a 
national scheme to funnel tens of millions of E-Rate funds to 
particular companies, including NEC BNS, and Intertel, both of 
which pleaded guilty last year to Federal fraud and conspiracy 
charges. Examples like these were amplified by national news 
stories of additional waste in Atlanta, Chicago, Houston, and 
elsewhere that served to highlight what we learned were 
fundamental weaknesses in the program--that is in the 
application process, the technology planning, and the oversight 
by the FCC. Some of these topics we will revisit today.
    Against this backdrop, we turn, today, to the FCC, which 
has been ultimately responsible for this $2 billion a year 
program with both its successes and failures these past 7 
years. In December 2003, as part of its E-Rate investigation, 
the committee requested the GAO, the investigative arm of 
Congress, to look at FCC management and oversight of the 
program. GAO's findings and recommendations form the 
centerpiece of today's hearing.
    [The report is available at http://www.gao.gov/new.items/
d05151.pdf]
    This will be a straightforward hearing with one panel of 
witnesses. We will hear from Mark Goldstein, Director of 
Physical Infrastructure Issues for GAO. We will hear from 
Jeffrey Carlisle, who is Chief of the FCC's Wireline 
Competition Bureau, which oversees the E-Rate program. And we 
will hear from Tom Bennett, FCC's Assistant Inspector General 
for Universal Service Fund Oversight. He will speak to the IG's 
perspective on program weaknesses and also to efforts to 
identity waste, fraud, and abuse in the program. At this time, 
I would like to welcome the witnesses and say that I am hopeful 
that we will able to obtain some clear answers about the state 
of FCC management today.
    The GAO report raises troubling questions about FCC's track 
record over the 7 years of E-Rate operations, a time period 
over which more than $9 billion were expended on E-Rate goods 
and services, supposedly under FCC's watchful eyes; yet after 
all of this money has been spent, and several billion more 
promised or committed, we still have no real firm measure of 
how effective this spending has been. I would like to 
understand why the FCC has failed to, until recently, begin 
addressing programmatic weaknesses long-identified by GAO and 
the FCC/IG. Why hasn't the FCC taken a comprehensive look at 
the program, its funding structure, and identify clearly the 
rules necessary for ensuring sound financial and program 
management. And what do these current findings say about FCC's 
management of the billions of dollars of other universal 
service funding mechanisms? If the patterns of problems we see 
in E-Rate extend to other portions of universal service, I 
would be interested in conducting additional investigatory work 
in those areas to assist the full committee as it works to make 
sure these programs work as Congress intended.
    In the meantime, while the subcommittee's work is complete, 
we are preparing a bipartisan staff report that I am confident 
will assist the telecommunications subcommittee in its efforts 
to overhaul the E-Rate program. Chairman Upton, I wish you well 
in preparing such legislation--it will be his subcommittee--and 
hope that you will find our work helpful in that regard. In my 
view, the subcommittee's work demonstrates that legislation 
should not be limited to changes that merely tinker around the 
edges. E-Rate requires serious reforms, and the FCC may very 
well turn out to be the wrong steward of this program.
    Now, let me, again, welcome the witnesses. And I would now 
like to recognize the Ranking Member Mr. Stupak of Michigan for 
the purposes of making an opening statement.
    Mr. Stupak. Well, thank you Mr. Chairman, and thank you for 
holding this hearing and continuing this bipartisan examination 
of the E-Rate program, the program set up to wire schools and 
libraries across the country to the Internet. This program is 
crucial to fulfill the promise of equal opportunity in America. 
Without equal access to knowledge, the children of low-income, 
underserved, and rural America will certainly never be able to 
flourish in the 21st century economy.
    You need only look at my Congressional district to see the 
power of the E-Rate program. Last month, my constituent Mary 
Crawford, representing a consortium of 64 libraries in the 
Upper Peninsula, testified before a Congressional forum about 
the importance of E-Rate. Through careful planning and prudent 
use of E-Rate funds, libraries were among the first to bring 
broadband to my district. Libraries in my district have seen 
Internet usage increase more than 200 percent in the last 4. 
More importantly, libraries have been revitalized, becoming 
hubs of activity for teenagers, children, business owners, and 
seniors.
    Educators tell a similar story. Thanks to E-Rate funds, the 
world is literally at the fingertips of children in my district 
who live in some of the most rural areas of the United States. 
Unfortunately, the power of the E-Rate program has not been 
fully realized because of greed and incompetence--the greed of 
a few bad vendors and the complete incompetence of the FCC. As 
this investigation has demonstrated, large vendors have all too 
often viewed the $2.2 billion set aside from the universal 
service fund for the E-Rate program as a cookie jar to be 
tapped at will. Some of the biggest names in corporate America 
have been caught with their hands in the cookie jar. The U.S. 
subsidiary of the Japanese giant Nippon Electric has pleaded 
guilty to bid rigging in connection with E-Rate procurement. 
These vendors have bilked the American public for uncounted 
millions of dollars, while the schoolchildren in the defrauded 
districts must do without the bridge across the digital divide 
that Congress intended.
    The FCC has permitted such abuses to flourish. The 
Commission has ignored repeated warnings and recommendations 
from the GAO and its own inspector general to reform the 
program. Most importantly, the FCC has failed to implement--or 
come to the Congress for the authority to implement remedies 
that punish the bad actors. Instead, the FCC's actions to date 
only punish the innocent victims of these scams.
    The chairman brought up, but let me reiterate, the example 
in Puerto Rico. One hundred million dollars was wasted over a 
3-year period from 1998 to 200 by greedy vendors. Do you know 
what $100 million bought? Two lousy computer connections. Yet 
the sum total of FCC action to date has been to refuse any 
further funding to the Puerto Rico school district. Thus, we 
are now approaching the 8 years in which the children of Puerto 
Rico will have completed their primary or secondary education 
without the meaningful Internet access that was promised by 
Congress in 1996, and not a penny has been recovered from the 
vendors that received the E-Rate dollars that went into the 
waste.
    In Puerto Rico, rural America, and elsewhere, the digital 
gap is widening, and the opportunity is evaporating. The FCC 
merely fiddles with ill-conceived reform plans, such as the 
sudden application of Gov GAAP accounting methods last year. 
Without the intervention of Congress, that brainstorm would 
have resulted in hundreds of millions of E-Rate dollars tied up 
in bureaucracy instead of going to our communities. The 
Commission cannot or will not use its authority to find these 
greedy vendors. It will impose debarment sanctions only after 
the justice department has obtained criminal convictions. In 
all, too few cases have the FCC or the USAC been able to even 
recover the funds that they know have been dispersed 
improperly.
    The FCC must find ways to deter waste and abuse from 
occurring in the first place. The recommendations from the GAO 
and the FCC inspector general's office that we will hear today 
are minimal, first steps, steps that should have been taken 
years ago.
    This committee will have its own bipartisan recommendations 
to offer shortly. I expect the changes that the Commission is 
urged to make will be made and made promptly. I also anticipate 
that we will have recommendation regarding statutory changes 
that this committee and that the Congress should consider. As a 
member of the telecommunications subcommittee, as well as being 
the ranking Democratic member on this subcommittee, I look 
forward to working with Chairman Barton, Chairman Upton, and 
yourself, Mr. Chairman, as well as Ranking Members Dingell and 
Markey to enact these reforms. Both the Congress and the FCC 
have much to do to do a better job than what we have done to 
date for the children that we promised to elevate out of the 
digital divide that marks the difference between opportunity 
and despair in the 21st century.
    With that, Mr. Chairman, I yield back the balance of my 
time, and I will ask unanimous consent the statement of the 
Honorable John Dingell be made part of the record.
    Thank you, Mr. Stupak, and at this time, I would like to 
welcome the witnesses--oh, Ms. Baldwin, would like an opening 
statement?
    Ms. Baldwin. Thank you, Mr. Chairman.
    As a new member of this subcommittee, I want to acknowledge 
and commend the subcommittee for its work in prior sessions in 
examining this issue and abuse in the E-Rate program in 
general. I would like to begin by noting that the E-Rate 
program can boast many, many success stories. Millions of 
children in thousands of school districts across the country 
have benefited from improved Internet access due to E-Rate 
funding. I have heard about the way the E-Rate has been used in 
school and libraries in my own district, and there should be no 
doubt about the value of this program.
    It is unfortunate that the actions of a few bad actors 
tarnishes an otherwise worthy program. When a school district 
fails to properly use E-Rate funds, not only do its students 
suffer, others that could have benefited also lose. When 
companies collude with school districts to rig bids, all kids 
lose.
    Reviewing the previous work of this subcommittee and the 
GAO report released today raises very disturbing questions 
about the management and oversight of this program. With so 
much money at stake in so many different school districts, it 
is, unfortunately, not surprising that some unscrupulous people 
would attempt to abuse the system. These people should be 
prosecuted to the full extent of the law.
    What is of greater concern are the failures of the Federal 
Communications Commission to properly safeguard public funds, 
to provide adequate program goals, and guidelines, and conduct 
sufficient auditing and oversight of E-Rate awards.
    I am pleased that the subcommittee has examined this issue 
so carefully, and I look forward to working with the chairman 
and ranking member to make this program a success.
    Mr. Whitfield. Thank you, Ms. Baldwin. Mr. Burgess, you are 
recognized for an opening statement.
    Mr. Burgess. I will submit mine for the record in the 
interest of time, since we vote on.
    Mr. Whitfield. Without objection.
    [Additional statement submitted for the record follows:]

Prepared Statement of Hon. Cliff Stearns, a Representative in Congress 
                       from the State of Florida

    Thank you Mr. Chairman, for holding this important hearing.
    I share the concerns of all parties regarding abuse, waste and 
fraud in the E-Rate program. We are talking about billions of dollars 
here, money that should be going to help young children learn how to 
bridge the digital divide.
    Obviously, the GAO report is disturbing, and it doesn't pull any 
punches in laying blame with the FCC, which has oversight over the 
program.
    But we in Congress have oversight over the FCC, so we are also 
responsible for this debacle. That's why we had GAO conduct this study, 
and why we are having this hearing. I commend the Chairman for holding 
this hearing, as well as the other E-Rate related hearings that have 
been held by this committee the last couple of years.
    I would be remiss if during this hearing on abuse of the E-Rate 
program that I did not bring up the report from Miami-Dade Public 
Schools in my home state of Florida about the legal quagmire that they 
appear to be in as a result of a Universal Service Administrative 
Company (USAC) recovery process.
    While I won't discuss the merits or specifics of this particular 
case, the situation in Florida certainly raises general concerns that 
can and should be addressed by this committee, the FCC and the USAC. 
This is especially in regard to the procedural process used by the 
USDAC and the FCC, which in this case seems to be hurting the local 
school board.
    Mr. Chairman, there are many questions that need to be answered at 
this hearing by all parties involved. It is the intent of Congress that 
schools and libraries have access to these funds to help 
underprivileged children learn using 21st century technology. However, 
the problems detailed in the GAO report and in other accounts defeat 
the very goal of the E-Rate program. We must fix this problem before an 
entire generation of children gets left behind.

    Mr. Whitfield. As you can hear, it looks like we have a 
vote on the floor, but before we do that, I would like to, at 
this time--and by the way, the Chairman of the full committee 
may come in. If he comes in, he will certainly be allowed to 
give an opening statement as well, but in the meantime, I would 
like to introduce the witnesses and welcome you to this panel. 
First, we have Mr. Mark Goldstein, who is the Director of 
Physical Infrastructure Issues at the Government Accountability 
Office, and he will be giving the testimony related to the GAO 
report, which was embargoed until today. We also have with us 
Mr. Jeffrey Carlisle, who is the Wireline Competition Bureau at 
the Federal Communications Commission; he is the Chief. We 
understand that his mother is in the audience today, and we 
welcome her as well to watch him testify. Also, Mr. Thomas 
Bennett, who is the Assistant Inspector General for the 
Universal Service Fund Oversight at the Federal Communications 
Commission. And I might add, as you know, we are holding an 
investigatory hearing, and it is the practice of this committee 
that we take testimony under oath. And each of you certainly 
has a right to an attorney being present, and I know that--it 
is my understanding that Mrs. Emmanuelli-Perez is an attorney 
that is accompanying you, Mr. Goldstein. Is that correct?
    Mr. Goldstein. That is correct, Mr. Chairman.
    Mr. Whitfield. Okay. Well, at this time--and Mr. Carlisle, 
do you want an attorney to be present with you?
    Mr. Carlisle. No, I will be fine.
    Mr. Whitfield. Mr. Bennett?
    Mr. Bennett. No.
    Mr. Whitfield. Okay. Well, then, at this time, if you would 
stand up with me, I would like to swear you in.
    [Witnesses sworn.]
    Mr. Whitfield. Thank you. You are now under oath, and you 
may now give a 5-minute summary of your written statement.
    And Mr. Goldstein, we will start with you.

TESTIMONY OF MARK L. GOLDSTEIN, PHYSICAL INFRASTRUCTURE ISSUES, 
  GOVERNMENT ACCOUNTABILITY OFFICE; JEFFREY CARLISLE, CHIEF, 
WIRELINE COMPETITION BUREAU, FEDERAL COMMUNICATIONS COMMISSION; 
  AND THOMAS D. BENNETT, ASSISTANT INSPECTOR GENERAL FOR USF 
          OVERSIGHT, FEDERAL COMMUNICATIONS COMMISSION

    Mr. Goldstein. Good afternoon, Mr. Chairman and members of 
the subcommittee. I am Mark Goldstein, a director with GAO's 
Physical Infrastructure team. Joining me today at the table is 
Edda Emmanuelli-Perez, an Assistant General Counsel at GAO. We 
appreciate the opportunity to come before you today to discuss 
management and oversight of the Federal E-Rate program, which 
provides schools and libraries across the country with funding 
for telecommunications and Internet services.
    We are releasing, today, our latest report concerning the 
E-Rate program. Including today's hearing, GAO, since 1998, has 
issued 12 reports and testimonies examining or relating to the 
E-Rate program. Recently, this program has received 
considerable scrutiny from your subcommittee due to multiple 
cases of fraud, waste, and abuse that have come to light. The 
FCC's Inspector General has testified before Congress 
concerning a few particularly egregious cases.
    Our work related to the E-Rate program has focused more on 
internal controls and other management-related issues the 
program faces. For the report being released today, we 
evaluated: No. 1, the effect of the current structure of the E-
Rate program on the FCC's management of the program, No. 2, 
FCC's development and use of performance goals and measures in 
managing the program, and No. 3, the effectiveness of FCC's 
oversight mechanisms.
    These oversight mechanisms include FCC rulemaking 
proceedings, audits of E-Rate beneficiaries, and the appeals 
process within the E-Rate program. This afternoon I will 
briefly summarize our findings, which are more fully detailed 
in our report.
    First, FCC established E-Rate as a multi-billion dollar 
program, operating under an organizational structure unusual to 
the Federal Government, and then never conducted a 
comprehensive assessment to determine which Federal 
requirements, policies, and practices apply to the program, to 
USAC, and to the Universal Service Fund itself. FCC believes 
that it has addressed, on a case-by-case basis, the 
applicability of various Federal requirements. We believe that 
addressing the applicability of statutes on a case-by-case 
basis as issues have arisen has put FCC and the E-Rate program 
in the position of reacting to problems as they occur, rather 
than setting up an organization of internal controls designed 
to ensure compliance with applicable laws. The laws 
encompassing fiscal and accountability rules are not applied in 
isolation, rather they are part of a framework that addresses 
issues of financial and general management of Federal agencies 
and programs. The E-Rate program was established over 7 years 
ago, yet as illustrated by the recent problems related to the 
applicability of the Antideficiency Act and its effect on 
funding commitments, FCC is still analyzing whether certain 
statutes and requirements apply to this program.
    We believe it also remains to be resolved the extent to 
which FCC has delegated some functions for the E-Rate program 
to USAC. Because of the unusual program structure, USAC 
operates and disburses funds under less explicit Federal ties 
than many other Federal programs. We believe that FCC needs to 
explore whether the disbursement policies and practices for the 
E-Rate program are consistent with statutory and regulatory 
requirements for the disbursement of public funds and whether 
some of the functions carried out by USAC are inherently 
governmental activities that should be performed by government 
personnel.
    We are encouraged that FCC just announced that it has 
contracted with the National Academy of Public Administration 
for NAPA to study and explore alternative models to the current 
organizational and governance structure of the Universal 
Service program. We believe this study will go a long way 
toward addressing the concerns outlined in our report, and we 
look forward to seeing the results of NAPA's efforts.
    The second issue we examined was FCC's development and use 
of performance goals and measures. GAO has made past 
recommendations that FCC develop meaningful performance goals 
and measures to assess the specific impact of E-Rate funds on 
schools' and libraries' Internet access and to improve the 
management of the program. When FCC did develop goals for the 
program, they were related to levels of Internet connectivity 
in schools; however, FCC failed to use measurements that 
isolated the effects of E-Rate funding. The FCC has also failed 
to put in place management-oriented goals and measures, despite 
longstanding concerns about the program's effectiveness in key 
areas. OMB, in its own assessment of the program, concluded 
that there is no way to tell whether the program has resulted 
in cost-effective deployment and uss of advanced 
telecommunications services to schools and libraries. FCC told 
us they are currently working on new performance goals and 
measures and that they plan to seek OMB approval of those goals 
and measures by the end of the fiscal year.
    Third, we examined FCC's oversight mechanisms for the E-
Rate program. We found that FCC's rulemakings have often lacked 
specificity and led to situations where USAC, in crafting the 
detail needed to operate the program, has established 
administrative procedures that arguably rise to the level of 
policy decisions, even though USAC is prohibited by FCC rules 
from making program policy. This has led to enforcement 
problems. We found that the Commission has been slow to respond 
to the findings coming out of beneficiary audits.
    Last, we found that the E-Rate program has a significant 
appeals backlog at FCC, due in part to a shortage of staff and 
staff turnover. In commenting on our report, the Commission 
stated that it has begun to redirect staff and hire additional 
attorneys to Universal Service Fund oversight and program 
management, including the resolution of E-Rate appeals. We are 
particularly encouraged that FCC established a measurable goal 
of resolving all backlogged E-Rate appeals by the end of this 
year.
    Our report details three recommendations for FCC action on 
the E-Rate program. First, that they conduct a comprehensive 
assessment to determine whether all necessary government 
accountability requirements, policies, and practices have been 
applied and are fully in place to protect the program and its 
funding. Second, that they establish performance goals and 
measures for the E-Rate program that are consistent with the 
Government Performance and Results Act. And third, that they 
develop a strategy for reducing the E-Rate appeals backlog.
    Thank you, Mr. Chairman, this concludes my opening 
statement. I will be happy to respond to any questions that you 
or members of the subcommittee may have.
    [The prepared statement of Mark Goldstein follows:]

      Prepared Statement of Mark L. Goldstein, Director, Physical 
 Infrastructure Issues, United States Government Accountability Office

    Mr. Chairman and Members of the Subcommittee: We are pleased to be 
here to discuss the results of our recently completed review of the 
Federal Communications Commission's (FCC) universal service program for 
schools and libraries. As you know, the Telecommunications Act of 1996 
expanded the concept of universal service to include assistance to 
schools and libraries in acquiring telecommunications and Internet 
services; the act charged FCC with establishing the universal service 
discount mechanism for eligible schools and libraries. The commission, 
in turn, created a large and ambitious program that became commonly 
known as the ``E-rate'' program, and set the annual funding cap for the 
program at $2.25 billion. FCC designated the Universal Service 
Administrative Company (USAC), a private, not-for-profit corporation 
established under FCC's rules, to carry out the day-to-day operations 
of the E-rate program. FCC retains responsibility for overseeing the 
program's operations and ensuring compliance with the commission's 
rules.
    Since 1998, the E-rate program has committed more than $13 billion 
in funding to help schools and libraries across the nation acquire 
telecommunications and Internet services. Eligible schools and 
libraries can apply annually to receive support, which can be used for 
specific eligible services and equipment such as telephone services, 
Internet access services, and the installation of internal wiring and 
other related items. Recently, however, allegations have been made that 
some E-rate beneficiaries (schools and libraries) and service providers 
(e.g., telecommunications and network equipment companies) have 
fraudulently obtained, wasted, or abused E-rate funding. In May 2004, 
for example, one service provider involved in E-rate projects in 
several states pleaded guilty to bid rigging and wire fraud and agreed 
to pay more than $20 million in criminal fines, civil payments, and 
restitution.
    In light of ongoing concerns about the E-rate program, we were 
asked to review various aspects of the program. Specifically, we 
evaluated (1) the effect of the current structure of the E-rate program 
on FCC's management of the program, (2) FCC's development and use of 
performance goals and measures in managing the program, and (3) the 
effectiveness of FCC's oversight mechanisms--rulemaking proceedings, 
beneficiary audits, and reviews of USAC decisions (appeals)--in 
managing the program.
    Our testimony is based on a report, being released today, 
containing the results of our review and recommendations for improving 
FCC's management and oversight of the E-rate program.1 In 
summary, we found the following:
---------------------------------------------------------------------------
    \1\ Telecommunications: Greater Involvement Needed by FCC in the 
Management and Oversight of the E-Rate Program, GAO05151 (Washington, 
D.C.: Feb. 9, 2005). The report is available on GAO's Web site at 
www.gao.gov.

 FCC established E-rate as a multibillion-dollar program operating 
        under an organizational structure unusual to the federal 
        government, but never conducted a comprehensive assessment to 
        determine which federal requirements, policies, and practices 
        apply to the program, to USAC, and to the Universal Service 
        Fund itself. As a result, FCC has struggled with determining 
        which fiscal and accountability requirements apply to the E-
        rate program. We believe that issues exist concerning the 
        applicability of certain statutes and the extent to which FCC 
        has delegated certain functions for the E-rate program to 
        USAC--issues that FCC needs to explore and resolve.
 FCC has not developed meaningful performance goals and measures for 
        assessing and managing the program. As a result, there is no 
        way to tell whether the program has resulted in the cost-
        effective deployment and use of advanced telecommunications 
        services for schools and libraries.
 FCC's program oversight mechanisms contain weaknesses that limit 
        FCC's management of the program and its ability to understand 
        the scope of waste, fraud, and abuse within the program. For 
        example, FCC's rulemakings have often lacked specificity and 
        have led to situations where important USAC administrative 
        procedures have been deemed unenforceable by FCC. There is also 
        a significant backlog of E-rate appeals that adds uncertainty 
        to the program and impacts beneficiaries.
    FCC has taken some important steps, particularly in recent months, 
to address some of the areas of concern discussed in our report. 
Nevertheless, we believe that FCC has not done enough to proactively 
manage and provide a framework of government accountability for the 
multibillion-dollar E-rate program.

