[Senate Hearing 115-359]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 115-359
 
FCC'S LIFELINE PROGRAM: A CASE STUDY OF GOVERNMENT WASTE AND MANAGEMENT

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

                                HEARING

                               before the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS


                             FIRST SESSION

                               __________

                           SEPTEMBER 14, 2017

                               __________

        Available via the World Wide Web: http://www.fdsys.gov/

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        Committee on Homeland Security and Governmental Affairs
        
        
        
        
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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                    RON JOHNSON, Wisconsin, Chairman
JOHN McCAIN, Arizona                 CLAIRE McCASKILL, Missouri
ROB PORTMAN, Ohio                    THOMAS R. CARPER, Delaware
RAND PAUL, Kentucky                  JON TESTER, Montana
JAMES LANKFORD, Oklahoma             HEIDI HEITKAMP, North Dakota
MICHAEL B. ENZI, Wyoming             GARY C. PETERS, Michigan
JOHN HOEVEN, North Dakota            MAGGIE HASSAN, New Hampshire
STEVE DAINES, Montana                KAMALA D. HARRIS, California

                  Christopher R. Hixon, Staff Director
                Gabrielle D'Adamo Singer, Chief Counsel
     Brooke N. Ericson, Deputy Chief Counsel for Homeland Security
               Margaret E. Daum, Minority Staff Director
                   J. Jackson Eaton, Minority Counsel
                     Laura W. Kilbride, Chief Clerk
                   Bonni E. Dinerstein, Hearing Clerk

                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Johnson..............................................     1
    Senator McCaskill............................................     2
    Senator Peters...............................................     9
    Senator Heitkamp.............................................    17
    Senator Daines...............................................    20
Prepared statements:
    Senator Johnson..............................................    29
    Senator McCaskill............................................    30

                               WITNESSES
                      Thursday, September 14, 2017

Seto Bagdoyan, Director, Forensic Audits and Investigative 
  Service, U.S. Government Accountability Office.................     4
Honorable Ajit V. Pai, Chairman, Federal Communications 
  Commission.....................................................     6
Vickie S. Robinson, Acting Chief Executive Officer and General 
  Counsel, Universal Service Administrative Company..............     8

                     Alphabetical List of Witnesses

Bagdoyan, Seto:
    Testimony....................................................     4
    Prepared statement...........................................    32
Pai, Hon. Ajit V.:
    Testimony....................................................     6
    Prepared statement with attachments..........................    46
Robinson, Vickie S.:
    Testimony....................................................     8
    Prepared statement...........................................   138

                                APPENDIX

Olga Ukhaneva Report.............................................   151
Letters submitted by Senator Peters..............................   189
Letter submitted by Senator Harris...............................   213
Statements submitted for the Record:
    Cellular One.................................................   214
National Grange..................................................   237
Navajo Nation....................................................   239
Responses to post-hearing questions for the Record:
    Mr. Pai......................................................   250
    Ms. Robinson.................................................   255


     FCC'S LIFELINE PROGRAM: A CASE STUDY OF GOVERNMENT WASTE AND 
                             MISMANAGEMENT

                              ----------                              


                      THURSDAY, SEPTEMBER 14, 2017

                                     U.S. Senate,  
                           Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:17 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Ron Johnson, 
Chairman of the Committee, presiding.
    Present: Senators Johnson, Daines, McCaskill, Carper, 
Tester, Heitkamp, Peters, and Hassan.

             OPENING STATEMENT OF CHAIRMAN JOHNSON

    Chairman Johnson. Good morning. This hearing will come to 
order.
    I want to welcome the witnesses, thank them for their time 
and their testimony. The hearing's title is ``FCC's Lifeline 
Program: A Case Study of Government Waste and Mismanagement.'' 
I would ask consent that my written remarks be entered in the 
record.\1\
---------------------------------------------------------------------------
    \1\ The prepared statement of Senator Johnson appears in the 
Appendix on page 29.
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    I will not steal anybody's thunder. There are a lot of 
facts, there are a lot of figures, there are a lot of 
assumptions. I want to quote Ronald Reagan. He said this, I 
think, a number of times, but this is the quote that I have: 
``No Government ever voluntarily reduces itself in size. 
Government programs, once launched, never disappear. Actually, 
a government bureau is the nearest thing to eternal life we 
will ever see on this Earth.''
    The reason I quote Ronald Reagan is because the Lifeline 
program was actually started under Ronald Reagan. And, as I 
just go through the briefing materials, you take a look where 
we have spent close to $20 billion on this. It is somewhere 
around $1.5 to $2 billion per year. Significant evidence of 
waste, of fraud, of abuse. The Government Accountability Office 
(GAO) reports that 96 percent of low-income Americans actually 
have a phone. I am just going to ask some questions. Maybe we 
should ask ourselves: Did we achieve the goal of this program? 
Should we declare success, should we declare victory? Should we 
maybe consider ending it? Or do we still need to try and get 
that final 4 percent? Is it even possible? Should we be looking 
at reforms and controls?
    Now, if we decide to end it, I think the other question 
would be: Do we just bank the money? We are $20 trillion in 
debt over the next 30 years. At least $100 trillion additional 
deficit that spending is projected. Maybe we ought to start 
banking some of this money. Maybe we ought to consider ending a 
program that worked, that succeeded, and save the money. Or 
maybe we could repurpose it to advance into high-speed 
broadband in rural areas. The same type of program under the 
Universal Service Fund (USF).
    So, again, I think those are the kind of questions I am 
going to be asking, the questions that were on my mind as I was 
reading all the briefing material. I am hoping those are the 
kinds of questions this Committee asks during this hearing.
    With that, I will turn it over to Senator McCaskill.

           OPENING STATEMENT OF SENATOR MCCASKILL\1\

    Senator McCaskill. First, I am really grateful, Mr. 
Chairman, that you agreed to hold this hearing. It is really 
important. I began working, as Chairman Pai will tell you, I 
have been working on this for years, and it all began when I 
got a solicitation for a free phone at the condominium I live 
in in Washington. And, I looked at it, and I thought, ``What in 
the world?'' and brought it to work and said, ``What is this?'' 
And then, I began to dive in and realized how poorly designed 
this program was from the get-go. And, you correctly pointed 
out that this program began under Reagan. The wireless part of 
this program began under President Bush. This program was 
actually set up in a way that was fatally flawed under 
President Bush, but then these phones became known as the 
``Obama phones.'' So, I want to make sure everyone knows there 
are lots of parents of this particular program that has gone 
awry.
---------------------------------------------------------------------------
    \1\ The prepared statement of Senator McCaskill appears in the 
Appendix on page 30.
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    We are going to spend a lot of time today talking about 
what has gone wrong with the Lifeline program. I know there are 
lots of people who depend on the Lifeline program, and I know 
that we need to look at ways we can support them. But the idea 
that we can continue a program that is still structurally 
deficient, in the same way we have been doing it, is frankly, a 
non-starter with me.
    The combination of ineffective oversight and the greed of 
private carriers has led to hundreds of millions of dollars in 
wasted public money. Since 2014, when the GAO began the most 
recent audit that I requested, the Federal Communications 
Commission (FCC) has identified and pursued several companies 
that have fraudulently profited from the Lifeline program. 
However, this investigation demonstrates this may only be the 
tip of the iceberg.
    GAO's multiyear audit found evidence suggesting that 
Lifeline may have paid more than $138 million a year in 
subsidies for 1.2 million potentially fraudulent accounts. We 
are not talking about highly sophisticated fraud here. There 
were 1.2 million accounts that were either duplicates of 
existing subscribers, or there was no record that the listed 
subscriber was actually eligible, or where the subscriber is 
dead.
    It should not have taken a 3-year GAO audit to spot these 
glaring red flags. I am so grateful for GAO's hard work. I 
asked them to assess the effectiveness of the 2012 Lifeline 
reforms, which began after I received the solicitation in 2011, 
and I began hollering about this on the Commerce Committee.
    I do not believe any of us could have anticipated the 
extent of the problems that GAO would uncover in spite of the 
2012 reforms. I would like to personally thank GAO, who spent 
more than 3 years on this, and I want to thank the team, your 
team, Mr. Bagdoyan, that did this. I know as a former auditor 
that there is a tremendous amount of focus and dedication 
needed for an audit like this.
    I also know the FCC and the Universal Service 
Administrative Company (USAC) have taken steps to improve the 
oversight. Today we will hear from the FCC Chairman and the 
Acting Executive Director of USAC about the efforts underway to 
combat the waste and fraud and abuse that have long plagued 
this program.
    I do not doubt the sincerity of the FCC and USAC and their 
desire to address the shortcomings. The reality is these are 
not new problems--investigative journalists, the FCC Office of 
Inspector General (OIG) and many of my colleagues in Congress 
and I have pointed them out time and time again over the last 
decade.
    Chairman Pai, you have been among those who have brought 
attention to Lifeline's serious weaknesses. During your time as 
an FCC Commissioner, you urged the FCC to implement much needed 
reforms and called for proactive measures to increase 
accountability and more aggressive enforcement. Now that you 
are leading the Commission, I am cautiously optimistic about 
the possibility of meaningful reform. I know that you are aware 
past attempts to increase accountability have fallen woefully 
short.
    One of the reasons for these past failures is that many of 
the weaknesses are deeply entrenched in the basic structure of 
the program. You do not tell people that they get to verify 
whether or not somebody needs a phone when they are the ones 
that are going to make the money if they verify eligibility for 
the phone. It will never work because the incentives are in the 
wrong place. The incentives are to override the database. The 
incentives are to put more people on the program because every 
person you put on the program is $9.25 a month to your company. 
And, it is just a moneymaker to push the envelope.
    It does not take an auditor to tell you it might not be the 
best idea to blindly trust the companies that are going to make 
the money--who receive $1.5 billion each year from this 
program--based on the number of accounts they service.
    The FCC has taken the initial step to address this 
structural flaw by creating the National Eligibility Verifier 
to independently screen eligibility. However, last year's 
Lifeline reform order does not require that crucial reform to 
be complete until the end of 2019, and there are still 
mechanisms to override that the companies can do. So, if we 
know the companies are overriding the database now, I have no 
confidence they are not going to override and self-certify over 
the National Verifier.
    We have made progress. I do want to acknowledge that. This 
program went from about $800 million per year to $2.2 billion 
in breakneck speed. Then we began the reforms and found massive 
duplications, and it fell down and it is about $1.5 billion 
now. So, we just skimmed the surface and found $600 million. 
And, by the way, that is real money. That is a lot of money 
that is desperately needed for rural broadband deployment.
    I have a lot of questions particularly on the enforcement 
end. We have $94 million that has been identified that should 
be paid back. The companies that should be paying this back get 
over $1 billion a year from this program. And, guess what? They 
have not paid us a dime. Not one thin nickel. I do not 
understand why we keep paying these companies that owe us 
money. And so, be prepared for that question because I need an 
answer to that.
    Thank you, Mr. Chairman, for the hearing.
    Chairman Johnson. Listen, I appreciate your passion on this 
thing. I woke up this morning with a stiff neck, and I think it 
is because, as I was reading the briefing materials, I was just 
shaking my head. So, this will be an interesting hearing, maybe 
a frustrating hearing. But, listen, I do appreciate your dogged 
pursuit of this waste, fraud, and abuse, and hopefully we can 
come up with some solid recommendations about what we should do 
moving forward.
    It is the tradition of this Committee to swear in 
witnesses, so if you will all stand up and raise your right 
hand. Do you swear that the testimony you will give before this 
Committee will be the truth, the whole truth, and nothing but 
the truth, so help you, God?
    Mr. Bagdoyan. I do.
    Mr. Pai. I do.
    Ms. Robinson. I do.
    Chairman Johnson. Please be seated.
    Our first witness is Seto Bagdoyan. Mr. Bagdoyan is the 
Director of Audit Services for the U.S. Government 
Accountability Office's Forensic Audits and Investigative 
Service mission team. In his role he supervises the team that 
reviews the internal controls of government programs and roots 
out waste, fraud, and abuse. Mr. Bagdoyan.

