    Schools and Libraries Program: Application and Invoice Review Procedures
    Need Strengthening (Letter Report, 12/15/2000, GAO/GAO-01-105).

    The Telecommunications Act of 1996 expanded the concept of universal
    telephone service to include telecommunication support services for
    eligible schools and libraries. Under this program, called the "e-rate
    program," schools and libraries can apply for discounts on
    telecommunications services, Internet access, and internal connections.
    GAO found that the Universal Service Administrative Company's (USAC)
    Schools and Libraries Division (SLD) committed over $3.7 billion to
    applicants during the 1998 and 1999 program years. However, a
    significant amount of these funds has not yet been paid out, even though
    the deadlines for applicants and vendors to use the funds has been
    extended more than once. In addition, more funding would be available
    for eligible requests if SLD's review procedures were more effective at
    identifying and denying ineligible requests. Despite procedures
    requiring reviewers to deny funding for ineligible items and to confirm
    that conditionally eligible services are being used according to program
    rules, GAO identified millions of dollars in funds incorrectly committed
    to ineligible products and services. Finally, SLD's practice of
    approving most vendors' invoices without reviewing how and where the
    committed funds are actually being spent leaves the program vulnerable
    to further funding errors and potential abuse.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  GAO-01-105
         TITLE:  Schools and Libraries Program: Application and Invoice
    	     Review Procedures Need Strengthening
          DATE:  12/15/2000
       SUBJECT:  Telecommunication
    	     Eligibility determinations
    	     Internal controls
    	     Performance measures
    	     Libraries
    	     Public schools
    	     Funds management
    	     Information technology
    	     Aid for education
    IDENTIFIER:  FCC E-Rate Program
    	     Universal Service Fund

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    GAO-01-105

    A

    Report to the Subcommittee on Commerce, Justice, State, the Judiciary, and
    Related Agencies, Committee on Appropriations, U. S. Senate

    December 2000 SCHOOLS AND LIBRARIES PROGRAM

    Application and Invoice Review Procedures Need Strengthening

    GAO- 01- 105

    Letter 3 Appendixes Appendix I: FCC's Authority to Set and Modify E- Rate's

    Annual Funding Level 40 Appendix II: Competitive Bidding Requirements 42
    Appendix III: Additional Eligible Students and Facilities 46 Appendix IV:
    Funding Commitments and Authorized

    Payments, 1998- 99 49 Appendix V: Application Sampling Methodology and

    Detailed Results 54 Appendix VI: Administrative Costs of Selected Technology

    Support Programs 56 Appendix VII: Comments From the Federal Communications

    Commission and Univeral Service Administrative Company 59

    Appendix VIII: GAO Contacts and Staff Acknowledgments 68 Tables Table 1:
    Amounts of Funds Requested and Committed for

    the First 2 Program Years, as of August 31, 2000 16 Table 2: Amounts of
    Funds Committed and Authorized for

    Payment by SLD for the First 2 Program Years, as of August 31, 2000 17 Table
    3: E- Rate Program's Operating Expenses, 1997- 99 29 Table 4: Additional
    Facilities and Students Eligible for E- Rate

    Funding 46 Table 5: Amounts of Funds Requested and Committed for the

    First 2 Program Years, as of August 31, 2000 50 Table 6: Amounts of Funds
    Committed and Authorized for

    Payment by SLD for the First 2 Program Years, as of August 31, 2000 52

    Table 7: Unweighted Results of GAO's Review of Internal Connections Funding
    Denied or Committed From 44 Applications From the Second Program Year,
    Through November 1999 54 Table 8: GAO's Estimates of Internal Connections
    Funding

    Denied or Committed From the Second Program Year, Through November 1999 55
    Table 9: Fiscal Year 1998 Administrative Costs for Selected

    Federal Programs That Target Technology 56 Figures Figure 1: Overview of E-
    Rate Application and Funding Cycle 10

    Figure 2: Examples of Eligible, Conditionally Eligible, and Ineligible
    Products and Services 13

    Abbreviations

    FCC Federal Communications Commission MSA Metropolitan Statistical Area NECA
    National Exchange Carrier Association PCS personal communications service
    SLD Schools and Libraries Division USAC Universal Service Administrative
    Company WAN Wide Area Network

    Lett er

    December 15, 2000 The Honorable Judd Gregg Chairman The Honorable Ernest F.
    Hollings Ranking Minority Member Subcommittee on Commerce, Justice,

    State, the Judiciary and Related Agencies Committee on Appropriations United
    States Senate

    The Telecommunications Act of 1996 expanded the traditional concept of
    universal service- affordable, nationwide telephone service. Among other
    things, the act extended universal service support to eligible schools and
    libraries and authorized the Federal Communications Commission (FCC) to
    implement a program to assist these institutions in acquiring advanced
    telecommunications and information services. Under FCC's program (often
    referred to as the “e- rate program”), eligible schools and
    libraries can apply individually or as part of district wide or even state
    wide consortia for discounts from vendors on the cost of eligible
    telecommunications services, Internet access, and internal connections (the
    equipment needed to deliver these services). The e- rate program committed
    over $3.7 billion to schools and libraries that requested e- rate support
    during its first 2 years, 1998 and 1999.

    We issued several reports in 1998 and 1999 dealing with the program's
    startup activities. 1 Among other things, we reviewed key aspects of the
    program's administrative structure, the design of its procedures, and its
    internal controls for reviewing applications. We made recommendations to FCC
    to improve the program's operations, which program officials implemented
    before making their first- year funding commitments to applicants in late
    1998.

    1 See Letter to the Honorable Ted Stevens, B- 278820, Feb. 10, 1998;
    Telecommunications: FCC Lacked Authority to Create Corporations to
    Administer Universal Service Programs (GAO/ T- RCED/ OGC- 98- 84, Mar. 31,
    1998); Telecommunications: Court Challenges to FCC's Universal Service Order
    and Federal Support for Telecommunications for Schools and Libraries( GAO/
    RCED/ OGC- 98- 172R, May 7, 1998); Schools and Libraries Corporation:
    Actions Needed to Strengthen Program Integrity Operations Before Committing
    Funds (GAO/ T- RCED- 98- 243, July 16, 1998); and Schools and Libraries
    Program: Actions Taken to Improve Operational Procedures Prior to Committing
    Funds( GAO/ RCED- 99- 51, Mar. 5, 1999).

    In June 1999, you directed us to review several additional aspects of the
    program as it neared the beginning of its third year. 2 Specifically, this
    report discusses four issues:

    the amount of e- rate funding requested by applicants, the amount of funds
    committed to them, and the amount of committed funds they have actually
    used; whether e- rate funds have been committed to products and services
    that

    are ineligible for support under the program's rules; whether the
    administrative costs of the program are increasing and how

    they compare with those of other federal support programs; and FCC's
    progress in establishing performance goals and measures for the

    program. In addition, you asked us to provide information on two related
    issues. Appendix I describes FCC's authority to increase the program's
    annual funding level, currently capped at $2.25 billion. Appendix II
    compares the program's competitive bidding procedures to federal procurement
    law and includes information on other e- rate competitive bidding issues.

    To evaluate these issues, we reviewed relevant laws and regulations, FCC
    orders, and program procedures; analyzed program data on the demand for
    funding and funding commitments; obtained the program's administrative
    expenses from audited financial statements; and compared the program's
    competitive bidding procedures to federal government practice. We also
    interviewed officials at FCC's Common Carrier Bureau, as well as at the
    Universal Service Administrative Company (USAC) and its Schools and
    Libraries Division (SLD), which is responsible for the program's day- to-
    day operations. In addition, we reviewed a sample of 44 out of 9, 770
    applications that requested and received funding commitments for internal
    connections from June through November 1999 to see if ineligible products
    and services had received funding commitments. The 44 applications contained
    over 2, 300 separate requests for internal connections and accounted for
    $285 million of the $1.2 billion in second- year funding commitments for
    internal connections through November 1999. The results of these 44
    applications are not representative of all 9, 770 applications, since our
    sampling procedures gave applications for a large amount of funding a
    greater chance of being included in our sample. We found that our sample of
    44 applications could not be used to provide reliable

    2 S. Rep. No. 106- 76 (June 14, 1999).

    estimates for all 9, 770 applications because there was great variation in
    the amounts of the errors we observed from one application to the next in
    our sample. As a result, we do not present the results of this analysis in
    the body of our report. When using computer- generated data provided by SLD,
    we tested their reliability against the actual applications or complementary
    data sets. We performed our review from September 1999 through October 2000
    in accordance with generally accepted government auditing standards.

    Results in Brief The amount of annual e- rate funding requested by schools
    and libraries almost doubled from $2.4 billion in 1998 to an estimated $4.7
    billion in 2000.

    For the first 2 program years (1998 and 1999), SLD committed a total of $3.7
    billion in e- rate funding to applicants. However, at least $1.3 billion (35
    percent) of the funds committed in these 2 years had not been paid out as of
    the end of August 2000, even though FCC extended its deadlines for
    applicants to use their funds. Although funding commitments for the third
    program year were not complete at the end of August 2000, about $1. 5
    billion had already been committed, and SLD estimated that it would be
    committing an additional $600 million.

    Weaknesses in SLD's e- rate application review process resulted in
    commitments of funds for ineligible products and services. We reviewed 44
    second- year applications that received funding commitments for internal
    connections- the type of service most likely to include ineligible items.
    After screening out $20 million from requests that included ineligible
    items, SLD committed $285 million in e- rate funds to these applications for
    internal connections. However, we found that SLD reviewers failed to
    identify other ineligible items, resulting in at least $6 million in funding
    errors. This amount understates the extent of the problem because it does
    not include cases in which we found funds mistakenly committed for
    ineligible items whose costs could not be determined from the application
    materials. Also, it does not include the costs of other items whose
    eligibility was questionable but could not be resolved using the application
    materials and current review criteria. We traced these funding commitment
    mistakes and problems to procedural errors, unclear review criteria, and a
    lack of sufficient information in some applications for reviewers to
    determine the eligibility of questionable items. In addition, we found that
    SLD's process for reviewing invoice forms prior to disbursing committed
    funds provides another opportunity to identify ineligible items. However,
    the invoice review process requires applicants to submit much less
    information than found on their applications and involves less comprehensive
    reviews. An

    independent auditor hired by SLD has uncovered preliminary evidence that
    some program funds were spent on ineligible services after clearing SLD's
    application and invoice reviews. We are making recommendations to further
    improve SLD's ability to identify and deny funding for ineligible products
    and services. After reviewing a draft of this report, FCC and USAC said they
    had begun to implement the recommendations and had already completed action
    on some of them.

    Although the e- rate program's administrative costs grew slightly from 1998
    to 2000, they still remain small in relation to the program's overall
    funding. Program officials recently took actions designed to reduce
    contractors' costs- the program's biggest expense. We compared the e- rate
    program's administrative expenses with those of 34 other federal technology
    support programs by calculating the administrative expenses for each program
    as a percentage of the total funding provided. The e- rate program's
    percentage of 2.4 fell in the middle of the range of the other programs'
    percentages.

    Until recently, the e- rate program lacked meaningful performance goals and
    measures as defined by the Government Performance and Results Act of 1993.
    FCC's initial goals focused on increasing the percentage of school buildings
    connected to the Internet, but these connectivity goals were much lower than
    the percentage of schools already connected. In September 2000, FCC
    finalized new goals and measures that focus on Internet connections to
    classrooms. Unlike the old goals, these properly reflect the percentage of
    classrooms already connected. The new goals include having 100 percent of
    public school instructional classrooms connected to the Internet by 2002 and
    95 percent of private school instructional classrooms connected by 2003. The
    plan also seeks to improve participation in the e- rate program by urban
    low- income school districts and rural school districts located outside of
    towns, as well as rural libraries and libraries serving small populations.
    According to FCC data, the participation rates for these groups currently
    fall below the average rates of participation for all groups of applicants.