                               BACKGROUND

    The concept of ``universal service'' has traditionally meant 
providing residential telephone subscribers with nationwide access to 
basic telephone services at reasonable rates. The Telecommunications 
Act of 1996 broadened the scope of universal service to include, among 
other things, support for schools and libraries. The act instructed the 
commission to establish a universal service support mechanism to ensure 
that eligible schools and libraries have affordable access to and use 
of certain telecommunications services for educational 
purposes.2 In addition, Congress authorized FCC to 
``establish competitively neutral rules to enhance, to the extent 
technically feasible and economically reasonable, access to advanced 
telecommunications and information services for all public and 
nonprofit elementary and secondary school classrooms . . . and 
libraries . . .'' 3 Based on this direction, and following 
the recommendations of a Federal-State Joint Board on Universal 
Service,4 FCC established the schools and libraries 
universal service mechanism that is commonly referred to as the E-rate 
program. The program is funded through statutorily mandated payments by 
companies that provide interstate telecommunications 
services.5 Many of these companies, in turn, pass their 
contribution costs on to their subscribers through a line item on 
subscribers' phone bills.6 FCC capped funding for the E-rate 
program at $2.25 billion per year, although funding requests by schools 
and libraries can greatly exceed the cap. For example, schools and 
libraries requested more than $4.2 billion in E-rate funding for the 
2004 funding year.
---------------------------------------------------------------------------
    \2\ 47 U.S.C.  254(h)(1)(B).
    \3\ 47 U.S.C.  254(h)(2).
    \4\ The Federal-State Joint Board on Universal Service was 
established in March 1996 to make recommendations to implement the 
universal service provisions of the Telecommunications Act of 1996. The 
board is composed of FCC commissioners, state utility commissioners, 
and a consumer advocate representative.
    \5\ These companies include providers of local and long distance 
telephone services, wireless telephone services, paging services, and 
pay phone services. 47 C.F.R.  54.706.
    \6\ The line item is called various things by various companies, 
such as the ``federal universal service fee'' or the ``universal 
connectivity fee.'' Some companies do not separate out universal 
service costs as a line item, but instead just build it into their 
overall costs. Either way, consumers ultimately pay for the various 
universal service programs, including E-rate.
---------------------------------------------------------------------------
    In 1998, FCC appointed USAC as the program's permanent 
administrator, although FCC retains responsibility for overseeing the 
program's operations and ensuring compliance with the commission's 
rules.7 In response to congressional conference committee 
direction,8 FCC has specified that USAC ``may not make 
policy, interpret unclear provisions of the statute or rules, or 
interpret the intent of Congress.'' 9 USAC is responsible 
for carrying out the program's day-to-day operations, such as 
maintaining a Web site that contains program information and 
application procedures; answering inquiries from schools and libraries; 
processing and reviewing applications; making funding commitment 
decisions and issuing funding commitment letters; and collecting, 
managing, investing, and disbursing E-rate funds. FCC permits--and in 
fact relies on--USAC to establish administrative procedures that 
program participants are required to follow as they work through the 
application and funding process.
---------------------------------------------------------------------------
    \7\ USAC was established at the direction of FCC and operates under 
FCC's rules and policies.
    \8\ See S.1768, 105th Cong.,  2004(b)(2)(A) (1998).
    \9\ 47 C.F.R.  54.702(c).
---------------------------------------------------------------------------
    Under the E-rate program, eligible schools, libraries, and 
consortia that include eligible schools and libraries 10 may 
receive discounts for eligible services. Eligible schools and libraries 
may apply annually to receive E-rate support. The program places 
schools and libraries into various discount categories, based on 
indicators of need, so that the school or library pays a percentage of 
the cost for the service and the E-rate program funds the remainder. E-
rate discounts range from 20 percent to 90 percent. USAC reviews all of 
the applications and related forms and issues funding commitment 
decision letters. Generally, it is the service provider that seeks 
reimbursement from USAC for the discounted portion of the service 
rather than the school or library.11
---------------------------------------------------------------------------
    \10\ Eligibility of schools and libraries is defined at 47 U.S.C.  
254. Generally, educational institutions that meet the definition of 
``schools'' in the Elementary and Secondary Education Act of 1965 are 
eligible to participate, as are libraries that are eligible to receive 
assistance from a state's library administrative agency under the 
Library Services and Technology Act. Examples of entities not eligible 
for support are home school programs, private vocational programs, and 
institutions of higher education. In addition, neither private schools 
with endowments of more than $50 million nor libraries whose budgets 
are part of a school's budget are eligible to participate. 20 U.S.C.  
9122.
    \11\ The school or library could also pay the service provider in 
full and then seek reimbursement from USAC for the discount portion.
---------------------------------------------------------------------------
 FCC ESTABLISHED AN UNUSUAL PROGRAM STRUCTURE WITHOUT COMPREHENSIVELY 
   ADDRESSING THE APPLICABILITY OF GOVERNMENTAL STANDARDS AND FISCAL 
                                CONTROLS

    FCC established an unusual structure for the E-rate program but has 
never conducted a comprehensive assessment of which federal 
requirements, policies, and practices apply to the program, to USAC, or 
to the Universal Service Fund itself. FCC recently began to address a 
few of these issues, concluding that as a permanent indefinite 
appropriation, the Universal Service Fund is subject to the 
Antideficiency Act and that USAC's issuance of commitment letters 
constitutes obligations for purposes of the act. However, FCC's 
conclusions concerning the status of the Universal Service Fund raise 
further issues relating to the collection, deposit, obligation, and 
disbursement of those funds--issues that FCC needs to explore and 
resolve comprehensively rather than in an ad hoc fashion as problems 
arise.
    The Telecommunications Act of 1996 neither specified how FCC was to 
administer universal service to schools and libraries nor prescribed 
the structure and legal parameters of the universal service mechanisms 
to be created. To carry out the day-to-day activities of the E-rate 
program, FCC relied on a structure it had used for other universal 
service programs in the past--a not-for-profit corporation established 
at FCC's direction that would operate under FCC oversight. However, the 
structure of the E-rate program is unusual in several respects compared 
with other federal programs:

 FCC appointed USAC as the permanent administrator of the Universal 
        Service Fund,12 and FCC's Chairman has final 
        approval over USAC's Board of Directors. USAC is responsible 
        for administering the program under FCC orders, rules, and 
        directives. However, USAC is not part of FCC or any other 
        government entity; it is not a government corporation 
        established by Congress; and no contract or memorandum of 
        understanding exists between FCC and USAC for the 
        administration of the E-rate program. Thus, USAC operates and 
        disburses funds under less explicit federal ties than many 
        other federal programs.
---------------------------------------------------------------------------
    \12\ USAC was appointed the permanent administrator subject to a 
review after one year by FCC to determine that the universal service 
programs were being administered in an efficient, effective, and 
competitively neutral manner. 47 C.F.R.  54.701(a). This review was 
never conducted.
---------------------------------------------------------------------------
 Questions as to whether the monies in the Universal Service Fund 
        should be treated as federal funds have troubled the program 
        from the start. Even though the fund has been listed in the 
        budget of the United States and, since fiscal year 2004, has 
        been subject to an annual apportionment from the Office of 
        Management and Budget (OMB), the monies are maintained outside 
        of Treasury accounts by USAC and some of the monies have been 
        invested.13 The United States Treasury implements 
        the statutory controls and restrictions involving the proper 
        collection and deposit of appropriated funds, including the 
        financial accounting and reporting of all receipts and 
        disbursements, the security of appropriated funds, and 
        agencies' responsibilities for those funds.14
---------------------------------------------------------------------------
    \13\ The Universal Service Fund is included in the federal budget 
as a special fund. OMB concluded that the fund does not constitute 
public money subject to the Miscellaneous Receipts Statute, 31 U.S.C.  
3302, and therefore can be maintained outside the Treasury by a 
nongovernmental manager. Letter from Mr. Robert G. Damus, OMB General 
Counsel to Mr. Christopher Wright, FCC General Counsel, dated April 28, 
2000.
    \14\ See 31 U.S.C. 331, 3301-3305 and the Treasury Financial 
Manual, vol. I, which instructs federal agencies in areas of central 
accounting and reporting, disbursing, deposit regulations, and other 
fiscal matters necessary for the financial accounting and reporting of 
all receipts and disbursements of the federal government.
---------------------------------------------------------------------------
    Since the inception of the E-rate program, FCC has struggled with 
identifying the nature of the Universal Service Fund and the 
managerial, fiscal, and accountability requirements that apply to the 
fund. In the past, FCC's Inspector General (IG) has noted that the 
commission could not ensure that Universal Service Fund activities were 
in compliance with all laws and regulations because the issue of which 
laws and regulations were applicable to the fund was unresolved. During 
our review, FCC officials told us that the commission has substantially 
resolved the IG's concerns through recent orders, including FCC's 2003 
order that USAC begin preparing Universal Service Fund financial 
statements consistent with generally accepted accounting principles for 
federal agencies (GovGAAP) and keep the fund in accordance with the 
United States Government Standard General Ledger.15 While it 
is true that these steps and other FCC determinations should provide 
greater protections for universal service funding, FCC has addressed 
only a few of the issues that need to be resolved. In fact, staff from 
the FCC's IG's office told us that they do not believe the commission's 
GovGAAP order adequately addressed their concerns because the order did 
not comprehensively detail which fiscal requirements apply to the 
Universal Service Fund and which do not.
---------------------------------------------------------------------------
    \15\ See FCC, Order, In the Matter of Application of Generally 
Accepted Accounting Principles for Federal Agencies and Generally 
Accepted Government Auditing Standards to the Universal Service Fund, 
FCC 03-232 (Washington, D.C.; Oct. 3, 2003).
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    FCC maintains that it has undertaken a timely and extensive 
analysis of the significant legal issues associated with the status of 
the Universal Service Fund and has generally done so on a case-by-case 
basis. We recognize that FCC has engaged in internal deliberations and 
external consultations and analysis of a number of statutes. However, 
we do not believe that this was done in a timely manner or that it is 
appropriate to do this on a case-by-case basis, which puts FCC and the 
program in the position of reacting to problems as they occur rather 
than setting up an organization and internal controls designed to 
ensure compliance with applicable laws.
    As you know, Mr. Chairman, a problem with this ad hoc approach was 
dramatically illustrated with regard to the applicability of the 
Antideficiency Act to the Universal Service Fund. In October 2003, FCC 
ordered USAC to prepare financial statements for the Universal Service 
Fund, as a component of FCC, consistent with GovGAAP, which FCC and 
USAC had not previously applied to the fund. In February 2004, staff 
from USAC realized during contractor-provided training on GovGAAP 
procedures that the commitment letters sent to beneficiaries (notifying 
them whether their funding is approved and in what amount) might be 
viewed as ``obligations'' of appropriated funds.16 If so 
viewed, and if FCC also found the Antideficiency Act--which does not 
allow an agency or program to make obligations in excess of available 
budgetary resources--to be applicable to the E-rate program, then USAC 
would need to dramatically increase the program's cash-on-hand and 
lessen the program's investments 17 to provide budgetary 
authority sufficient to satisfy the Antideficiency Act. As a result, 
USAC suspended funding commitments in August 2004 while waiting for a 
commission decision on how to proceed. At the end of September 2004--
facing the end of the fiscal year--FCC decided that commitment letters 
were obligations; that the Antideficiency Act did apply to the program; 
and that USAC would need to immediately liquidate some of its 
investments to come into compliance with the Antideficiency Act. 
According to USAC officials, the liquidations cost the fund 
approximately $4.6 million in immediate losses and could potentially 
result in millions in foregone annual interest income. In response to 
these events, in December 2004, Congress passed a bill granting the 
Universal Service Fund a one-year exemption from the Antideficiency 
Act.18
---------------------------------------------------------------------------
    \16\ An ``obligation'' is an action that creates a legal liability 
or definite commitment on the part of the government to make a 
disbursement at some later date.
    \17\ According to USAC, the Universal Service Fund was invested in 
a variety of securities, including cash and cash equivalents, 
government and government-backed securities, and high-grade commercial 
paper. USAC generally did not seek the approval of the commission on 
particular investments, although investments were made with FCC 
knowledge and oversight through formal audits and informal meetings and 
review.
    \18\ Universal Service Antideficiency Temporary Suspension Act, 
Pub. L. No. 108-494,  302, 118 Stat. 3986 (2004). The law exempts 
universal service monies from the Antideficiency Act until December 31, 
2005.
---------------------------------------------------------------------------
    As we explain more fully in our report, Mr. Chairman, we agree with 
FCC's determinations that the Universal Service Fund is a permanent 
appropriation subject to the Antideficiency Act and that its funding 
commitment decision letters constitute recordable obligations of the 
Universal Service Fund. However, there are several significant fiscal 
law issues that remain unresolved. We believe that where FCC has 
determined that fiscal controls and policies do not apply, the 
commission should reconsider these determinations in light of the 
status of universal service monies as federal funds. For example, in 
view of its determination that the fund constitutes an appropriation, 
FCC needs to reconsider the applicability of the Miscellaneous Receipts 
Statute, 31 U.S.C.  3302, which requires that money received for the 
use of the United States be deposited in the Treasury unless otherwise 
authorized by law.19 FCC also needs to assess the 
applicability of other fiscal control and accountability statutes 
(e.g., the Single Audit Act and the Cash Management Improvement 
Act).20
---------------------------------------------------------------------------
    \19\ Because OMB and FCC had believed the funds were not public 
monies ``for the use of the United States'' under the Miscellaneous 
Receipts Statute, neither OMB nor FCC viewed the Universal Service Fund 
as subject to that statute.
    \20\ For example, in October 2003, when FCC ordered USAC to comply 
with GovGAAP, it noted that the Universal Service Fund was subject to 
the Debt Collection Improvement Act of 1996. In that same order, FCC 
stated that ``the funds may be subject to a number of federal financial 
and reporting statutes'' (emphasis added) and ``relevant portions of 
the Federal Financial Management Improvement Act of 1996,'' but did not 
specify which specific statutes or the relevant portions or further 
analyze their applicability. FCC officials also told us that they were 
uncertain whether procurement requirements such as the Federal 
Acquisition Regulation (FAR) applied to arrangements between FCC and 
USAC, but they recommended that those requirements be followed as a 
matter of policy.
---------------------------------------------------------------------------
    Another major issue that remains to be resolved involves the extent 
to which FCC has delegated some functions for the E-rate program to 
USAC. For example, are the disbursement policies and practices for the 
E-rate program consistent with statutory and regulatory requirements 
for the disbursement of public funds? 21 Are some of the 
functions carried out by USAC, even though they have been characterized 
as administrative or ministerial, arguably inherently governmental 
activities 22 that must be performed by government 
personnel? Resolving these issues in a comprehensive fashion, rather 
than continuing to rely on reactive, case-by-case determinations, is 
key to ensuring that FCC establishes the proper foundation of 
government accountability standards and safeguards for the E-rate 
program and the Universal Service Fund. We are encouraged that FCC just 
announced that it has contracted with the National Academy of Public 
Administration (NAPA) for NAPA to study and explore alternative models 
to the current organizational and governance structure of the Universal 
Service Fund program. We believe this study will go a long way toward 
addressing the concerns outlined in our report and we look forward to 
seeing the results of NAPA's efforts.
---------------------------------------------------------------------------
    \21\ See 31 U.S.C. 3321, 3322, 3325, and the Treasury Financial 
Manual.
    \22\ See OMB Circular A-76, May 29, 2003, which defines an 
inherently governmental activity as requiring ``the exercise of 
substantial discretion in applying government authority and/or in 
making decisions for the government.''
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FCC DID NOT DEVELOP USEFUL PERFORMANCE GOALS AND MEASURES FOR ASSESSING 
                    AND MANAGING THE E-RATE PROGRAM

    Although $13 billion in E-rate funding has been committed to 
beneficiaries during the past 7 years, FCC did not develop useful 
performance goals and measures to assess the specific impact of these 
funds on schools' and libraries' Internet access and to improve the 
management of the program, despite a recommendation by us in 1998 to do 
so. At the time of our current review, FCC staff was considering, but 
had not yet finalized, new E-rate goals and measures in response to 
OMB's concerns about this deficiency in a 2003 OMB assessment of the 
program.
    One of the management tasks facing FCC is to establish strategic 
goals for the E-rate program, as well as annual goals linked to them. 
The Telecommunications Act of 1996 did not include specific goals for 
supporting schools and libraries, but instead used general language 
directing FCC to establish competitively neutral rules for enhancing 
access to advanced telecommunications and information services for all 
public and nonprofit private elementary and secondary school classrooms 
and libraries.23 As the agency accountable for the E-rate 
program, FCC is responsible under the Government Performance and 
Results Act of 1993 (Results Act) for establishing the program's long-
term strategic goals and annual goals, measuring its own performance in 
meeting these goals, and reporting publicly on how well it is 
doing.24
---------------------------------------------------------------------------
    \23\ 47 U.S.C.  254(h)(2)(A).
    \24\ For additional details on the Results Act and its 
requirements, see GAO, Executive Guide: Effectively Implementing the 
Government Performance and Results Act, GAO/GGD-96-118 (Washington, 
D.C.: June 1996). GAO first noted the lack of clear and specific E-rate 
performance goals and measures in its July 1998 testimony before the 
Senate Committee on Commerce, Science, and Transportation. See GAO, 
Schools and Libraries Corporation: Actions Needed to Strengthen Program 
Integrity Operations before Committing Funds, GAO/TRCED98243 
(Washington, D.C.: July 16, 1998), pp. 15-16.
---------------------------------------------------------------------------
    For fiscal years 2000 through 2002, FCC's goals focused on 
achieving certain percentage levels of Internet connectivity during a 
given fiscal year for schools, public school instructional classrooms, 
and libraries. However, the data that FCC used to report on its 
progress was limited to public schools (thereby excluding two other 
major groups of beneficiaries--private schools and libraries) and did 
not isolate the impact of E-rate funding from other sources of funding, 
such as state and local government. This is a significant measurement 
problem because, over the years, the demand for internal connections 
funding by applicants has exceeded the E-rate funds available for this 
purpose by billions of dollars. Unsuccessful applicants had to rely on 
other sources of support to meet their internal connection needs. Even 
with these E-rate funding limitations, there has been significant 
growth in Internet access for public schools since the program issued 
its first funding commitments in late 1998. At the time, according to 
data from the Department of Education's National Center for Educational 
Statistics (NCES), 89 percent of all public schools and 51 percent of 
public school instructional classrooms already had Internet access. By 
2002, 99 percent of public schools and 92 percent of public school 
instructional classrooms had Internet access.25 Yet although 
billions of dollars in E-rate funds have been committed since 1998, 
adequate program data was not developed to answer a fundamental 
performance question: How much of the increase since 1998 in public 
schools' Internet access has been a result of the E-rate program, as 
opposed to other sources of federal, state, local, and private funding?
---------------------------------------------------------------------------
    \25\ See NCES, Internet Access in U.S. Public Schools and 
Classrooms: 1994-2002, NCES-2004-011 (Washington, D.C.; October 2003). 
This was the most recent update available at the time of our review.
---------------------------------------------------------------------------
    Performance goals and measures are used not only to assess a 
program's impact but also to develop strategies for resolving mission-
critical management problems. However, management-oriented goals have 
not been a feature of FCC's performance plans, despite long-standing 
concerns about the program's effectiveness in key areas. For example, 
two such goals--related to assessing how well the program's competitive 
bidding process was working and increasing program participation by 
low-income and rural school districts and rural libraries--were planned 
but not carried forward.
    FCC did not include any E-rate goals for fiscal years 2003 and 2004 
in its recent annual performance reports. The failure to measure 
effectively the program's impact on public and private schools and 
libraries over the past 7 years undercuts one of the fundamental 
purposes of the Results Act: to have federal agencies adopt a fact-
based, businesslike framework for program management and 
accountability. The problem is not just a lack of data for accurately 
characterizing program results in terms of increasing Internet access. 
Other basic questions about the E-rate program also become more 
difficult to address, such as the program's efficiency and cost-
effectiveness in supporting the telecommunications needs of schools and 
libraries. For example, a review of the program by OMB in 2003 
concluded that there was no way to tell whether the program has 
resulted in the cost-effective deployment and use of advanced 
telecommunications services for schools and libraries.26 OMB 
also noted that there was little oversight to ensure that the program 
beneficiaries were using the funding appropriately and effectively. In 
response to these concerns, FCC staff have been working on developing 
new performance goals and measures for the E-rate program and plan to 
finalize them and seek OMB approval in fiscal year 2005.
---------------------------------------------------------------------------
    \26\ OMB reviewed E-rate using its Program Assessment Rating Tool 
(PART), which is a diagnostic tool intended to provide a consistent 
approach to evaluating federal programs as part of the executive budget 
formulation process.
---------------------------------------------------------------------------
 FCC'S OVERSIGHT MECHANISMS ARE NOT FULLY EFFECTIVE IN MANAGING THE E-
                              RATE PROGRAM

    FCC testified before Congress in June 2004 that it relies on three 
chief components in overseeing the E-rate program: rulemaking 
proceedings, beneficiary audits, and fact-specific adjudicatory 
decisions (i.e., appeals decisions). We found weaknesses with FCC's 
implementation of each of these mechanisms, limiting the effectiveness 
of FCC's oversight of the program and the enforcement of program 
procedures to guard against waste, fraud, and abuse of E-rate funding.

FCC's Rulemakings Have Led to Problems with USAC's Procedures and 
        Enforcement of Those Procedures
    As part of its oversight of the E-rate program, FCC is responsible 
for establishing new rules and policies for the program or making 
changes to existing rules, as well as providing the detailed guidance 
that USAC requires to effectively administer the program. FCC carries 
out this responsibility through its rulemaking process. FCC's E-rate 
rulemakings, however, have often been broadly worded and lacking 
specificity. Thus, USAC has needed to craft the more detailed 
administrative procedures necessary to implement the rules. However, in 
crafting administrative procedures, USAC is strictly prohibited under 
FCC rules from making policy, interpreting unclear provisions of the 
statute or rules, or interpreting the intent of Congress. We were told 
by FCC and USAC officials that USAC does not put procedures in place 
without some level of FCC approval. We were also told that this 
approval is sometimes informal, such as e-mail exchanges or telephone 
conversations between FCC and USAC staff. This approval can come in 
more formal ways as well, such as when the commission expressly 
endorses USAC operating procedures in commission orders or codifies 
USAC procedures into FCC's rules. However, two problems have arisen 
with USAC administrative procedures.
    First, although USAC is prohibited under FCC rules from making 
policy, some USAC procedures deal with more than just ministerial 
details and arguably rise to the level of policy decisions. For 
example, in June 2004, USAC was able to identify at least a dozen 
administrative procedures that, if violated by the applicant, would 
lead to complete or partial denial of the funding request even though 
there was no precisely corresponding FCC rule. The critical nature of 
USAC's administrative procedures is further illustrated by FCC's 
repeated codification of them throughout the history of the program. 
FCC's codification of USAC procedures--after those procedures have been 
put in place and applied to program participants--raises concerns about 
whether these procedures are more than ministerial and are, in fact, 
policy changes that should be coming from FCC in the first place. 
Moreover, in its August 2004 order (in a section dealing with the 
resolution of audit findings), the commission directs USAC to annually 
``identify any USAC administrative procedures that should be codified 
in our rules to facilitate program oversight.'' This process begs the 
question of which entity is really establishing the rules of the E-rate 
program and raises concerns about the depth of involvement by FCC staff 
with the management of the program.
    Second, even though USAC procedures are issued with some degree of 
FCC approval, enforcement problems could arise when audits uncover 
violations of USAC procedures by beneficiaries or service providers. 
The FCC IG has expressed concern over situations where USAC 
administrative procedures have not been formally codified because 
commission staff have stated that, in such situations, there is 
generally no legal basis to recover funds from applicants that failed 
to comply with the USAC procedures. In its August 2004 order, the 
commission attempted to clarify the rules of the program with relation 
to recovery of funds. However, even under the August 2004 order, the 
commission did not clearly address the treatment of beneficiaries who 
violate a USAC administrative procedure that has not been codified.