 TESTIMONY OF SETO BAGDOYAN,\1\ DIRECTOR, FORENSIC AUDITS AND 
  INVESTIGATIVE SERVICE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Bagdoyan. Thank you. Chairman Johnson, Ranking Member 
McCaskill, and Members of the Committee, I am pleased to appear 
before you today to discuss GAO's May 2017 report on FCC's 
Lifeline program. The program's expenditures total about $1.5 
billion annually, covering over 12 million beneficiaries. Given 
it scope and scale, Lifeline is inherently vulnerable to fraud. 
In this regard, our findings highlight multiple significant 
risks involving, for example, the program's financial 
management and beneficiary enrollment controls. Accordingly, 
today I will highlight two of our report's principal takeaways 
regarding these particular risks.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Bagdoyan appears in the Appendix 
on page 32.
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    First, FCC and USAC, the not-for-profit corporation which 
administers Lifeline, have taken some steps to enhance controls 
over program finances. For example, FCC and USAC established 
financial and management controls regarding billing, 
collection, and disbursement of funds for Lifeline and related 
USF programs. However, FCC maintains the USF with a cash 
balance of over $7 billion and net assets of about $8 billion 
as of June 2017 outside of Treasury in a private bank account. 
In 2005, we recommended that FCC reconsider this arrangement 
given that the USF consists of Federal funds. In addition to 
addressing any risks associated with having the funds outside 
of Treasury where they do not enjoy the same rigorous financial 
management practices and regulatory safeguards as other Federal 
programs, FCC identified potential benefits of moving the 
funds. For example, by having the funds in Treasury, USAC will 
have better tools for fiscal management of the funds. In March 
2017, FCC developed a preliminary plan to move the USF to 
Treasury.
    Second, to enhance Lifeline's ability to detect and prevent 
ineligible subscribers from enrolling, FCC in 2014 established 
a database with a real-time list of subscribers. In 2015, the 
agency adopted a rule requiring Lifeline providers to retain 
eligibility documentation used to qualify consumers for program 
support to improve the auditability and enforcement of FCC 
rules.
    Nevertheless, we found weaknesses in several key control 
areas. For example, the program's structure relies on over 
2,000 Lifeline service providers to implement important program 
functions such as verifying subscriber eligibility. This 
involved internal control environment could actually exacerbate 
fraud risk as companies may have financial incentives to enroll 
as many customers as possible without sufficient verification.
    Accordingly, based on our data matching analyses, we were 
unable to confirm whether about 1.2 million individuals of 
about 3.5 million we reviewed, also 36 percent, participated in 
a qualifying program such as Medicaid as claimed on their 
Lifeline enrollment applications. Since we were able to review 
only about a third of total subscribers due to methodological 
limitations, we believe that this number is actually 
understated. In terms of cost, providers would have received 
about $137 million in USAC disbursements annually for 
delivering Lifeline phone services to these individuals.
    To address enrollment control weaknesses, FCC's 2016 order 
calls for the implementation of a third-party National 
Eligibility Verifier by 2019 to determine subscriber 
eligibility. In addition to data analyses, we covertly tested 
provider enrollment controls. Specifically, we made 21 attempts 
to enroll in Lifeline through 19 different providers using 
fictitious identities and documentation, and we were successful 
in 12 attempts. Five providers we enrolled through were among 
the top 30 recipients of Lifeline disbursements from USAC in 
2014, totaling almost half a billion dollars. One of these 
providers who did not actually send us a Lifeline phone upon 
enrollment collected almost $10 million in such disbursements.
    In closing, I would underscore that it is essential for FCC 
to place a high policy priority on deploying effective 
preventative enrollment and other controls to help mitigate the 
risk for potential fraudulent activity in Lifeline, including 
the broadband expansion, and safeguard the government's 
substantial investment in this program. Fully and timely 
implementing our report's seven recommendations in addition to 
any other actions FCC is taking independently would be vital in 
this regard. To its credit, FCC has agreed to implement all of 
our recommendations.
    Chairman Johnson, this concludes my remarks. I look forward 
to the Committee's questions. Thank you.
    Chairman Johnson. Thank you.
    Our next witness is the Honorable Ajit Pai. Mr. Pai is the 
Chairman of the Federal Communications Commission. He was 
originally appointed to the FCC by President Obama in 2012 and 
was designated Chairman by President Trump in January 2017. 
While serving at the FCC, he has championed numerous innovative 
reforms. Chairman Pai.