    Background Universal service traditionally has meant providing residential
    customers with nationwide access to basic telephone service at reasonable
    rates. The

    Telecommunications Act of 1996, however, broadened the scope of universal
    service, in part by extending universal service support to include eligible
    schools and libraries. The new program (often referred to as the
    “erate” program) is designed to improve schools' and libraries'
    access to advanced telecommunications and information services.

    The Telecommunications Act of 1996 did not prescribe to FCC a structure for
    administering the program. In 1997, FCC directed the establishment of the
    Schools and Libraries Corporation as a not- for- profit organization working
    within the framework of FCC orders and rules to carry out the program's day-
    to- day operations, such as processing and reviewing e- rate applications.
    In November 1998, FCC changed the program's administrative structure in
    response to legal concerns about FCC's authority to create a corporation and
    the Congress's directive that a single entity should administer the e- rate
    program and a related program that provides telecommunications support to
    rural health care providers. 3 FCC appointed an existing body, the Universal
    Service Administrative Company (USAC), as the permanent administrator of the
    program and directed the Schools and Libraries Corporation to merge with
    USAC by January 1, 1999. 4 Under this merger, the Corporation's staff became
    part of a new USAC unit called the Schools and Libraries Division (SLD),
    carrying out essentially the same functions as before. In this report, we
    will refer to SLD when discussing operational issues associated with the
    program. FCC retains responsibility for overseeing the program's operations
    and ensuring compliance with its orders. Among other things, FCC reviews
    USAC's budget, makes e- rate policy decisions as needed, and handles appeals
    about funding decisions that are not resolved by SLD in favor of the
    applicant.

    3 See Senate Bill 1768 and the Conference Report on H. R. 3579 (H. Rept. No.
    105- 504). Section 2004( b) of the Senate bill provided, in part, that the
    Commission should propose a structure for the administration of its
    universal service programs that would consist of one entity.

    4 USAC was originally established as a subsidiary of the National Exchange
    Carrier Association (NECA) to administer the high- cost and low- income
    universal service support mechanisms. USAC currently performs billing,
    collection, and disbursement functions for all the universal support
    mechanisms. See Changes to the Board of Directors of the National Exchange
    Carrier Association, Inc., Federal- State Board on Universal Service, Third
    Report and Order and Fourth Order on Reconsideration, and Eighth Order on
    Reconsideration, CC Docket Nos. 96- 45, 97- 21, FCC 98- 306 (rel. Nov. 20,
    1998).

    Eligibility Defined by Generally, educational institutions that meet the
    definition of “schools” in

    Federal and State Law the Elementary and Secondary Education Act of 1965 5
    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. 6 Prekindergarten education programs, adult secondary
    education programs, and juvenile justice facilities (e. g., classes leading
    to the General Educational Development High School Equivalency Test or other
    education that does not go beyond grade 12) may also be eligible for program
    funding depending on how state law defines elementary and secondary schools
    in the state where the program or facility is located. Appendix III
    identifies the states where this broader eligibility applies.

    Eligible schools and libraries may apply annually for e- rate support. Over
    30, 000 applications were submitted during each of the program's first 3
    program years (1998- 2000) from schools and libraries in each of the 50
    states, the District of Columbia, and Puerto Rico. 7 Individual applications
    can cover single schools, whole school districts, consortia, or even schools
    in entire cities and states. Applicants can also submit multiple
    applications each year for different services. The amount of support sought
    in an individual application can range from hundreds of dollars to tens of
    millions of dollars, depending on the number of schools or libraries covered
    by the application and the extent of the services for which funding is
    sought.

    5 20 U. S. C. 8801( 14) and (25). 6 20 U. S. C. 9122. Examples of entities
    not eligible for support are home school programs, private vocational
    programs, and institutions of higher education. In addition, private schools
    with endowments of more than $50 million are not eligible to participate.
    Libraries whose budgets are part of a school's budget are not eligible to
    receive universal service support.

    7 Schools and libraries located in American Samoa, Guam, the Northern
    Mariana Islands, and the U. S. Virgin Islands have also requested funds in
    one or all of the program years.

    Funding Is Provided Schools and libraries do not receive funding directly
    from the program.

    Through Discounts on Instead, the program requires applicants to seek
    competitive bids from

    Contracted Services technology vendors for telecommunications services,
    Internet access, and

    internal connections that are eligible for e- rate support. The program
    reimburses the applicants' vendors for discounts the vendors provide on the
    costs of services, as approved by SLD during the application process.
    Alternatively, if the applicant has already paid in full for the service, it
    may seek reimbursement from SLD. Approved reimbursements are paid to the
    service provider, which passes them on to the applicant. The discount levels
    range from 20 to 90 percent, with schools and libraries located in rural and
    low- income areas receiving the highest discounts. 8 See figure 1 for an
    overview of the e- rate application and funding cycle.

    8 The program measures how economically disadvantaged the schools and
    libraries are by the number of students eligible to participate in the
    national school lunch program. Urban and rural designations are based on the
    Metropolitan Statistical Area (MSA) listing.

    Figure 1: Overview of E- Rate Application and Funding Cycle

    (1) Applicants submit (2) After 4 weeks,

    (3) Applicants submit descriptions of services

    applicants may choose requests for e- rate funds

    they are seeking. SLD posts their vendors and sign

    to cover the discounted descriptions on its Web site.

    contracts for services. share of eligible services. (6) Applicants inform

    (5) SLD commits funds (4) SLD reviews

    SLD when vendors for eligible requests and

    applications for the begin providing services. notifies applicants and

    eligibility of requested vendors via letter.

    services and entities. (7) Vendors send invoices

    (8) SLD authorizes payment for discounted share of costs

    of valid invoices and requests to SLD. Applicants that have for
    reimbursement from

    paid vendors directly request universal service fund. reimbursement.

    The discounts are funded by the universal service fund, which is one of the
    financial support mechanisms used to compensate telephone companies and
    other communications entities for providing access to telecommunications
    services at reasonable and affordable prices to highcost areas, low- income
    households, and rural health care providers in addition to schools and
    libraries. The Telecommunications Act specifies that every
    telecommunications carrier providing interstate telecommunications services
    must contribute to this fund, unless exempted by FCC. 9 A portion of this
    fund is used to compensate vendors for the discounts they provide to e- rate
    program participants. Unless the Commission takes action, $2.25 billion is
    available for e- rate discounts each year.

    Not All Telecommunications The e- rate program does not provide support for
    all the

    Products and Services Are telecommunications services that schools and
    libraries may need or desire.

    Eligible for Support The Telecommunications Act directed FCC to convene a
    Federal- State

    Joint Board on universal service. Based on the board's recommendations,
    FCC's May 1997 Universal Service Order, along with several subsequent
    orders, defines three classes of service that are eligible for e- rate
    support:

    telecommunications services, such as local, long- distance, and
    international telephone service; as well as high- speed data links (such as
    T- 1 lines); Internet access services, such as dial- up Internet access, and
    e- mail

    services; and internal connections, such as telecommunications wiring,
    routers,

    switches, and network servers that are necessary to transport information to
    individual classrooms.

    Charges for telecommunications and Internet access services can include both
    recurring costs, such as monthly service, and one- time installation costs.
    Internal connections are generally one- time costs to purchase and install
    eligible equipment and software. Some items within these categories are
    eligible only if certain conditions are met. For example, personal
    communications service (PCS) and cellular telephone service are
    conditionally eligible if used at a place of instruction for educational
    purposes. Other items are always ineligible for e- rate support, even though

    9 The Commission also required certain other providers of telecommunications
    services, such as payphone service providers, to contribute to the universal
    service fund.

    they may be necessary or desirable for providing students or library patrons
    with access to advanced telecommunications services, such as the Internet.
    Ineligible items include personal computers, modems in personal computers,
    virus protection software, and content- filtering software designed to block
    access to objectionable Web sites. Figure 2 illustrates some of the common
    eligible and ineligible products and services. FCC's Schools and Libraries
    Eligibility List provides additional information on the items that can be
    funded under each of these categories.

    Figure 2: Examples of Eligible, Conditionally Eligible, and Ineligible
    Products and Services

    Eligible for Funding Conditionally Eligible Ineligible for Funding

    for Funding Telephone/ data services Software

    Modems installed in personal computers

    Maintenance Televisions

    Computers used as web/ mail servers

    Video services Computers used as

    individual workstations Central phone systems

    Wiring Telephones

    Schools and libraries are allowed to contract with the same vendor for both
    eligible and ineligible services. However, in preparing their e- rate
    applications, applicants are required to exclude the cost of all ineligible
    items from their funding requests.

    Although E- Rate The annual amount of e- rate funds requested by applicants
    has grown

    Funding Requests Have sharply, from $2.4 billion for the first program year
    (1998) to an estimated

    $4. 7 billion for the third program year (2000). This latter amount greatly
    Increased, a Significant

    surpasses the annual e- rate funding cap of $2. 25 billion, which FCC Amount
    of Committed

    established at the outset of the program. For the first 2 program years
    (1998 Funds Has Not Been

    and 1999), SLD committed a combined total of $3. 7 billion in e- rate
    support in response to applicants' requests. However, as of August 31, 2000,
    at least

    Used $1. 3 billion of this $3.7 billion in committed funds was still unused.
    Because

    FCC extended its deadlines, some applicants receiving funds for the second
    program year will have until September 30, 2001, to receive onetime
    services. As of August 31, 2000, SLD had committed $1.5 billion for the
    third program year and expected to commit another $600 million.

    Amount of Requested Section 254 of the Communications Act of 1934, as
    amended, provided FCC

    Funding Has Increased with the authority to set the funding level for the e-
    rate program. Acting on

    Sharply the recommendations of the Federal- State Joint Board, which
    estimated

    the demand for e- rate support, FCC established a $2.25 billion annual
    funding cap for the program. Each year, FCC determines the funding level for
    the program, based on projected demand, subject to the cap. Appendix I
    provides additional details on FCC's authority to set and modify this cap.

    Table 1 shows the amounts of e- rate funds requested by applicants and
    committed to them by SLD for the first 2 program years. (Funding commitments
    for the third program year were not complete at the time our review ended.)
    For the first program year, FCC set the funding level at $1. 925 billion. 10
    This was enough to fund all the applicants' requests for eligible
    telecommunications services and Internet access support, but not enough to
    cover all requests for eligible internal connections support. The program's
    funding priorities call for telecommunications services and Internet access
    requests to be funded first, with any remaining funding going to internal
    connections for the most disadvantaged applicants. As a result, only those
    applicants with discount rates of 70 percent or higher received e- rate
    funding for their internal connections. 11 For the second program year, FCC
    raised the funding level to the full $2.25 billion allowed under the cap.
    SLD received about $2. 7 billion in requests but found, after reviewing them
    against various eligibility criteria, that all eligible requests could be
    funded for only $1. 99 billion. According to SLD officials, FCC directed
    them to reopen the second- year application period so that they could use
    the remainder of the funds. 12 These additional applications, requesting an
    estimated $370 million, had not been processed at the time our review ended
    and are not included in table 1.

    10 FCC also extended the first program year from 12 to 18 months. 11 As
    table 1 shows, the total amount of first year funds committed was $1. 731
    billion. This amount does not equal the total amount of authorized funding
    available that year ($ 1. 925 billion). SLD held some funds in reserve to
    cover appeals by applicants that were denied funding. Program funds are also
    used to cover the program's administrative costs.