FCC Has Been Slow to Address Problems Raised by Audit Findings
    FCC's use of beneficiary audits as an oversight mechanism has also 
had weaknesses, although FCC and USAC are now working to address some 
of these weaknesses. Since 2000, there have been 122 beneficiary audits 
conducted by outside firms, 57 by USAC staff, and 14 by the FCC IG (2 
of which were performed under agreement with the Inspector General of 
the Department of the Interior). Beneficiary audits are the most robust 
mechanism available to the commission in the oversight of the E-rate 
program, yet FCC generally has been slow to respond to audit findings 
and has not made full use of the audit findings as a means to 
understand and resolve problems within the program.
    First, audit findings can indicate that a beneficiary or service 
provider has violated existing E-rate program rules. In these cases, 
USAC or FCC can seek recovery of E-rate funds, if 
justified.27 In the FCC IG's May 2004 Semiannual Report, 
however, the IG observes that audit findings are not being addressed in 
a timely manner and that, as a result, timely action is not being taken 
to recover inappropriately disbursed funds.28 The IG notes 
that in some cases the delay is caused by USAC and, in other cases, the 
delay is caused because USAC is not receiving timely guidance from the 
commission (USAC must seek guidance from the commission when an audit 
finding is not a clear violation of an FCC rule or when policy 
questions are raised). Regardless, the recovery of inappropriately 
disbursed funds is important to the integrity of the program and needs 
to occur in a timely fashion.
---------------------------------------------------------------------------
    \27\ USAC, through its duties as administrator of the fund, 
initially seeks recovery of erroneously disbursed funds. In addition, 
the commission adopted rules in April 2003 to provide for suspension 
and debarment from the program for persons convicted of criminal 
violations or held civilly liable for certain acts arising from their 
E-rate participation. Debarments would be for a period of three years 
unless circumstances warrant a longer debarment period in order to 
protect the public interest.
    \28\ See FCC, Office of the Inspector General Semiannual Report to 
Congress, October 1, 2003-March 31, 2004 (Washington, D.C.; May 3, 
2004).
---------------------------------------------------------------------------
    Second, under GAO's Standards for Internal Controls in the Federal 
Government,29 agencies are responsible for promptly 
reviewing and evaluating findings from audits, including taking action 
to correct a deficiency or taking advantage of the opportunity for 
improvement. Thus, if an audit shows a problem but no actual rule 
violation, FCC should be examining why the problem arose and 
determining if a rule change is needed to address the problem (or 
perhaps simply addressing the problem through a clarification to 
applicant instructions or forms). FCC has been slow, however, to use 
audit findings to make programmatic changes. For example, several 
important audit findings from the 1998 program year were only recently 
resolved by an FCC rulemaking in August 2004.
---------------------------------------------------------------------------
    \29\ GAO/aimd-00-21.3.1.
---------------------------------------------------------------------------
    In its August 2004 order, the commission concluded that a 
standardized, uniform process for resolving audit findings was 
necessary, and directed USAC to submit to FCC a proposal for resolving 
audit findings. FCC also instructed USAC to specify deadlines in its 
proposal ``to ensure audit findings are resolved in a timely manner.'' 
30 USAC submitted its Proposed Audit Resolution Plan to FCC 
on October 28, 2004. The plan memorializes much of the current audit 
process and provides deadlines for the various stages of the audit 
process. FCC released the proposed audit plan for public comment in 
December 2004.31
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    \30\ FCC, Fifth Report and Order, In the Matter of Schools and 
Libraries Universal Service Support Mechanism, FCC-04-190 (Washington, 
D.C.; Aug. 13, 2004), para. 74.
    \31\ Comments were due January 5, 2005; reply comments were due 
January 20, 2005.
---------------------------------------------------------------------------
    In addition to the Proposed Audit Resolution Plan, the commission 
instructed USAC to submit a report to FCC on a semiannual basis 
summarizing the status of all outstanding audit findings. The 
commission also stated that it expects USAC to identify for commission 
consideration on at least an annual basis all audit findings raising 
management concerns that are not addressed by existing FCC rules. 
Lastly, the commission took the unusual step of providing a limited 
delegation to the Wireline Competition Bureau (the bureau within FCC 
with the greatest share of the responsibility for managing the E-rate 
program) to address audit findings and to act on requests for waiver of 
rules warranting recovery of funds.32 These actions could 
help ensure, on a prospective basis, that audit findings are more 
thoroughly and quickly addressed. However, much still depends on timely 
action being taken by FCC, particularly if audit findings suggest the 
need for a rulemaking.
---------------------------------------------------------------------------
    \32\ FCC 04-190, para. 75.
---------------------------------------------------------------------------
    In addition to problems with responding to audit findings, the 
audits conducted to date have been of limited use because neither FCC 
nor USAC have conducted an audit effort using a statistical approach 
that would allow them to project the audit results to all E-rate 
beneficiaries. Thus, at present, no one involved with the E-rate 
program has a basis for making a definitive statement about the amount 
of waste, fraud, and abuse in the program.33 Of the various 
groups of beneficiary audits conducted to date, all were of 
insufficient size and design to analyze the amount of fraud or waste in 
the program or the number of times that any particular problem might be 
occurring programwide. At the time we concluded our review, FCC and 
USAC were in the process of soliciting and reviewing responses to a 
Request for Proposal for audit services to conduct additional 
beneficiary audits.
---------------------------------------------------------------------------
    \33\ In testimony before the House Subcommittee on Oversight and 
Investigations of the Committee on Energy and Commerce in June 2004, 
FCC's Inspector General submitted a prepared statement that said the 
``results of audits that have been performed and the allegations under 
investigation lead us to believe the program may be subject to 
unacceptably high risk of fraud, waste and abuse.'' At the same 
hearing, the Chief of FCC's Office of Strategic Planning and Policy 
Analysis and the Deputy Chief of FCC's Wireline Competition Bureau 
submitted a prepared statement that said that FCC had ``enabled 
implementation of the [E-rate] statutory goals with a minimum of fraud, 
waste, and abuse.''
---------------------------------------------------------------------------
            FCC HAS BEEN SLOW TO ACT ON SOME E-RATE APPEALS

    Under FCC's rules, program participants can seek review of USAC's 
decisions,34 although FCC's appeals process for the E-rate 
program has been slow in some cases. Because appeals decisions are used 
as precedent, this slowness adds uncertainty to the program and impacts 
beneficiaries. FCC rules state that FCC is to decide appeals within 90 
days, although FCC can extend this period. At the time of our review 
there was a substantial appeals backlog at FCC (i.e., appeals pending 
for longer than 90 days). Out of 1,865 appeals to FCC from 1998 through 
the end of 2004, approximately 527 appeals remain undecided, of which 
458 (25 percent) are backlog appeals.35
---------------------------------------------------------------------------
    \34\ Virtually all of the decisions made by FCC and USAC in their 
management and administration of the E-rate program may be subject to 
petition for reconsideration or appeal by beneficiaries. Moreover, 
schools and libraries have the option of multiple appeal levels, 
including USAC, the Wireline Competition Bureau, and the commission.
    \35\ The bulk of the appeals are to USAC, which received a total of 
16,782 appeals from the beginning of the program through 2003. Of 
these, 646--roughly 4 percent--remained undecided as of September 20, 
2004.
---------------------------------------------------------------------------
    We were told by FCC officials that some of the backlog is due to 
staffing issues. FCC officials said they do not have enough staff to 
handle appeals in a timely manner. FCC officials also noted that there 
has been frequent staff turnover within the E-rate program, which adds 
some delay to appeals decisions because new staff necessarily take time 
to learn about the program and the issues. Additionally, we were told 
that another factor contributing to the backlog is that the appeals 
have become more complicated as the program has matured. Lastly, some 
appeals may be tied up if the issue is currently in the rulemaking 
process.
    The appeals backlog is of particular concern given that the E-rate 
program is a technology program. An applicant who appeals a funding 
denial and works through the process to achieve a reversal and funding 
two years later might have ultimately won funding for outdated 
technology. FCC officials told us that they are working to resolve all 
backlogged E-rate appeals by the end of calendar year 2005.
    In summary, Mr. Chairman, we remain concerned that FCC has not done 
enough to proactively manage and provide a framework of government 
accountability for the multibillion-dollar E-rate program. Lack of 
clarity about what accountability standards apply to the program causes 
confusion among program participants and can lead to situations where 
funding commitments are interrupted pending decisions about applicable 
law, such as happened with the Antideficiency Act in the fall of 2004. 
Ineffective performance goals and measures make it difficult to assess 
the program's effectiveness and chart its future course. Weaknesses in 
oversight and enforcement can lead to misuse of E-rate funding by 
program participants that, in turn, deprives other schools and 
libraries whose requests for support were denied due to funding 
limitations.
    To address these management and oversight problems identified in 
our review of the E-rate program, our report recommends that the 
Chairman of FCC direct commission staff to (1) conduct and document a 
comprehensive assessment to determine whether all necessary government 
accountability requirements, policies, and practices have been applied 
and are fully in place to protect the E-rate program and universal 
service funding; (2) establish meaningful performance goals and 
measures for the E-rate program; and (3) develop a strategy for 
reducing the E-rate program's appeals backlog, including ensuring that 
adequate staffing resources are devoted to E-rate appeals.

                         SCOPE AND METHODOLOGY

    We conducted our work from December 2003 through December 2004 in 
accordance with generally accepted government auditing standards. We 
interviewed officials from FCC's Wireline Competition Bureau, 
Enforcement Bureau, Office of General Counsel, Office of Managing 
Director, Office of Strategic Planning and Policy Analysis, and Office 
of Inspector General. We also interviewed officials from USAC. In 
addition, we interviewed officials from OMB and the Department of 
Education regarding performance goals and measures. OMB had conducted 
its own assessment of the E-rate program in 2003, which we also 
discussed with OMB officials. We reviewed and analyzed FCC, USAC, and 
OMB documents related to the management and oversight of the E-rate 
program. The information we gathered was sufficiently reliable for the 
purposes of our review. See our full report for a more detailed 
explanation of our scope and methodology.
    Mr. Chairman, this concludes my prepared statement. I would be 
pleased to respond to any questions that you or other Members of the 
Subcommittee may have.

    Mr. Whitfield. Mr. Goldstein, thank you, and we have about 
6 minutes remaining on a vote on the floor. We are going to 
have a series of votes, so we are going to suspend this 
hearing. And Mr. Carlisle, when we come back, we will pick up 
with your testimony, and then yours, Mr. Bennett. So we will be 
recessed for a period of time for us to make these votes.
    [Brief recess.]
    Mr. Whitfield. We will reconvene this hearing, and I 
apologize to the witness for the interruption for votes. I 
would also note that the chairman of the full committee, the 
Energy and Commerce Committee, Joe Barton, will not be able to 
be here, but we are going to submit his opening statement for 
the record.
    And with that, Mr. Carlisle, I will call on your for you 
opening statement.

                  TESTIMONY OF JEFFREY CARLISLE

    Mr. Carlisle. Good morning, Mr. Chairman, and distinguished 
members of the subcommittee. Thank you for giving me the 
opportunity to discuss with you the GAO report regarding FCC 
management and oversight of the E-Rate program. We believe that 
the GAO report provides us a good opportunity to focus on areas 
in the E-Rate program and our management of it that need 
attention in order to ensure that oversight of the Universal 
Service Fund meets the highest standards of government 
accountability. We look forward to continuing to work with GAO 
to improve our process. And indeed, as our response GAO 
details, and as I will summarize here, we are continuing 
existing and have initiated new measures to address issues 
identified by the GAO. In doing so, we are doing nothing more 
than acknowledging the need to undertake a serious review of 
the FCC's management and oversight of Universal Service. 
Indeed, doing so is the only way to ensure that we are doing 
our jobs to act as safeguards of the public's interest and its 
money.
    The GAO report made three recommendations that have been 
summarized in the statement of Mr. Goldstein; I will not repeat 
them here. On January 14, we provided a response to the GAO 
report. In the first area, in the first recommendation, of 
assessing government accountability requirements, our response 
details analyses that have been performed by the FCC of 15 
separate statues and the regulations thereunder, including the 
Antideficiency Act, the Miscellaneous Receipts Act, The 
Improper Payments Information Act, the Single Audit Act, and 
the Cash Management Improvement Act. We have shared these 
analyses with GAO and specifically asked GAO to if it disagrees 
with them and welcome its expert guidance and expect fully to 
continue to work with them.
    In the second area, establishing government accountability 
requirements, we are in full agreement with this recommendation 
and are already working to address it. We are working with OMB 
and its program-assessment rating tool process to establish 
better and more comprehensive ways for measuring E-Rate 
performance. We anticipate including revised performance 
measures for the High-Cost Fund and the E-Rate Program in the 
FCC's fiscal year 2007 budget submission.
    In the third area, developing a strategy to reduce our 
backlog of E-Rate appeals, we have taken several steps outlined 
in the response and are already seeing process. We have 
prioritized pending cases and reassigned agency resources in 
order to bring more attorneys and other professionals to bear 
on outstanding cases. On January 1, our backlog--defined as 
cases pending for longer than 90 days--stood at 458 cases. 
Since then, we have resolved 100 cases. These results are due 
in large part to the addition of four new staff members of the 
E-Rate team during the first quarter of this year. With this 
increased staff level, we are now resolving between 60 and 70 
cases a month, with a goal of increasing that rate to 80 to 90 
cases a month. In all, we are on track to reduce our backlog to 
zero by the end of this year.
    I will also take this opportunity to emphasize some of the 
additional steps the agency is taking to improve oversight. 
Last year, we adopted rules codifying certain USAC procedures 
regarding technology plans and document retention, and we will 
soon recommended that the Commission adopt a notice of proposed 
rulemaking to codify a substantial number of additional 
procedures. Following on an initiative by our Office of the 
Managing Director, begun in Fall of last year, we have recently 
retained the National Academy of Public Administration to 
evaluate the management structure of the program. On a separate 
track, the bureau is considering making a recommendation to the 
Commission to adopt a notice of proposed rulemaking that would 
solicit public comment on this issue and also present specific 
questions as to current structure and management of each of the 
funds. We are also considering making a recommendation to the 
Commission to adopt an order that would expand audit coverage 
of the entities receiving the largest financial benefits from 
the E-Rate program. As is reflected in the President's budget 
for the next fiscal year, we are also seeking additional 
resources so that we can hire the staff necessary to improve 
oversight of the program and review of beneficiary audits.
    Thank you, Mr. Chairman, for the opportunity to speak with 
you today. I look forward to your questions.
    [The prepared statement of Jeffrey Carlisle follows:]

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    Mr. Whitfield. Thank you, Mr. Carlisle. And at this time, 
Mr. Bennett, if you would, give your opening statement.

                 TESTIMONY OF THOMAS D. BENNETT

    Mr. Bennett. Mr. Chairman and members of the subcommittee, 
I appreciate the opportunity to come before you today to 
discuss oversight of the Universal Service Fund program, and 
more specifically the E-Rate program. This is the third time 
the FCC/OIG has testified before this subcommittee on oversight 
of the Universal Service Fund program. In my testimony, I will 
briefly summarize OIG involvement in the USF oversight, discuss 
concerns that the OIG has regarding the program, and provide an 
update on OIG oversight activities.
    The FCC/OIG first looked at the USF in 1999 as part of our 
audit of the Commission's fiscal year 1999 financial statement. 
Starting with that audit, the Office of Inspector General has 
continued to devote considerable resources to oversight of the 
USF. Due to materiality and our assessment of audit risk, we 
have focused much of our attention on the USF mechanism for 
funding telecommunications and information services for schools 
and libraries--the schools and libraries program also known as 
the E-Rate program.
    Despite limited resources, the OIG has implemented an 
aggressive, independent oversight program. Our oversight 
program includes audits conducted using internal resources, 
audits conducted by other Federal Offices of Inspector General 
under reimbursable agreement, review of audit work conducted by 
auditors with the Universal Service Administrative Company, and 
active participation in Federal investigations of E-Rate fraud. 
In addition to conducing audits, we are providing audit support 
to a number of investigations of E-Rate recipients and service 
providers. To implement the investigative component of our 
plan, we established a working relationship with the anti-trust 
division of the Department of Justice. We are also supporting 
several investigations being conducted by Assistant United 
States attorneys. We are currently supporting 17 investigations 
and monitoring an additional 15 investigations.
    Allegations being investigated in these cases include: 
procurement irregularities, including lack of a competitive 
process and bid rigging; false claims; service providers 
billing for goods and services not provided; ineligible items 
being funded; and beneficiaries not paying the local portion of 
the costs, resulting in inflated costs for goods and services 
to the program and potential kickback issues.
    In the past year, there have been a number of significant 
law enforcement actions involving the E-Rate program. In May 
2004, NEC Business Network Solutions, Inc. plead guilty and 
agreed to pay a total $20.6 million criminal fine, civil 
settlement, and restitution related to charges of collusion and 
wire fraud involving the E-Rate program. In December 2004, 
Inter-Tel technologies, Inc. plead guilty and agreed to pay a 
total $8.71 million criminal fine, civil settlement, and 
restitution related to charges of bid rigging and wire fraud in 
connection with the E-Rate program. The NEC and Inter-Tel cases 
are part of a large, ongoing investigation. In October 2004, 
Qasim Bokhari and Haider Bokhari plead guilty to charges of 
conspiracy, fraud, and money laundering involving the E-Rate 
program. This past January Qasim Bokhari and Haider Bokhari 
were each sentenced to 6-year prison terms.
    Our involvement in E-Rate audits and investigations has 
highlighted numerous concerns with the program. General 
concerns include lack of clarity regarding program rules and 
lack of timely and effective resolution of audit findings. 
Specific concerns regarding program design include weaknesses 
in program competitive procurement requirements, ineffective 
use of purchased goods and services, over-reliance on applicant 
certifications, weaknesses in technology planning, and issues 
relating to discount calculation and payment.
    I am pleased to report that concerns that we have raised 
about the E-Rate program have received considerable attention 
at the Commission. Most notably, on August 4, 2004, the 
Commission adopted the fifth report and order on the school and 
libraries universal service support mechanism. In the Fifth 
Report and Order, the Commission resolved a number of issues 
arising from audits of the E-rate program and programmatic 
concerns, including concerns about E-Rate certifications raised 
by the OIG.
    The primary obstacle to implementation of effective OIG 
oversight has been a lack of adequate resources to conduct 
audits and provide audit support to investigation. This lack of 
resources has prevented us from conducting an audit using a 
statistical approach that would allow us to project the audit 
results to all E-Rate beneficiaries. Today, I am happy to 
report that we have made significant progress in addressing our 
resource concerns. In January, we added two new staff to the 
USF team and the OIG has been advised that we will be receiving 
two additional staff. Last summer, we began working with USAC 
to establish a three-way contract, under which the OIG and USAC 
can obtain access to audit resources to conduct USF audits. We 
released a request for proposal in November 2004 and expect to 
complete the contractor selection process very soon.
    We are also currently working with USAC and a public 
accounting firm to conduct the fourth large-scale audit of E-
Rate beneficiaries. One hundred beneficiaries are being audited 
as part of this project. The project was initiated in August 
2004 and is expected to be completed next summer. The Office of 
Inspector General remains committed to meeting our 
responsibility for providing effective, independent oversight 
of the Universal Service Fund, and we believe we have made 
significant progress.
    While the Commission has taken steps to address 
programmatic weaknesses, more work remains to be done. Through 
our participation in the fourth large-scale round of E-Rate 
beneficiary audits with USAC and through audits that we 
anticipate conducting under our three-way agreement with USAC, 
we are moving forward to evaluate the state of the program and 
identify opportunities for programmatic improvements.
    Thank you. I will be happy to answer any of your questions.
    [The prepared statement of Thomas D. Bennett follows:]

 Prepared Statement of Thomas D. Bennett, Assistant Inspector General 
          for USF Oversight, Federal Communications Commission

    Mr. Chairman and Members of the Subcommittee, I appreciate the 
opportunity to come before you today to discuss oversight of the 
Universal Service Fund (USF) program and more specifically the E-rate 
program. My name is Tom Bennett and I am the Assistant Inspector 
General for USF Oversight with the FCC Office of Inspector General 
(OIG). This is the third time that the FCC OIG has testified before the 
subcommittee on oversight of the Universal Service Fund (USF) program. 
In my testimony, I will briefly summarize OIG involvement in USF 
oversight, discuss concerns that the OIG has regarding the program, and 
provide an update on OIG oversight activities.

           OIG OVERSIGHT OF THE UNIVERSAL SERVICE FUND (USF)

    The FCC OIG first looked at the USF in 1999 as part of our audit of 
the Commission's FY 1999 financial statement. During that audit, we 
questioned the Commission regarding the nature of the USF and, 
specifically, whether it was subject to the statutory and regulatory 
requirements for federal funds. Starting with that inquiry, the Office 
of Inspector General has continued to devote considerable resources to 
oversight of the USF.
    Due to materiality and our assessment of audit risk, we have 
focused much of our attention on the USF mechanism for funding 
telecommunications and information services for schools and libraries, 
also known as the ``Schools and Libraries Program'' or the ``E-rate'' 
program. Applications for E-rate funding have increased from 30,675 in 
funding year 1998 to 43,050 for the current funding year. Applications 
have been received from schools and libraries in each of the 50 states, 
the District of Columbia, and most territories and included 15,255 
different service providers. Requested funding has increased from 
$2,402,291,079 in funding year 1998 to $4,538,275,093 for the current 
funding year.