 TESTIMONY OF THE HONORABLE AJIT V. PAI,\1\ CHAIRMAN, FEDERAL 
                   COMMUNICATIONS COMMISSION

    Mr. Pai. Chairman Johnson, Ranking Member McCaskill, 
Members of the Committee, thank you for holding this hearing 
and for inviting me to testify today alongside my distinguished 
counterparts, Mr. Bagdoyan and Ms. Robinson.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Pai appears in the Appendix on 
page 46.
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    I have often said that the FCC's highest priority is 
closing the digital divide--the gap between those who have 
access to next-generation technologies and those who do not. 
The Lifeline program can play a role in our efforts to bring 
digital opportunity to all Americans. But, unfortunately, it 
continues to be riddled by waste, fraud, and abuse. This is 
doubly destructive: every dollar wasted comes from ratepayers 
and does nothing to help low-income families actually in need 
of communications services. The FCC owes it to everyone who 
contributes to or properly receives benefits from the Universal 
Service Fund to make sure the Lifeline program is efficient, 
effective, and free of waste, fraud, and abuse.
    Prior to becoming Chairman, as Senator McCaskill observed, 
I conducted my own investigation of the Lifeline program as a 
Commissioner in 2016. The Government Accountability Office 
report that we will discuss today confirms some of the issues I 
identified and more, and I will briefly highlight some of them.
    First, because the Lifeline program lacks adequate 
safeguards, it has paid for subscribers who are not eligible to 
participate, potentially to the tune of hundreds of millions of 
dollars a year. In its investigation, as Mr. Bagdoyan pointed 
out, GAO was unable to confirm whether more than 1.2 million 
Lifeline subscribers of the 3.5 million sampled actually 
participated in Lifeline-qualifying programs that they or their 
provider claimed during the enrollment process.
    Second, while Lifeline rules only allow one subsidy per 
household, loopholes in enforcing the program's one-per-
household rule have allowed providers to enroll hundreds of 
subscribers at a single address, including one address that was 
associated with 10,000 separate subscribers.
    Third, for years, a lack of robust verification procedures 
has allowed providers to claim support for ``phantom'' and 
deceased subscribers, as well as to unlawfully claim multiple 
benefits for other subscribers. Phantom subscribers--that is, 
subscribers who do not exist but who still collect a Lifeline 
benefit--have numbered in the thousands for multiple providers.
    Finally, some Lifeline providers' sales agents' practices 
continue to be a key driver of inappropriate enrollments in the 
program. This is because agents are often paid based on the 
number of new subscribers that they sign up. Not surprisingly, 
many are less than scrupulous about who they enroll.
    Now, in light of some of these problems, I have directed 
USAC to implement aggressive administrative changes to correct 
the problems that GAO, my office, and the FCC's Inspector 
General (IG) have identified.
    Specifically, I have asked USAC to take immediate action to 
strengthen its administrative processes and the National 
Lifeline Accountability Database (NLAD). Among other measures, 
I have asked USAC to review addresses associated with large 
numbers of subscribers and to prevent providers from claiming 
subsidies for more than their total number of enrolled 
subscribers. USAC should also block benefits for dead 
subscribers and actively detect and remove duplicative benefits 
found for the same household. Moreover, to hold sales agents 
accountable, USAC should require them to register with USAC 
before using the Lifeline enrollment systems.
    Any improper payments that USAC identifies in these 
processes will be reported to the FCC's Enforcement Bureau and 
the FCC's Office of the Inspector General for administrative, 
civil, or criminal action, as appropriate.
    Furthermore, to combat eligibility-related waste, fraud, 
and abuse, the FCC will launch the Lifeline National 
Eligibility Verifier in at least six States this year. The 
National Verifier will determine subscriber eligibility, and 
this will make it harder for fraudsters to claim ineligible or 
duplicate subscribers. The National Verifier will also use 
Federal and State data sources to automate eligibility checks. 
This will improve accuracy and minimize administrative expense.
    Finally, the FCC must consider whether further programmatic 
changes are necessary to ensure that Lifeline funds are 
efficiently directed to those families who need it most.
    To be clear, the challenges in restoring the program's 
integrity are significant, but we have to learn from past 
mistakes and set the program on the right course.
    One last point. The GAO report also raises concerns 
regarding universal service funds being held in a private bank 
outside of the United States Treasury. The FCC is actively 
working with the Treasury Department and with USAC on a plan to 
move those funds to the Treasury as soon as possible.
    Chairman Johnson, Ranking Member McCaskill, thank you once 
again for holding this hearing. I look forward to answering 
your questions and to continuing to work with you and your 
staff on this important issue in the time to come.
    Chairman Johnson. Thank you, Chairman Pai.
    Our final witness is Vickie Robinson. Ms. Robinson is the 
acting chief executive officer (CEO) and general counsel of the 
Universal Service Administrative Company. She has spent nearly 
20 years working for and with the FCC on universal service 
issues. Ms. Robinson.

  TESTIMONY OF VICKIE S. ROBINSON,\1\ ACTING CHIEF EXECUTIVE 
 OFFICER AND GENERAL COUNSEL, UNIVERSAL SERVICE ADMINISTRATIVE 
                            COMPANY

    Ms. Robinson. Thank you, Chairman Johnson. Good morning, 
Chairman Johnson, Ranking Member McCaskill, and Members of the 
Committee. I appreciate this opportunity to represent the 
Universal Service Administrative Company as part of the 
Committee's examination of the FCC's Lifeline program. I am 
honored to appear here alongside Chairman Pai, and it is my 
privilege to work together with him and our colleagues at the 
FCC to ensure the goals of universal service and the 
expectations of this Congress and the FCC with respect to our 
administration of the Lifeline program are not only met but 
exceeded.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Robinson appears in the Appendix 
on page 138.
---------------------------------------------------------------------------
    I am also honored to be here today with Mr. Bagdoyan of the 
Government Accountability Office. My colleagues at USAC 
appreciate GAO's hard work in bringing to light those issues 
highlighted in its recent report and believe that the report's 
findings directly contribute to our efforts to improve program 
performance and root out waste, fraud, and abuse.
    I joined USAC in February 2016 after serving in various 
positions at the FCC for over 14\1/2\ years. During my time 
there, I held leadership roles in the bureaus charged with 
universal service policy and enforcement matters. Armed with 
that knowledge, I brought to USAC an understanding and 
appreciation of the FCC's universal service goals and its 
programs, as well as the importance of a strong relationship 
between the FCC and USAC. I am committed to building upon that 
relationship.
    USAC was designated as the permanent administrator of the 
Lifeline and other programs in 1998, and as part of this 
responsibility, we are charged with managing the day-to-day 
operations and overall management of the fund, including 
assessing contributions, disbursing funds, and executing 
related audit functions. USAC does not establish policy and may 
not advocate policy positions.
    The GAO's report we will discuss today casts a critical 
spotlight on the administration of the Lifeline program. Among 
its many findings, GAO expressed concern about efficiencies in 
the Lifeline program, program oversight, and the risk of waste, 
fraud, and abuse. Today I would like to highlight for you some 
of the key efforts USAC is making to improve program integrity 
and performance, including actions initiated before and since 
the release of GAO's report.
    In 2014, USAC executed the FCC's directive to establish a 
NLAD, to help eliminate fraud by detecting duplicate 
subscribers within the program. It is an essential tool in our 
effort to prevent waste, fraud, and abuse in the program, and 
it is used to perform name and address verification, duplicate 
checking, as well as management of enrollment, de-enrollment, 
and transfer of subscribers between Lifeline service providers.
    As has been alluded to in previous testimony, NLAD has 
drastically reduced instances where subscribers had more than 
one connection and were, therefore, violating Lifeline program 
rules. Upon initial launch of NLAD in 2014, NLAD detected 2.5 
million duplicate subscribers that have since been eliminated. 
This in turn led to hundreds of millions of dollars in savings. 
Lifeline disbursements have dropped from $2.2 billion in 2012 
to $1.5 billion in 2015 following implementation of NLAD.
    In 2016, the FCC directed USAC to establish a National 
Verifier to authenticate program eligibility prior to 
enrollment. We are working closely with the FCC, State and 
Federal agencies, program participants, and other parties to 
develop a system that will ensure program integrity by placing 
under USAC's control responsibility for verification of 
subscriber eligibility. The National Verifier is on track to be 
completed on time and on budget.
    Once complete, the National Verifier, working in tandem 
with the NLAD, will comprise a comprehensive system to verify 
eligibility and prevent waste, fraud, and abuse, greatly 
improving USAC's ability to safeguard Lifeline funds. However, 
duplicate detection and eligibility verification are not the 
only tools that USAC can use to prevent waste, fraud and abuse. 
Building on data analytics and program integrity projects 
already underway, as well as the findings in GAO's report and 
Chairman Pai's 12- or 18-month-long investigation in his most 
recent letter, we have developed the Lifeline Safeguard 
Implementation Plan, which aggressively focuses on key areas 
for action and increased collaboration with Chairman Pai. We 
are implementing this vigorously and developing new tools to 
take the NLAD and National Verifier where they cannot be 
leveraged. And, as Chairman Pai has alluded to, since the GAO 
report was issued, we have taken concrete steps to ensure 
accountability for universal funds, reaching agreement with our 
private bank to provide the FCC a more explicit role in the 
oversight of funds and working closely with the FCC and the 
Department of Treasury to transfer funds.
    Thank you for the opportunity to testify. I look forward to 
your questions.
    Chairman Johnson. Thank you, Ms. Robinson.
    I am more than happy to hold off on my questioning if, 
Senator Peters, you want to go.