    12 SLD is reviewing applications received between Apr. 7, 1999, and Mar. 31,
    2000, for the remaining second- year program funding.

    Table 1: Amounts of Funds Requested and Committed for the First 2 Program
    Years, as of August 31, 2000 First program year (1998) Second program year
    (1999) a Amount requested by

    Amount committed by Amount requested by

    Amount committed by Service type applicants SLD applicants SLD

    Telecommunications $725,533,870 $679, 158, 138 $770,554,717 $579, 455, 836
    Internet access 138,977,710 135,647,152 185, 823,153 148, 408, 155 Internal
    connections 1,536,573,944 917,092,722 1, 754, 481,404 1,242, 965, 575

    Total $2,401,085,524 $1, 731, 898, 012 $2, 710, 859,274 $1,988, 829, 566

    a Does not include requested and committed amounts for additional
    applications accepted after April 7, 1999. Source: SLD's database.

    The funding commitment process for the third year was still under way when
    we ended our audit. SLD estimated, however, that the total amount of third-
    year funding requested by applicants is about $4.7 billion, almost double
    the request level for the program's first year. Since this amount is well
    above the funding level of $2. 25 billion that FCC set for this year, many
    requests will not be met. As noted above, the program's funding priorities
    call for telecommunications services and Internet access requests to be
    funded first, with any remaining funding going to internal connections. SLD
    officials estimated that they would be able to fund eligible internal
    connection service requests only for applicants that have a discount rate of
    82 percent or higher. As of August 31, 2000, SLD had committed $1.5 billion
    for the third year and estimated that it would be committing an additional
    $600 million once all the third- year applications were processed.

    A Significant Amount of Although SLD commits program funds to applicants on
    the basis of their

    Funds Committed to application requests, it does not authorize payouts of
    committed funds

    Applicants Has Not Been until it receives valid invoices showing that the
    applicants have obtained

    Used the requested products and services. In accordance with its internal
    control

    procedures, SLD will not approve payments of committed funds until (1)
    applicants certify that they have begun to receive e- rate- supported
    services from their vendors and (2) vendors file invoice forms requesting
    reimbursement for the e- rate- supported services that they have provided to
    the applicants. In many cases, applicants and their vendors have not yet
    submitted this material. As of August 31, 2000, at least 35 percent ($ 1. 3
    billion) of the $3.7 billion in program funds committed to applicants during
    the first and second program years had not yet been paid out. Table 2
    summarizes the amounts of first- and second- year funding that were

    committed to applicants and the amounts that SLD authorized to be paid out
    as of August 31, 2000. Appendix IV contains the same data broken out by each
    state, the District of Columbia, and the Commonwealth of Puerto Rico.

    Table 2: Amounts of Funds Committed and Authorized for Payment by SLD for
    the First 2 Program Years, as of August 31, 2000 First program year (1998)
    Second program year (1999)

    Program funds Program funds Program funds

    authorized for Program funds

    authorized for Service type committed

    payment committed payment

    Telecommunications $679, 158, 138 $507,321,407 $579, 455, 836 $233, 465, 766
    Internet access 135, 647, 152 95, 165,521 148, 408, 155 68, 118, 565
    Internal connections 917, 092, 722 792,059,949 1, 242, 965, 575 707, 530,
    523

    Total $1, 731, 898, 012 $1, 394, 546,877 $1, 988, 829, 566 $1,009, 114, 854

    Source: SLD's database.

    FCC required that applicants use all funds committed to them in the first
    program year no later than June 30, 1999. In March 1999, FCC granted a
    partial extension of this deadline, allowing the payment of funds committed
    for one- time services provided through September 30, 1999. FCC permitted
    this extension because a number of schools and libraries received late
    notice of funding commitment decisions, making it difficult for them to
    initiate the installation of internal connection services. 13 In December
    1999, FCC waived the new deadline for those applicants that had received
    late funding commitments following appeal decisions, requested a change in
    vendors, or for some reason had their payments delayed. The waiver generally
    gives an applicant an additional 180 days from the time of receiving the
    late commitment letter or changing the vendor to use its funds committed for
    one- time services. 14 Despite these extensions, about $337 million of the
    total funds committed during the first program year had not been authorized
    for payment as of August 31, 2000.

    13 In addition, FCC noted the extension would allow schools to use internal
    connection funding over the summer months when schools were in recess. 14
    Because of these extensions and pending appeals, SLD estimates that it is
    possible that as much as $44 million committed in the first year could still
    be paid out.

    For the second program year, FCC originally established a deadline of June
    30, 2000, for receiving services supported by committed funds. FCC
    subsequently extended this deadline for one- time services to September 30,
    2000, largely because SLD again notified applicants of their funding
    commitments later than anticipated. As of August 31, 2000 (30 days before
    the deadline), about $980 million of these committed funds, or nearly 50
    percent, had not been authorized for payment. On October 31, 2000, FCC again
    extended this deadline. Applicants meeting certain criteria now have until
    September 30, 2001, to use second- year funds committed for one- time
    services.

    It is currently unclear what percentage of committed funds will ultimately
    be used. Given the deadline extensions and waivers, SLD officials expect
    that additional applicants and vendors will eventually file the required
    forms and receive some of the committed funding, while others may never
    claim all of the funds committed to them because they did not obtain all of
    the items included in their request. FCC has already used $447 million of
    first- year program funds to reduce the amount that telecommunications
    carriers paid into the universal service fund in the second and third
    program years. Both FCC and SLD officials stated that a comprehensive
    analysis has not been conducted to determine why some committed funds have
    not been claimed or whether changes in program procedures could reduce the
    amount of unused funds.

    Weaknesses Found in Weaknesses in SLD's application review process caused
    some funds to be

    Application and committed for ineligible products and services. We reviewed
    44 secondyear

    applications that received funding commitments for internal Invoice Review

    connections- the type of service most likely to include ineligible items.
    Procedures

    After screening out $20 million from requests that included ineligible
    items, SLD committed $285 million in e- rate funds to these applications.
    However, we found that SLD reviewers had failed to identify other ineligible
    items that resulted in at least $6 million in funding errors. This amount
    understates the extent of the problem because it does not include cases we
    found in which funds were mistakenly committed for ineligible items whose
    costs could not be determined from the application materials. Furthermore,
    it does not include the costs of other items whose eligibility was
    questionable but could not be resolved using the application materials and
    current review criteria. We traced these funding commitment mistakes and
    problems to procedural errors, unclear review criteria, and a lack of
    sufficient information in some applications that prevented reviewers from
    determining the eligibility of questionable items. In addition, we found
    that

    SLD's process for reviewing invoice forms prior to disbursing committed
    funds provides another opportunity to identify ineligible items. However,
    the invoice review process requires applicants to submit much less
    information than is found on their applications and involves less
    comprehensive reviews. An independent auditor hired by SLD has uncovered
    preliminary evidence that some program funds were spent on ineligible
    services after the requests for these funds cleared SLD's application and
    invoice reviews. SLD officials have begun efforts to address some of these
    weaknesses.

    Application Review One of SLD's key management objectives is to ensure that
    e- rate funds are

    Includes Procedures to provided only to eligible entities for eligible
    products and services. Not

    Prevent Funding of only is it inequitable for some applicants to receive
    funding for ineligible

    Ineligible Items products while others do not, but such errors deplete the
    funds available to

    other applicants. This latter point is particularly important because, as we
    noted earlier, there was not enough funding available during the first and
    third program years (1998 and 2000) to meet all the applicants' requests.

    SLD's primary internal control for ensuring that program funds are not
    directed to ineligible products and services is the application review
    process. This process calls for more than one reviewer to examine virtually
    all applications, identify all ineligible items that an applicant may have
    included, and exclude these items from the funding commitment made to the
    applicant. One key aspect of this process calls for reviewers to compare the
    services described in each application to a database listing more than 750
    telecommunications services, Internet access services, and internal
    connection items. 15 For each item, the database identifies the type of
    service, provides a definition, and specifies whether it is eligible,
    ineligible, or eligible only if certain conditions are met. Any funding
    request that includes an ineligible entity or an ineligible product or
    service must be reduced by the cost of the ineligible item. If the cost of
    ineligible items totals more than 30 percent of the funding request, then
    the whole request is denied. 16

    15 This aspect of the review process was implemented as a result of our
    testimony Schools and Libraries Corporation: Actions Needed to Strengthen
    Program Integrity Operations Before Committing Funds( GAO/ T- RCED- 98- 243,
    July 16, 1998), which found that the same review criteria were not being
    applied to all applications. 16 This procedure was put in place to prompt
    applicants to prepare their applications carefully and make a conscientious
    effort to exclude ineligible items.

    While the process used to review the eligibility of services is the same for
    all applications, the amount of effort needed to review an application
    varies. Some applications are quite large, covering many schools and
    containing hundreds of separate requests for products and services, each of
    which needs to be reviewed, whereas other applications include only a few
    products or services. Applications also vary in the amount of information
    provided. Some applications we reviewed included detailed descriptions of
    every product or service for which support was requested. In other cases,
    reviewers had to ask applicants for more information to understand what
    services they had included.

    The importance of the application review process is underscored by the fact
    that applicants can request substantial funding for ineligible items. For
    example, for the 1999 program year, SLD officials said that they had
    identified and denied nearly $400 million in internal connection funding
    requests for ineligible items or requests that did not meet other
    eligibility rules. 17 Once SLD reviews the applications and adjusts the
    requested amounts to remove the cost of ineligible items, it makes its
    funding determinations. Each applicant receives a letter detailing the
    amount of funding committed for each funding request and noting any funding
    that was denied.

    Some Ineligible Internal To test the effectiveness of SLD's application
    review process, we examined

    Connection Items Were a sample of applications that received funding
    commitments for internal

    Included in Second- Year connections during the second program year (1999),
    the one most recently

    Funding Commitments completed at the time of our review. Our objective was
    to determine how

    effective the process was in funding only eligible items. We focused on
    internal connections because many ineligible products and services fall into
    this category. All of the applications in our sample had gone through SLD's
    review process and had received funding commitments. Our sample universe was
    the 9,770 applications that had received funding for internal connections
    for the 1999 program year. We selected applications for review with a
    probability proportionate to their size, as measured by the number of
    dollars committed for internal connections. Our sample included 44
    applications that accounted for more than $285 million of the $1.2 billion
    in

    17 SLD officials stated that, during the 1999 program year, they denied a
    total of $700 million in funding requests for ineligible items or requests
    that did not meet other eligibility rules. These denials included requests
    for telecommunications, Internet, and internal connection services.

    second- year funds committed for internal connections through November 1999.
    These applications contained over 2, 300 separate funding requests for
    internal connections, many of which contained dozens of internal connection
    items. Because of the great variation in the amounts of the errors we
    observed from one application to the next in our sample, we were unable to
    reliably estimate the total amount of funding for ineligible or potentially
    ineligible services committed by SLD in the second program year. Additional
    information on our sampling methodology appears in appendix V.

    We found that SLD reviewers correctly identified and screened out $20
    million from requests that included ineligible items before committing $285
    million in internal connections funding to the 44 applications. This $20
    million includes both ineligible items and requests in which more than 30
    percent of the cost was for ineligible items (a condition that results in a
    denial of funding for the entire request). The following examples illustrate
    some of the ineligible items that SLD caught during the application review
    process:

    $6. 8 million was correctly denied to an applicant requesting ineligible
    multimedia equipment. $4. 2 million was correctly denied to an applicant
    requesting ineligible

    satellite and computer services, Wide Area Network (WAN) equipment,
    software, and maintenance. $3. 7 million was correctly denied to an
    applicant requesting equipment

    identified as part of an ineligible WAN. About $336,000 was correctly denied
    to an applicant requesting wiring at

    ineligible locations, including a stadium and housing, as well as ineligible
    software, modems, and telephones.