OIG Oversight
    During FY 2001, we worked with Commission staff as well as with the 
Defense Contract Audit Agency (DCAA) and the Universal Service 
Administrative Company (USAC), to design an audit program that would 
provide the Commission with programmatic insight into compliance with 
rules and requirements on the part of E-rate program beneficiaries and 
service providers. Our program was designed around two corollary and 
complementary efforts. First, we would conduct reviews on a statistical 
sample of beneficiaries large enough to allow us to derive inferences 
regarding beneficiary compliance at the program level. Second, we would 
establish a process for vigorously investigating allegations of fraud, 
waste, and abuse in the program.
    Several obstacles have impeded our ability to implement effective, 
independent oversight of the program. The primary obstacle has been a 
lack of adequate resources to conduct audits and provide audit support 
to investigations. Despite limited resources, the OIG has implemented 
an aggressive independent oversight program. My oversight program 
includes: (1) audits conducted using internal resources; (2) audits 
conducted by other federal Offices of Inspector General under 
reimbursable agreements; (3) review of audit work conducted by USAC; 
and (4) active participation in federal investigations of E-rate fraud.
    One-hundred and thirty five (135) audits have been completed by the 
OIG, USAC internal auditors, or USAC contract auditors in which the 
auditors have reached a conclusion about beneficiary compliance. Of the 
135 audits, auditors determined that beneficiary were not compliance in 
48 audits (36%) and generally compliant in an additional 22 audits 
(16%). Beneficiaries were determined to be compliant in 65 audits 
(48%). Recommended fund recoveries for those audits where problems were 
identified total over $17 million.

OIG Audits Using Internal Resources
    The FCC OIG has completed thirteen (13) audits that we initiated 
during fiscal year 2002 using auditors detailed from the Commission's 
Common Carrier Bureau (since reorganized as the Wireline Competition 
Bureau). For these thirteen (13) audits, we concluded that applicants 
were compliant with program rules in five (5) of the audits, that 
applicants were generally compliant in two (2) of the audits, and that 
the applicants were not compliant with program rules in six (6) of the 
audits. We have recommended recovery of $1,794,792 as shown below:

----------------------------------------------------------------------------------------------------------------
                                                                                                       Potential
               Report Date                           Applicant                    Conclusion             Fund
                                                                                                       Recovery
----------------------------------------------------------------------------------------------------------------
09/11/0..................................  Enoch Pratt Free Library....  Compliant..................          $0
02/03/03.................................  Robeson County Public         Compliant..................           0
                                            Schools.
02/05/03.................................  Wake County Public Schools..  Compliant..................           0
08/27/03.................................  Albemarle Regional Library..  Compliant..................           0
12/22/03.................................  St. Matthews Lutheran School  Not Compliant..............     136,593
12/22/03.................................  Prince William County         Generally Compliant........       5,452
                                            Schools.
12/22/03.................................  Arlington Public School       Generally Compliant........       7,556
                                            District.
03/24/04.................................  Immaculate Conception School  Not Compliant..............      68,846
04/06/04.................................  Children's Store Front        Not Compliant..............     491,447
                                            School.
05/19/04.................................  St. Augustine School........  Not Compliant..............      21,600
05/25/04.................................  Southern Westchester BOCES..  Compliant..................           0
06/07/04.................................  United Talmudical Academy...  Not Compliant..............     934,300
08/12/04.................................  Annunciation Elementary       Not Compliant..............     129,003
                                            School.
                                                                                                     -----------
                                                                                                      $1,794,797
                                                                                                     ===========
----------------------------------------------------------------------------------------------------------------

Audits Conducted by Other Federal Offices of Inspector General
    On January 29, 2003, the FCC OIG and USAC executed a Memorandum of 
Understanding (MOU) with the Department of the Interior (DOI) OIG. The 
MOU is a three-way agreement among the Commission, DOI OIG, and USAC 
for reviews of schools and libraries funded by the Bureau of Indian 
Affairs and other universal service support beneficiaries under the 
audit cognizance of DOI OIG. Under the agreement, auditors from the 
Department of the Interior perform audits for USAC and the FCC OIG. In 
addition to audits of schools and libraries, the agreement allows for 
the DOI OIG to consider requests for investigative support on a case-
by-case basis. We have issued two (2) final audit reports under this 
MOU, three (3) draft audit reports, and have completed fieldwork on two 
(2) additional audits. For the audit where we determined that the 
applicant was not compliant, we have recommended recovery of 
$2,084,399. A summary of completed audits is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                       Potential
               Report Date                           Applicant                    Conclusion             Fund
                                                                                                       Recovery
----------------------------------------------------------------------------------------------------------------
11/06/03.................................  Santa Fe Indian School......  Compliant..................          $0
01/07/04.................................  Navajo Preparatory Academy..  Not Compliant..............   2,084,399
----------------------------------------------------------------------------------------------------------------

    We have also established a working relationship with the Office of 
Inspector General at the Education Department (Education OIG). In 
January 2004, Education OIG presented a plan for an audit of 
telecommunication services at the New York City Department of Education 
(NYCDOE). Because of the significant amount of E-rate funding for 
telecommunication services at NYCDOE, Education OIG has proposed that 
they be reimbursed for this audit under a three-way MOU similar to the 
existing MOU with DOI OIG. In April 2004, the Universal Service Board 
of Directors approved the MOU. In June 2004, the MOU was signed and the 
audit was initiated.

Review of USAC Audits
    We have reviewed work performed by USAC's Internal Audit Division 
and performed the procedures necessary under our audit standards to 
rely on that work. In December 2002, USAC established a contract with a 
public accounting firm to perform agreed-upon procedures at a sample of 
seventy-nine (79) beneficiaries from funding year 2000. The sample of 
beneficiaries was selected by the OIG. In a departure from the two 
previous large-scale rounds of E-rate beneficiary audits conducted by 
USAC contractors, the agreed-upon procedures being performed under this 
contract would be performed in accordance with both the Attestation 
Standards established by the American Institute of Certified Public 
Accountants (AICPA) Standards and Generally Accepted Government 
Auditing Standards, issued by the Comptroller General (GAGAS or 
``Yellow Book'' standards). In March 2003, we signed a contract with a 
public accounting firm to provide audit support services for USF 
oversight to the OIG. The first task order that we established under 
this contract was for the performance of those procedures necessary 
under ``Yellow Book'' standards to determine the degree to which we can 
rely on the results of that work (i.e., to verify that the work was 
performed in accordance with the AICPA and GAGAS standards). Many of 
the audit findings raised by this body of work are reflected in the 
section addressing concerns with the E-rate program.

Support to Investigations
    In addition to conducting audits, we are providing audit support to 
a number of investigations of E-rate recipients and service providers. 
To implement the investigative component of our plan, we established a 
working relationship with the Antitrust Division of the Department of 
Justice (DOJ). The Antitrust Division has established a task force to 
conduct USF investigations comprised of attorneys in each of the 
Antitrust Division's seven (7) field offices and the National Criminal 
Office. We are also supporting several investigations being conducted 
by Assistant United States Attorneys.
    We are currently supporting seventeen (17) investigations and 
monitoring an additional fifteen (15) investigations. Allegations being 
investigated in these cases include the following:

 Procurement irregularities--including lack of a competitive process 
        and bid rigging;
 False Claims--Service Providers billing for goods and services not 
        provided;
 Ineligible items being funded; and
 Beneficiaries not paying the local portion of the costs resulting in 
        inflated costs for goods and services to the program and 
        potential kickback issues.
    In the past year, there have been a number of significant law 
enforcement actions involving the E-rate program:

 In May 2004, NEC-Business Network Solutions Inc. (NEC/BNS) pled 
        guilty and agreed to pay a total $20.6 million criminal fine, 
        civil settlement and restitution relating to charges of 
        collusion and wire fraud involving the E-rate program. NEC/BNS 
        was charged with allocating contracts and rigging bids for E-
        Rate projects at five different school districts in Michigan, 
        Wisconsin, Arkansas, and South Carolina, in violation of the 
        Sherman Antitrust Act. NEC/BNS was also charged with wire fraud 
        by entering into a scheme to defraud the E-Rate program and the 
        San Francisco Unified School District by inflating bids, 
        agreeing to submit false and fraudulent documents to hide the 
        fact that it planned on installing ineligible items, agreeing 
        to donate ``free'' items that it planned to bill E-rate for, 
        and submitting false and fraudulent documents to defeat inquiry 
        into the legitimacy of the funding request. In May 2004, NEC/
        BNS filed a petition for waiver of program suspension and 
        debarment rules. In July 2004, the Commission sought comment on 
        NEC/BNS's petition for waiver. The Commission has not taken 
        action on NEC/BNS's petition.
 In December 2004, Inter-Tel Technologies Inc. pled guilty and agreed 
        to pay a total of $8.71 million in criminal fines, civil 
        settlement, and restitution relating to charges of bid rigging 
        and wire fraud in connection with the E-Rate program. Inter-Tel 
        was charged with one count of allocating contracts and 
        submitting rigged bids for E-Rate projects at two different 
        school districts in Michigan and California. Inter-Tel also was 
        charged with one count of wire fraud and aiding and abetting by 
        willfully entering into a scheme to defraud the E-Rate program 
        in San Francisco by inflating bids, agreeing to submit false 
        and fraudulent documents to hide the planned installation of 
        ineligible items, and submitting false and fraudulent documents 
        to defeat inquiry into the legitimacy of the funding request. 
        In January 2005, Inter-Tel received a notice of suspension and 
        of proposed debarment from the E-rate program. The NEC/BNS and 
        Inter-Tel cases are part of a large, on-going investigation.
 In October 2004, Qasim Bokhari and Haider Bokhari pled guilty to 
        charges of conspiracy, fraud, and money laundering involving 
        the E-rate program. According to court papers, in 2001, Qasim 
        Bokhari and his company submitted applications for E-Rate 
        Program funding on behalf of 21 schools in the Milwaukee and 
        Chicago areas totaling more than $16 million. Qasim Bokhari and 
        his company eventually received more than $1.2 million for 
        goods and services that were not provided to three of these 
        schools. Additionally, according to the charges, Qasim Bokhari, 
        Haider Bokhari, and Raza Bokhari conspired to conduct numerous 
        financial transactions involving the proceeds of the fraud to 
        conceal and disguise the source of the proceeds. These alleged 
        financial transactions include wiring more than $600,000 to 
        Pakistan, purchasing a residence, and acquiring several 
        automobiles. In January 2005, Qasim Bokhari and Haider Bokhari 
        were each sentenced to six-year prison terms. In February 2005, 
        Qasim Bokhari and Haider Bokhari received notices of suspension 
        and proposed debarment from the E-rate program.

                    CONCERNS WITH THE E-RATE PROGRAM

    OIG involvement in E-rate audits and investigations has highlighted 
numerous concerns with this program. These include general programmatic 
and management concerns as well as specific concerns related to program 
design. General concerns include:

 lack of clarity regarding program rules, and;
 lack of timely and effective resolution of audit findings.
    Specific concerns regarding program design include;

 weaknesses in program competitive procurement requirements;
 ineffective use of purchased goods and services;
 over-reliance on certifications;
 weaknesses in technology planning; and
 issues relating to discount calculation and payment.

Lack of Clarity Regarding Program Rules
    Under Commission staff oversight, USAC has implemented numerous 
policies and procedures to administer the E-rate program. In some 
cases, the Commission has adopted these USAC operating procedures, in 
other cases however, USAC procedures have not been formally adopted by 
the FCC. In those cases where USAC implementing procedures have not 
been formally adopted by the Commission, it is the position of 
Commission staff that there is no legal basis for recovery of funds 
when applicants fail to comply with these procedures. To further 
complicate matters, we have been advised that, in some cases, USAC may 
have exceeded their authority in establishing program requirements. We 
are concerned about the distinction that Commission staff makes between 
program rules and USAC implementing procedures for a number of reasons.

 First, we believe that this distinction represents a weakness in 
        program design. Within their authority under program rules, 
        USAC has established implementing procedures to ensure that 
        program beneficiaries comply with program rules and that the 
        objectives of the program are met. In those cases where USAC 
        has established implementing procedures that are not supported 
        by program rules, USAC and the Commission have no mechanism for 
        enforcing beneficiary compliance.
 Second, we believe that it is critical that participants in the E-
        rate program have a clear understanding of the rules governing 
        the program and the consequences that exist if they fail to 
        comply with those rules. We do not believe that it is possible 
        under the current structure for applicants to have a clear 
        understanding of program rules. We are concerned that the 
        Commission has not determined the consequences of beneficiary 
        non-compliance in many cases and that, in those instances where 
        the Commission has addressed the issue of consequences for non-
        compliance, the consequences associated with clear violations 
        of program rules do not appear to be consistent.
 Third, a clear understanding of the distinction between program rules 
        and USAC implementing procedures is necessary for the design 
        and implementation of effective oversight. It is necessary for 
        the timely completion of audits and the timely resolution of 
        audit findings and implementation of corrective action 
        resulting from audits. This matter is further complicated by 
        the Commission's position that USAC may have exceeded their 
        authority in establishing some of the implementing procedures. 
        As a result, we have determined that it is necessary, as part 
        of the E-rate beneficiary audit process, to examine USAC 
        authority for establishing procedures for which we are 
        evaluating beneficiary compliance.

Lack of Timely and Effective Resolution of Audit Findings from E-rate 
        Beneficiary Audits
    Since our involvement in this program, I have become increasingly 
concerned about efforts to resolve audit findings and to recover funds 
resulting from E-rate beneficiary audits. It has been our observation 
that audit findings are not being resolved in a timely manner and that, 
as a result, actions to recover inappropriately disbursed funds are not 
being taken in a timely manner. In some cases, it appears that audit 
findings are not being resolved because USAC is not taking action in a 
timely manner. In other cases, findings are not being resolved because 
USAC is not receiving guidance from the Commission that is necessary to 
resolve findings. USAC is prohibited under program rules from making 
policy, interpreting unclear provisions of the statute or rules, or 
interpreting the intent of Congress. As a result of this prohibition, 
USAC must seek guidance from the Commission when audit findings are not 
clearly violations of Commission rules.
    The second large-scale audit of E-rate beneficiaries was conducted 
by the public accounting firm of Arthur Andersen under contract to 
USAC. In 2001, USAC contracted with Arthur Andersen to conduct audits 
at twenty-five (25) beneficiaries from funding years 1999 and 2000. E-
rate disbursements to these beneficiaries totaled $322 million. Arthur 
Andersen provided a draft audit report summarizing the results of these 
audits on May 31, 2002. The final report, including responses from the 
USAC Schools and Libraries Division, was released by the Schools and 
Libraries Committee of the USAC Board of Directors on April 23, 2003, 
eleven months after the draft report was provided by Arthur Andersen. 
The audit report disclosed monetary findings at fourteen (14) of the 
twenty-five (25) beneficiaries including $11.4 million dollars in 
inappropriate disbursements and unsupported costs. As of September 30, 
2003, USAC had recovered $1,927,579 in inappropriate disbursements and 
unsupported costs and initiated recovery actions for another 
$1,353,741, of which $709,013 is under appeal. We have been advised 
that USAC initiated recovery actions for the remaining $8,059,141.
    The final report adopted by the Universal Service Board also 
identified eleven (11) policy issues, relating to thirty-three (33) 
separate findings, for which USAC determined that FCC policy guidance 
was required. The dollar value of potential fund recoveries associated 
with these thirty-three (33) findings was not available because, in 
most cases, the final report indicated that those amounts had not been 
determined. Policy issues identified included the lack of fixed asset 
and associated records, maintenance of connectivity once it is 
established, technology plan approver control and requirements, 
insufficient documentation including lack of invoice detail and vendor 
payment information, incomplete or insufficient competitive bidding 
documentation, monitoring of technology plan goals and objectives, and 
physical security of equipment. Although the final report was released 
on April 23, 2003, USAC did not request policy guidance from Commission 
staff until October 2003. In January 2004, Commission staff provided 
``informal'' guidance to USAC related to E-rate beneficiary audits 
being conducted by KPMG. These informal comments included reference to 
four (4) of the eleven (11) Arthur Anderson round 2 policy questions 
raised by USAC in their October 2003 request. On March 4, 2004, 
Commission staff provided guidance to USAC on the eleven (11) policy 
issues, almost two years after the draft report was submitted by Arthur 
Andersen. Many of the policy questions raised in USAC's request for 
guidance address issues identified in other audits including other E-
rate beneficiary audits conducted by USAC's Internal Audit Division and 
those conducted by the FCC OIG.

Weaknesses in Program Competitive Procurement Requirements
    Program rules require that applicants use a competitive procurement 
process to select vendors. In establishing this requirement, the 
Commission recognized that ``(c)ompetitive bidding is the most 
efficient means for ensuring that eligible schools and libraries are 
informed about all of the choices available to them'' and that 
``(a)bsent competitive bidding, prices charged to schools and libraries 
may be needlessly high, with the result that fewer eligible schools and 
libraries would be able to participate in the program or the demand on 
universal service support mechanisms would be needlessly great.''
    Applicants are required to submit a form 470 identifying the 
products and services needed to implement the technology plan. The form 
470 is posted to the USAC web page to notify service providers that the 
applicant is seeking the products and services identified. Applicants 
must wait at least 28 days after the form 470 is posted to the web site 
and consider all bids they receive before selecting the service 
provider to provide the services desired. In addition, applicants must 
comply with all applicable state and local procurement rules and 
regulations and competitive bidding requirements. The form 470 cannot 
be completed by a service provider who will participate in the 
competitive process as a bidder and the applicant is responsible for 
ensuring an open, fair competitive process and selecting the most cost-
effective provider of the desired services. Further, although no 
program rule establishes this requirement, applicants are encouraged by 
USAC to save all competing bids for services to be able to demonstrate 
that the bid chosen is the most cost-effective, with price being the 
primary consideration.
    Although the programs competitive bidding requirements were 
intended to ensure that schools and libraries are informed about all of 
the choices available to them, we have observed numerous instances in 
which beneficiaries are not following the program's competitive bidding 
requirements or are not able to demonstrate that competitive bidding 
requirements are being followed. We question whether the rules are 
adequate to ensure a competitive process is followed. In addition, weak 
recordkeeping requirements to support the procurement process, as well 
as other aspects of the E-rate application, offer little protection to 
the program. We believe that the competitive procurement requirements 
are based on some faulty assumptions. For example,

 Form 470s will have enough information for meaningful proposals from 
        prospective service providers.
 Service providers are reviewing and considering posted form 470s 
        (particularly for smaller schools).
 ``Applicable'' state and local procurement regulations exist and 
        those regulations are consistent with program rules.

Ineffective Use of Purchased Goods and Services
    Site visits are conducted during most E-rate beneficiary audits. 
Site visits are conducted for several reasons including to evaluate the 
eligibility of facilities where equipment is installed, verify that 
equipment is installed and operational, and to verify that equipment is 
being used for its intended purpose. Examples of concerns identified 
during audits and investigations are as follows:

 Goods and services not being provided.
 Unauthorized substitution of goods and services.
 Goods and services being provided to ineligible facilities (e.g., 
        non-instructional building including dormitories, cafeterias, 
        and administrative facilities).
 Equipment not being installed or not operational. Program rules 
        require that nonrecurring services be installed by a specified 
        date. However, there is no specific FCC rule requiring 
        beneficiaries to use equipment in a particular way, or for a 
        specified period of time, or to full efficiency. Commission 
        staff have provided guidance stating that if the equipment was 
        uninstalled (i.e., still in a box) that would represent a rule 
        violation. However, Commission staff have also provided 
        guidance stating that the rules do not require that 
        beneficiaries effectively utilize the services provided or that 
        the beneficiaries maintain continuous network or Internet 
        connectivity once internal connections are installed.

Over-reliance on Certifications
    The E-rate program is heavily reliant on applicant and service 
provider certifications. For example, on the form 470, applicants 
certify that the support received is conditional upon the ability of an 
applicant to secure access to all of the resources, including 
computers, training, software, maintenance, and electrical connections, 
necessary to use effectively the services that will be purchased under 
this mechanism. On the form 471, applicants make several important 
certifications. Applicants certify that they have ``complied with all 
applicable state and local laws regarding procurement of services for 
which support is being sought'' and that ``the services that the 
applicant purchases--will not be sold, resold, or transferred in 
consideration for money or any other thing of value.'' Other 
certifications are required on various program forms.
    My office started to raise concerns about perceived weaknesses in 
the competitive procurement process and over reliance on certifications 
shortly after we became involved in program oversight. We first became 
concerned about the competitive procurement process as a result of our 
involvement in the Metropolitan Regional Education Service Agency 
(MRESA) investigation. During that investigation we observed how 
weaknesses in competitive bidding requirements and reliance on self 
certification were exploited resulting in, at a minimum, a significant 
amount of wasteful spending. We continued to express our concerns as we 
designed our oversight program, developed a program for auditing 
beneficiaries, and supported E-rate fraud investigations. In fact, we 
established a working relationship with the Antitrust Division of the 
Department of Justice in a large part because of the number of 
investigations that we were supporting that involved allegations 
regarding the competitive procurement process.
    Our level of concern regarding both the competitive procurement 
process and reliance on self-certification was heightened as we started 
to work with the Antitrust Division. During our discussions with 
Antitrust, they expressed a general concern with the lack of 
information regarding the competitive process and specific concerns 
regarding applicant and service provider certifications. We started to 
pursue issues raised by the Antitrust Division with Commission staff in 
the fall of 2002. I am pleased to report today that the Commission has 
addressed many of the recommendations from Antitrust and is considering 
action on other recommendations.

Weaknesses in Technology Planning
    Program rules require that applicants prepare a technology plan and 
that the technology plan be approved. The approved technology plan is 
supposed to include a sufficient level of information to justify and 
validate the purpose of a request for E-rate funding. USAC implementing 
procedures state that approved technology plans must establish the 
connections between the information technology and the professional 
development strategies, curriculum initiatives, and library objectives 
that will lead to improved education and library services. Although the 
technology plan is intended to serve as the basis for an application, 
we have observed many instances of non-compliance with program rules 
and USAC procedures related to the technology planning process. 
Examples of technology planning concerns identified during audits and 
investigations are as follows:

 Technology plans are not being reviewed and approved in accordance 
        with program rules.
 Technology plans do not address all required plan elements in 
        accordance with USAC implementing procedures for technology 
        planning. Commission staff has provided guidance that failure 
        to comply with USAC implementing procedures for technology 
        plans is not a rule violation and does not warrant recovery of 
        funds. As part of the current round of beneficiary audits, we 
        are attempting to determine if USAC had the authority to 
        establish these requirements.
 Applicants not being able to provide documentation to support the 
        review and approval of technology plan.
    USAC guidance on technology planning states that ``(i)n the event 
of an audit, you may be required to produce a certification similar to 
the SLD sample ``Technology Plan Certification Form,'' in order to 
document approval of your technology plan.'' Numerous audits have 
included findings beneficiaries were unable to provide documentation to 
demonstrate the review and approval of technology plans. Although 
program rules require that applicants have a technology plan and that 
the plan be approved, the rules do not require that the applicant 
maintain specific documentation regarding the approval process.