              OPENING STATEMENT OF SENATOR PETERS

    Senator Peters. I appreciate that. Thank you, Mr. Chairman, 
Ranking Member McCaskill. First off, I want to thank both of 
you for bringing this hearing to us today. This is a very 
important topic, and reading the GAO report, I do not think 
anyone could read that report and not be very angry.
    Senator McCaskill, you have been a real champion, thank 
you. Since that first day when you got the notice for the free 
telephone, you have really been a champion for this, and I 
applaud your efforts. So, it is great to be here with both of 
you, and I appreciate the testimony here today.
    But, I want to start off, before I ask a few questions, and 
thank Chairman Pai for your comments about making sure that we 
have access in our society, the digital divide. You and I have 
spoken about that a great deal. I know you are sincere, I know 
you are passionate about making sure that folks in this country 
have access to communications service, which is absolutely 
essential in the modern age. We have to have that. This country 
made a focus to make sure everybody had electricity in the last 
century. Communications is every bit as important as 
electricity. It is essential to life.
    And so, the basic premise and the goals of this program 
remain the same, are very important, that folks who may not 
have those opportunities need to have it. But, as I mentioned, 
with the GAO report, none of us can stand here and accept the 
kind of fraud and abuse that we see going on in this program. 
And, it endangers a program that does bring a lot of 
significant benefits to people who need it, and that angers me 
that you have actors out there that are basically scamming this 
program, and we have to stop that and be very aggressive in 
doing that.
    And, I could not agree with Senator McCaskill more--the 
scam really seems to be from the companies that are out there. 
It is not individuals that are bringing--at least that is not 
my understanding. Correct me if it is a wrong understanding, 
but it is not individuals bringing fraudulent documents. It is 
companies that have an incentive to just sign everybody up. I 
am very confident the thousands of phantom people who are dead 
are not scamming it themselves. There is not a dead person who 
is trying to scam this. These are companies that are taking 
this money away from taxpayers and endangering a program that 
provides vital services to people who need it.
    On the other hand, there are folks who do not need it, but 
it is pretty hard for most folks, if you get a notice for a 
free telephone, you do not usually ask a lot of questions if 
you get a free telephone. So, we have to hold these folks 
accountable, and I know there are a number of steps that are 
being taken.
    When I saw the GAO report, I wrote a letter to both Mr. Pai 
and Ms. Robinson, and I appreciate your very detailed responses 
to the questions that I asked. And, Mr. Chairman, I would like 
to enter all three letters into the record,\1\ if I may.
---------------------------------------------------------------------------
    \1\ The letters submitted by Senator Peters appears in the Appendix 
on page 189.
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    Chairman Johnson. Without objection.
    Senator Peters. Thank you.
    I want to focus on some of the potential fixes here, and so 
I want to talk a little bit about the National Verifier system 
that Ms. Robinson talked about quite a bit, which is to address 
many of the outstanding issues. And, I asked many of these 
questions in the letter that I have just entered into the 
record, so I do not need to repeat some of those. But, I just 
have some straightforward questions for you, Ms. Robinson.
    In your August 18th response to my letter, you said that 
USAC will publish and distribute a comprehensive list of 
available State eligibility databases for service providers to 
use by the end of the month. Are you on track to do that?
    Ms. Robinson. Absolutely. That has been done.
    Senator Peters. It has been done? So, we have completed 
that.
    Ms. Robinson. Yes.
    Senator Peters. Good. Do you agree with those who think 
that the National Verifier will significantly reduce the risk 
of waste, fraud, and abuse by shifting the burden of 
eligibility determinations away from sales agents and third-
party contractors to a neutral administrator?
    Ms. Robinson. Absolutely, I do.
    Senator Peters. Well, I just want to add a follow-up. We 
are shifting some of the burden of that to a third party, but 
we still have to have the burden on those folks who are signing 
these individuals up. They need to be held accountable, that 
they have to check the paperwork, they have to have it. They 
have to have records of it, and it has to be available for 
vigorous audits, just like any other private entity would be.
    Chairman Pai, do you agree with the assessments?
    Mr. Pai. Senator, I do, and I also want to commend Ms. 
Robinson for her able leadership of USAC during the past 
several months. She has been a terrific partner for the FCC in 
this effort, and I am grateful to all that she and her team 
have done. I would simply add two points, however.
    First, that the National Verifier will only cover 
eligibility. There are a number of other vulnerabilities in the 
processes that GAO identified.
    And, second, in the meantime I think we also need to make 
sure that we pursue as aggressively as we can some of those 
unscrupulous actors on the enforcement side to make sure that 
there are no cracks in the system as best we can fill them.
    Senator Peters. And, if you could tell me how you will 
personally ensure that the National Verifier system is 
implemented, are you actively involved as well? And, what do 
you plan to do personally?
    Mr. Pai. Yes, sir, we are actively monitoring that. We are 
working with USAC to make sure that we can get that National 
Verifier stood up as quickly as possible. It involves 
coordination with a number of different jurisdictions, 
obviously, and so we and our team are very actively working on 
that to make sure that we can meet those timeframes, six States 
by the end of the year, a couple dozen States more by the end 
of 2018, and nationwide implementation by the end of 2019. That 
is our goal, and I am doing everything I can to make sure that 
we meet it.
    Senator Peters. As I mentioned in my earlier comments, the 
most important thing here is enforcement, and deterrence is the 
best way to prevent a lot of these problems when providers know 
that the consequences of their fraud will be detected, they 
will be punished, and they will have to pay back the taxpayers 
aggressively.
    Chairman Pai, tell me a little more about what the FCC is 
doing to make this painfully clear to all of these probably 
thousands of service providers who have been scamming us for 
quite some time, that the Enforcement Bureau is going to take 
tough actions, and what you have seen in the past is nothing 
like what you are going to see in the future?
    Mr. Pai. Thank you for the question, Senator. It is an 
unfortunate feature of human nature that if there is not a cop 
on the beat, people tend to play a little faster and looser 
with the rules. And, unfortunately, that has manifested itself 
here.
    As Senator McCaskill observed, when I was a Commissioner, I 
aggressively urged the FCC to take action against some of those 
unscrupulous providers that you mentioned who are scamming not 
just the ratepayers but, of course, the people who really need 
the help, the recipients.
    Senator Peters. And, what have we seen during that time? 
When you say additional action, what have we actually seen in 
that time period?
    Mr. Pai. Unfortunately, to be candid, Senator, we did not 
see any action during the previous Administration, and I was 
disturbed when I became Chairman to find in my review of the 
Enforcement Bureau's policies and priorities that there was no 
plan for any enforcement action against some of these Lifeline 
providers. We have changed that. I have instructed our 
Enforcement Bureau to make this a top priority. And, while I 
cannot discuss the particulars of any given case, what I can 
tell you is that this will not be an afterthought. It is front 
and center in my mind in terms of our enforcement priorities.
    Senator Peters. And, you will be able to come to us at some 
future date and tell us how many cases have been pursued, how 
many have been successful? And, we would expect to see that 
fairly soon, I would expect?
    Mr. Pai. I cannot give you a specific timeframe. What I can 
tell you is I urge you to hold us accountable, and we will give 
you all the information that we can as soon as we can to make 
sure that you are aware that enforcement is not just an 
aspiration but it is a reality at the FCC.
    Senator Peters. Well, I appreciate that. My time has 
expired, but I just want to say that, again, I think there is 
an important goal here to make sure that people have access to 
communications services, but it has to be done properly, it had 
to be done efficiently, it has to be done without fraud and 
abuse. And, if there are any tools that you need from us here 
in Congress, I will at least let you know in my case, and I am 
sure I speak for others, that we will be here to help you do 
that, because we have got to make sure this program is 
administered properly so the individuals who rely on this 
service continue to have it. It is absolutely essential in 
today's modern economy. Thank you.
    Mr. Pai. Thank you, Senator.
    Chairman Johnson. Thank you, Senator Peters.
    Let me follow up on that same line of questioning. Chairman 
Pai, are you telling me there has never been a prosecution 
against these fraudulent actors?
    Mr. Pai. Well, Chairman, the one notable exception would be 
the Total Call Mobile case. That was a glaring case in which 
one particular company had scammed the fund out of millions of 
dollars. We did take action in that case. But, there are a 
number of other cases that are pending, which Senator McCaskill 
adverted to in her opening statement. I urged the FCC at the 
time to take aggressive action in those cases, and nothing 
happened.
    Chairman Johnson. So, describe what enforcement means.
    Mr. Pai. Typically, what will happen is the FCC will issue 
what is called a ``Notice of Apparent Liability (NAL).'' We 
tell Party X, ``We think you have violated the law, and based 
on our assessment, we believe that you are liable to the 
Federal Government for this amount of money.'' At that point 
the company has a chance to respond, and based on that response 
or non-response, the FCC then proceeds to what is called a 
``forfeiture order,'' in which we say we affirmatively 
determined that you are liable for this amount of money.
    One of the unfortunate things that we found during the 
previous Administration is that there were a lot of words about 
enforcement. We might issue a Notice of Apparent Liability, but 
there was no actual follow up on the back end.
    Chairman Johnson. So, the enforcement sounds to me like, 
``Oops, I got caught, I have to pay it back.'' Is that really 
the only enforcement action possible? Is there a criminal 
prosecution? Can we hold people accountable? Can they go to 
jail?
    Mr. Pai. Absolutely. There is one case, Icon Telecom in 
Oklahoma, in which we found that the proprietor of that company 
had been using some of the funds for personal benefit, and I 
believe in that case there was a prosecution.
    Chairman Johnson. What is the maximum penalty?
    Mr. Pai. It depends on the particular nature of the 
criminal offense that the Department of Justice (DOJ) chooses 
to prosecute. We obviously do not have direct criminal 
prosecutorial authority.
    Chairman Johnson. Ms. Robinson, you are shaking your head. 
Would this just fall under normal criminal statutes in terms of 
theft and the extent of the theft in terms of penalties? Or, 
are there specific penalties called out in the statute?
    Ms. Robinson. So, I am speaking from another role that I 
had. While at the FCC, I actually worked for some time in the 
Enforcement Bureau, so I happen to know, and this is one of my 
areas of expertise. The Communications Act actually sets forth 
statutory maximums that kind of confine and restrict what the 
FCC can do in terms of the structure of enforcement actions. 
But, yes, the FCC has many tools, as Chairman Pai alluded to, 
including the Notice of Apparent Liability, forfeiture actions, 
citations, admonishments, and the FCC aggressively uses those 
tools, especially under Chairman Pai, and we are working 
closely with him right now to continue in that effort.
    Chairman Johnson. So, again, kind of the question I want, 
you literally have the possibility of--let us say a CEO of a 