    Overall, we believe that about $193 million of the $285 million in
    commitments was correctly reviewed and processed. We found, however, that
    SLD reviewers missed other ineligible items in these 44 applications and
    incorrectly included them in funding commitments made to applicants.
    Specifically, we found that SLD improperly committed at least $6 million for
    ineligible items or for requests in which more than 30 percent of the
    funding was for ineligible items and should have been denied entirely. Some
    of the ineligible items missed by reviewers involved relatively small
    amounts. For example, $6,000 was incorrectly committed to one applicant for
    ineligible WAN equipment. Other missed items involved larger amounts of
    funding, as the following cases show:

    About $1.8 million was incorrectly committed to an applicant for ineligible
    videoconference capabilities. About $2 million was incorrectly committed to
    an applicant for

    ineligible maintenance services that were intended to be delivered outside
    the program year. About $306,000 was incorrectly committed to an applicant
    for ineligible

    interface cards, video cameras, and maintenance. About $50,000 was
    incorrectly committed to an applicant for services to

    ineligible locations and for ineligible telephone maintenance. In addition,
    we found that SLD committed funds to requests when (1) an applicant included
    an ineligible item whose cost was not identified or (2) the eligibility of
    the requested services could not be determined because descriptive
    information in the application material was not sufficiently clear. These
    problems occurred in requests that totaled $86 million, but we did not have
    enough information to determine what proportion of this amount might involve
    ineligible items. Specific examples include the following:

    One application submitted by a city school district included more than 600
    requests. The attachment to the application listed a number of eligible
    services and items, including servers, switches, and hubs, as well as an
    ineligible software product. Since the application did not specify the
    amount of funding related to the ineligible software, or even which of the
    600 requests included the ineligible item, neither we nor SLD could
    determine how much of the $21 million requested in this application and
    committed to the applicant was committed in error. Another applicant (a
    school system) requested about $1.2 million for

    approximately 93 file servers. The application, however, suggests that an
    ineligible service center could be one of the locations scheduled to receive
    a server. Neither we nor SLD could determine whether and to what extent the
    applicant was going to use program funding for this ineligible location.
    Still another applicant asked for $2. 7 million to support the installation

    of voice, data, and video cabling. SLD approved this request because the
    list of eligible services it maintains indicates that each of the requested
    services is eligible. However, the list also includes a description noting
    that video services are eligible only under certain circumstances. Neither
    we nor SLD could determine if the applicant intended to use the television
    cabling to provide ineligible video services (which would make the cabling
    itself ineligible). SLD stated that reviewers should

    have sought additional information from the applicant to resolve this
    matter.

    Inadequate Information and As shown by the proceeding examples, weaknesses
    exist in the application

    Unclear Guidance Weaken review process. Some mistakes appear to be the
    result of human error,

    the Review Process since the information needed to make a correct
    determination was

    available in the application materials. For example, one application clearly
    indicated that the applicant intended to use $1. 7 million in program funds
    to upgrade its telephone systems to include videoconferencing capabilities-
    an ineligible service. However, other errors appear to be the result of
    problems in the application and review process. First, applicants did not
    always describe the services for which they requested funding in enough
    detail to enable the reviewers to determine whether any of the requested
    services were ineligible. For their part, SLD reviewers did not always
    contact applicants for additional information needed to make informed
    decisions about the eligibility of requested services. Second, the program's
    policies and guidance do not always effectively define which services are
    eligible for funding support.

    Inadequate Information in E- rate applications do not always include
    detailed information on the

    Applications services for which funding is requested. This is the result of
    FCC's policy to

    allow the applicants flexibility in how they document their funding
    requests. The e- rate application requires one line of basic information for
    each funding request, including such information as the vendor, the general
    type of service requested, the total monthly and annual costs, and the
    discount rate requested. In addition, applicants are required to provide an
    attachment for each request that includes “a concise but specific
    itemization of services provided.” In the applications we reviewed,
    some applicants listed every item for which they were requesting support,
    while others included only a general description of the requested services,
    making it difficult to readily determine if these requests included
    ineligible items.

    Procedures direct SLD reviewers to contact applicants for additional
    information if the application is unclear. Moreover, for conditionally
    eligible services, reviewers are required to determine whether the requested
    service will be used according to the program's rules. If the reviewers
    cannot make that determination from the information provided in the
    application, they are required to ask the applicant for clarification.
    However, we found that this procedure was not being consistently followed
    for the applications that we reviewed. We identified several instances when

    reviewers approved requests for conditionally eligible services without
    having documentation showing how the services would be used. For example,
    two applicants requested program funds for network equipment maintenance,
    which is eligible for program support if the equipment being maintained is
    eligible. However, the applicant did not identify the equipment to be
    maintained, and SLD approved the request without seeking additional
    information.

    Similarly, service to administrative buildings is conditionally eligible.
    Such a building is eligible only if needed to provide service to
    instructional buildings. However, we found instances when SLD approved
    requests for services to buildings despite evidence that they could be
    ineligible administrative sites. For example, an applicant included in its
    list of sites to be funded one site that had no students. SLD fully funded
    this request, even though the application did not specify whether the site
    with no students was an instructional or an administrative building. SLD
    stated that while additional information should have been requested,
    reviewers did not ask for additional information on this conditionally
    eligible item because they assumed the request was eligible.

    Lack of Clarity as to the FCC's rules do not always clearly define which
    services and entities are

    Eligibility of Some Items ineligible for program funding. For example, FCC's
    rules state that WANs

    are not eligible for funding but do not provide clear guidance on what
    should be considered a WAN. 18 As a result, SLD reviewed 1999 applications
    under a policy that rejected any item specifically identified as part of a
    WAN, such as components with the acronym “WAN” in their
    description. However, similar items that did not include the acronym
    “WAN” in their description were approved. For example, SLD
    denied one applicant's request for radios used to cross a public right- of-
    way. However, SLD approved a request by another applicant because the
    acronym “WAN” was not used in the application's description of
    wireless transmitters capable of transmitting data up to 600 feet from the
    school. When we pointed out this inconsistency, SLD (with FCC's concurrence)
    changed its procedures for dealing with WANs. Under the new procedures, all
    types of networking equipment located within school and library facilities
    are considered eligible, regardless of how they are labeled. Only the actual
    wires that carry data across public rights- of- way are considered
    ineligible WAN components.

    18 See 47 C. F. R. 54. 500 and 54. 518.

    FCC has also identified teacher training as an ineligible service but does
    not specifically define the type of training that is ineligible or discuss
    the training of other personnel. As a result, SLD approved several requests
    for what it assumed was initial training provided by vendors on the use of
    eligible items. For example, one applicant submitted a request stating that
    over $4,500 in program funds would be spent for “on- premises
    training” and “on- site translation.” SLD approved the
    request, considering it a reasonable cost of installing eligible equipment.
    FCC staff stated that this policy is consistent with the intent of the
    original order, which identified training as an ineligible item and FCC
    subsequently specified as teacher training. FCC staff concluded that basic
    instruction in using eligible equipment is eligible, provided it is
    “reasonable.” However, they have not defined any criteria to
    determine when these training costs should be considered reasonable or
    provided guidance to SLD on how training costs should be reviewed.

    Similarly, we identified several requests to fund project design costs and
    contingency fees. Guidance provided by FCC describes “room design
    consulting and system integration” as ineligible services. However,
    FCC staff responsible for e- rate oversight told us that design costs and
    contingency fees are eligible for program funds if they are related to
    eligible services and are “reasonable.” Again, FCC has not
    defined what is reasonable. In one case involving these services, SLD
    approved a $3 million request from one applicant that included over $621,
    000 in design costs and almost $200, 000 in contingency fees. Because this
    request also included some ineligible services, program officials have yet
    to determine how much of the requested design and contingency fees should
    have been denied. Although they stated that the applicant's contingency fee
    was not unreasonable because it represented only 6 percent of the contract's
    total cost, they did not define the precise threshold that SLD could use to
    determine whether similar requests are reasonable.

    In addition, FCC staff stated in June 1998 that no universal service support
    will be provided for the costs of tearing down walls to install wiring,
    repairing carpets, or repainting. The applications we reviewed, however,
    included funding SLD had approved for an indeterminate amount of repainting
    and construction of walls and doors. For example, SLD approved a request by
    one applicant for over $18 million in program funds for a vendor to install
    new central telephone systems in 133 schools. At the request of an SLD
    reviewer, the applicant later provided a comprehensive list of the equipment
    and cabling to be included in 1 of the 133 schools. Although this list
    included the costs of constructing a wall and door, SLD stated that these
    costs might be allowable if they resulted from and were

    required for the installation of the equipment. As of September 2000, FCC
    staff had not determined if these items were eligible to receive funding,
    although they said that nominal repair and painting may sometimes be linked
    to installation. FCC staff had not provided this additional guidance to SLD.

    We also found that SLD sometimes failed to inform applicants that they had
    requested funds for ineligible services, even though its internal procedures
    require such notification. For example, one applicant requested more than
    $7. 7 million for a districtwide cabling project, including approximately
    $183,000 in equipment and maintenance that were not eligible for e- rate
    support. While SLD denied the funds requested for the ineligible items, its
    letter to the applicant did not explain the basis for the reduction or
    caution the applicant not to spend any e- rate funds on the ineligible
    equipment and maintenance. Without such explicit notification, an applicant
    could mistakenly apply funds to ineligible items.

    Most Invoices Paid Without SLD's invoice review procedures provide another
    opportunity to prevent

    Detailed Review funding from going to ineligible products and services. Both
    the applicant

    and its vendor must file additional forms before committed e- rate funds are
    paid. However, these forms contain less information and are reviewed in a
    less comprehensive manner than e- rate applications.

    One way in which the invoice review process differs from the application
    review process is that neither the applicant nor the vendor is required to
    provide a descriptive listing of the products and services for which the
    invoice seeks payment. The form submitted by the applicant simply states
    that it has begun receiving services under an approved request. The invoice
    form submitted by vendors also includes few details. It essentially requires
    the vendor to identify itself, the application and request number for which
    it is seeking reimbursement, and the total amount of reimbursement
    requested. Both the applicant and the vendor must certify on their forms
    that the information they are providing is accurate. 19

    19 When an applicant has paid a vendor the entire cost of an approved
    service, the applicant may apply for reimbursement through its service
    provider to SLD of the approved, discounted cost. As when vendors submit
    invoices, the forms do not require detailed information on the services
    provided.

    In contrast to the application review process, when every application is
    checked for ineligible services, the invoice review process scrutinizes only
    a limited number of invoices to determine what services are being funded.
    SLD's invoice reviews begin with an automated validation process that
    determines if all the required information is included on an invoice form.
    20 Once this validation is complete, the invoice is approved for payment,
    denied for payment, put on hold, or assigned to a reviewer for a special
    review. Invoices are generally chosen for a special review because they are
    considered to be “high risk.” For example, invoices from an
    applicant or vendor that has previously violated program rules generally
    receive special reviews. In some cases, SLD requires the applicant or vendor
    to submit detailed billing statements as part of a special review.