Discount Calculation and Payment of the Non-Discount Portion
    The E-rate program allows eligible schools and libraries to receive 
telecommunications services, Internet access, and internal connections 
at discounted rates. Discounts range from 20% to 90% of the costs of 
eligible services, depending on the level of poverty and the urban/
rural status of the population served, and are based on the percentage 
of students eligible for free and reduced lunches under the National 
School Lunch Program (NSLP) and other approved alternative methods. A 
number of audits have identified audit findings that applicants have 
not followed program requirements for discount rate calculation or were 
unable to support the discount rate calculated.
    Applicants are required to pay the non-discount portion of the cost 
of the goods and services to their service providers and service 
providers are required to bill applicants for the non-discount portion. 
The discount rate calculation and program requirement for payment of 
the non-discount portion are intended to ensure that recipients avoid 
unnecessary and wasteful expenditures and encourage schools to seek the 
best pre-discount rate. Examples of concerns identified during audits 
and investigations are as follows:

 Applicant not paying the non-discount portion;
 Applicant not paying the non-discount portion in a timely manner; and
 Service providers not billing recipients for the non-discount 
        portion.
    I am pleased to report that concerns that we have raised about the 
E-rate program have received considerable attention at the Commission. 
Most notably, on August 4, 2004, the Commission adopted the Fifth 
Report and Order on the Schools and Libraries Universal Service Support 
Mechanism. In the Fifth Report and Order, the Commission resolved a 
number of issues arising from audits of the E-rate program and 
programmatic concerns raised by my office. In the introduction to the 
Fifth Report and Order, the Commission included the following statement 
regarding actions taken in the order:

          First, we set forth a framework regarding what amounts should 
        be recovered by the Universal Service Administrative Company 
        (USAC or Administrator) and the Commission when funds have been 
        disbursed in violation of specific statutory provisions and 
        Commission rules. Second, we announce our policy regarding the 
        timeframe in which USAC and the Commission will conduct audits 
        or other investigations relating to use of E-rate funds. Third, 
        we eliminate the current option to offset amounts disbursed in 
        violation of the statute or a rule against other funding 
        commitments. Fourth, we extend our red light rule previously 
        adopted pursuant to the Debt Collection Improvement Act (DCIA) 
        to bar beneficiaries or service providers from receiving 
        additional benefits under the schools and libraries program if 
        they have failed to satisfy any outstanding obligation to repay 
        monies into the fund. Fifth, we adopt a strengthened document 
        retention requirement to enhance our ability to conduct all 
        necessary oversight and provide a stronger enforcement tool for 
        detecting statutory and rule violations. Sixth, we modify our 
        current requirements regarding the timing, content and approval 
        of technology plans. Seventh, we amend our beneficiary 
        certification requirements to enhance our oversight and 
        enforcement activities. Eighth, we direct USAC to submit a plan 
        for timely audit resolution, and we delegate authority to the 
        Chief of the Wireline Competition Bureau to resolve audit 
        findings. Finally, we direct USAC to submit on an annual basis 
        a list of all USAC administrative procedures to the Wireline 
        Competition Bureau (Bureau) for review and further action, if 
        necessary, to ensure that such procedures effectively serve our 
        objective of preventing waste, fraud and abuse.

                   UPDATE ON OIG OVERSIGHT ACTIVITIES

    As I discussed earlier in this testimony, the primary obstacle to 
implementation of effective, independent oversight has been a lack of 
adequate resources to conduct audits and provide audit support to 
investigations. This lack of resources has prevented us from completing 
the body of work necessary to assess fraud, waste, and abuse at the 
program level.
    Since our initial involvement in independent oversight of the USF 
as part of our conduct of the FY 1999 financial statement audit, we 
have added four (4) staff auditor positions and organized USF oversight 
activities under an Assistant Inspector General for USF Oversight. This 
represents dedication of five (5) of the ten (10) auditors on the staff 
of the FCC OIG to USF oversight. In addition to the OIG staff dedicated 
to USF oversight, two (2) audit staff members responsible for financial 
audit are also involved in USF oversight as part of the financial 
statement audit process. In January 2005, we were advised that the OIG 
would receive two (2) additional staff for USF oversight. We are in the 
process of hiring these additional staff.
    We have also requested appropriated funding to obtain contract 
support for our USF oversight activities. In our FY 2004 budget 
submission, we requested $2 million for USF oversight. That request was 
increased to $3 million in the President's budget submission for FY 
2004. This funding was not included in the Commission's final budget 
for FY 2004 and report language indicated that monies for USF audits 
should come from the fund itself.
    Based largely on that report language, we began to explore 
alternatives for obtaining access to contract audit support to 
implement the USF oversight portions of our audit plan. We have been 
working with USAC since last summer to establish a three-way contract 
under which the OIG and USAC can obtain audit resources to conduct USF 
audits. Under this contract, we intend to conduct the body of audits 
necessary to assess fraud, waste, and abuse at the program level by 
conducting a statistically valid sample of audits for each of the four 
USF funding mechanisms. The objectives of the audits are to: (1) detect 
waste, fraud, and abuse by beneficiaries of the universal service 
support mechanisms, (2) deter waste, fraud, and abuse by beneficiaries 
of the universal service support mechanisms, (3) generate insights 
about the compliance of beneficiaries with applicable law and the 
quality of administration of the universal service support mechanisms 
and (4) identify areas for improvement in the compliance of 
beneficiaries with applicable law and in the administration of the 
universal service mechanisms. An additional objective is to identify 
improper payments as defined by the Office of Management and Budget to 
estimate error rates for the Improper Payments Improvement Act of 2002 
(IPIA). I am pleased today to report that we are close to selecting a 
public accounting firm, or firms, to provide support for our USF 
oversight activities, including E-rate audits and support to E-rate 
investigations. We released a Request for Proposal in November 2004 and 
expect to complete the selection process very soon.
    We are also working with USAC and a public accounting firm under 
contract to USAC to conduct the fourth large-scale audit of E-rate 
beneficiaries. One-hundred beneficiaries are being audited as part of 
this project. The project was initiated in August 2004 and is expected 
to be completed next summer.

                               CONCLUSION

    The Office of Inspector General remains committed to meeting our 
responsibility for providing effective independent oversight of the USF 
and we believe we have made significant progress. While the Commission 
has taken steps to address programmatic weaknesses, more work remains 
to be done. Through our participation in the fourth large-scale round 
of E-rate beneficiary audits with USAC and through audits that we 
anticipate conducting under our three-way agreement with USAC, we are 
moving forward to evaluate the state of the program and identify 
opportunities for programmatic improvements.