company, running the company, has to be aware of this fraud, 
literally stealing millions of dollars. Now, if you go and rob 
a bank of millions of dollars, you would be put away for how 
many years? How many years can these people be put away for if 
we actually enforce and have the Justice Department follow up 
on it? What is the penalty?
    Mr. Pai. I cannot give you the specific term of years that 
would be applicable to that criminal offense, but I can say 
from an FCC perspective, we are consistently looking at the 
full range, up to the maximum of the fines that we can impose, 
the other civil and criminal and administrative penalties that 
we can impose, to make sure that there is a deterrent effect, 
because, otherwise, as you pointed out, folks just think, OK, I 
will get a slap on the wrist, I can go back to the business 
model that we had before.
    Chairman Johnson. So, I found it jaw-dropping, the 
instances where one address was getting hundreds and then 
thousands of phones. It kind of reminds me of the earned income 
tax credit with some audits from the Inspector General of the 
Internal Revenue Service (IRS).
    I want to go through the process of how this reimbursement 
works so we can understand how that kind of fraud can occur. 
Mr. Bagdoyan, Chairman Pai, or Ms. Robinson, tell me how the 
reimbursement works. How is the phone applied for or how is the 
fraud committed?
    Ms. Robinson. Sure, and I can try to approach this a couple 
different ways. But, I think it is important, Chairman Johnson, 
to kind of clarify a few issues.
    In the first instance, the Lifeline program rules as 
written today do not actually provide support for phones. It is 
actually to provide the subsidies designed to provide for the 
underlying service. But, of course, certain service providers 
do have the ability to, and often do actually provide free 
phones.
    Chairman Johnson. So, a service provider basically sends an 
invoice to the FCC----
    Ms. Robinson. Or to USAC.
    Chairman Johnson [continuing]. To get $9.25 reimbursement 
for a phone.
    Ms. Robinson. That is correct.
    Chairman Johnson. That is on a monthly basis?
    Ms. Robinson. Sure, they can submit monthly. They can 
submit quarterly, etc, and that is through the Form 497. And, 
what we are doing now, actually through the great work that 
Chairman Pai pointed out, previously there were some 
disconnects that he was quick to note, between information that 
was included in that form, the Form 497, and in the National 
Lifeline Accountability Database. And, through Chairman Pai's 
observations, we actually rectified that process such that we 
no longer allow a delta between what was submitted on the Form 
497, which could be a lot more than what was actually allowed 
in the NLAD.
    Chairman Johnson. So, the companies themselves have sales 
agents that can go through different types of eligibility 
rolls, whether it is Medicare or Medicaid.
    Ms. Robinson. Correct.
    Chairman Johnson. And, start calling up people and say, 
``Hey, do you want a phone?'' Is that kind of how it works or 
it could work?
    Mr. Pai. It could work that way, yes.
    Chairman Johnson. So, I understand the verification process 
in terms of whether one of these people who subscribe actually 
are part of that program, and there is an audit result, what 
was it, 3.5 million people contacted, 1.5 million they were not 
part of those programs. Do we also verify that they actually 
get a phone?
    Mr. Bagdoyan. That is a great question, Mr. Chairman. We 
really do not know whether they do get a phone.
    Chairman Johnson. I am shaking my head again here.
    Mr. Bagdoyan. Yes, I know. I am not trying to compound your 
problem, but we really do not know, and we really do not know 
how many of these individuals have other phones, like the 12.3 
million or so subscribers that I mentioned in my opening 
remarks, we have no idea how many other phones they have and 
from whom. So, that is also a problem.
    Chairman Johnson. I will get to that in my next round, but 
it was also pretty stark that it was like one in eight or one 
in nine did not have another phone, or whatever. We will get 
into that in the next round. Senator McCaskill.
    Senator McCaskill. I do not even know where to start. There 
is so much.
    Chairman Johnson. That was one of the problems with this 
hearing.
    Senator McCaskill. Let us go with enforcement first. I have 
a list of folks who received NALs, and NALs are basically for 
the folks you found that have done bad stuff. Right, Ms. 
Robinson? And on this list, Icon was referred for criminal 
prosecution, but that ended up as a money-laundering case.
    Mr. Pai. Correct.
    Senator McCaskill. And, the only person I know of that has 
ever been convicted of anything was this guy, and it was not 
for anything having to do with Lifeline. He was convicted of 
money laundering.
    Mr. Pai. Right.
    Senator McCaskill. So, let us take that case and put it 
aside. I have $94 million--take his out, so that means I have 
$90 million that has been identified from 10 carriers, $90 
million from 10 carriers. Now, keep in mind those same 10 
carriers you wrote checks totaling $2.4 billion to in the last 
three years.
    Now, how in the world are we writing these people checks 
when they owe us $90 million? How is that happening?
    Mr. Pai. Senator, that is a great question, which I asked 
when I was a Commissioner, and we are committed to stopping 
that now that I have the privilege of serving as Chairman.
    Senator McCaskill. Well, you are not. Nothing is happening 
here. There is no enforcement in this program. These guys know 
they can get away with it. I mean, you have done three. You 
have done three settlements with AT&T, Bluejay and Total Call. 
But nobody has gone to jail. And, let us look at what the GAO 
did. They did a secret shopper program, and they applied with 
fraudulent information, and 63 percent of the time they were 
deemed eligible. This is after 2012, Chairman Pai. This is 
after all these reforms. This is after the database. This is 
after all of that. Sixty-three percent of the time they were 
made eligible.
    So, why you guys do not internally have a secret shopper 
program? And, the minute you catch somebody doing that, why you 
do not immediately slap a lawsuit on them and go after them? 
This is not hard. I am a prosecutor. I guarantee you a jury 
will convict these guys. It is outrageous to me that they have 
gotten away with this level of fraud for this long, $90 million 
that you guys have identified and you keep writing them checks. 
I mean, I do not know what I have to do to stop this.
    Mr. Pai. Senator, what I can tell you is that, again, this 
is a top enforcement priority for us. We are moving 
aggressively. And, again, I cannot give particular information 
in this setting, but what I can tell you is this is not falling 
through the cracks under my leadership.
    Senator McCaskill. Is there a statute of limitations 
problem?
    Mr. Pai. There are legal issues such as that that we have 
to take into account.
    Senator McCaskill. OK. I need to know what you are going to 
do about all those things. I mean, this is like the third 
hearing I have had where I have said, ``You have collected no 
money, much less sent anybody to jail.'' Of course, this is 
going to continue.
    Let us talk about overrides. Basically, right now, the 
Lifeline providers are supposed to use the databases to confirm 
eligibility. When they cannot be confirmed, the Lifeline 
requires that the providers independently review income. Prior 
to February 2016, you guys had no way to confirm they were 
doing so other than literally taking their word for it.
    So, we now know that 63 percent of the time that GAO 
applied with fake info, they were getting a phone. You 
indicated you found in June of last year that between October 
2014 and April 2016, carriers were overriding the duplicate 
database 35 percent of the time.
    So, we put this database in there for duplicates, and then 
they are just going in and overriding it. No harm, no foul. Is 
anybody calling them when they override it and saying, ``What 
are you doing?'' Thirty-five percent of the time, one of out 
three times, they are not paying any attention to the duplicate 
database.
    Ms. Robinson. Ranking Member McCaskill, that is a very fair 
question, and under the existing rules, I think, and with all 
the universal service programs, as I understand the 
Commission's policy, there is always a balance between program 
integrity and trying to manage and balance program 
participation.
    Senator McCaskill. Believe me, program integrity is lost on 
this one.
    Ms. Robinson. Sure.
    Senator McCaskill. In that battle they are not even close.
    Ms. Robinson. Right.
    Senator McCaskill. It is not even close. I mean, I think 
there are various ways you could confirm if it is a nursing 
home or a homeless shelter.
    Ms. Robinson. Sure.
    Senator McCaskill. The notion that you are letting one out 
of three override the duplicate verification process is 
outrageous on its face. Outrageous. So, what is going to keep 
them from overriding the National Verifier? Have you got any 
ideas on that?
    Mr. Pai. Senator, that is one of the issues that I am 
concerned about, given the fact that, as you pointed out, in my 
own investigation in 2016 we found that overrides for some 
companies in particular was more the norm than the exception. 
And, that is one of the things that we have to make sure----
    Senator McCaskill. Yes, those guys are cheating, the ones 
that are overriding the most. I will just tell you right now 
they are cheating. You want to go out and send an investigator 
and then bring whatever jurisdiction they are in to the local 
prosecutor, I will be glad to call the local prosecutor and 
walk them through putting them in jail. They are cheating. I 
mean, you guys just have to decide. Why can we not hand these 
phones out when someone signs up for unemployment insurance? 
Why can we not hand these phones out when someone signs up for 
Supplemental Nutrition Assistance Program (SNAP) benefits? Why 
can we not have these phones handed out at the very setting 
where their eligibility verification has been done? Why are we 
providing these companies with this massive opportunity for 
fraud? Is there a reason why we cannot do that?
    Ms. Robinson. Ranking Member McCaskill, I want to just kind 
of clarify a couple of things.
    First, in the first instance, with respect to the 
overrides, literally through the ongoing investigation and 
things that have been pointed out, we have been getting more 
aggressive with--and the process for allowing overrides through 
the dispute process has been modified as a result of seeing 
that there was clearly a level of abuse that was occurring, and 
we have modified and significantly reduced the instances in 
which providers would be able to sort of override the system to 
sort of say, no, this actual subscriber is eligible. So, that 
is what I want to say in the first instance.
    Second, with respect to the National Verifier, there is no 
override function being contemplated within there, so we have 
actually taken that lesson and learned from NLAD and have no 
intent in working with the Commission to sort of duplicate what 
some subscribers are using as a loophole to take----
    Senator McCaskill. So, there will be no override?
    Ms. Robinson. No.
    Senator McCaskill. OK. So, if there is not a local database 
and the National Verifier cannot, then it will be upon the 
person who wants the phone to prove their verification to the 
National Verifier or to the local phone company?
    Ms. Robinson. Right, and we also have a manual review 
process as well, so it is three components. There will be the 
Federal----
    Senator McCaskill. Well, I will be interested to learn all 
about that. I would really love to see the proposal on that. I 
know, and why we do not stop the override on the duplicate 
database? Why do we not just say you cannot do it anymore? Why 
can we not do that? Do you not have the power to do that, 
Chairman Pai.
    Mr. Pai. We would have to change our rules to do that, but 
that is----
    Senator McCaskill. I am down for that. And, by the way, we 
have two people here that are all about getting rid of stupid 
regulations, and if there is a regulation that is keeping you 
from quickly changing the rule to stop the override on the 
duplicate database, you have three champions right here, three 
warriors that will help you.
    Mr. Pai. Well, I appreciate that and would be happy to work 
with you and your staffs on it going forward.
    Senator McCaskill. Thank you.
    Chairman Johnson. Or, come up with a whole new system that 
is fraud-proof in terms of distribution of these phones. 
Senator Heitkamp.