    Prior to January 2000, reviewers were not required to verify that only
    eligible products and services were included in any billing information
    submitted by applicants or vendors during the invoice review process.
    Because of ongoing concerns about vulnerabilities in this review process,
    SLD clarified its procedures in early 2000 to require reviewers to examine
    all submitted billing information for evidence of ineligible services.
    However, these new procedures are still more limited than those applied to
    applications because SLD does not require additional billing information for
    all special reviews. Even for cases that require additional information, SLD
    did not specify what level of detail should be provided. Since they began,
    SLD's special reviews have identified a limited number of invoices that
    requested payment for ineligible services, resulting in a denial of payment.
    For example, one applicant's vendor requested payment of about $535,000 in
    program funding for an ineligible service. As a result, SLD withheld some of
    the funds related to the invoice. In addition, SLD plans to modify the
    applicant's funding commitment to deny the amount associated with the
    ineligible service.

    SLD officials also told us in September 2000 that they were taking further
    steps to improve their invoice review process. Another detailed review will
    be added to identify invoices associated with funding commitments that were
    modified by SLD from the original requests because they included ineligible
    items. According to SLD officials, procedures for this additional detailed
    invoice review are being developed. Also, on October 12, 2000, SLD released
    a request for proposals for the evaluation and improvement

    20 These checks include determining if the invoice is missing information
    about the contact, vendor, or service delivery dates.

    of its invoice authorization and payment procedures. As part of its ongoing
    quality control efforts, SLD has a contract with an outside auditor (Arthur
    Andersen LLP) to conduct site visits to a number of applicants that received
    funding during the first program year after clearing SLD's application and
    invoice reviews. 21 At the time we completed our review, SLD had received
    information from the auditor that some funds approved for payment had not
    been used in accordance with the program's rules. In October 2000, SLD
    officials told us that over half of the auditor's reviews had been completed
    or virtually completed with no major reportable findings. However, the
    remaining reviews have disclosed some violations, including cases in which
    program funds were used to pay for ineligible services and services
    delivered outside the program year. At one location, there are preliminary
    indications that program funds could have been intentionally misused. USAC
    forwarded this information to FCC, and as a result, this case is under
    investigation by FCC's Office of Inspector General.

    Administrative Costs The e- rate program's administrative costs for 1997
    through 1999, together

    Remain a Small with the projected costs for 2000, show some overall growth
    despite earlier

    expectations that they would decline following the program's start- up
    Percentage of Overall

    phase. Program officials recently took action to reduce contract costs- the
    Funding

    source of most of the increase- but it is too early to determine the success
    of their effort. Even with this growth, however, administrative costs remain
    a small percentage of the program's total costs. We compared the e- rate
    program with 34 other federal programs that can provide technology funding
    to schools and libraries by calculating each program's administrative costs
    as a percentage of its total program costs. The e- rate program's
    administrative costs were 2.4 percent of its total program costs, while the
    others ranged from less than 1 percent to 15 percent. Overall, the
    percentage of administrative costs was higher for 12 of the 34 programs than
    for the e- rate program, lower for 21, and the same for 1. However, it is
    difficult to draw conclusions from this comparison, given the many
    differences in these programs' characteristics and operations.

    21 SLD selected a diverse sample of applications based on a variety of
    factors, including highrisk designations.

    Operating Expenses of the Most of the administrative cost of the e- rate
    program stems from the

    E- Rate Program operations of the program administrator. Table 3 provides a
    breakdown of

    Administrator the operating expenses for the Schools and Libraries
    Corporation (which

    operated from the inception of the program in September 1997 through 1998),
    and the current administrator, the Schools and Libraries Division of USAC
    (which has operated since January 1, 1999). The data, based on independently
    audited financial statements, cover two time frames: the 16 months of the
    Corporation's operational lifetime and the first 12 months of the current
    administrator's operations.

    Table 3: E- Rate Program's Operating Expenses, 1997- 99

    Dollars in thousands

    Schools and Libraries Corporation Schools and Libraries Division, USAC
    Expense category (Sept. 1997 to Dec. 1998) (Jan. 1999 to Dec. 1999)

    Compensation and related expenses $1, 269 $881 (includes program's staff
    salaries and benefits)

    Professional fees (includes legal, audit, 1, 574 510 bookkeeping expenses)
    Other operating expense (includes rent,

    1, 140 899 taxes, office supplies, postage and freight, travel, telephone,
    computer support, dues, and subscriptions)

    Depreciation and amortization (includes -89 furniture and computer software)
    Contractual expenses (includes salaries and

    23, 341 26, 555 expenses of NECA and its subcontractors for day- to- day e-
    rate program support operations)

    Total $27, 324 $28, 934

    Source: Report by Arthur Andersen LLP to USAC's Board of Directors, dated
    Apr. 12, 2000.

    Audited financial statements for 2000 are not yet available. However, USAC
    submits projections of its operating expenses to FCC in advance of each
    quarter of the calendar year. The projected expenses for the four quarters
    of 2000 total somewhat over $34 million. According to USAC, the actual
    expenses should come close to these projections.

    Together, the audited financial statements and the projections for 2000
    indicate a small, but steady, growth in administrative expenses. In
    testimony before the Senate Committee on Commerce, Science, and

    Transportation on July 16, 1998, the head of the Schools and Libraries
    Corporation at that time stated that “[ i] n future years, with start-
    up costs behind us, we anticipate administrative costs will decline
    accordingly.” As table 3 indicates, there were decreases in several
    expense categories in 1999. These decreases are attributable to the change
    in program administrators. According to USAC's Chief Executive Officer,
    consolidating e- rate program operations with USAC's existing universal
    service operations and rebidding contacts produced savings in compensation
    and benefits, insurance, rent, independent audits, and general accounting.

    However, contract costs for the day- to- day operational support performed
    by NECA increased, rather than decreased. The former administrator of the
    Schools and Libraries Corporation awarded a support services contract to
    NECA without using a competitive bidding process involving formal requests
    for proposals. NECA's contract was a “time and materials”
    contract under which the Corporation agreed to pay “all reasonable,
    actual costs” incurred by NECA in carrying out the agreed upon work.
    The heavy workload for 1999 contributed to the increase in contract costs.

    The policy of USAC, the current program administrator, requires that all
    contracts over $100,000 be put out for competitive bid unless an exception
    is approved by its Board. Accordingly, in December 1999, USAC issued a
    request for proposals for programmatic support services for the e- rate
    program and a related telecommunications program covering rural health care
    providers. 22 Unlike the previous contract, whose price was based on actual
    costs, the new solicitation was for a firm fixed- price contract. At the
    conclusion of the competitive bidding process, USAC announced in May 2000
    that it had awarded this new contract to the incumbent, NECA. The 3- year
    contract, running from July 2000 through June 2003, is valued at $61. 6
    million and covers both the schools and libraries and rural health support
    mechanisms. USAC estimates that the new contract will result in a 25-
    percent savings over the old contract. However, the actual savings depend on
    the accuracy of the workload assumptions included in the contract's
    statement of work. Although a lower- than- expected workload could result in
    reduced contract costs, a higher- than- expected workload could result in
    additional costs.

    22 The Rural Health Care Program is a universal service support program
    authorized by the Congress to provide reduced rates to rural health care
    providers for telecommunications services related to the use of telemedicine
    and telehealth. It can provide up to $400 million in support annually.

    USAC also plans to solicit competitive bids for its billing and collections
    services, which could result in additional savings in administrative costs.
    The request for proposals for this service is expected to be issued this
    fall, with the aim of having a new contract in place by July 2001. In
    addition, USAC plans to seek competitive bids on its employee benefits
    package, which could further reduce some administrative costs.

    FCC's E- Rate Administrative The salaries of the FCC staff working on the
    program are another

    Costs component of the e- rate program's administrative costs. At the time
    of our

    review, four managers and nine staff in FCC's Common Carrier Bureau were
    spending some portion of their time on e- rate activities, such as reviewing
    USAC documents, forms, and audit plans; dealing with policy questions;
    responding to inquiries from the public and the Congress; performing
    outreach to the applicant and vendor communities; reviewing and providing
    feedback on USAC's operational and financial audits; and resolving appeals
    from schools and libraries.

    The portion of FCC staff salaries that can be allocated to e- rate
    administrative activities cannot be precisely determined because the Common
    Carrier Bureau's procedures do not call for the staff to track the amount of
    time they spend working on e- rate activities. However, Common Carrier
    Bureau officials estimate their staff cost for administering the program
    during fiscal year 2000 to be roughly $420,000 (the equivalent of about 5
    full- time staff years). This is an increase from the fiscal year 1998
    workload, which FCC estimated to be the equivalent of 2 full- time staff
    years. Common Carrier Bureau officials attributed the increased staff
    workload to several factors related to the e- rate program: the need for FCC
    to respond to numerous appeals (as of July 2000, it had resolved 185 appeals
    and had 253 pending); a steadily growing number of administrative and policy
    issues; and audits and inquiries from the executive and legislative
    branches.

    Comparison of In August 1999, we reported on 35 federal programs (including
    the e- rate

    Administrative Costs for ERate program) that could be used as a source of
    federal funding for schools and

    libraries. 23 Using fiscal year 1998 data, we found that the annual and
    Related Federal

    administrative costs of the programs varied widely, with the National
    Programs

    Science Foundation's Connections to the Internet Program having the lowest
    costs at $4,000 and FCC's e- rate program having the highest costs at
    $26,909, 000. 24 However, to compare the programs, we calculated the
    administrative costs as a percentage of the total program costs. 25 For
    example, the program costs for Connections to the Internet for fiscal year
    1998 were only $147,000, making the administrative costs 2.6 percent of the
    program costs. For the e- rate program with its much higher funding level,
    the administrative costs were 2.4 percent of the program costs, somewhat
    lower than for the Connections to the Internet program. 26

    Our analysis showed that the administrative costs of the 35 programs,
    expressed as a percentage of the programs' total fiscal year 1998 costs,
    ranged from less than 0.02 percent for the Department of Education's
    Emergency Immigrant Education Assistance Program to 15 percent for the
    Department of Commerce's Telecommunications and Information Infrastructure
    Assistance Program. Twelve of the programs had higher percentages of
    administrative costs to total program costs than the e- rate program; the e-
    rate program and another program had the same percentage; and 21 others had
    lower percentages. This analysis can be

    23 Telecommunications Technology: Federal Funding for Schools and Libraries(
    GAO/ HEHS99- 133, Aug. 20, 1999). 24 The e- rate administrative costs used
    in our analysis of the 35 programs cover the 12- month period from Jan. 1,
    1998, through Dec. 31, 1998. This total includes both FCC and SLD e- rate
    administrative costs for this period.

    25 Administrative costs as a percentage of total program costs are
    calculated by dividing the 1998 administrative costs by the sum of the 1998
    program funding and the 1998 administrative costs, except for programs (like
    the e- rate program) that pay administrative costs out of program funds. For
    those programs, administrative costs as a percentage of total program costs
    are calculated by dividing the 1998 administrative costs by the 1998 program
    funding.

    26 The e- rate program was funded at $1. 66 billion for the 18- month period
    from Jan. 1, 1998, through June 30, 1999. In order to calculate
    administrative costs as a percentage of total program costs on an annual
    basis, the 18- month figure of $1.66 billion was reduced by onethird to $1.1
    billion. Even though funding commitments were not made until late 1998 and
    early 1999, the applicants were being reimbursed the discounted portion of
    bills they paid in full as early as Jan. 1998. Therefore, the one- third
    reduction is a reasonably accurate estimate.

    further refined by focusing on the 10 programs out of the 35 that
    specifically target their funds to technology initiatives, rather than
    simply including technology among the items they can fund. Of these 10
    technology- targeted programs (which include the e- rate program), 6 had
    higher percentages of administrative costs to total program costs than the
    e- rate program and 3 had lower percentages. See appendix VI for details on
    these 10 programs.