    Mr. Whitfield. Thank you, Mr. Bennett, and we appreciate 
the testimony of all of you.
    Listening to the testimony this afternoon emphasizes, once 
again, what I consider to be some significant problems with 
this program. We have heard mentioned today procurement 
irregularities, false claims, purchase of ineligible items of 
the E-Rate program, local match not being made, civil fines and 
criminal fines totally $20 million, totaling $8 million in 
another instance, people going to prison. And yet this was a 
program, I think, that started with great promise, certainly 
sufficient funding to make a significant difference in the 
lives of a lot of young people; and yet report after report 
after report points out serious shortcomings in the oversight 
of this program.
    One issue that I would like to discuss--and there will be 
many more, of course--but the National Exchange Carrier 
Association is a body of about 900 companies that provide 
Internet services, phone services, whatever. And a subsidiary 
of that is the Universal Service Administrative Company. And 
the carriers, themselves, that go to the local school boards or 
libraries and talk to them about the various equipment that is 
available to them, they do certification themselves; the 
schools do certification themselves; the libraries certify 
themselves. Do you not see an inherent conflict of interest 
with this Universal Service Corporation that is administering 
this program being a subsidiary of the companies that benefit 
by selling the equipment? I would just ask all three of you 
that question to start off with. Do you see an inherent 
conflict in that setup?
    Mr. Goldstein. Mr. Chairman, we didn't really look at that, 
per se, but I think what is important is that structural 
clarity is obviously required in this program at a lot of 
levels. We think it is clear, particularly between the FCC and 
USAC, that while they have tried to make a number of changes in 
the last couple years to improve the program--and the August 
order that the other gentleman at the table had mentioned has 
helped to improve some of the structural issues--there are many 
issues that still remain. I am sure that the issue that you 
referred to may partly be suffering from the same kind of 
question. But we did not specifically look at that, and so it 
is difficult for me to comment.
    Mr. Whitfield. Well, what is your impression, Mr. Carlisle, 
of that issue?
    Mr. Carlisle. NECA is an entity that predated the 1996 act 
that was established not to represent rural carriers so much as 
it was established to coordinate pooling of payments, of costs 
among them, so that they could recover their costs through 
common tariff filings.
    So NECA is an independent entity. I do not see that there 
is specifically a conflict of interest. Now, there may be other 
reasons to change the structure of USAC and how it manages the 
fund, but I don't see that, specifically, as being an issue. I 
could certainly talk about it in further detail with your staff 
if you would like.
    Mr. Whitfield. But from your perspective, you don't see any 
conflict at all?
    Mr. Carlisle. I don't know that that has been--I don't see 
a conflict, given how NECA was set up and what its intent is. 
Is there a possibility that you have carriers--you do have 
carriers on the USAC board, for example, but you also have 
representatives from State consumer groups, and you have other 
entities on the board as well--representatives from the schools 
and library community. So it certainly bears looking into, and 
we can talk about the issues relating to NECA specifically, in 
detail with your----
    Mr. Whitfield. Do you have any thoughts on this, Mr. 
Bennett?
    Mr. Bennett. This was actually an area that, when we first 
got involved in oversight of USF, it was certainly something 
that we had questions about. As we got more involved, our focus 
began to shift toward, how the funds were being used; so it is 
not something we have really explored in some time.
    Mr. Whitfield. Well, Mr. Goldstein, and you, Mr. Bennett, 
you all are involved in a lot of studies and oversight 
investigations in a lot of different programs. When you read 
these GAO reports, and when you go back and you look at the 
hearings from last year, you see these criminal convictions and 
these civil convictions. It appears that--and not being able to 
determine how much this program specifically contributed to 
connecting these schools and libraries, it seems pretty 
frustrating to me. In comparing this to other investigations, 
do you find this to be a blatantly badly administered program 
compared to other investigations you have done?
    Mr. Goldstein. I would say, Mr. Chairman, that I think 
there are a number of issues which are outlined in the report 
that are problems that have been surfaced now for a number of 
years. At the same time, I think that FCC and USAC have tried 
to make progress, particularly in the last couple of years. I 
think they have gotten a better handle on how portions of this, 
being Federal funds, are going to be connected to various laws. 
As they have tried to work out procedures that ought to be 
codified, they have dealt with other issues.
    But I think, really, at the bottom of it, though, is an 
issue with respect to what is trying to be achieved. The goals 
and the performance measures for this program have never really 
been developed, frankly, and until or unless that is done, it 
is difficult to know what the program is achieving and what its 
connection to connectivity in the schools really is, so I think 
that is----
    Mr. Whitfield. Mr. Carlisle, do you agree that the goals 
have never really been clearly articulated?
    Mr. Carlisle. Of the program?
    Mr. Whitfield. Yes.
    Mr. Carlisle. I believe the goals of the program--what we 
were told by the statute to do was to facilitate the funding of 
telecommunications services in schools; that was the goal that 
we were given.
    In terms of the FCC having effective metrics to ensure that 
that goal was being met, I would absolutely agree that 
effective metrics for that were never adopted by the 
Commission. We adopted a metric that basically looked at gross 
Internet connections; but as GAO points out, it doesn't really 
break out what effect the fund, itself, had on that and what 
would have been the effect if the fund had never been in place. 
So I agree. We need to get those metrics in place.
    Mr. Whitfield. Well, you know, you hear, repeatedly, that 
one of the primary obstacles for the FCC is lack of resources; 
and yet you look at the money that is available in this fund--
over $14 billion, $9 billion committed--why hasn't the FCC 
every come forward and asked for additional resources, even 
from the fund, to help provide adequate oversight and to remove 
some of these errors?
    Mr. Carlisle. I think I should give you my answer in two 
parts.
    First of all, we have come to Congress, repeatedly, to ask 
for additional resources in order to improve our oversight, and 
we have another request in 2006 submission. In terms of use of 
the fund--this is the second part of the answer. In terms of 
use of the fund, my understanding from our general counsel's 
office is that 31-USC-1351 prohibits an agency from 
transferring funds between accounts in the budget.
    Mr. Whitfield. Well, why don't we change that?
    Mr. Carlisle. That would allow us to do so, and I think 
that has been discussed before.
    Mr. Whitfield. Yes, but we have lost millions of dollars in 
this program, and it seems to me that changing a law to allow 
you to use those funds would not be something that would be all 
that difficult.
    Mr. Carlisle. If Congress would like to do that, I would be 
absolutely thrilled.
    Mr. Whitfield. Mr. Goldstein and Mr. Bennett, I noticed 
that in the letter that was submitted as the testimony for the 
FCC that they mentioned--in the GAO report it said that the FCC 
has not done a comprehensive assessment of what Federal 
requirements, policies, and practices apply to the E-Rate 
program. The FCC responded to your report by stating that it 
has undertaken timely and extensive analysis of the significant 
legal issues related to the status of the Universal Service 
Fund on a case-by-case basis. Mr. Goldstein, what is your 
concern with the FCC's case-by-case approach?
    Mr. Goldstein. We have a couple of concerns, Mr. Chairman. 
We recognize that the Commission has, indeed, gone through a 
process on an ad hoc basis where they have tried to determine 
which laws applied to the Universal Service Fund. The problem 
is, from our perspective, twofold. One is that they didn't do 
it comprehensively. They haven't taken a look at the entire 
financial management structure that would accrue to funds that 
are considered to be Federal funds, and when this became a 
permanent and definite appropriation, it seems to us that they 
had to take a look at that from the perspective of how these 
various laws would apply and to do so, not in isolation, but 
together, because some of them have impacts on other laws. 
There is a framework, frankly, we believe, of how the laws are 
applied to be able to protect the program and the funds 
themselves.
    Second of all, over time, this program has obviously 
changed considerably I think it is important to note that back 
1998, the Commission did what I would call a kind of cursory 
look at the Anti-deficiency Act--and whether it applied to the 
fund. That was before there was a determination that these were 
Federal funds. And they really, as far as we can tell, never 
went back, until last year, to look again. In other words, the 
passage of time, in addition to the framework, need to be 
looked at together, over time, vigilantly, to make sure that 
these kinds of things are dealt with forthrightly and that the 
funds are protected in the way that the government expects 
Federal funds to be protected.
    Mr. Whitfield. Thank you, my time has expired. Mr. Stupak?
    Mr. Stupak. Thank you, Mr. Chairman. Mr. Carlisle, I would 
like to follow up a couple of questions that the Chairman had 
asked.
    You indicated that you have come to Congress to ask for 
more people, correct? To do your work? I need yes or no.
    Mr. Carlisle. Yes.
    Mr. Stupak. Okay. But yet, you pay for USAC out of this 
fund, don't you?
    Mr. Carlisle. Yes.
    Mr. Stupak. You don't have to come to Congress to get 
authorization to pay USAC.
    Mr. Carlisle. That is correct.
    Mr. Stupak. So you could put more auditors in USAC to help 
find these deficiencies or problems within this program, could 
you not?
    Mr. Carlisle. I believe USAC has hired additional personnel 
in order to deal with this, and that is being reflected in 
their increased administrative costs over the last year.
    Mr. Stupak. Yes. Right. But the point is, if you were 
aggressive, you don't really need to come to Congress. If you 
can hire USAC, you certainly can hire auditors for USAC to make 
sure that these discrepancies were not there.
    Mr. Carlisle. But even if USAC does have a full team of 
auditors and goes out and finds problems with the program, at 
some point, we bear operational or we bear programmatic 
responsibility to review those findings.
    Mr. Stupak. Sure.
    Mr. Carlisle. And at the same time as handing the policy on 
the program, how funds are distributed, who receives the funds, 
how we get the funds in----
    Mr. Stupak. Sure.
    Mr. Carlisle. [continuing] that is a lot of responsibility. 
And so getting additional resources into USAC helps, but it 
doesn't solve the problem for us. We need additional resources 
in the FCC to deal to with it.
    Mr. Stupak. Hindsight is always 20/20, but if USAC would 
have been set up differently, maybe you wouldn't have had all 
problems if you had ongoing audits because I mean it seems 
like, you know, when no one is watching the store, that is when 
it gets robbed. Right?
    Mr. Carlisle. I think the--well, I have to agree with you 
that if USAC had been set up differently from the beginning, we 
may very well have avoided some of these problems.
    Mr. Stupak. Well, how about the FCC? Does that come 
underneath the Single Audit Act?
    Mr. Carlisle. Pardon me?
    Mr. Stupak. Is FCC subject to the Single Audit Act?
    Mr. Carlisle. Yes, I believe so.
    Mr. Stupak. Okay. Well, then, why wouldn't you use that Act 
because any expenditure over $300,000 is required to be 
audited, and that Act expressly allows you to pay for auditors 
from the funds from which the money came from.
    Mr. Carlisle. Well, I believe we are going through 
processes where we are using funds from the USF to pay for 
audits. For example, the audits under the Improper Payment 
Improve Act--later on this year, we are going to be conducting 
hundreds of those audits. Those audits are being conducted 
under a 3-way agreement between our inspector general----
    Mr. Stupak. Sure.
    Mr. Carlisle. --USAC, and the auditors.
    Mr. Stupak. Right.
    Mr. Carlisle. [continuing] and those auditors are being 
paid for out of the fund.
    Mr. Stupak. Right. Well, my question was in the past 8 or 9 
years that the fund has been there, why wasn't that Single 
Audit Act looked at because, again, any expenditure over 
$300,000 has to be audited; and if the FCC is subject to it, 
that would give you more personnel because you can take the 
money out of that fund. Again, hindsight is always 20/20, but I 
can just point to two examples where I think the FCC could have 
done a better job, and the existing law is there where the 
funds would have been made available.
    Mr. Carlisle. Well, with regard to the use of the Single 
Audit Act historically, I will be happy to talk to our Office 
of the General Counsel and get back to your staff about that.
    Mr. Stupak. Mr. Goldstein, is that a fair assessment of the 
Single Audit Act that they could have done that?
    Mr. Goldstein. The Single Audit Act could be used, sir, and 
my understanding of it--and counsel can certainly help me--is 
that it involves anything related to law, to grants, to loans, 
cooperative agreements, and ``other assistance.''
    Mr. Stupak. Sure.
    Mr. Goldstein. And this would certainly fall into that 
category, as it seems to us.
    Mr. Stupak. Well, Mr. Carlisle, let me ask you this: you 
know the chairman and I and others have brought up the $100 
million of Puerto Rico, $67 million from the El Paso, and the 
FCC has been aware of these cases for some time. Yet from 
everything we can gather, the FCC has only recovered--$36 
million in overcharges have been identified--not recovered, but 
at least identified. And if you have been aware of these cases 
for some time, why has no determination been made, then, 
regarding the refunds due to the E-Rate program, much less any 
steps for recovery on these two cases?
    Mr. Carlisle. You are talking about El Paso, specifically?
    Mr. Stupak. Well, sure. El Paso and Puerto Rico, I mean. I 
know you tried to do some stuff on Puerto Rico, but if you take 
these two cases, there is $167 million that has sort of been 
wasted, and only $36 million in overcharges have been 
identified. I would think we would find a lot more, so I guess 
I am asking you why has no determination been made regarding 
recovery of funds? And let us start with El Paso because I 
don't think anything has been done on that case, $67 million.
    Mr. Carlisle. I am actually more familiar with the facts of 
the Puerto Rico case.
    Mr. Stupak. Okay.
    Mr. Carlisle. On El Paso, I will not be able to provide any 
details at this time. On Puerto Rico, however, I believe KPMG 
is going to be finishing its final audit report within the next 
month or so, and it is going to be submitted for consideration 
at the USAC board meeting.
    Mr. Stupak. Will they identify that could possibly be 
recovered?
    Mr. Carlisle. I believe so. We will see when we see their 
actual final audit report. I have not seen a draft of it.
    Mr. Stupak. Okay. I spoke of the $36 million that has been 
identified. Of that $36 million, only $3.2 million has actually 
been recovered; $14.4 million is tied up in appeals. This is 
money that could have gone back into the E-Rate. Why have we 
only been able to recover $3.2 million? I mean how long has 
this program been going on now? Eight years at $2 billion a 
year, that is about $16 billion; and of all the money spent and 
problems we have, we only got about $3 million ever recovered--
$3.2 million.
    Mr. Carlisle. I would have to actually check on the $3.2 
million number. However, in terms of the process for recovery, 
like any other audit and recovery process, there is a process 
to it to ensure that the beneficiaries actually have a fair 
opportunity to take a look at the audit reports. They have the 
ability to challenge the audit findings. If USAC comes out with 
an audit finding that warrants recovery, they can appeal that 
to the Commission.
    Mr. Stupak. Sure.
    Mr. Carlisle. And Commission review of that can take some 
time.
    Mr. Stupak. Take some time.
    Mr. Carlisle. And so I think that is probably the primary 
reason why you haven't seen recovery tracking the total amount 
that has been identified. However, I am hopeful that we will 
move forward very quickly over the next year to increase that 
that.
    Mr. Stupak. In the responder saying the FCC Wireline 
Competition Bureau cannot provide Congress or the public with 
any indication as to the magnitude of the potential of waste, 
fraud, and abuse within the E-Rate program? Is that correct?
    Mr. Carlisle. Where do you get that understanding? I 
don't--was that something that we said, if I may ask?
    Mr. Stupak. It was in one of the report we read that the 
FCC Wireline Competition Bureau cannot provide Congress or the 
public with any indication as to the magnitude of a potential 
waste, fraud, and abuse within the E-Rate program. So if that 
is correct, how do you propose to provide us with a meaningful 
counting of the FCC's stewardship of the E-Rate program?
    Mr. Carlisle. Well, first, as to a concept as to the amount 
of waste, fraud, and abuse in the program: I believe we are 
getting a sense of that as a result of the audits that have 
been conducted so far.
    Mr. Stupak. What is that sense? What do you think? 10 
percent? 20 percent?
    Mr. Carlisle. Well, if we look at the audits that have been 
conducted so far----
    Mr. Stupak. Sure.
    Mr. Carlisle. [continuing] as the IG stated in their 
testimony, they found that there were compliance issues with 
about 36 percent of the audits that they have conducted. If you 
look at the total amount of dollars disbursed that would be 
recoverable because of those compliance issues, it comes out to 
somewhere, I believe, between 3 and 5 percent of the dollars 
disbursed, and I believe that is actually confirmed by the 
results of our most recent round of--I believe it was the KPMG 
audits, which saw that out of the total numbers of dollars 
disbursed that were audited, about 3-percent recovery was 
warranted.
    Mr. Stupak. So that is about, if my math is correct, about 
$500 million; yet nationwide, we have identified about $36 
million.
    Mr. Carlisle. As a result of the audits that we conducted--
and some of those were audits--I believe some of the audits 
that were conducted were as a result of specific issues that 
were identified, so it was not a random sampling. The KPMG 
audit was a random sampling. So in terms of how that lines up, 
I would have to look at the details myself and get back to you.
    Mr. Stupak. Okay. If I can go back to El Paso for a 
minute--and maybe Mr. Bennett will want to help you on that 
one. Over the course of the subcommittee's investigation into 
the El Paso School System, we learned that El Paso persuaded 
USAC to fund a $27 million, state-of-the-art, network-
maintenance-system support center for 53 of the districts' 
school that keep the networks so-called up and running. And you 
know, I think the Chairman brought it up--it was switches and 
routers and cables; all should have been conveyed by vendor 
warranties--or at least the first year after installation 
should have been warranted. They spend the $27 million, and it 
only operates for about 3 months, and the system sort of 
crashes.
    And in order to ensure that this type of deceit does not 
happen again, what mechanisms can the FCC put in to make sure 
that--first of all, $27 million, there is a Cadillac plan was 
way too much for the school, and that is why the whole system 
crashed. What do you have in there to make sure that you don't 
have that kind of rip off again by vendors? And I will use El 
Paso as an example.
    Mr. Carlisle. Well, I believe there are several steps that 
the Commission has taken and will continue to take in order to 
protect against that. First of all, in the Fifth Report and 
Order that was released last year, the Commission codified 
rules regarding technology plans that the schools are supposed 
to have in order to determine the equipment that is appropriate 
for them. These plans have to be consistent with Department of 
Education guidelines. That is in place now. And they are also 
required to retain documents related to the development of the 
technology plan.
    Separately, when USAC goes through the 35,000--actually it 
is approaching 40,000, now--applications a year for E-Rate 
funding, they actually have a system very similar to, for 
example, the system that the SEC uses to identify possible 
insider trading transactions. Flags will go up if certain 
parameters are not met when a bid is submitted. So we actually 
have the ability to take a look at that and prevent the actual 
application from being approved. So there are steps that are 
taken before the funding every goes out; and then there are 
steps that can be taking after the funding goes out through the 
auditing of the program.
    Mr. Stupak. Well, I know my time is up. Can I just ask one 
more question? Okay.
    The El Paso system--just a little more on El Paso here. On 
El Paso School System, if it had a 1-year warranty, it crashes 
after 3 months, have you done anything to try and go after this 
$27 million? It seems like you have a warranty, you have a 
great legal to ground to go after it. Has anything been sought 
to recover any of that money?
    Mr. Carlisle. I am sorry. I am going to have to get back to 
you on details about that. I am just not familiar enough with 
the details of the case. I am sorry about that.
    Mr. Stupak. Thank you, Mister----
    Mr. Whitfield. The gentleman's time is expired. The 
gentlelady from Tennessee, Ms. Blackburn.
    Ms. Blackburn. Thank you, Mr. Chairman, and thank you to 
each of you for being here today. We have been interested to 
read your testimony and interested to have you here with us. 
And Director Goldstein, I think I will begin with you, if you 
don't mind.
    From my time I served on government reform, I have come to 
really appreciate you guys----
    Mr. Goldstein. Thank you very much.
    Ms. Blackburn. [continuing] and the work that you. You all 
have indicated that there may be 35 programs--or at least 35 
other programs that provide funding for technology in schools 
and that this funding could move as high as $12 billion. Is 
that correct?
    Mr. Goldstein. Are you referring to an older report of 
ours? Are you----
    Ms. Blackburn. Yes.
    Mr. Goldstein. Yes. This is----
    Mr. Blackburn. Okay.
    Mr. Goldstein. In a report that we issued a number of years 
ago, that is correct.
    Ms. Blackburn. Okay. Great. Have any of these other 
programs had the financial problems that E-Rate has?
    Mr. Goldstein. I am not sure that we have tracked them 
since then, so I think it is pretty difficult for us to tell. 
This is a report that was issued some time ago about other 
kinds of programs. And obviously, they have, no doubt, changed 
over the years, so I would hesitate to characterize what kinds 
of problems they may have today. Whether they had problems at 
that time, obviously, is another issue; but we haven't tracked 
them in a way that would help us to answer that question.
    Ms. Blackburn. Okay. So you have not tracked the 
effectiveness of those programs?
    Mr. Goldstein. No, ma'am.
    Ms. Blackburn. Okay. Is it too much for me to ask if you 
would respond to me on those programs and the financial 
management of those programs so that we will know what is still 
in effect? I see the individuals who are with you and seated 
behind you kind of nodding their heads----
    Mr. Goldstein. I hope they are nodding their heads, yes.
    Ms. Blackburn. [continuing] making some comments, and I 
think that would be helpful to us.
    Mr. Goldstein. We will be happy to get back to you and to 
figure out how we can----
    Ms. Blackburn. That would be great.
    Mr. Goldstein. [continuing] help you with that.
    Ms. Blackburn. That would be great. I think as we look at 
E-Rate that that would be helpful to have that information 
because if there is a way to begin to measure some 
effectiveness moving forward, I think it would serve us well.
    Another thing on E-Rate, funded, primarily, through the 
Universal Service Fee, and that is capped at $2.25 billion per 
year. And the tax started out at 3 percent in 1998 and is now 
at 9 percent. Is that correct?
    Mr. Carlisle. May I?
    Ms. Blackburn. Yes. Go ahead, please, Mr. Carlisle.
    Mr. Carlisle. It is actually, for the first quarter of the 
year, it is at 10.7 percent.
    Ms. Blackburn. 10.7? Thank you for that. That is important. 
I have just left a telecommunications subcommittee hearing, and 
you know, as we look at the Telecom Act, I think that applies 
to us.
    Okay. Mr. Goldstein, to you again: does the FCC's 
administration of the E-Rate program comply with the FFMIA?
    Mr. Goldstein. One of the things we are trying to ask FCC 
to do is to go back and look at the various financial laws and 
make that determination. We are not in a position to 
specifically determine----
    Ms. Blackburn. You are not? Mr. Carlisle, I saw your 
interest peaked a bit by that question. Do you have an answer 
for that one?
    Mr. Carlisle. I believe the Office of the General Counsel 
made a determination and communicated in a letter--and I am 
going to forget exactly to whom it was sent--but it made a 
determination in 2000 the FFMIA did apply to the fund.
    Ms. Blackburn. And do they comply?
    Mr. Carlisle. We have no reason to believe they are not in 
compliance.
    Ms. Blackburn. Okay. Great. Wonderful. And Mr. Goldstein, 
another one for you.
    Going back to all of the programs--let me loop this back 
into my first question, going back into the technology funding. 
With the 35 programs that have been in existence--as you 
respond to me on that, I would like to know--we are looking at 
waste, fraud, and abuse, and we are looking at where our 
opportunities for savings exist. I would like to know how much 
efficiency could be gained if you were take all 35 of these 
various and sundry programs with the different--probably 
different levels of effectiveness, and if they were rolled and 
consolidated into one program--more or less what our 
administrative savings would be and what we could gain from 
that oversight, what we could address through rules, what we 
would need to address through legislation. So that would be 
helpful.
    Mr. Goldstein. We would be happy to take a preliminary 
look, come talk to you and your staff, and see what we can do 
from there.
    Ms. Blackburn. Okay. That will be great.
    Mr. Carlisle, has the FCC consulted with school and 
libraries on the programs' goals and measures of those goals? 
And what ought to be done next with the program, now that 90 
percent of the schools are--they have connectivity.
    Mr. Carlisle. Usually the way that we interface with the 
schools and libraries is through the notice and comment 
process, when we are adopting rules related to the program, and 
so we do always have the opportunity to get input from them. We 
also have regular calls--my staff has regular calls with the 
national coordinating bodies for schools and libraries 
participating in the program. So we do have the opportunity to 
talk to them about the goals of the program and how they 
change, and we are looking forward to receiving further comment 
from them as we continue to modify the program.
    Ms. Blackburn. Will E-rate have outlived its usefulness 
when we see most of the service going wireless?
    Mr. Carlisle. Well, certainly, that may be, in some cases, 
a more cost-effective way of providing broadband to schools, as 
opposed to running actual wires out to schools located at a 
distance. Now, it may be that even it is more cost effective, 
it may be very expensive for some schools to actually buy that 
equipment; there may still be a gap between what the schools 
are able to pay and what the technology costs. So I would hope, 
that as technology becomes more ubiquitous and cheaper over 
time, you would see less of a need for extremely high funding 
requests for equipment, over time. But is a valid question; as 
we do reach a level of--for example, 94-percent penetration of 
broadband services to schools--how should the funding program 
change? Should it become more targeted? Should we be looking at 
more cost-effective technologies? And we have solicited comment 
on some of those issues; we hope to solicit comment on more of 
them very soon.
    Ms. Blackburn. Do you feel that, even with these other 35 
funding programs that have been there over the past decade, do 
you think that the E-rate Program is the main reason or the 
primary cause of most of the schools in underserved areas being 
connected to the Internet?
    Mr. Carlisle. Well, I think if you look at where the U.S. 
was in--say for 1999--or 1998, I believe, the numbers stood at 
something like somewhere under 60 percent of the schools were 
connected to the Internet. Now, it is 94 percent. Do I believe 
that the program had a--that amount would have gone up over 
time. There is no question. I believe the program, however, did 
certainly--it must have had an impact in term of accelerating 
the deployment of broadband to these schools. Now, GAO has 
appropriately raised the issue that our performance metrics 
didn't serve to measure that difference, and we are trying to 
come up with that.
    Ms. Blackburn. Mr. Goldstein, would you like to comment on 
that?
    Mr. Goldstein. Thank you. I think Mr. Carlisle has said it 
fairly succinctly. While it is certainly true that the number 
of schools that have been hooked up to the Internet and 
received other services has obviously increased by various 
measures, the FCC is unable to tell us how much of those 
increases are due to the E-rate Program. They were unable to 
isolate the effect of E-rate funding on connectivity in their 
performance measures because they did not have those measures 
in place or any ways to validate them. So that is the case 
today.
    Ms. Blackburn. All right. Thank you.
    Mr. Carlisle, has OMB done a PART analysis on the E-rate 
Program?
    Mr. Carlisle. Well, we have gone through the process with 
them, I believe, last year, and I believe last year they said 
that, as part of their PART analysis, that we did not have--
they could not make a judgment that the program was effective 
because we didn't have performance measurements. After that, we 
started working with them very closely and have been working 
with them in order to develop new management and also program-
performance metrics.
    Ms. Blackburn. So they rendered it ineffective, and you all 
are taking steps in what timeline? What is your timeline for 
bringing it into a compliance or up to a certain level of 
effectiveness?
    Mr. Carlisle. I believe we will have a set of metrics 
within the next few months brought together, certainly by the 
end of this fiscal year. Because of the way the PART process 
operates, I believe they will actually be used by the agency in 
fiscal year 2007, which is in our response to the GAO report.
    Ms. Blackburn. So your timeline, then, would bear out that 
you would have a compliance by 2007.
    Mr. Carlisle. We would hope so, yes.
    Ms. Blackburn. Thank you. My time has expired. Thank you, 
Mr. Chairman.
    Mr. Whitfield. Mr. Inslee, would you like time for 
questions?
    Mr. Inslee. I would. Thank you--and answers, too.
    I am sorry. I haven't been able to join you for this whole 
hearing, so my apologies if my questions are redundant. This 
has been a pretty startling report to read, in some of these 
revelations, to see--and I have looked at a lot of GAO reports, 
and perfection is never attained and always sought for, and we 
never get there, and so we recognize criticisms for every 
potential project; but this one is really disturbing to me. And 
I will just be very candid with the FCC on this. Looking at 
these multiple sort of structural failures, I am very glad that 
we are raising these funds for this incredible need that we 
need in our schools, but I am honestly questioning whether this 
is the right agency to be responsible for the distribution of 
these funds. I think it is incredibly important program, and it 
has an incredible demand in our schools. I think the fund is 
appropriate and want to see it remain. But I really wonder if 
having a regulatory agency responsible for distributing funds 
to other local agencies is really the right mix for the talents 
of the FCC and whether there is another agency in the Federal 
Government that is more adept at that type of procedure, of 
establishing audit trails, criteria for funding, a good, 
competitive bidding process, matrixes for determining 
performance--that is a skill set, you know, that I just really 
wonder whether this agency has, given its sort of historic 
regulatory function. Now, that is a broad question. You know, 
what assurance do we have that it wouldn't be better for us to 
go to an agency who really has one its principal focuses the 
distribution of funds to other agencies? Is there some inherent 
difficulty for a regulatory agency to be given that type of 
responsibility? Anyone can answer that. The FCC might go first, 
but----
    Mr. Carlisle. I think you are actually asking exactly the 
right question. When this program was established in 1996, it 
was given to an independent regulatory agency that has an 
annual budget of about $250 million. Alright? Nothing near the 
size of--for example, the Department of Education, the 
Department of Agriculture--any executive branch Agency. 
Moreover, it is a regulatory agency which is largely populated 
with regulatory attorneys and economists, not people who have 
had extensive experience with grant-making programs. So as a 
result, the FCC did the best it could in setting up the 
program. Now, I think it is a valid criticism that should it 
have asked for more help early on, should have gotten outside 
help, should have gotten outside consultants, talked with NAPA, 
the National Academy of Public Administration, earlier? 
Absolutely. At this point and I believe for the last couple of 
years, we have focused on trying to undo some of the effect of 
that process we started out with. But to a certain extent, I 
think you are raising a very valid question about whether or 
not the FCC is the appropriate holder for this responsibility.
    Mr. Goldstein. I would add a couple of points. First, I 
think the GAO has long been concerned, since we have done quite 
a few reports over the years, that there are a lot of 
structural issues, a lot of administrative issues, surrounding 
USAC and FCC and the E-rate Program, that things have never 
worked, nearly, in the way they could have, particularly early 
on.
    We are not in a position to say whether or not this is 
something that ought to be sent to another agency. We are very 
happy to see that FCC is going to have NAPA take a look at this 
because it is certainly time that an outside entity helped them 
determine what are some of the other ways that these kinds of 
programs could be delivered, how these funds could be managed, 
and how could this program be more effective. I think it is 
important that there be a number of attributes to this program, 
wherever it ends up and however it's finally managed. I think 
it has to have structural clarity between any of the entities 
that are involved in it; it has to have financial management 
and internal controls that apply to Federal funds and that work 
effectively; it has to have clear program goals and performance 
measures; it should continue to have minimal burdens for the 
beneficiaries, as minimal as possible; and it ought to have 
extremely effective oversight through rulemaking, through the 
audit process, through appeals processes, through an effective 
Inspector General that has enough funds to do the job, if 
indeed the program continues to reside at the FCC.
    Mr. Inslee. If another agency was going to take over 
responsibility for distribution--and I am not proposing that at 
the minute. It is just an honest, open-minded questions. Would 
that in some way damage the ability to collect the funds from 
the payers? There is no difficulty there we would encounter, is 
there?
    Mr. Carlisle. No, at the present time, we collect the funds 
through the 499 form, which is filed by telecommunications 
carriers every year on, I believe, a semi-annual basis. There 
is no reason why that form and its return couldn't be lodged 
somewhere else.
    Mr. Inslee. I noted a newspaper article that suggested that 
of the $14.6 billion that had been collected or awarded, only 
$9.2 billion has been spent. Is that a correct 
characterization? Are those real terms? And if so, you know, 
what are we to make of that, and what is the principal reason 
for that?
    Mr. Carlisle. I believe those numbers are approximately 
correct. Historically, we have known that every year the amount 
of funds disbursed does not match the amount of funds 
committed, and lags it every year; and there are a number of 
reasons for this.
    Quite frequently, when funds are actually committed to the 
schools through a final commitment decision letter, usually the 
school does not come back with an invoice to claim the funds 
for a number of months. In some cases, it could be 1 or 2 
months, but in many cases, it might be 12 months or 18 months, 
once the actual work--and usually on priority 2, wiring work, 
it usually takes about that long.
    Now, there is certainly an issue that we need to consider 
as to whether that indicates that our processes aren't 
efficient enough, but I think there is also an issue that is 
just inevitable: that equipment prices go down; schools decide 
that they don't want to do certain work; contractors aren't 
available; and the funds don't get used. So there is always 
going to be a situation, no matter how efficient our processes 
are, where your disbursements in a program of this type may lag 
commitments. However, programmatically, we have handled this. 
And in order to make sure we continue to be able to make funds 
available to schools, if we have unused funds from year to 
year, they roll over to the next year and increase the cap. So 
the cap for this year is not $2.25 billion; it is $2.4 billion. 
And that additional money, we believe, will actually allow us 
to provide more funding to schools that otherwise wouldn't have 
received it.
    Mr. Inslee. Mr. Bennett, did you have response to that kind 
of issue?
    Mr. Bennett. No; no response at all.
    Mr. Inslee. Got you. Thank you, gentleman and lady. Thank 
you.
    Mr. Whitfield. Thank you, Mr. Inslee, and I am delighted 
that the chairman of the full committee, Mr. Barton of Texas, 
was able to join us, and I will call on him now for an opening 
statement or any comments he might want to make.
    Chairman Barton. Well, thank you, Mr. Chairman, and thank 
you for continuing the series of hearings that we have held on 
this program. We would also like to thank our GAO witnesses for 
the report that they are releasing today.
    I don't really have an opening statement, other than what 
we are going to submit for the record. I will say I think the 
E-Rate program is broken; I am not sure it can be fixed. I 
think we ought to seriously look at significantly restructuring 
the program. We are going to have a Telecommunications Act this 
summer that we are going to put before the committee, and there 
will certainly be a component of it that deals with the E-Rate 
program.
    [The prepared statement of Hon. Joe Barton follows:]

 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce

    Thank you Chairman Whitfield. This afternoon we consider the 
results of a study by the Government Accountability Office of the E-
rate program. I appreciate the GAO's hard work in building this report, 
as it will help lay the groundwork for repairing the flawed E-rate 
program.
    Last year, in the three hearings held during the 108th Congress, we 
examined specific examples of E-rate waste, fraud, and abuse. I have 
said from the beginning of my chairmanship of this committee that we 
would not shy from conducting an aggressive and bipartisan 
investigation of E-rate--whether it be the FCC's poor management and 
oversight of E-rate, or program abuse by schools or vendors. I am 
pleased to say that we have done exactly that.
    The 1996 Telecommunications Act Conference Report explained that 
the overarching reason for providing schools and libraries with a 
telecommunications discount was to ``assure that no one is barred from 
benefiting from the power of the information age.'' In the abstract, 
everyone can appreciate a program intended to give schools and 
libraries financial assistance so they can afford Internet access and 
other telecom services necessary for improving the educational 
environment of our children.
    However, if this is our goal, we also have to ensure that the 
program is cost-effective, efficient, and--most importantly--actually 
reaching that goal. But the Subcommittee's work has revealed a program 
containing powerful incentives for waste, fraud, and abuse. And, as 
we'll hear today, there are also very serious issues regarding the 
structure and management of the E-rate program. While every player--
schools, equipment vendors, telephone companies, and consultants--has 
an obligation to responsibly participate in E-rate, the FCC and USAC 
have obligations as well. Unfortunately, they have been lackluster 
stewards of the program, to say the least.
    Today's GAO report and testimony describe how the FCC mismanaged 
the E-rate program. The report explains that the FCC never conducted a 
comprehensive review to determine which federal financial and 
accounting statutes, as well as other laws and policies, apply to E-
rate. As we have said before, E-rate is not a small-money program--it 
is funded at $2.25 billion per year. So, given the size of this multi-
billion dollar program and its significant burden on telephone rate-
payers, I am bewildered that the FCC would respond to the GAO by 
maintaining that the FCC has conducted a comprehensive evaluation of 
the program--``on a case by case basis.'' I hope the FCC will be able 
to answer why E-rate has never received the sort of review that the GAO 
clearly thinks is required.
    The GAO also reports that the FCC has never implemented useful 
performance goals and measures for E-rate. In fact, according to the 
GAO, ``a key unanswered question is the extent to which increases in 
connectivity can be attributed to E-rate.'' After committing over $14 
billion, and actually disbursing nearly $9 billion, the fact that 
nobody has any idea about how helpful this money has been in getting 
schools and libraries connected to the Internet is simply stunning. 
What's more, I am told that recent statistics show that as of 2003, 
nearly 100% of public schools and 93% of public school instructional 
classrooms have Internet access. Given this rate of connectivity, the 
FCC's poor oversight, and the fact that--after seven years--the agency 
has no idea to what extent E-rate has had an impact in our schools, the 
FCC will be hard pressed to convince me that the E-rate program belongs 
in its hands. These statistics also bring to the forefront the question 
of what is E-rate's mission going forward?
    Finally, the GAO report confirms the Subcommittee's concerns 
regarding the weaknesses in the FCC's oversight mechanisms--pointing 
out that the FCC has been slow to respond to audit findings, has a 
massive backlog of beneficiary funding appeals, and promulgates rules 
that are often unclear or unspecific, leading to serious problems in 
enforcing the program's rules.
    In sum, the GAO's testimony and report reinforce the Subcommittee's 
work during its E-rate oversight of the last two years. E-rate seems to 
be rudderless, and I fear that the waste, fraud, and abuse we have seen 
so far may be just the tip of the iceberg. No one responsible for the 
program knows how deep the problems run. I look forward to hearing the 
FCC's response to the GAO's report today. Clearly, based upon the work 
of our investigation, and the GAO's report, the Congress needs to move 
expeditiously on legislation to reform the E-rate program. I look 
forward to Telecommunications Subcommittee Chairman Upton's work in 
this regard. We must ensure that this money is spent wisely, and for 
its intended purpose.
    I'm pleased to see that the FCC's Assistant Inspector General for 
Universal Service Fund Oversight will testify today, and describe both 
his continuing concerns and the latest developments in rooting out 
program waste, fraud and abuse.
    Thank you, Mr. Chairman. I yield back the remainder of my time. ###