             OPENING STATEMENT OF SENATOR HEITKAMP

    Senator Heitkamp. I want to start out by just telling you 
that I hope we all appreciate how critically important this 
program is to saving lives. The access to communications, if 
you have ever seen any example of how critical maintaining 
access to communications is, you can look at Hurricane Harvey, 
you can look at what happened with Hurricane Irma. This is a 
program that is about saving lives. When I look at this 
program, I think about it in the context of 911 programs. I 
think of it in the context of all of the other availability for 
especially older elderly to live in their homes, to live worry-
free in their homes, and still have that access. So, this is 
not a choice for me of throwing out the baby with the bath 
water. But, you have to get it right.
    And so, I want to talk about what could be kind of a 
reaction to the GAO report. In the report issued by GAO in May, 
they recommend the Universal Service Administrative Company 
transfer their funds which are currently held in private bank 
accounts into the Treasury. I am concerned that that could be 
done without assurances that the funds would be rated or 
transferred around to help pay down the debt, or in the case of 
extraordinary measures, used when we are hitting close to the 
debt ceiling. And, I think it is critical that the universal 
service fee maintain its ability to access these funds without 
implementation to maintain the continuity providers rely on.
    And one thing, we all grouse when we pay the additional 
taxes and we pay the additional fees when we pay our 
communications bills, but I do it with a smile because I think 
that means that a Grandma in her home still able to live has 
access to important and critical communications services.
    And so, those funds are intended for that purpose, and what 
are we going to do to guarantee if we do follow the GAO 
recommendation to transfer them into bank accounts that those 
funds are insulated or protected against utilization for other 
purposes? Mr. Pai.
    Mr. Pai. Senator, thank you for the question. My 
understanding is that the funds being transferred to Treasury 
actually make the universal service funds more insured against 
the risk of loss, that there are Federal management and other 
practices that the Treasury observes that will make sure that 
those funds are there for the grandmother that you spoke about.
    The second point is that my understanding is that those 
funds, once transferred to Treasury, would be used to offset 
debts that are owed by payees. And so, for example, if Party X 
owes money to the IRS and that party is also getting Lifeline 
subsidies from the FCC, those funds being in Treasury would be 
allowed to be an offset, which is a way of giving the Federal 
Government more flexibility.
    Senator Heitkamp. Well, we are going to be watching very 
closely the administration of those funds to guarantee that 
those funds are utilized the way, when I pay my bill, I expect 
them to be utilized.
    I want to just talk more systematic, because I think 
Senator McCaskill and Senator Johnson--I mean, we are always 
amazed because it is like when people come in front of our 
Committee and you think, oh, we just discovered this problem, 
guess what? We did not just discover this problem. This is a 
problem that has been ongoing for a lot of years. Why is it 
that there never seems to be urgency in solving this problem 
when we discover it, a problem of fraud, waste, and abuse? We 
would think you would jump on that, say, man, we do not want to 
go in front of Claire and Ron because they are going to have 
our lunch. Why is it that I envision them in 2 years we are 
going to be back here talking about the same thing unless 
people really get that our expectation is that in protecting 
the Federal fisc, you have to act with immediacy and urgency 
when you see a problem. And, why is it that we do not seem to 
get that?
    Mr. Pai. Senator, I could not agree with you more, and as 
Senator McCaskill knows, because we have talked about this 
issue, she and I, for many years now, when I was a 
Commissioner, I was irritated about the fact that the prior 
administration of the FCC did not make this a priority. That is 
why I started my own investigation as a minority Commissioner 
because I wanted to get facts. I sent USAC a number of letters 
in my capacity as a Commissioner because I did not have the 
chance to set the agenda for the agency, but I wanted Congress 
and the American public to know that someone at the FCC was 
looking at this issue.
    Now that I am in the driver's seat, it is a top priority, 
and we have an enforcement plan to go after the unscrupulous 
actors. I sent to USAC a very detailed letter on July 11th 
saying weed out the dead subscribers, weed out the ineligible 
subscribers. Make these sales agents register with USAC before 
they get to dip into the database. These are some of the steps 
we are taking to make sure that the problems we saw in 2014, 
2015, and 2016 under the prior leadership do not continue. And, 
I want you to be able to go back to North Dakota and say, 
``This program is delivering for the grandmother who deserves 
it and nobody else, no unscrupulous actors, no undeserving 
beneficiaries.''
    Senator Heitkamp. Mr. Pai, you are a big thinker. That is 
your reputation in town, that you think beyond what you are 
doing. Offer us some advice on how we can create a greater 
sense of urgency in the bureaucracy--I am not even going to say 
``the administration'' because I do not think--this is an 
administration to administration to administration problem. We 
do oversight. We cannot sit here and administer agencies, and 
we only respond when we have hearings like this. But, give me 
three good ideas on how we can create a greater sense of 
urgency when people spot fraud, waste, or abuse or just have a 
good idea that could promote government efficiency.
    Mr. Pai. Well, that is a good question, Senator, and you 
are certainly putting my reputation, if that is earned, on the 
line.
    Senator Heitkamp. I do not always agree with you, but you 
are known as a big thinker. [Laughter.]
    Mr. Pai. We were doing so well. Senator, I will say a 
couple different ideas that spring to my mind, especially after 
reading the GAO report.
    First, it is always better, I think, to have up-front 
verification as opposed to after-the-fact enforcement. The pay-
and-chase model that was described in the GAO report is never 
going to be sufficient. It is going to be, as Senator McCaskill 
has described it before, sort of like whack-a-mole. You just 
hope to catch the ones that you can after the fact. So, having 
up-front verification is very important.
    Second, one of the things that Senator McCaskill has talked 
about, including today, is having a cap, a budget for the 
program. I think any family in the United States knows, OK, 
before going out and spending a bunch of money, let us see how 
much money we have available, and we do not want to go above 
that money. We do not have a meaningful budget mechanism for 
the Lifeline program, and that is something that I think many 
advocates have talked about as well.
    The third thing--and this is much bigger picture, but we 
have to think about what is the purpose of the program and does 
the FCC, and USAC on our behalf, have the ability to monitor 
with key metrics whether we are meeting that goal? As the GAO 
report points out, we do not have the ability right now to 
know, for example, are these funds actually going to people who 
otherwise have non-Lifeline phone services and other services? 
We need to make sure that we figure out what the goal is and 
then measure whether the program is meeting that goal in a very 
quantitative way. That is something, I think, that Congress 
could certainly look at.
    Senator Heitkamp. Just to close the loop on that, Mr. 
Chairman, Senator Lankford and I just had a hearing yesterday 
talking about government efficiency, and we talked about the 
lack of cost-benefit analysis on existing programs. We do it on 
regulations, major regulations, but we do not analyze ongoing 
programs probably as adequately as what we should.
    Chairman Johnson. Is that term not an oxymoron, 
``government efficiency''? [Laughter.]
    Thanks, Senator Heitkamp.
    I do want to point out, the three witnesses we have before 
us, they are wearing white hats. These are individuals who are 
going to be partners with this Committee to do this. We will 
hold everybody accountable, but we are venting frustration up 
here, but I think we really do have three individuals before us 
that want to get to the bottom of this, want to take a look at 
the rules and regulations, alter them, control this, and fix 
this problem. So, I want to point that out. Senator Daines.