    It is difficult to draw precise comparisons among these programs because the
    nature of their administrative costs can vary. For example, some of the
    programs distribute funding through a formula grant process, while others
    use a competitive grant process that includes reviewing and scoring
    applications as part of a selection process. And while most competitive
    grant programs hired outside experts to review applications, one program
    used volunteers and another used only agency staff. Moreover, the Department
    of Education considers the cost of reviewers a “program
    expense,” whereas other agencies consider this cost an
    “administrative expense.” Other key variables include the number
    of applications reviewed and the amount of funding distributed.

    FCC Has Recently After some false starts, FCC recently developed meaningful
    performance

    Established New goals and measures for the e- rate program. Performance
    measurement is

    critical to managing a program and determining its progress in meeting
    Performance Goals and

    intended outcomes. In our July 1998 testimony before the Senate Measures for
    the

    Committee on Commerce, Science, and Transportation, we noted that Program

    FCC's e- rate program lacked the kinds of specific goals and measures called
    for under the Government Performance and Results Act of 1993 (the Results
    Act). 27 At that time, we noted that FCC had simply informed the Congress in
    its annual performance plan for fiscal year 1999 that it would “work
    to improve the connections of classrooms, libraries, and rural health care
    facilities to the Internet by the end of [fiscal year] 1999.” We
    recommended that FCC develop specific goals and measures for the program
    before the end of fiscal year 1998, in time to gauge the effect of the first
    year's funding. We reiterated this recommendation in our March 1999 report
    on the program, just after the first e- rate funding commitments had been
    made to applicants.

    27 The Results Act defines a performance goal as a target level of
    performance expressed as a tangible, measurable objective against which
    actual achievement is to be compared.

    The program participation goals and measures that FCC set during the two
    budget cycles following our July 1998 recommendation did not resolve our
    initial concern. In February 1999, as part of its fiscal year 2000 budget
    submission to the Congress, FCC listed a goal of ensuring that 30 percent of
    eligible schools and libraries would have Internet access by the end of
    fiscal year 2000. This goal was not meaningful because it was well under the
    prevailing conditions. According to survey data from Department of
    Education's National Center for Education Statistics, 89 percent of public
    schools and 67 percent of private schools were already connected to the
    Internet in 1998. For the fiscal year 2001 budget submission (dated Feb.
    2000), FCC raised the goal to having 90 percent of schools and libraries
    connected to the Internet by fiscal year 2001. But even this much higher
    goal still fell short of actual conditions at public schools and libraries.
    The National Center for Education Statistics reported that in 1999, over 95
    percent of all public schools had Internet access. Even those public schools
    serving the most economically disadvantaged or rural areas were reported to
    be at least 90 percent connected in 1999. As for libraries, the American
    Library Association reported in April 2000 that more than 90 percent of them
    were connected to the Internet. The one area where the fiscal year 2001 goal
    had potential relevance was private schools, since only 67 percent of them
    were connected in 1998 (the most recent data available). 28

    During our review, we spoke with FCC staff about the need for effective
    performance goals and measures. On September 29, 2000, FCC finalized a new
    performance plan for the e- rate program that has two key features: (1) it
    recognizes that nearly all school buildings are already connected to the
    Internet, and (2) it targets populations that are underserved by the e- rate
    program. Instead of focusing on connections to school buildings, the plan
    focuses on improving Internet connections to “instructional
    classrooms.” The new goal is to have 100 percent of public school
    instructional classrooms connected to the Internet by 2002 and 95 percent of
    private school instructional classrooms connected by 2003. To help
    accomplish this strategic goal, the plan includes tactical goals targeted at
    increasing participation in the e- rate program by urban low- income school
    districts and rural school districts located outside of towns. According to
    FCC's data, the participation rates for both of these groups currently fall
    below

    28 The results of several years of surveys on Internet access by the
    National Center for Education Statistics are summarized in Internet Access
    in U. S. Public Schools and Classrooms: 1994- 99( NCES 2000- 086, Feb. 2000)
    and Computer and Internet Access in Private Schools and Classrooms: 1995 and
    1998( NCES 2000- 044, Feb. 2000).

    the average participation rate for all eligible schools. Similarly, the plan
    seeks to increase the e- rate program participation rates for rural
    libraries and libraries serving small areas, which currently lag behind the
    participation rates for libraries serving larger areas. These new goals,
    benchmarked to current Internet connectivity rates and program participation
    rates, should help FCC to assess whether the program is reaching the full
    spectrum of eligible applicants.

    It should be noted that FCC's participation goals do not attempt to measure
    the impact of advanced telecommunications on improving educational outcomes.
    This complex issue lies outside the range of FCC's expertise and comes under
    the purview of the Department of Education, which has developed related
    performance goals and measures.

    Conclusions In our July 1998 testimony, we recognized that the e- rate
    program faced many challenges and difficulties during its first year of
    operation. These

    challenges continue as the program enters its fourth year. SLD succeeded in
    committing over $3.7 billion to applicants during the 1998 and 1999 program
    years. However, a significant amount of these funds has not yet been paid
    out, even though the deadlines for applicants and vendors to use the funds
    have been extended more than once. Identifying and addressing the causes of
    this problem could help increase the amount of funding that is actually used
    to bring telecommunications services to schools and libraries. In addition,
    it would be undesirable to have a significant percentage of committed funds
    go unused at a time when the level of requests for funding greatly exceeds
    the annual amount available.

    In addition, more funding would be available for eligible requests if SLD's
    review procedures were more effective at identifying and denying ineligible
    requests. Despite procedures requiring reviewers to deny funding for
    ineligible items and to confirm that conditionally eligible services are
    being used according to program rules, we identified millions of dollars in
    funds incorrectly committed to ineligible products and services. In some
    cases, reviewers simply overlooked ineligible items that were clearly
    identified by applicants. In other cases, the lack of clear, consistent
    rules likely contributed to mistakes made by both applicants and reviewers.
    Furthermore, the reviewers' ability to identify ineligible requests is
    limited when applications include vague or broad terms to describe the
    services for which funding is requested. The frequency of such cases could
    be reduced if the review procedures and criteria were clarified and if the

    applicants submitted more details about the items for which they intend to
    use program funds.

    Finally, SLD's practice of approving most vendors' invoices without
    reviewing how and where the committed funds are actually being spent leaves
    the program vulnerable to further funding errors and potential abuse. In
    particular, the larger applications involving dozens of sites and millions
    of dollars need a higher level of quality assurance to determine that funds
    are being spent as approved.

    SLD has already taken some steps to address the issues we identified, such
    as contracting with an outside auditor to review a limited number of
    applicants, and is considering others. However, given the large amount of
    funds involved in the e- rate program, cost- effective quality assurance
    procedures that result in more consistent and reliable application and
    invoice reviews are warranted. Because the next program year is not
    scheduled to begin until July 2001, we believe that SLD and FCC have
    adequate time to implement our recommendations.

    Recommendations for In order to (1) improve the application review and
    invoicing process to

    Executive Action prevent funds from being used for ineligible services and
    (2) maximize the

    funding available to applicants to support eligible services, we recommend
    that the Chairman, FCC, direct responsible FCC staff to complete the
    following four actions before funding commitments are made for the fourth
    program year:

    Finalize all outstanding program rules and review procedures, including
    determining the extent to which training, design, contingency, and repair
    fees are eligible for program support. Implement procedures for promptly
    clarifying additional eligibility

    issues that arise during the application review process and publicizing such
    clarifications to the applicant community in a timely manner. Revise the
    list of eligible services available to applicants so that it

    clearly identifies which services are eligible and ineligible for program
    support. Additionally, the list should clearly identify as
    “conditionally eligible” all products and services whose
    eligibility is subject to conditions included in their descriptions, such as
    cellular telephone service and video services. Revise the e- rate program's
    application to require more detailed

    information from applicants on the services they intend to purchase with
    program funds.

    In addition, the Chairman, FCC, should direct responsible staff to develop a
    strategy for reducing the percentages of committed funds that go unused by
    applicants. This effort should include (1) contacting applicants to
    ascertain their reasons for not fully using their committed funds and (2)
    determining whether changes to program rules and procedures are needed to
    address the difficulties that applicants may be having in this regard.

    Finally, the Chairman, FCC, should direct the Chief Executive Officer of
    USAC to establish a quality assurance function in USAC responsible for (1)
    ensuring that SLD's funding decisions follow FCC's program eligibility
    rules, as well as SLD's management goals and procedures; and (2) developing
    effective internal control procedures over the disbursement of funds to
    ensure that they have been used as approved.

    Agency Comments We provided a draft of this report to FCC and USAC for
    comments. In general, they agreed with our findings and recommendations.
    They stated

    that they had begun to implement the recommendations and completed some
    actions, which have already led to significant improvements in the program.
    However, USAC provided details on some points in our report that USAC
    believed could be misinterpreted. The full text of FCC's and USAC's comments
    appears with our responses in appendix VII. FCC and USAC also provided us
    with technical clarifications, which we included in the report where
    appropriate.

    We are sending copies of this report to interested congressional committees;
    the Chairman, Commissioners, and Managing Director of FCC; the Director,
    Office of Management and Budget; and other interested parties. We will also
    make copies available to others upon request.

    If you or your staff have any questions about this report, please call me on
    (202) 512- 7631. Key contributors to this report are listed in appendix VII.

    Stanley J. Czerwinski Director, Physical Infrastructure Issues

    Appendi xes FCC's Authority to Set and Modify E- Rate's

    Appendi xI

    Annual Funding Level Section 254 of the Communications Act of 1934, as
    amended, provides the Federal Communications Commission with the authority
    to set the level of funding for the e- rate program. 1 Among other things,
    this provision required the Commission, acting on the recommendations of a
    FederalState Joint Board, to establish predictable and sufficient mechanisms
    to preserve and advance universal service. 47 U. S. C. 254( a)( d). The
    Joint Board recommended a $2.25 billion annual cap on support for schools
    and libraries. The Board based its estimate on cost data extrapolated from a
    1995 McKinsey and Company report entitled Connecting K- 12 Schools to the
    Information Superhighwayadjusted to reflect the Board's modeling
    assumptions. 2 On the basis of this and a few other sources, the Joint Board
    estimated “that the total cost of the [eligible] communications
    services [sought by schools and libraries] . . . would be approximately $3.1
    to $3.4 billion annually during an initial four year deployment period, and
    approximately $2. 4 to $2.7 billion annually during subsequent years.”
    3 The Commission has not revisited this issue to obtain more current cost
    data.

    According to FCC officials, the Commission adopted the $2.25 billion annual
    cap recommended by the Joint Board in accordance with section 254. 4 Each
    year, the Commission bases the funding level for the schools and libraries
    program on demand and on the expense of administering the program, subject
    to the cap. FCC officials stated that as long as the Commission adopts a
    funding level that is less than or equal to the cap, no formal proceeding is
    generally necessary. They noted that the funding levels for the first and
    second year were promulgated through formal FCC orders because of
    extenuating circumstances. However, the funding level for the third year was
    simply announced by the Chairman through a public statement. 5

    1 Section 254 was added by the Telecommunications Act of 1996. 2 For
    example, the Board adjusted the McKinsey base cost estimates for the full
    classroom model. This model assumes one computer for every five students in
    all classrooms, with a T1 connection.