    Chairman Barton. I guess my question to this panel--I have 
2 or 3 general questions. In hindsight, was it an appropriate 
role of the Congress to expand the concept of universal service 
to require that we connect our schools and libraries to the 
Internet? Is that a reasonable expansion of the definition of 
universal service?
    Mr. Goldstein. Mr. Barton, I think it was, in that you have 
seen--again notwithstanding the issue that it is difficult to 
determine whether E-Rate, specifically, or how much of it, 
specifically, aided the connectivity of schools--we have seen 
the growth of technology in schools, and we have seen poorer 
schools become more adept using technologies, and we have seen 
a lot of really good benefits in terms of schools in rural 
areas being able to have different kinds of benefits that they 
might not have otherwise had and the educational benefits that 
accrue to them.
    Chairman Barton. Wouldn't a lot of that have happened 
anyway?
    Mr. Goldstein. Yes, sir, but I do think that there is a lot 
of money that has come through this program. Some of it has, as 
Mr. Carlisle has said, undoubtedly had a benefit. It is just 
difficult to determine how much.
    Chairman Barton. Okay. Anybody else want to make a comment 
on that?
    The second general question: now that we have had this 
program in operation for a number of years, what data is there 
and how many schools and libraries are now up and running, 
actually have Internet connections, and they are working? Are 
we at 100 percent, 90 percent, 80 percent? Where are we?
    Mr. Carlisle. I believe our most recent data from the 706 
Report to Congress indicates that 94 percent of schools, and 
approximately the same number of libraries--I believe it might 
be even 95 percent of libraries have high-speed connections to 
the Internet.
    Chairman Barton. Okay. Well, so I think the universal 
service requirement for telephone--and correct me if I am 
wrong. But I think telephone service, where we have had 
universal service requirement for, I guess, 60 years, is a 
little bit less than that. I think it is around 92, 93 percent. 
Is that right?
    Mr. Carlisle. I believe we just published in our Telephone 
Penetration Report that it is somewhere between 93 and 94 
percent----
    Chairman Barton. Okay.
    Mr. Carlisle. [continuing] at this time. Yes.
    Chairman Barton. On the other hand, television sets in 
home, which has no universal service requirement, is about 99 
percent. And cell phones, which are certainly no requirement, 
are probably close to 100 percent, especially if you have a 
teenager who just has to have one so that she can talk to his 
or her boyfriend or girlfriend. Is there any reason to continue 
this program past where it is? If we have basically penetrated 
the market, what public good is to be served by continuing the 
program? We have done what we set out to accomplish, even 
though we did it very inefficiently and messily.
    Mr. Carlisle. When you say ``this program'' do you mean 
only E-Rate or do you mean E-Rate and High Cost?
    Chairman Barton. You can define it either way.
    Mr. Carlisle. Okay. Since the hearing is focusing on E-
Rate, I will focus on E-Rate; and if you would like me to 
address High Cost, I can do that as well.
    From a point of view of program management, once you 
achieve an extremely high penetration level, you can go two 
ways. You can either say, alright. We have done our job. 
Everybody is on their own from now on. If you do that, though, 
you have to acknowledge that there will be recurring costs of 
continuing to receive the service from the service providers, 
but there will also be costs in terms of continuing to keep the 
network maintained and upgraded, at some point replaced. So you 
can either say, look. Everybody is on their own. Or you can say 
there will continue to be a certain amount of targeted funding 
in order to maintain the networks. I think it is a valid 
question to say is our priority to funding appropriately 
targeted to do that, and we will be soliciting comment on that.
    Chairman Barton. Well, I mean I don't know where the votes 
are. I was a part of the debate in 1996 and the Telco Act, and 
my recollection was that Congressman Field and Congressman 
Synar were the proponents of this, but I could be corrected. 
Mr. Markey and some others are not here, but they were part of 
that debate, too. So we didn't put a lot of thought into it. 
And it is obvious that the program had done good because we 
have a lot of schools and libraries that are now connected, and 
the majority of them have operated within the system; but there 
has been so much fraud and corruption and waste and gold-
plating. And I mean I don't need to repeat all of our other 
hearings, but now that we are 94 percent, I really question 
whether we should do anything, other than maybe have some 
subsidy for low-income schools and libraries to help them, you 
know, pay the ongoing costs; but above and beyond that, turn it 
over to the local and State communities and let them do the 
upgrades and the things that need to be done. We have done the 
major job, which was to get the connection. You know, I am only 
one vote, so I don't know where the votes are.
    But I guess my last question to the GAO: if you had to make 
a decision to where to put this if we decide to continue the 
program, is there a better place to have it than the FCC?
    Mr. Goldstein. Congressman, I am not really sure where you 
would put it. I indicated, earlier, that we are really pleased 
that NAPA is going to study this issue for the FCC and that 
hopefully they will come to some conclusions that the FCC can 
use and that Congress can use in understanding the future of 
the program. I think that is about as much as I would want to 
say at this point. We haven't studied, specifically, options 
like NAPA is going to do. As I had mentioned earlier, there are 
certain attributes that any program, regardless of where it is 
going to be placed, ought to have, including better structural 
clarity, financial-management controls, better oversight, and 
the ability to have more of an auditing capability--things like 
that, regardless of where it goes, that it needs to have, 
whether that is within FCC or some other part of the government 
or some other structure.
    Chairman Barton. Well, I will ask Mr. Carlisle. Do you want 
to keep it?
    Mr. Carlisle. I would only want to keep it if we can 
continue the progress that we have made within the last couple 
of years to improve oversight over the program, oversight and 
management of the program. If we can continue that pace of 
improvement, then I think we should keep it.
    The only other logical place for it to go--and I won't make 
any friends over there by saying this--would be the Department 
of Education.
    Chairman Barton. Okay. Mr. Bennett, you are the assistant 
inspector general for the FCC. Should the FCC be allowed to 
keep it, given their absolutely dismal records, until very 
recently, in even caring about the program in terms of its 
management?
    Mr. Bennett. I think from our perspective we have been 
looking at the program within the context of it being at the 
FCC and focusing on the weaknesses in the design of the program 
and trying to make recommendations. Certainly, we have been 
frustrated with the time it has taken to address some of the 
weakness that we have talked about. However, as I indicated in 
my testimony, the Commission has started to give consideration 
to these matters. At the same time, we have worked very closely 
with USAC.
    We are very close to having in place a contract, under 
which we are going to be able to do the number of audits that 
we believe needs to be done to get a handle on the level of 
waste, fraud, and abuse in the program. So I feel like we have 
made important progress. We are now poised to do this large 
body of work. We want to do that work and basically design 
oversight based on the results of that work.
    Chairman Barton. Well, my time is about to expire. I will 
say, on the record, before I turn it back to Chairman 
Whitfield, again, because of, in my opinion, the lack of 
direction that we gave to this program in the implementing 
legislation in the 1996 Telecommunications Act, the Congress 
and the House and this committee bear some responsibility for 
what has happened. I can't put all of the responsibility on the 
executive branch. So that when we get to the Telecommunications 
Restructuring Act of 2005 later this summer, we are going to 
put more thought into this and almost certainly give more 
direction, if the collective decision of the committee is to 
maintain the program.
    With that, Mr. Chairman, I yield back.
    Mr. Whitfield. Thank you, Mr. Chairman, and at this time, I 
will recognize Mr. Engle for 10 minutes.
    Mr. Engel. Well, thank you Mr. Chairman. I appreciate the 
opportunity to participate, and I will be brief.
    I really just have one question that I would like to ask 
Mr. Carlisle. It is about the schools in my hometown in New 
York City. E-Rate, obviously, has helped wire all of our 
schools in over 80 percent of the classrooms. I, obviously, 
like everybody else, want to make sure that E-Rate is free of 
fraud and abuse, and I want to ensure that the program 
continues to provide service to needy kids. But why has--I am 
told of a problem that USAC has chosen to suspend payments for 
several months now to New York City schools while conducting a 
routine audit. I am told--and you can correct me if that is not 
the case, that previous audits have shown no abuse of the E-
Rate program. So I don't disagree with conducting audits, but I 
want to know why it is taking so long and why payments are 
being held off while this happening. It is really to a point of 
crisis, where the schools are worried because the payments have 
been withheld; they cannot pay their bills; and they are very 
much afraid that they are going to be shut down.
    Mr. Carlisle. I recently had a meeting with the New York 
City Department of Education on exactly this issue, and we 
have, my staff, has discussed the issue with USAC. My 
understanding is that the New York City Department of Education 
has had a call with USAC to discuss moving forward on 
processing their funds. Now, I cannot here say exactly when 
that is going to happen, but my understanding is that the 
process is moving forward as a result of those discussions that 
we have had.
    Mr. Engel. Well, I would like to continue to work on this 
with you, and after the hearing, I am wondering if we can be in 
touch----
    Mr. Carlisle. Absolutely.
    Mr. Engel. [continuing] because I am told that things 
really are at a breaking point, and I haven't been told that 
things are moving along and that they have, you know, been in 
touch and that things are proceeding. I am told just the 
opposite, so perhaps I have gotten some miscommunication, but I 
have had a lot of people feel strongly, and they are very 
frighten about the prospect of this dragging on any further, so 
I would welcome the opportunity to dialog with you.
    Mr. Carlisle. These are all very recent developments, and I 
will be happy to follow up with you on this.
    Mr. Engel. All right. Thank you very much. And I thank you, 
Mr. Chairman. That is all I have.
    Mr. Carlisle. Yes, sir.
    Mr. Whitfield. Dr. Burgess, you are recognized for 10 
minutes.
    Mr. Burgess. Thank you, Mr. Chairman. I apologize to the 
panel for being out of the room for part of this.
    Mr. Goldstein, the FCC recently contracted with the 
National Academy of Public Administration to examine a 
structure of the current Universal Service program and its 
alternatives. Would you characterize this as a positive 
development?
    Mr. Goldstein. Yes, sir. It is a very positive development. 
We think it will help the FCC and potentially the Congress to 
determine what kind of a structure would most be appropriate to 
a program that has not always worked very well, and that, while 
it has improved over the last couple of years, still has a 
considerable way to go to do better in providing timely funds 
to beneficiaries, making sure they can determine how the 
program is measured in terms of the delivery of its services, 
and how it is effectively structured to ensure that it is 
working well from both a financial and a legal perspective.
    Mr. Burgess. Well, in regards to measuring, what will be 
the metrics to ensure that this has been an effective movement?
    Mr. Goldstein. I think that it is really up for FCC to 
decide that, working with the various stakeholders in the 
program. There are various ways, hopefully, that they can 
determine how to measure it. The problem has been, in the past, 
for some of the reasons we have discussed here, that these 
measures haven't really been adopted. And GAO has looked at 
this a number of times over the years, and it has been, 
frankly, kind of either a nonexistent or a relatively haphazard 
approach to performance. To developing metrics, they have, at 
times, had some metrics, but they haven't been metrics that 
would be useful in isolating E-Rate funding. At other times, 
there have been metrics that would be put into, say, budget 
submissions, but then they were never in the performance plans 
and then would disappear all together. We are pleased the FCC 
is working, at this point with OMB to try to develop more 
effective metrics that are supposed to be completed by the end 
of this year.
    Mr. Burgess. Mr. Bennett, would you care to comment on the 
use of those metrics?
    Mr. Bennett. Only to concur with what Mr. Goldstein has 
indicated.
    Mr. Burgess. Do you think we will be able to tell that we 
are doing and effective job at the end of this?
    Mr. Bennett. I think if we design the metrics correctly, we 
will be able to tell.
    Mr. Burgess. Will we be able to tell from here, in 
Congress, that it has been effective? Well, Mr. Bennett, does 
the USAC have sufficient authority to operate the program 
effectively?
    Mr. Bennett. I think that is an area that has been of some 
concern to us. Talking from the audit perspective, one of the 
things that we learned in the conduct of audits and our 
involvement in investigations has been the difference that 
exists between the program rules, as they are contained in Part 
54 of Title 47 of the Code of Federal Regulations and the rules 
that USAC has created under their authority. And this 
disconnect that exists between the rules contained in Part 54 
of Title 47 and USAC implementing procedures has created a 
situation where if an applicant doesn't comply with an 
implementing procedure, there may be no way to enforce 
compliance; there may be no legal basis for recovering funds 
related to those issues. And that has been an area of concern 
for us. As we indicated in my testimony last August, the 
Commission adopted the Fifth Report and Order and has started 
to adopt and recognize some of the USAC implementing 
procedures, and we think that is an important step.
    Mr. Burgess. Thank you, Mr. Chairman. I will yield back.
    Mr. Whitfield. We are going to do another round here for 
those interested. And I would just make the comment that the 
very first sentence in the GAO report says, ``the FCC 
established the E-Rate program using an organizational 
structure unusual to the government, without conducting a 
comprehensive assessment to determine which Federal 
requirements, policies, and practices apply to it.'' And since 
the inception of the program, all of the reports, all of the 
oversight reports, the Congressional reports--there has been a 
disagreement and differences of opinions about which policies 
apply and which policies do not apply.
    Then, as Mr. Carlisle made the statement, ``the FCC is a 
regulatory body with a regulatory expertise. They do not really 
have the expertise to process applications.'' In addition to 
that, we have had all of these various criminal activities 
going on with entities being convicted, and then we have got 
NEC BNS that was convicted of wire-fraud and bid-rigging, as an 
example; and they, after being convicted last May, asked the 
FCC to waive its pending debarment from the program, and since 
then, the FCC has not yet issued a decision on their debarment, 
as an example, which it seems to me should be pretty clear, but 
there may be some factors there that I do not know about. But 
Mr. Carlisle, why would it take the FCC so long to make a 
decision about that issue?
    Mr. Carlisle. My understanding is that waiver proceeding is 
being handled by the Enforcement Bureau right now, and they 
have been considering that waiver petition in the context of 
the DOJ's investigation of NEC, so they have spoken with DOJ 
about their concerns about the information that they have 
received from NEC over time in their investigation, and they 
are taking those considerations into account.
    I would point out, however, that during the pendency of the 
waiver, and in fact, predating the filing of their waiver, NEC 
has not participated in the program. They have voluntarily 
said, we are not going to participate in the program until this 
is resolved. So they actually have not been involved in E-Rate 
or in any bids on E-Rate for over a year now.
    Mr. Whitfield. Well, I am glad to hear that because I don't 
think they should be----
    Mr. Carlisle. Right.
    Mr. Whitfield. [continuing] participating in program. I 
might, also, just make the comment that basically, the 
priority-1 needs, I think, have been met through this program, 
and so we are moving into new areas, and I think the questions 
raised by Mr. Inslee and the chairman of the committee and Mr. 
Stupak--all of those comments are warranted because as we move 
forward, I think we have to reevaluate this program. Do we 
continue this program? Do we keep it at the FCC? Do we move it 
to the Department of Education? What do we need to make it more 
effective and less fraud and abuse?
    And this committee, after this hearing, is going to submit 
a report, a bipartisan report, to the chairman of the 
Telecommunications Committee as they prepare to revisit the 
entire telecommunications issues later this year. And so I 
think this has been a helpful, constructive hearing going over 
the GAO report, and I think we are back to the very starting 
point, from my perspective, of where do we go with this E-Rate 
program? It is a useful program, an important program, and 
there is a lot of money; and so we want to be sure that we move 
forward in the most constructive, effective, efficient way that 
we can.
    And with that, I will turn it over to Mr. Stupak.
    Mr. Stupak. Well, thank you, Mr. Chairman. And if I can 
pick on your first question there, when you said that on the 
GAO report that was released today, the first sentence, ``FCC 
established the E-Rate program using an organizational 
structure unusual to the government, without conducting a 
comprehensive assessment to determine which Federal 
requirements, policies, and practices apply to it.'' In fact, 
that is the first GAO recommendation. Isn't that, Mr. 
Goldstein, your first recommendations to the FCC to actually 
use Federal requirements, policies, and practices?
    Mr. Goldstein. Yes, sir. We would like them to do a 
comprehensive assessment--that is correct--along the lines that 
we have been talking about----
    Mr. Stupak. Right.
    Mr. Goldstein. [continuing] so that they can determine how 
best to structure the program and to apply to the program those 
laws and policies and procedures that should have been applied 
long ago and to do so--even in instances where they did apply 
them--in a more comprehensive manner that has a framework 
surrounding it and so that all of the various laws that apply 
are applied in tandem.
    Mr. Stupak. But in reading the GAO, Mr. Carlisle, it says 
the FCC doesn't accept that recommendation; you would rather do 
it on a case-by-case basis. Is that correct?
    Mr. Carlisle. Well, I think we don't accept the 
recommendation that we have never done the assessment. We have 
done assessments of whether various statutes apply to the 
program, and we may not have done them in the way that GAO is 
recommending that we have done them, but we have done them. And 
so the question, now that we have the GAO recommendation, is 
what exactly does it mean to do a comprehensive assessment. Is 
it merely a retread of the analyses that we have already done, 
or is it something that is potentially more useful? And I have 
already spoken with Mr. Goldstein about following up with him 
and GAO to get more detail as to the sort of process they would 
like us to engage in, so I can make sure it is an appropriate 
process.
    Mr. Stupak. Well, yes. I think if you do that comprehensive 
study, then some of the laws we spoke about--the Single Audit 
Act, some of the others that we spoke of here today--would 
apply to everybody, and I think if it is applied on everybody, 
you could move these applications faster, get through these 
appeals quick, and actually, everyone knows the rules we are 
all playing by, as opposed to a case-by-case review. Because 
you know--and let me ask this one. Maybe it would be fair to 
ask Mr. Bennett. In order to do competitive bidding here--it is 
my understanding that the current E-Rate competitive bidding 
process consists of or is based upon the assumption that you 
post a form on the Internet. It says 470, Form 470, on USAC's 
website for 28 days. And do you believe that promotes, you 
know, a competitive bidding process? Posting a forum for 28 
days?
    Mr. Bennett. Well, we have been concerned about the 
competitive bidding process almost as long as we have been 
looking at this program. Actually, there are a couple things 
that happen. The Form 470 is posted for 28 days. The program 
rules require that the applicant comply with State and local 
procurement regulations, and that has given us some concern as 
well. In some cases, there may not be any applicable State and 
local procurement regulations. In other cases, we may have 
concerns about the State and local procurement regulations that 
exist. So we have been concerned about competitive procurement 
and talking about our concerns regarding competitive 
procurement for some time.
    Mr. Stupak. I guess it goes back to our first statement. 
Maybe if we had a comprehensive assessment to determine what do 
we do on other Federal programs--I am sure we don't use Form 
470--we will probably get better compliance and less waste. 
Because this is a great program, I don't want to see it go 
anywhere. I think the FCC is capable of handling it. I just 
would hope that the rules that the rest of the government lives 
by, FCC would live by, especially with this program, because as 
I said, I believe in this program; it is a great program, and 
it has really helped in my district.
    Mr. Carlisle, it is my understanding--and I know the 
chairman had a lot of good questions, and I was dying to 
interrupt him to try to point out a couple of things. So let me 
ask you these questions, because I do believe in this program. 
It is a great program.
    The needs of the E-Rate and the need for money for this 
program doesn't go away, even if 100 percent of every school 
and every library in the United State is wired. Correct?
    Mr. Carlisle. I believe that is correct.
    Mr. Stupak. I mean besides upgrades--I am on 
telecommunications, a number of others were talking about VOIP, 
and we have got wireless and tomorrow there will be some new 
technology, and all parts of America should have access to it, 
and one way of doing it is the Universal Service Fund, through 
the E-Rate, through our libraries and that--but is it correct 
that two-thirds of the money, though, that is spent in this 
program really goes to pay the telephone bill for libraries, 
pay the service provider, the Internet provider? Isn't that 
where two-thirds of the money goes?
    Mr. Carlisle. There are two separate types of funding. 
There is priority-1 funding, which is exactly the kind of 
recurring charges that you just mentioned. And then there is 
priority-2 funding, which is wiring.
    Mr. Stupak. Okay.
    Mr. Carlisle. Under the statute--the statute makes clear 
that the priority-1 types of funding are to be supported 
through the program.
    Mr. Stupak. Correct.
    Mr. Carlisle. It provides the FCC discretion about 
priority-2 funding, and we exercised that discretion and said, 
okay. It should be funded.
    Mr. Stupak. Sure.
    Mr. Carlisle. But yes, that is approximately the break out, 
two-thirds to one-third, and historically that has been the 
case. That has been a consistent point over time.
    Mr. Stupak. So to all due respect to Chairman, if he would 
like to see the upgrades paid by State and local governments, 
that may be one thing; but the biggest cost here to a lot of 
these taxpayers is just the access cost of the program through 
the platform that they are using at the time. Is that basically 
correct? Two-thirds of the money goes that way? To there?
    Mr. Carlisle. I am sorry. I have actually been told that 
the numbers are actually closer to 50/50, as----
    Mr. Stupak. 50/50, though?
    Mr. Carlisle. [continuing] as opposed to one-third. 
However, you know, 50 percent is still a lot.
    Mr. Stupak. It is still a lot of money----
    Mr. Carlisle. And I think if that is the case, however, the 
statute would actually have to be changed in order for us to 
make a significant shift in priority there.
    Mr. Stupak. Well, I don't want to make that significant 
shift because I like it at two-thirds----
    Mr. Carlisle. Well, okay.
    Mr. Stupak. [continuing] but if it is 50--my small 
district--I mean I don't have a city over 20,000 people. I mean 
most of mine are 2,000 or 3,000, and they now have access to 
the Internet because of this program. And now, if you suddenly 
say, well, your monthly support bill, or your bill to the 
telephone company or the service provider, Internet provider--
you have to pay, they are not going to have money for the 
upgrades. They are probably going to lose the process. In 
Michigan, we are cutting school aid; we are not expanding it, 
unfortunately. Unfortunately.
    Mr. Bennett, one more question, if I may. And I don't mean 
to end on a negative note here, because I do believe in this 
program. But it is painfully obvious that certification 
contained in the E-Rate forms have failed to deter abuse by 
predatory vendors and irresponsible school officials. On 
September 22, the inspector general testified before this 
subcommittee oversight and investigation that reliance on 
beneficiary self-certification is a serious vulnerability. Why 
do you believe that self-certification is a serious weakness in 
the program, and then what can we do to improve upon that?
    Mr. Bennett. We had a couple of concerns with 
certification. One was what we viewed as an over-reliance on 
certifications--that is relying on certification without 
following up and reviewing documents. Excuse me.
    The other issue we had with certifications was the design 
of the certifications themselves. When we got involved with the 
Antitrust Division of Department of Justice, primarily because 
of concerns related to the competitive process, we sat down 
with their attorneys; their attorneys looked at these various 
forms and raised concerns to us about the way the 
certifications were written, their concern being can they 
indict people for making false statements based on the 
certifications, and they had concerns about the way things were 
structured. They brought those concerns to us. We brought those 
concerns to the Commission, and the Commission has--actually, 
starting with the Fifth Report and Order last August and moving 
forward--begun to address modifying the certifications in those 
forms.
    So it was really two things. It was the design of the 
forms, which is being addressed. There are still some open 
issues that the Wireline Competition Bureau is looking at, but 
it is also the process itself, that is relying on 
certifications while doing no follow up and looking at no 
additional documentation.
    USAC has done a great deal to address their application-
review process. In the earliest days, there was very little 
documentation provided or reviewed. That has changed 
significantly, so I mean we have seen improvement on both 
fronts.
    Mr. Stupak. Well, let me ask you this: it is my 
understanding USAC might do one set of procedures, but those 
procedures may not have been approved by FCC. And if USAC says 
do this, and FCC says, well, we haven't certified that 
procedure; we haven't done that, then, doesn't that really 
allow the discrepancy here, really allowing schools and vendors 
to really get around this whole process, and there is no 
enforcement then?
    Mr. Bennett. It creates a problem when we are trying to 
enforce----
    Mr. Stupak. Sure.
    Mr. Bennett. [continuing] compliance with the rules. If 
there are no financial consequences for beneficiary 
noncompliance, then it is very difficult for us to send a 
message that applicants need to comply with the rules.
    Mr. Stupak. And if FFC doesn't bless those rules, certify 
them, then the is really no need to comply because they can 
say, hey, FCC hasn't even approved this, so you can't enforce 
this upon us. Right?
    Mr. Bennett. That is correct, and it has been--this is 
really a concern that we identified through our involvement in 
audits. And you know, in the Fifth Report and Order last August 
the Commission did adopt a number of the USAC implementing 
procedures where we had been identifying concerns.
    Mr. Stupak. Well, it looks like we are moving in the right 
direction, and it looks like with USAC--and I do believe that 
more money can put into USCA to put auditors in--and also with 
the Single Audit Act. Hopefully, we have identified some ways 
we can keep this viable program going. I salute the GAO for 
their report. It has been a good report--OIG--and let us work 
together and get this thing going. This is a great program.
    Mr. Whitfield. Thank you, Mr. Stupak. Dr. Burgess, do you 
have any other questions?
    Mr. Burgess. Thank you, Mr. Chairman. Yes, I would just ask 
the question, again, that Chairman Barton asked. Is it time to 
revisit the concept, here, and ask if this would not be better 
handled at the local level, and perhaps Congress just be 
involved from a monitoring or oversight standpoint and not 
involved in a primary way in this program?
    Mr. Goldstein. I can't say one way or the other that it 
ought to be at a particular level of government or even in a 
particular agency. As I have indicated, it is important to look 
at the program and try to understand how we can make it better. 
The kinds of issues that Mr. Stupak was just referring to with 
respect to how there are differences in procedures that USAC 
handles versus rules that the FCC puts in place gets at the 
heart of the structural issues when you have a nonprofit, 
private entity essentially all but making policy and then 
turning around to the agency in charge and saying, these are 
the things that we think you ought to put into code. It gets at 
a lot of the issues of structure here.
    So I think there is still a lot of work that does need to 
be done to try and improve the structure. Again, where that 
structure best ends up--whether it is in a Federal agency, 
whether it is some kind of contract entity, whether it is with 
the State and local government--I think that NAPA will help FCC 
grapple with some of those issues. Then it is a question of 
trying to implement it in a way that gets to really protect 
Federal funds and a program that has done some good for the 
country.
    Mr. Burgess. Well, Mr. Bennett--just going through your 
testimony. And you seem to detail a lot of areas where someone 
has fallen down on the job. You discussed the auditing 
agreement, the 3-way auditing agreement that you are about the 
implement. Will this address concerns about a statistically 
representative audit? Is this going to do the job?
    Mr. Bennett. It will. This will finally give us the ability 
to make statements about programmatic compliance, program-wide. 
Up to this point, audits have been in some cases random, in 
some cases targeted; but as GAO pointed out in their report, we 
have never done the necessary body of audits to make a 
statement about beneficiary compliance, program-wide, so we are 
very pleased to report today that we are close to reaching an 
agreement and moving forward with those audits.
    Mr. Burgess. Mr. Bennett, given the findings of the GAO and 
the inspector general's work regarding the Universal Service 
funds, how do the management issues that we are addressing 
today reflect on management and potential problems for other 
funding mechanisms?
    Mr. Bennett. Well, as I said in my testimony, the 
Commission has begun to take the concerns that we have raised 
very seriously, and we have seen, you know, a lot of movement 
on addressing some of these concerns. We have been focused on 
not only working with management to address these concerns, but 
trying to get the process in place to do the audits that we 
believe are necessary to not only evaluate beneficiary 
compliance, but identify additional opportunities for 
programmatic improvement.
    Mr. Burgess. Thank you. Mr. Chairman, I will yield back the 
balance of my time.
    Mr. Whitfield. Thank you, Dr. Burgess, and that will 
conclude today's hearing. I might add, though, that Mr. Stupak 
raised this issue of competitive bidding. And another issue 
that we can consider, of course, is that the Federal 
acquisition regulations has been a particularly effective 
method to ensure competitive bidding, and that might be 
something that we can look at as well. But we have a lot of 
issues on our plate relating to this great program.
    And Mr. Goldstein, we want to thank you--Mr. Carlisle and 
Mr. Bennett, for your testimony. And Ms. Perez, we want to 
thank you for keeping Mr. Goldstein out of trouble. And then, I 
want to thank Mr. Carlisle's mother for being here, and I hope 
that you found it so stimulating you will come back again. Yes.
    And the record will stay open for 30 days, and we will be 
entering the report into the record. Thank you all very much.
    [Whereupon, at 4:42 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                  Federal Communications Commission
                                     Washington, D.C. 20554
                                                     April 21, 2005
The Honorable Ed Whitfield
Chairman, Subcommittee on Oversight and Investigations
Committee on Energy and Commerce
United States House of Representatives
Washington, DC 20515
    Dear Chairman Whitfield: Thank you for your concern regarding 
reports of waste, fraud and abuse in the Schools and Libraries 
universal service support mechanism of the Universal Service Fund 
(USF), otherwise known as the E-rate program. I appreciated the 
opportunity to appear before the Subcommittee on March 16, 2005 to 
discuss the steps that the FCC Office of Inspector General has taken to 
establish effective, independent oversight of this program. As I 
indicated during the hearing, we believe that we have made significant 
progress in ensuring adequate oversight of the USF, however, we 
recognize that much additional work remains to be done. I am writing 
this letter in response to your letter dated April 15, 2005 that 
included additional questions from the Honorable Marsha Blackburn. My 
response to each of those questions is as follows:
    Question #1--What is your estimate of the number of locations with 
e-rate contracts that have had questionable financial dealings?
    Response--The FCC Office of Inspector General has not completed the 
body of work necessary to estimate the number of locations with E-rate 
contracts that have had questionable financial dealings. However, as a 
result of our involvement in E-rate audits and investigations, we have 
become concerned about the effectiveness of the program's requirements 
for competitive procurement. On the audit side, numerous of the audits 
completed by the FCC OIG, auditors from USAC, and others have 
identified findings related to competitive procurement. In our role 
supporting investigations related to the program, we are currently 
supporting twenty-two (22) investigations and monitoring an additional 
eight (8) investigations. Many of these investigations involve 
allegations related to questionable financial dealings including 
procurement irregularities such as lack of a competitive process and 
bid rigging; false claims in which service providers are billing the 
program for goods and services that are not provided; ineligible items 
being funded; and beneficiaries not paying the local portion of the 
costs resulting in inflated costs for goods and services to the program 
and potential kickback issues. In fact, the Antitrust Division of the 
Department of Justice established an E-rate fraud task force largely 
because of the number of E-rate cases involving competitive 
procurement.
    Question #2--Mr. Bennett, in your testimony, in agreement with GAO, 
that FCC fails to timely act on audit findings. What is their current 
time frame to act on audit findings as compared to other audits for 
other programs your office performs?
    Response--The Commission is required to resolve audit findings 
within six-months from the date of the final audit report. This 
requirement applies to all FCC OIG audit reports including E-rate 
beneficiary audits. The concern that we raised in our testimony, and 
that GAO referred to in their report, relates to our observation that 
audit findings are not being resolved in a timely manner and that, as a 
result, actions to recover inappropriately disbursed funds are not 
being taken in a timely manner. As we stated in our testimony, we 
believe that audit findings are not being resolved in a timely manner 
because, in some cases, USAC is not taking action in a timely and 
because USAC is not receiving guidance from the Commission that is 
necessary to resolve findings.
    Question #3--Does FCC or USAC have any procedures to enforce 
beneficiary compliance with rules and regulations.
    Response--The Commission and USAC have many procedures to enforce 
beneficiary compliance with program rules and regulations. The 
Commission uses the rulemaking process, adjudication of USAC decisions, 
and audits of E-rate recipients to enforce compliance with program 
rules. USAC employs a variety of procedures--including the application 
review process, program integrity assurance process, and site visits--
to enforce compliance. However, although there are procedures to 
enforce compliance to program rules and regulations, we remain 
concerned about beneficiary compliance because of the lack of clarity 
regarding the rules and regulations governing the program.
    Question #4--In your opinion, do you think e-rate has significant 
waste, fraud, and abuse within the program?
    Response--As I indicated in my response to the first question, the 
FCC Office of Inspector General has not done the body of work necessary 
to assess fraud, waste, and abuse at the program level. However, as a 
result of our involvement in audit and investigations, we are concerned 
about the level of fraud, waste, and abuse in this program.
    Question #5--How much would it cost to audit every beneficiary 
every year?
    Response--We believe that it would be very expensive to audit every 
beneficiary every year. We are currently in the process of establishing 
a three-way agreement with USAC and a public accounting firm to conduct 
audits of the four USF funding mechanisms, including E-rate. We have 
conducted a preliminary estimate of the cost to conduct a statistically 
valid number of audits. Based on our experience and USAC's experience 
conducting E-rate beneficiary audits, we have used an estimated cost of 
$50,000 per audit to estimate the total cost of this project. There 
have been over 43,000 applications for funding in the current funding 
year.
    Question #6--What would be the most efficient method of overseeing 
disbursement of e-rate projects?
    Response--We believe that effective, independent oversight of this 
program is the most efficient method of overseeing disbursements. 
During FY 2001, we worked with Commission staff as well as with the 
Defense Contract Audit Agency (DCAA) and the Universal Service 
Administrative Company (USAC), to design an audit program that would 
provide the Commission with programmatic insight into compliance with 
rules and requirements on the part of E-rate program beneficiaries and 
service providers. Our program was designed around two corollary and 
complementary efforts. First, we would conduct reviews on a statistical 
sample of beneficiaries large enough to allow us to derive inferences 
regarding beneficiary compliance at the program level. Second, we would 
establish a process for vigorously investigating allegations of fraud, 
waste, and abuse in the program. As we discussed in our testimony, we 
are very close to establishing a contract under which we will obtain 
access to the resources necessary to implement the oversight program 
that we have designed. We believe that this oversight program will 
allow us to detect and deter waste, fraud, and abuse by beneficiaries 
of the universal service support mechanisms. In addition, the program 
will generate insights about the compliance of beneficiaries with 
applicable law and the quality of administration of the universal 
service support mechanisms and identify areas for improvement in the 
compliance of beneficiaries with applicable law and in the 
administration of the universal service mechanisms.
    We look forward to continuing to work with the Committee and 
Subcommittee on oversight of this program. Please do not hesitate to 
contact me if you have further questions.
            Sincerely,
                                             Thomas Bennett
                                     Assistant IG for USF Oversight
                                 ______
                                 