              OPENING STATEMENT OF SENATOR DAINES

    Senator Daines. Thank you, Mr. Chairman, Ranking Member 
McCaskill. I first want to thank the witnesses for highlighting 
the need to reform the Lifeline program in order to curb the 
waste, fraud, and abuse. I cannot even think how many times I 
have used the words ``waste, fraud, and abuse'' as it relates 
to programs in the Federal Government, and I applaud your 
efforts in doing this. And, Mr. Chairman, as well, thank you 
for your leadership here as taxpayers.
    I also appreciate the leadership we have seen from Chairman 
Pai and the reform of the FCC has already made to the program. 
It is a very good start.
    Chairman Pai, you often speak of closing this digital 
divide. This is an important goal. But, I want to also add one 
more part which is probably closing the rural-urban divide as 
well, closing that rural gap. I see so often your decisions in 
government focus on the needs of the population centers, and I 
understand that rationale, but sometimes forget States like 
Montana that have a very strong rural thread that runs through 
it, and I know you grew up that way in Kansas. A decision or 
solution that might make sense and work in San Francisco may 
not work and probably will not work in a place like Richey, 
Montana. We are seeing a broadband explosion across the United 
States. However, it is confined more to cities and to urban 
areas. Free Wi-Fi can be found in coffee shops, book stores, 
and now even whole cities are adopting municipal Wi-Fi systems. 
While they are thinking about going from 4G to 5G, we still 
have not found the alphabet sometimes in parts of Montana. 
However, with each new expansion in our major cities, rural 
States are left with nothing.
    In fact, I just saw a Brookings Institution study that 
showed one in four rural residents do not have access to 
broadband. And, as a Westerner, sometimes when I come back 
here, back east, there is kind of this highbrow mentality on 
the East Coast where you grew up, where you went to school. I 
can tell you the folks out in rural America are as 
sophisticated, as well educated, and have, frankly, more common 
sense than most in this Nation. Compared now to 0.6 percent of 
those living in cities, so one in four in rural areas do not 
have access, 0.6 percent in the cities. This rural gap hurts 
Montana, it hurts rural States where we lack access to even the 
most basic forms of broadband communication.
    As you know, I was part of building a world-class cloud 
computing company headquartered in Montana that Oracle later 
acquired, that had products in 33 different languages. In fact, 
Oracle took our cloud expertise and elevated that to leave the 
entire Oracle cloud, the seventh largest cloud computing 
company in the world, and they took Montana expertise here, 
elevated it to the world.
    Chairman Pai, how can we reform Lifeline and other USF 
programs to focus on those who have nothing before upgrading 
those who already have good access?
    Mr. Pai. Senator, thanks for the question, and you put your 
finger on the central problem that we are discussing today, 
which is that, by definition, a dollar that goes to somebody 
who does not need the help is a dollar denied from someone who 
does. And, that is the core of this FCC's mission in terms of 
closing the digital divide, is ensuring that scarce Federal 
dollars are devoted to where they are absolutely needed. And, 
in the Lifeline context, that means that we weed out the waste, 
fraud, and abuse, the dead subscribers who are getting Lifeline 
benefits, the $137 million or more annually that GAO pointed 
out that is wasted. We need to make sure that those dollars are 
directed to the people who are on the wrong side of the divide, 
who need the help, to make sure that they have a chance to 
participate in the digital economy just like the folks in 
bigger cities.
    Senator Daines. Yes, as we have said, technology now has 
removed geography as a constraint, where some of our best and 
brightest who bring incredible capacities to the workforce, but 
have been disconnected because of this divide, and this is 
closing. And, as a Nation, as we think going forward here of 
bringing not only their competencies professionally to the 21st 
Century economy, they bring a work ethic that is exceptional. 
When you get raised getting up early, having to take care of 
what needs to be done, you are up early--I was struck the other 
day. Some farmers and ranchers came here to the office, and 
they are struck by the fact that D.C. does not start until 9:00 
in the morning, oftentimes. And, I remind them, I said they do 
stay here late. But, they reminded me, the Montana Legislature, 
their hearings start at 8 a.m. That would be unheard of here in 
Washington, D.C. But, the point is you have a strong work 
ethic, and you have this great workforce here that is ready to 
engage in this global economy.
    I want to shift gears here to the National Verifier. One of 
the solutions GAO has proposed and the FCC has already taken 
action on is the National Verifier. Although no solutions are 
ever perfect, I think this is a step in the right direction, 
reducing the waste, fraud, and abuse. There, I said it again.
    Mr. Chairman, could you outline the status of the National 
Verifier program and some of the benefit and shortfalls? And, 
the second part of this question would be: How will this 
program work in a State like Montana where many of these rural 
customers do not have access to the broadband needed to even 
sign up or may have other difficulties that arise from living a 
long ways from town?
    Mr. Pai. Sure, Senator. So, in terms of the status, we are 
working actively with USAC, and I am sure Ms. Robinson could 
also give you an update. But we are on track to roll out the 
National Verifier in six States by the end of this year, a 
couple dozen more by the end of 2018, and then full national 
implementation by the end of 2019. That is certainly our goal, 
and we are actively working with all relevant jurisdictions, 
including States like Montana, to make sure that we have a 
chance to integrate the data that they have into that verifier.
    I also should add, by the way, that the National Verifier 
is an important tool with respect to Lifeline in terms of 
eligibility. It is not the only tool. There are other 
administrative actions that the FCC needs to take, and USAC on 
our behalf can take, as well as potential programmatic changes 
that could help stop this problem. So, eligibility is 
important, but there are other tools in the toolbox that we 
need to consider as well.
    Senator Daines. I am running out of time. Ms. Robinson, I 
am just reading lots of body language here. You have some 
things to share here. I have limited time, but I would like 
your thoughts as well, please.
    Ms. Robinson. I am happy to add a little bit, some 
additional detail around the status of the National Verifier. 
We are very passionate about that, and we think it will be a 
great tool.
    Senator Daines. Yes.
    Ms. Robinson. Your State is one of the six States that will 
be included in the initial launch of the six States. I am happy 
to report again or to reiterate that currently we are running 
on budget and to be on time. We are projecting to have our soft 
launch of the National Verifier in December of this year, going 
with the six States, including Montana, and we also have 
secured an agreement with the Department of Housing and Urban 
Development (HUD) to have Federal matching of eligibility using 
Federal housing information. And, we are targeting our hard 
launch in March 2018, so things are moving along great.
    Of course, there have been some challenges we have to deal 
with various privacy issues and things of that nature when 
looking to deal with States, but they are not insurmountable. 
And, we also recognize that there will not necessarily be 
matching in all of the States, and we are moving along with the 
understanding that we will have a combination of matching with 
States, Federal databases, but also some manual use. I can give 
you information on cost if you would like that as well, 
Senator.
    Senator Daines. I am out of time, so I will respect the 
Chairman. But we can follow up with you on that.
    Ms. Robinson. Absolutely.
    Senator Daines. Thank you for including Montana.
    Ms. Robinson. Absolutely.
    Senator Daines. If you get a chance to come out there, you 
are going to find you will meet some great folks out there. 
They will be very excited about moving forward.
    Ms. Robinson. We are excited about that.
    Senator Daines. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator McCaskill.
    Senator McCaskill. First, for the argument that has been 
made in other settings to GAO that this report is outdated 
based on the changes to the program that have actually been 
implemented since 2014, do you believe your results would have 
been significantly different based on the changes that have 
actually been implemented?
    Mr. Bagdoyan. Thank you for the question, Senator 
McCaskill. The analytics we performed were a point in time. I 
want to be absolutely clear with that, and their purpose was 
first and foremost to flag indicators of potential fraud, 
waste, or abuse, not reach a definitive conclusion about that. 
So, that is very important to know that.
    As you know, we are working with the FCC IG and with this 
Committee to provide referrals for follow up action to see 
exactly what happened, both in the analytics part as well as 
the undercover part. So, that is the first point.
    The second point is I believe, my team believes, that while 
what has happened since the analytics were performed, a lot of 
our audit work was performed, are steps in the right direction. 
But, to be perfectly candid, they would not materially change 
what we found and what it means.
    Senator McCaskill. Thank you for that. And briefly, you 
mentioned about contractor oversight, the fact that we now know 
that these carriers are now farming out to sometimes overseas 
call centers calling to try to sign up customers. Did I hear 
you say you have taken a step--that they cannot do that now 
without being cleared by USAC?
    Mr. Pai. Senator, I did not mention that. I do not know if 
Ms. Robinson did. But, obviously we hold the providers 
responsible and liable for any actions that their agents might 
take on their behalf, and that is one of the things we have 
reiterated.
    Senator McCaskill. OK. I am sure those contractors are 
being compensated by virtue of how many people they sign up.
    Mr. Pai. And, that is one of the issues that we flagged. 
So, long as those incentives remain, the behavior will tend to 
follow.
    Senator McCaskill. Finally, on contribution audits, I was 
interested in that portion of your report. We know that they 
are incorrectly assessing these fees based on this audit. 
Sometimes they are charging under. Importantly, many times they 
are charging over. What are you doing to make sure consumers 
get refunds? I mean, this is a class-action lawsuit waiting to 
happen. I am surprised it has not happened yet. Have you guys 
not been sued in a class action yet for people being charged 
too much for these fees on their phone bills, being assessed 
incorrectly?
    Mr. Pai. We have not yet, but the day is young, I suppose.
    Senator McCaskill. Yes, I bet you do, because it is perfect 
for a class-action suit because one individual, it is what, 
maybe a dollar a month? But if you have thousands of people 