    3 Federal- State Joint Board on Universal Service Recommended Decision, 12
    FCC Rcd. 87, 369- 70, para. 554 (1996). 4 Letter from Federal Communications
    Commission Chairman, William E. Kennard to U. S. General Accounting Office
    Assistant General Counsel Michael R. Volpe, dated Apr. 28, 2000. 5 Statement
    of FCC Chairman William E. Kennard and Commissioner Gloria Tristani, 2000
    FCC LEXIS 1906, Apr. 13, 2000.

    Although the demand for program funds increased sharply in the third year
    (to $4. 7 billion, according to program officials' estimates), the
    Commission maintained the funding level for the schools and libraries
    program at the $2. 25 billion annual cap. FCC officials stated that a
    readjustment of the cap would require an amendment of FCC's rules. As of
    September 2000, no rulemaking proceeding was under way to consider
    readjusting the cap.

    Questions have been raised as to whether e- rate funds are federal funds.
    The Congressional Budget Office and the Office of Management and Budget
    count payments into the universal service fund as federal revenues and
    payments from the fund (including payments for e- rate support) as federal
    outlays. Both agencies have interpreted the act to mean that the
    expenditures from the fund should be part of the federal budget because the
    transfer of income between various classes of telephone users would not
    occur but for the exercise of the sovereign power of the United States. 6
    Nevertheless, both the Commission and the Office of Management and Budget
    have determined that these funds are appropriately maintained outside the
    Treasury by a nongovernmental manager. Action by the U. S. Senate appears to
    concur with this assessment. In 1997, the Senate passed a “sense of
    the Senate” provision that stated, “Federal and State universal
    service contributions are administered by an independent, non- Federal
    entity and are not deposited into the Federal Treasury and therefore are not
    available for Federal appropriations.” 7

    6 Congressional Budget Office , Federal Subsidies of Advanced
    Telecommunications for Schools, Libraries, and Health Care Providers, Jan.
    1998, p. 5. 7 See section 614, H. R. 2267, as passed by the Senate (Oct. 1,
    1997).

    Appendi xII

    Competitive Bidding Requirements FCC's rules generally require applicants to
    seek competitive bids for all services eligible for e- rate support. 1 The
    Commission found competitive bidding to be the most efficient means of
    ensuring that applicants were informed about all of the choices available to
    them. It also found that without competitive bidding, an applicant may not
    receive the most costeffective services available, resulting in a higher-
    than- necessary demand for e- rate support and, consequently, less support
    available for other applicants. 2

    Applicants May Consider FCC's competitive bidding rules require applicants,
    as an initial step, to

    Factors Other Than Price in provide the Schools and Libraries Division (SLD)
    with a description of the

    Selecting a Bid services for which e- rate support is sought. SLD then posts
    this description

    on its public Web site for all potential competing vendors to review. An
    applicant must wait at least 4 weeks from the time the description is posted
    on the Web site before entering into an agreement with a vendor in order to
    give vendors an opportunity to evaluate and respond to the applicant's
    stated needs. SLD will deny (and has denied) funding for services based on
    contracts that were signed fewer than 28 days after the related service
    descriptions were posted.

    FCC concluded that applicants should consider price to be the primary factor
    in selecting a bid. However, FCC does not require applicants to select the
    lowest bid offered, even among bids for comparable services. In its
    Universal Service Order, FCC concurred with the Joint Board's recommendation
    that applicants should be given “maximum flexibility” to take
    service quality into account and choose the offering that meets their needs
    “most effectively and efficiently,” where this is consistent
    with other procurement rules under which they must operate. The Commission
    noted several other factors that applicants could also consider in
    determining which vendor meets their needs “most effectively and
    efficiently.” These additional factors- when permitted by state and
    local procurement rules- include “prior experience, including past
    performance; personnel qualifications, including technical excellence;
    management capability, including schedule compliance; and environmental
    objectives.” 3 FCC

    1 Pre- existing contracts, as defined by FCC's rules, are exempt from
    competitive bidding requirements. 47 C. F. R. sec. 54. 511( c). 2 Universal
    Service Order, 12 FCC Rcd. at 9029, para. 480.

    3 Universal Service Order, at 9028, para. 481.

    cautioned, however, that when comparable services are being offered, price
    needs to be carefully considered “to ensure that any considerations
    between price and technical excellence (or other factors) are
    reasonable.”

    Although federal procurement regulations are not applicable to the contracts
    between e- rate applicants and their vendors, FCC's e- rate competitive
    bidding rules are similar to the rules and factors used in federal
    procurements. In federal procurements, price must always be considered- but
    is not necessarily the primary factor- in determining which bid is most
    advantageous to the government. Federal contract officials may also address
    the quality of the product or service by considering, along with price,
    evaluation factors such as prior experience, personnel qualifications, and
    technical excellence to form a reasonable basis for selecting an offer. With
    negotiated procurements, federal acquisition regulations state that
    “the objective of source selection is to select the proposal that
    represents the best value.” And with invitations for bid, the
    regulations state that the award is made to the “responsible bidder
    whose bids, conforming to the invitation, will be most advantageous to the
    Government, considering only the price and price- related factors . . .
    included in the invitation.”

    FCC has noted that its competitive bidding requirements are not intended to
    preempt state and local bidding requirements. In fact, in addition to
    complying with FCC's rules, applicants are required to certify on their
    applications that they have complied with all applicable state and local
    laws regarding procurements of services for which e- rate support is sought.
    One of the reasons that FCC maintains it is sensible to rely on state and
    local procurement practices for determining compliance with its own
    competitive bidding requirements is “because such rules and practices
    will generally consider price to be a ‘primary factor' . . . and
    select the most cost- effective bid.”

    No Performance Data Neither FCC nor SLD has data on the extent to which
    applicants did not

    Related to Vendor choose the lowest bidders. Although applicants must
    maintain records of

    Competition their bidding process, they were not required to report the
    number of bids

    they received or the number of times they did not choose vendors offering
    the lowest- priced bids. Given the large number of applicants that have
    received funding so far, it is likely that there are many thousands of
    vendor contracts associated with the e- rate funding. Tracking this issue in
    detail, therefore, would be a time- consuming undertaking for both
    applicants and program officials. In 1999, FCC did establish a performance
    goal related to vendor competition, which was to ensure that a majority of
    the requests for

    services posted on SLD's Web site received two or more bids. However, FCC
    did not gather any data to measure its performance in meeting this goal and
    decided to drop the goal from its subsequent performance plans.

    E- Rate Appeals Have Vendors that have concerns about the competitive
    bidding process can

    Focused on Funding raise them through an appeal to SLD or FCC. Both
    applicants and vendors

    Decisions, Not Competition can appeal to SLD regarding decisions it makes
    about e- rate applications

    Issues and funding. If not satisfied with SLD's determination, they can
    appeal to

    FCC. According to SLD and FCC officials, as of the end of September 2000,
    there were only four appeals related to vendor competition issues.

    SLD received two appeals from a vendor in Alaska that was not awarded
    contracts with two school districts, even though it had submitted the
    lowest- price estimates. In one of the cases, SLD's general counsel
    determined that the school district had considered price as the primary
    factor when reviewing bids from different vendors and denied the appeal. In
    the other case, SLD determined that price had not been considered the
    primary factor and informed the school district that its application would
    not be considered for e- rate funding.

    FCC dealt with two other vendor appeals. One vendor appealed the outcome of
    a competitive bidding process, complaining that the Department of Education
    of the State of Tennessee (the applicant) awarded more bid points to a rival
    vendor's bid, even though the rival's initial bid was greater. The rival was
    ultimately awarded the contract. SLD's position on the vendor's complaint
    was that it would “defer to the state and local competitive bidding
    procurement review and procedures and findings.” In reviewing the
    appeal, FCC determined that the applicant adequately considered price, as
    well as other factors, in determining the most cost- effective bid. FCC
    therefore denied the vendor's appeal. 4 In another case, the applicant had
    the vendor prepare the applicant's description of requested services, and
    the vendor was listed as the point of contact. The vendor was ultimately
    awarded the contract for the requested services. SLD denied funding because
    of the vendor's inappropriate involvement. The vendor appealed to FCC, but
    FCC upheld in part SLD's decision to deny funding to the applicant on the
    ground that having a

    4 FCC 99- 216, (Order) rel. Aug. 11, 1999. Other issues were also considered
    in this case.

    vendor involved in the competitive bidding process in this way was contrary
    to the principle of fair and open competition. 5

    SLD's Reviews Disclosed SLD has identified other cases through its own
    review procedures when a

    Some Cases Involving vendor's actions have led SLD to conclude that the
    vendor engaged in

    Unfair Competition unfair competition. For example, in the third program
    year, SLD found that

    about 160 of more than 200 applications prepared by the same consultant
    indicated that a particular vendor had been selected to deliver the
    requested services. In addition, regardless of the school size or number of
    students, every sample contract with the vendor provided for the same number
    of servers at each location. SLD conducted a more thorough review and
    discovered, among other things, that the consultant was listed as a
    beneficiary in each of a sample of contracts that it reviewed and there was
    evidence that prices had been inflated. On the basis of this information,
    SLD, with FCC's knowledge, concluded there was evidence that prices had been
    inflated, and SLD denied every application associated with this consultant
    and vendor. The total amount of third- year program funding denied for these
    applications was approximately $26 million.

    5 FCC 00- 167, (Order) rel. May 23, 2000.

    Appendi xI II

    Additional Eligible Students and Facilities The e- rate program is directed
    at providing support to public and private elementary and secondary schools
    and libraries. Prekindergarten education programs, adult secondary education
    programs, and juvenile justice facilities (e. g., classes leading to the
    General Educational Development High School Equivalency Test, or other
    education that does not go beyond grade 12) may be eligible for program
    funding depending on how state law defines elementary and secondary schools
    in the state where the program or facility is located. Table 4 provides the
    results of USAC's analysis of each state's definition of elementary and
    secondary schools for the second and third program year funding decisions.
    (“ Yes” indicates that the category of facility or student is
    eligible for e- rate funding.)

    Table 4: Additional Facilities and Students Eligible for E- Rate Funding
    Prekindergarten Adult secondary education Juvenile justice State a
    Facilities Students Facilities Students Facilities Students

    Alabama No No No No Yes Yes Alaska Yes Yes No Yes No Yes American Samoa No
    No No No Yes Yes Arizona No No No No No Yes Arkansas No No No No No Yes
    California Yes Yes Yes Yes Yes Yes Colorado No No No No No No Connecticut No
    Yes No Yes Yes b Yes b Delaware No No No No Yes Yes District of Columbia No
    No No No Yes Yes Florida Yes Yes Yes Yes Yes Yes Georgia No Yes No Yes Yes
    Yes Guam No No No No No No Hawaii Yes Yes Yes Yes Yes Yes Idaho No No No No
    No Yes Illinois No Yes No Yes No Yes Indiana No No No Yes Yes Yes Iowa Yes
    Yes Yes Yes Yes Yes Kansas No Yes No No Yes Yes Kentucky No No No No No No
    Louisiana Yes Yes Yes Yes Yes Yes Maine No No No Yes Yes Yes

    (Continued From Previous Page)

    Prekindergarten Adult secondary education Juvenile justice State a
    Facilities Students Facilities Students Facilities Students

    Maryland Yes Yes No Yes c No No Massachusetts No No No No No No Michigan No
    No No No Yes Yes Minnesota No No No No No Yes Mississippi No Yes No Yes Yes
    Yes Missouri No Yes No Yes No Yes Montana No No No No No No Nebraska No No
    No No No No Nevada No No No No No No New Hampshire No No No Yes No No New
    Jersey No Yes No No Yes d Yes New Mexico No No No No No Yes d New York No
    Yes No Yes Yes Yes North Carolina No Yes No No Yes Yes North Dakota No No
    Yes Yes Yes Yes Ohio No No No No No No Oklahoma Yes Yes No Yes Yes Yes
    Oregon No No No No No Yes Pennsylvania No No No No Yes Yes Puerto Rico No No
    Yes Yes Yes Yes Rhode Island Yes Yes Yes Yes Yes Yes South Carolina No No No
    No Yes d Yes South Dakota No Yes No No Yes d Yes Tennessee No No No No Yes
    Yes Texas No Yes No Yes Yes Yes U. S. Virgin Islands No No Yes Yes Yes Yes
    Utah No No No No No No Vermont No No No No Yes Yes Virginia No No No Yes Yes
    Yes Washington Yes Yes Yes Yes Yes d Yes West Virginia No No No Yes Yes Yes
    Wisconsin No Yes No No Yes Yes Wyoming No No No No No No

    a USAC's legal counsel has not reviewed the eligibility of additional
    programs or facilities in the Northern Mariana Islands. b Only juvenile
    justice schools in District 1 are eligible.

    c For General Educational Development (High School Equivalency). d Only
    juvenile justice schools listed in statutes are eligible.