                  Federal Communications Commission
                                     Washington, D.C. 20554
                                                       May 12, 2005
The Honorable Ed Whitfield
Chairman
Subcommittee on Oversight and Investigations
Committee on Energy and Commerce
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515
    Dear Chairman Whitfield: Thank you for your April 15, 2005 letter 
concerning former Wireline Competition Bureau Chief Jeffrey Carlisle's 
appearance before the Subcommittee on Oversight and Investigations at 
the March 16, 2005 hearing. Please find attached written responses to 
post-hearing questions included in your letter posed by the Honorable 
Cliff Stearns and the Honorable Marsha Blackburn.
    Please do not hesitate to contact me if I can be of further 
assistance concerning this matter.
            Sincerely,
                                            Thomas J. Navin
                          Acting Chief, Wireline Competition Bureau
Enclosures

               QUESTIONS FROM THE HONORABLE CLIFF STEARNS

    Question 1. Is USAC governed by the FCC rules of procedure and 
practice?
    Response. The Commission's rules of procedure and practice 
generally apply to parties and participants in Commission proceedings. 
The Universal Service Administrative Company (USAC) assists the 
Commission in its administration of the universal service program, but 
it is not permitted to participate as a party in the Commission's 
proceedings. 47 C.F.R.  54.702(d). In the performance of its functions 
with respect to the universal service program, USAC is therefore not 
governed by the rules of practice and procedure that apply generally to 
parties in proceedings before the Commission. The Commission has 
adopted specific procedural rules that apply to parties in proceedings 
before USAC. See, e.g., 47 C.F.R. 54.719, 54.720, 54.721.
    Question 2. Does the FCC ex parte rules apply to USAC recovery 
processes and suspension determinations and appeals from such USAC 
actions?
    Response. The Commission's ex parte rules apply only in proceedings 
before the Commission. See 47 C.F.R.  1.1200 (a). Pursuant to section 
1.1204(a)(12)(iii) of the Commission rules, presentations between 
Commission staff and USAC relating to the administration of universal 
service support mechanisms, including recovery processes and appeals, 
are exempt from ex parte requirements. 47 C.F.R.  1.1204(a)(12)(iii). 
The ex parte rules do apply to a party if that party appeals a USAC 
decision to the Commission.
    Question 3. Does the FCC staff discuss pending appeals at the FCC 
from USAC actions with USAC staff? Shouldn't the FCC ex parte rules 
apply to pending USAC appeals at the FCC?
    Response. The Commission's ex parte rules place restrictions on 
communications between parties or others and decision-making personnel. 
47 C.F.R. 1.1206(a), 1.1208. The rules do not, however, prohibit or 
place restrictions on discussions among decision-makers. In this 
respect, USAC is treated in the same manner as Commission staff, who 
are treated as decision makers and may talk freely to the Commission 
about administrative appeals from the staff's own decisions. See 47 
C.F.R.  1.1202 (c) (definition of decision-making personnel). The 
Commission staff is likewise permitted to discuss with USAC pending 
appeals from USAC decisions. Thus, although the Commission's ex parte 
rules do apply to parties in USAC appeal proceedings at the Commission, 
those rules do not restrict USAC's discussions with the Commission.
    Question 4. As I understand it, the FCC rules and procedures assure 
parties of due process by providing them with an opportunity to review 
allegations of violations and having an opportunity to respond prior to 
the FCC making a determination. Doesn't this same procedure apply to 
USAC and its consideration of potential program violations and 
subsequent actions by USAC including recovery actions and suspension of 
funding requests?
    Response. In Commission proceedings in which the Commission seeks 
to impose monetary sanctions (``forfeitures'') for rule violations, the 
Communications Act sets forth specific statutory procedures that 
provide for notice and an opportunity to respond and other due process 
protections. See 47 U.S.C.  503. In contrast, the Commission's 
recovery procedures for debts owed to the government, including matters 
involving payments from the universal service fund, assure parties of 
due process by following the notification and other administrative 
appeal procedures mandated by the Debt Collection Act. Changes to the 
Board of Directors of the National Exchange Carrier Association, Inc., 
Federal-State Joint Board on Universal Service, 15 FCC Rcd 22975 
(2000); recon. granted 19 FCC Rcd 15252 (2004); modified in Schools and 
Libraries Universal Service Support Mechanism, Fifth Report and Order, 
19 FCC Rcd 15808 (2004). In addition, specific Commission rules provide 
for notice and an opportunity to respond to allegations of 
``prohibitive conduct'' in certain proceedings involving appeals of 
actions taken by USAC. See 47 C.F.R.  54.721(d). The Commission's 
rules also permit, and sometimes require, USAC to withhold 
disbursements pending the disposition of administrative appeals in 
recovery proceedings. See 47 C.F.R.  54.725.
    Question 5. The FCC has a long history of handling confidential 
information from various parties subject to FCC rules and regulations 
including having a model protective order available to parties. 
Shouldn't USAC have these same procedures and protective orders 
available for adverse parties in recovery and/or suspension 
proceedings?
    Response. Protective orders and other procedures may be available, 
where appropriate, in Commission regulatory proceedings that involve 
adverse parties and where the materials subject to a protective order 
are relevant to the Commission's decision. Such procedures are not used 
for preliminary administrative actions taken by USAC involving debt 
collection or related matters, nor has the Commission had occasion to 
routinely use such procedures in appeals from debt collection actions 
in its own proceedings. Such proceedings to recover money owed to the 
government by debtors are generally governed by the separate federal 
laws and procedures for debt collection and do not normally involve 
adverse parties or necessitate the disclosure of confidential 
information to parties using protective orders. The Commission's 
policies are intended to protect, insofar as possible, the 
confidentiality of proprietary information submitted by carriers and 
others.
    Question 6. In the Puerto Rico case, it is my understanding that 
the FCC restricted USAC's authority to suspend pending and future 
funding applications only when there were allegations of program 
violations related to the funding requests or the proposed service 
provider. Has USAC been following the FCC's mandate in tailoring its 
suspension orders?
    Response. In accordance with its standard operating procedures, 
USAC committed and disbursed funds on behalf of the Puerto Rico 
Department of Education (PRDOE) for Funding Years (FYs) 1998-2000. On 
December 5, 2001, USAC suspended payments on behalf of PRDOE for FYs 
1998-2000 based on an audit that identified apparent program violations 
involving PRDOE funding. After consultation with the Wireline 
Competition Bureau, USAC also suspended consideration of PRDOE's 
applications for FY 2001 and 2002, and it required PRDOE to respond to 
the findings of the USAC-initiated audit. Subsequent to that audit, 
USAC became aware of a number of local and federal law enforcement 
investigations involving activities of the PRDOE. On January 30, 2003, 
PRDOE petitioned the Commission to direct USAC to resume processing 
PRDOE's applications for FY 2001 and 2002.1
---------------------------------------------------------------------------
    \1\ See Letter from Dr. Cesar A. Rey Hernandez, Secretary, PRDOE, 
to Jane Mago, General Counsel, Federal Communications Commission, dated 
January 30, 2003. See also Wireline Competition Bureau Seeks Comment on 
a Petition by Puerto Rico Department of Education to Release Funds 
Associated With Schools and Libraries Universal Service Support 
Mechanism for Funding Years 2001 and 2002, CC Docket No. 02-6, Public 
Notice, 18 FCC Rcd 10467 (Wireline Comp. Bur. 2003). Comments, all in 
support of PRDOE's Petition, were submitted by the Hon. Anibal Acevedo-
Vila, Resident Commissioner, Commonwealth of Puerto Rico, U.S. House of 
Representatives; Centennal Communications Corp.; and The Hispanic 
Information and Telecommunications Network, Inc. PRDOE had selected the 
Puerto Rico Telephone Company (PRTC) for telecommunications service and 
Internet access and Data Research Communications Company for Internet 
access and internal connections for FY 2001. PRDOE selected PRTC for 
telecommunications service, Internet access, and internal connections 
and Sprint for telecommunications service for FY 2002.
---------------------------------------------------------------------------
    On November 25, 2003, the Commission released the Order addressing 
PRDOE's request, providing direction for treating applications 
involving potential program violations. Specifically, the Commission 
concluded that, ``to guard against waste, fraud, and abuse, it is 
reasonable for USAC to generally defer action on applications upon 
receiving evidence of potential program violations, including evidence 
acquired from an active law enforcement investigation related to the E-
rate related activities of the applicant or any of the service 
providers utilized by that applicant, until such time as questions 
raised by the evidence can be resolved.'' 2
---------------------------------------------------------------------------
    \2\ Petition of the Puerto Rico Department of Education to Release 
Funds Associated with the Schools and Libraries Universal Service 
Support Mechanisms for Years 2001 and 2002, Federal-State Joint Board 
on Universal Service, CC Docket No. 02-6, Order, 18 FCC Rcd 25417, 
25422, para. 15 (2003) (Puerto Rico Order).
---------------------------------------------------------------------------
    Consistent with the Commission's directive as articulated in 
various orders,3 USAC has developed principles for treating 
entities under investigation for program violations. 4 These 
principles balance the goal of preventing waste, fraud, and abuse 
against the need to ensure due process and fundamental fairness, as 
well as respect for the integrity of law enforcement investigations.
---------------------------------------------------------------------------
    \3\ See generally Schools and Libraries Universal Service Support 
Mechanism, CC Docket 02-6, Notice of Proposed Rulemaking, 17 FCC Rcd 
1914 (2002); Request for Immediate Relief filed by the State of 
Tennessee, Federal-State Joint Board on Universal Service, Changes to 
the Board of Directors of the National Exchange Carrier Association, 
Inc., CC Docket Nos. 96-45 and 97-21, Order, 18 FCC Rcd 13581 (2003); 
Puerto Rico Order.
    \4\ Principles for Treating Entities Under Investigation Relating 
to Their Participation in the Schools and Libraries Universal Service 
Support Mechanism http://www.sl.universalservice.org/reference/
investigation.asp.
---------------------------------------------------------------------------
             QUESTIONS FROM THE HONORABLE MARSHA BLACKBURN

    Question 1. In 2003, IBM had sought to handle almost $1 billion on 
E-rate projects, but it was later held until completion of an 
investigation. What was the outcome of this investigation?
    Response. For FY 2002 (July 1, 2002-June 30, 2003), eighteen 
applicants sought approximately $500 million for contracts employing 
IBM as a systems integrator or in other substantial capacities. In 
response to a tip from a whistleblower in mid-2002, USAC began 
investigating these applications, and as a result of that and 
subsequent related investigations, denied the funding requests. Nine of 
the applicants representing $268 million in IBM contracts appealed 
those USAC decisions to the Commission.
    In December 2003, the Commission upheld USAC denial of $251 million 
in funding requests to eight of the nine applicants.5 
Although the Commission concluded that the practices followed in 
various applications were not consistent with the competitive bidding 
rules, the Commission found that good cause existed to re-open the 
filing window for FY 2002 to allow the applicants that appealed SLD's 
denial of their funding requests to re-bid for services. Four of the 
applicants sought re-bids for the FY 2002 requests. While the 
Commission permitted IBM to re-bid on those applications, its single 
bid was unsuccessful.
    Question 2. Some school districts have wired their own schools 
because the funds they need to match the e-rate program would have cost 
them more. Does USAC perform any cost-benefit fair market value 
analysis of wiring an individual school, library or a local district?
    Response. USAC does not perform a cost-benefit fair market value 
analysis of wiring for any individual school, library, or local 
district. As noted in the Universal Service Order, the Commission's 
competitive bidding requirements are designed to assist schools and 
libraries in receiving the best value for their limited 
funds.6 Under the competitive bidding requirements, 
applicants must select the most cost-effective offerings, and price 
must be the primary factor in determining whether a particular vendor 
is the most cost-effective.7 In addition to the competitive 
bidding requirements, program beneficiaries must pay the non-discounted 
share of the supported services and have resources necessary for 
sufficient computer equipment, software, staff training, internal 
connections, maintenance and electrical capacity to make use of the 
supported services. These safeguards help ensure that participants 
employ cost-effective services.
------
    5 Request for Review of the Universal Service 
Administrator by Ysleta Independent School District, CC Docket Nos. 96-
45 and 97-21, Order, 18 FCC Rcd 26407 (2003).
    6 Federal-State Joint Board on Universal Service, CC 
Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, 9027-29, paras. 
475-480 (1997) (Universal Service Order).
    7 Universal Service Order, 12 FCC Rcd at 9029-30, para. 
481; 47 C.F.R.  54.511(a).

                                 
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