that are being overcharged a dollar a month, that is a lot of 
money to these carriers, and they clearly are getting away with 
that. So, what steps have you taken on that?
    Mr. Pai. Senator, here, too, I was disturbed by some of the 
findings of the GAO, and we accepted that recommendation, and 
that is one of the things we are looking at going forward, is 
making sure that if a customer sees that line item on his or 
her bill, he or she can have, must have confidence that, OK, 
this is the exact amount that I am owed, because as you pointed 
out, a lot of these folks, customers who were overcharged, they 
will never figure it out. Or even if they figure it out, there 
is not much recourse they can have.
    Senator McCaskill. And, it is real found money for these 
guys.
    Mr. Pai. Oh, it is a lot of money.
    Senator McCaskill. So, I hope you get after that. I will be 
following up on that one, too.
    Mr. Pai. Absolutely, Senator.
    Senator McCaskill. Thank you, Mr. Chairman. And, tell 
everybody at GAO how proud I am of this audit. This is a really 
good job.
    Mr. Bagdoyan. Thank you, Senator. I really appreciate that. 
Thank you.
    Chairman Johnson. Thank you, Senator McCaskill, and I know 
you have to leave for Finance, so I will close it out here 
after a couple of questions.
    I do want to ask consent to enter in the record a study by 
Olga Ukhaneva from Georgetown University.\1\ It is ``Universal 
Service in a Wireless World,'' and it kind of gets to the point 
that I made earlier about prioritization of spending, where 
maybe money from the Universal Service Fund might be better 
spent, kind of what Senator Daines was talking about, it is 
great if you can get a phone, but if you do not have the 
broadband to be able to effectively use it.
---------------------------------------------------------------------------
    \1\ The report referenced by Senator Johnson appears in the 
Appendix on page 151.
---------------------------------------------------------------------------
    The summary of this study, on the front page it says, 
``Results indicate that the Lifeline program increases a 
households propensity to subscribe to phone service. However, 
the effects are quite small. Findings reveal that the subsidy, 
as it has evolved, suffers from a great deal of infra-marginal 
subscribers and would benefit from restructuring.'' I would 
call that an understatement.
    But here is kind of the data behind this, and I want to get 
your reaction. They really found that out of all the landlines 
and wireless, basically one out of eight of the subscribers 
needed the program. In other words, seven out of eight would 
have had a landline or wireless anyway. When it was just 
wireless, only 1 out of 20, which means that 19 of the 
subscribers of wireless would have had a phone anyway and truly 
did not need it.
    Now, everybody likes free money. Everybody likes to get 
that subsidy. But it is kind of beyond the Lifeline, and when 
we are $20 trillion in debt, when we have a Universal Service 
Fund that we really could allocate money to the Mobility Fund 
for rural access to broadband to increase that access, does 
this really make sense?
    So, kind of what I am hearing within this hearing is this 
is an important service. Now, I think for some people, 
certainly the Lifeline name is relevant, but maybe not to 19 
out of 20. And so, I just kind of want to get your reaction to 
this study. We will start with you, Mr. Bagdoyan, and does this 
kind of comport with what you found in your assessments?
    Mr. Bagdoyan. Well, we really did not look at it from the 
policy and impact perspective, certainly, but throughout this 
study, it is pretty consistent that historically this has been 
a low participation program. I think roughly we mentioned a 
third, 33 or so percent penetration of the eligible universe, 
which means the other 66 or so percent pay into the program 
without benefiting from it.
    Chairman Johnson. And, by the way, of the third, some of 
those were 10,000 being billed to one household.
    Mr. Bagdoyan. Well, since you bring that up, I would also 
add that we verified with the Postal Service that that is not a 
valid address, by the way. So, I just wanted to make sure that 
we close the loop on that example. But, yes, in a prior report, 
GAO mentioned that study by the professor, and we thought that 
it was robust methodologically, so the findings are pretty eye-
opening in terms of who gets what and for what purposes.
    Chairman Johnson. I want the other two witnesses to react 
to that, but while I am talking to you, your study was really, 
like you said, trying to find indicators of waste, fraud, and 
abuse.
    As opposed to an overall study that says this is how much 
waste we believe really exists.
    Mr. Bagdoyan. Correct, right.
    Chairman Johnson. Could you expand this with relative ease? 
Or, are there other studies being undertaken either through the 
Inspector General or through the FCC directly to try and get 
some figure of the $1.5 billion we are spending, that this much 
is being wasted?
    Mr. Bagdoyan. That is a great question, and we are working 
with the FCC OIG, their investigative component, to make 
referrals. We are in the process of untangling the original 
analysis so that we identify individuals and the phone 
companies that they got their service from among the 1.2 
million, as well as provide the appropriate leads from our 
undercover work for them to follow up. They are fully staffed 
and eager to work with us to get those referrals to really get 
to the bottom of what happened in these cases, whether these 
are fraudulent or legitimate ones that simply fell through the 
cracks in terms of the process.
    So, we are not going to do that work, but we are going to 
make the referrals and track them over time to see what 
happens.
    Chairman Johnson. In business, you generally follow the 80/
20 rule: 80 percent of your sales really go through about 20 
percent of your customers. Is that kind of true in terms of 
these providers as well?
    Mr. Bagdoyan. Yes, that is a great point. I believe--and 
Chairman Pai may correct me--that roughly the top 30 providers 
account for maybe 85 or 90-plus percent of the business.
    Chairman Johnson. So, how difficult would it be to go in 
there and do a real detailed forensic audit of 30 providers to 
really get to the bottom of this? Is that not the way we should 
approach this?
    Mr. Bagdoyan. Of course, yes, it would be a pretty good 
undertaking for GAO, but also the OIG would have a vast role in 
doing that as well.
    Chairman Johnson. Again, financial audits are relatively 
simple, so that would be from my standpoint--is anybody doing 
that? Is that an action that is being taken right now?
    Mr. Pai. Not currently, Senator, but that is certainly 
something that I think we should think about very seriously.
    Chairman Johnson. I would highly recommend that. I would 
start that next week. You want to get some control over this 
thing, send in 30 audit teams to those 30 top providers, and we 
would have a pretty good indication very early on, how much 
really is being wasted and what kind of enforcement action 
needs to be taken.
    Chairman Pai, why don't you kind of comment on the one out 
of 8 and one out of 20.
    Mr. Pai. That study to me is exceptionally disturbing, and 
if the study's methodology and conclusions are sound, then it 
means that the benefit is not necessarily worthy of the name, 
that the program is not necessarily closing the digital divide, 
because the entire premise is that we give these $9.25 
subsidies to people who otherwise would be disconnected. And, 
if they are otherwise willing and able to subscribe to 
communications services or do, in fact, have non-Lifeline 
subscriptions already, then essentially we are not doing 
anything other than going on the treadmill, so to speak. So, I 
think it is incredibly important for us to make sure, as I 
mentioned in our exchange with Senator Heitkamp, that the 
agency has a goal in mind. What is the goal of the program? And 
then, measure us against that goal to make sure that we are not 
subsidizing people who do not actually need the help.
    Chairman Johnson. We just do not have the money to waste.
    Ms. Robinson, do you want to comment on that at all?
    Ms. Robinson. Sure. I just would add two or three points, 
Chairman Johnson.
    On the first point, with respect to sort of what we are 
doing with the FCC to actually sort of measure the 
effectiveness of the program, just yesterday we actually 
released a Request for Proposal (RFP) to actually begin to do 
that work, to do a risk assessment, to actually begin to ask 
those hard questions. Is the Lifeline program working as it is 
intended to work? Because that is important. That is really the 
question that is before us, and we are doing that in close 
coordination with the FCC, and we look forward to begin to do 
that work, to have it inform what we are doing in this regard. 
And, that was really as a result of GAO's great work a few 
years ago. It has taken us a while to get there, but we are 
doing it now under Chairman Pai's leadership, and I think that 
is a great undertaking. I have appreciated the support in that 
regard.
    Also, with respect to--you also talked about auditing and 
taking a look at some providers and outliers, Chairman Pai has 
actually directed us to do that in his July 11th letter, to 
take the top 10 offenders, as it were, in GAO's report and to 
begin to do sampling work to really sort of dig behind things 
that they are doing. And, we are beginning that work as well. 
So, we are taking really an all-hands approach both in terms of 
looking at the effectiveness of the program, but also looking 
at right now who is sort of on the radar right now and what can 
we do about it.
    Chairman Johnson. So, let me just interject. Let me suggest 
that there are really 30 top suppliers. Go to the private 
sector, go to the big three or four accounting firms, have them 
send in a forensic audit team. You could pay them on a 
commission basis based on what they are able to recover. They 
would probably do it for 1 percent. OK, get in there and do it 
now. My concern about kind of doing it the old government way 
is we go in there, we do assessments, then we have another 
study and we have another hearing like this 2 years from now. 
Go in there assuming--because I think it is a pretty good 
assumption--you are going to find a lot of waste, a lot of 
fraud, that we need to get under control like right now. This 
is your money. That would be my suggestion. You will probably 
be getting a letter from me suggesting exactly that. But I 
interrupted.
    Ms. Robinson. That is really all I had to say, Mr. 
Chairman. I thank you for your suggestion and look forward to 
your letter.
    Chairman Johnson. Again, we have gotten a little grumpy up 
here, not directed at you whatsoever. This is just a real head 
shaker here. And, I realize all three of you are really trying 
to work and get this under control, and we truly appreciate 
your efforts, and, again, your time, your testimony, your 
answers to our questions.
    With that, I will close out the hearing by saying the 
hearing record will remain open for 15 days until September 
29th at 5 p.m. for the submission of statements and questions 
for the record.
    This hearing is adjourned.
    [Whereupon, at 11:36 a.m., the Committee was adjourned.]

                            A P P E N D I X

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