    Source: SLD.

    Funding Commitments and Authorized

    Appendi xI V

    Payments, 1998- 99 SLD provided us with a copy of its database for the first
    3 program years. This database included all commitments and authorized
    payments of committed funds as of August 31, 2000. Since SLD's database is
    constantly changing as funding decisions and appeal decisions are reached,
    the data included in this report constitute a snapshot in time. In addition,
    we were unable to report the actual amount of discount funding requested by
    applicants, since SLD has modified the requests. For example, some entries
    in the database include the original amounts requested minus funding for
    ineligible services removed by SLD. Other entries were adjusted to correct
    mathematical errors made by the applicants. 1 In addition, we found that
    discount funding restored through the appeal process was not reflected
    consistently in the database- the committed amounts but not the requested
    amounts were adjusted to reflect the appeal decisions. As a result, some
    applicants appeared to receive more discount funds than the database showed
    them requesting. SLD officials stated, however, that no applicant received
    more discount funding than requested. 2

    Table 5 shows the amounts of discount funding requested by applicants, as
    well as the amounts of discount funding committed to applicants by SLD in
    the first 2 program years. Table 6 presents the amounts of these committed
    funds that SLD authorized to be paid out to vendors participating in the
    program. 3

    1 SLD officials said they could examine the record for each application in
    the database to determine the original amount of discount funding requested
    but doing so would be costly and time- consuming.

    2 In the first program year, the data show that the schools and libraries
    that applied for discount funding from Tennessee received more funding than
    requested. According to SLD officials, this discrepancy reflects FCC's
    reversal of an SLD decision to deny funds to the Tennessee Department of
    Education. While SLD updated its data to reflect the funds committed, it did
    not update the amount requested, which had been reduced to reflect the
    original denial. We could not verify the accuracy of this statement.

    3 According to SLD's database, American Samoa, the Northern Mariana Islands,
    and the U. S. Virgin Islands were committed $10. 9 million in discount funds
    during the first 2 program years. As of Aug. 31, 2000, SLD had authorized
    payment of about $8. 8 million (81 percent) of these funds. Guam did not
    request any program funding during the first 2 program years.

    Table 5: Amounts of Funds Requested and Committed for the First 2 Program
    Years, as of August 31, 2000 First program year (1998) Second program year
    (1999) Amount requested by

    Amount committed by Amount requested by

    Amount committed State applicants SLD applicants by SLD

    Alabama $56, 882, 765 $46, 885, 216 $35,038, 876 $26,652, 386 Alaska 15,
    276, 225 13, 577, 806 16, 521, 143 12, 189, 113 Arizona 51, 191,444 35,
    640,711 55, 670, 736 38, 716, 994 Arkansas 15, 831, 916 13, 408, 504 13,
    263, 241 10, 497, 241 California 288, 618, 184 212, 079, 600 396,351, 207
    256,663, 058 Colorado 25, 608, 514 14, 316, 805 14, 703, 097 11, 786, 626
    Connecticut 33, 548, 696 24, 192, 938 46, 207, 112 32, 133, 484 Delaware
    4,062, 132 1, 017, 272 1,435, 969 1,393, 689 District of Columbia 17, 575,
    100 4, 866,571 21, 822, 021 9, 348, 789 Florida 76, 942,833 49, 676,963 109,
    560, 958 73, 022, 870 Georgia 90, 932,457 78, 357,505 104, 153, 221 91, 565,
    615 Hawaii 7,307, 019 5, 891, 308 6,277, 569 5,301, 184 Idaho 6,220, 849 4,
    620, 940 6,096, 407 5,124, 101 Illinois 113, 401, 873 81, 032, 031 199,076,
    472 162,605, 582 Indiana 33, 757, 611 21, 906, 914 27, 661, 323 22, 876, 019
    Iowa 26, 214, 828 7, 343,810 12, 612, 038 8, 140, 673 Kansas 15, 550, 865
    10, 462, 313 19, 364, 587 14, 990, 120 Kentucky 57, 099, 768 50, 354, 985
    75, 868, 966 57, 599, 372 Louisiana 45, 321, 832 40, 153, 955 46, 941, 793
    37, 725, 411 Maine 3, 963, 159 3, 014,559 6, 025, 067 3, 649, 468 Maryland
    23, 002, 868 15, 026, 602 28, 263, 284 22, 062, 531 Massachusetts 43, 592,
    441 30, 264, 968 42, 756, 850 33, 836, 941 Michigan 94, 992, 053 58, 533,
    358 111, 139, 905 78, 997, 144 Minnesota 33, 976,833 24, 757,330 41, 242,
    594 29, 290, 076 Mississippi 26, 675,416 24, 373,162 34, 968, 751 30, 240,
    179 Missouri 35, 363, 557 24, 916, 281 33, 732, 699 28, 776, 550 Montana
    4,736, 337 3, 674, 052 4,468, 041 3,776, 331 Nebraska 6,384, 251 4, 926, 858
    8,175, 526 6,811, 847 Nevada 9,840, 915 5, 380, 808 5,219, 146 3,147, 926
    New Hampshire 3,151, 087 1, 619, 847 1,801, 528 1,269, 103 New Jersey 82,
    341,010 62, 698,153 69, 456, 029 42, 938, 426 New Mexico 35, 762,517 19,
    308,898 32, 967, 739 29, 168, 906 New York 215, 937, 895 172, 068, 433
    266,812, 092 195,037, 891

    (Continued From Previous Page)

    First program year (1998) Second program year (1999) Amount requested by

    Amount committed by Amount requested by

    Amount committed State applicants SLD applicants by SLD

    North Carolina 36, 970,225 26, 908,604 44, 328, 601 37, 790, 543 North
    Dakota 4, 528, 745 2, 585,531 2, 690, 849 2, 212, 311 Ohio 74, 650, 282 58,
    136, 696 52, 361, 094 42, 615, 140 Oklahoma 41, 015, 572 33, 696, 296 70,
    186, 268 34, 114, 998 Oregon 14, 086, 139 9, 596,037 14, 489, 153 11, 101,
    943 Pennsylvania 83, 437, 796 52, 219, 303 95, 013, 595 56, 633, 437 Puerto
    Rico 47, 692, 072 47, 646, 855 68, 570, 966 67, 842, 733 Rhode Island 7,044,
    468 6, 010, 398 10, 356, 442 7,831, 110 South Carolina 30, 540,070 26,
    365,435 46, 266, 917 32, 368, 742 South Dakota 4, 487, 782 2, 965,172 3,
    046, 233 2, 150, 742 Tennessee 49, 092,319 51, 665,111 69, 320, 100 61, 632,
    448 Texas 198, 643, 013 129, 802, 466 189,290, 644 135,891, 161 Utah 7,522,
    346 6, 386, 095 6,537, 625 5,430, 865 Vermont 3, 503, 543 2, 073,329 2, 060,
    499 1, 604, 751 Virginia 39, 762, 879 25, 494, 960 37, 450, 614 25, 284, 943
    Washington 51, 234, 165 29, 442, 396 47, 515, 398 31, 341, 756 West Virginia
    10, 543, 250 9, 350,687 9, 421, 348 9, 375, 906 Wisconsin 87, 400,413 38,
    244,130 34, 933, 585 26, 134, 345 Wyoming 2, 125, 917 1, 221,264 5, 391, 091
    4, 989, 311 American Samoa, Northern

    5, 739,277 b 5, 737,792 5, 972, 267 5, 146, 738 Mariana Islands, U. S.
    Virgin Islands a

    Total $2,401, 085, 524 $1,731, 898, 012 $2,710, 859, 274 $1,988, 829, 566

    a Guam did not request any program funds in the first and second program
    years. b The Northern Mariana Islands did not request any program funds the
    first program year.

    Source: SLD's database.

    Table 6: Amounts of Funds Committed and Authorized for Payment by SLD for
    the First 2 Program Years, as of August 31, 2000 First program year (1998)
    Second program year (1999)

    Program funds Program funds

    Program funds authorized for

    Program funds authorized for

    State committed payment committed

    payment

    Alabama $46,885, 216 $40,810,055 $26, 652, 386 $16, 211, 376 Alaska 13,577,
    806 8,759,085 12, 189,113 6, 111, 844 Arizona 35,640, 711 30, 105, 673 38,
    716, 994 22, 931, 162 Arkansas 13,408, 504 10, 543, 027 10, 497, 241 6, 636,
    497 California 212,079, 600 164,843,376 256, 663, 058 121, 723, 361 Colorado
    14,316, 805 11, 494, 794 11, 786, 626 5, 445, 640 Connecticut 24,192, 938
    21, 492, 462 32, 133, 484 25, 514, 375 Delaware 1,017, 272 922,451 1, 393,
    689 536, 682 District of Columbia 4,866, 571 4,624,354 9, 348, 789 1, 127,
    049 Florida 49,676, 963 41, 429, 911 73, 022, 870 35, 303, 208 Georgia
    78,357, 505 56, 795, 293 91, 565, 615 43, 662, 006 Hawaii 5,891, 308
    5,191,882 5, 301, 184 3, 016, 966 Idaho 4,620, 940 3,508,863 5, 124, 101 2,
    650, 957 Illinois 81,032, 031 63, 829, 587 162, 605, 582 56, 493, 845
    Indiana 21,906, 914 16, 127, 441 22, 876, 019 14, 194, 016 Iowa 7,343, 810
    5,578,971 8, 140, 673 3, 554, 659 Kansas 10,462, 313 7,874,118 14, 990,120
    7, 622, 748 Kentucky 50,354, 985 38, 220, 231 57, 599, 372 22, 063, 658
    Louisiana 40,153, 955 33, 608, 775 37, 725, 411 26, 358, 899 Maine 3, 014,
    559 2,243,649 3, 649, 468 1, 863, 445 Maryland 15,026, 602 13, 321, 165 22,
    062, 531 11, 678, 928 Massachusetts 30,264, 968 24, 954, 239 33, 836, 941
    23, 638, 936 Michigan 58,533, 358 49, 684, 389 78, 997, 144 38, 099, 072
    Minnesota 24,757, 330 20, 244, 463 29, 290, 076 16, 493, 348 Mississippi
    24,373, 162 19, 221, 676 30, 240, 179 19, 383, 924 Missouri 24,916, 281 20,
    637, 661 28, 776, 550 17, 341, 361 Montana 3,674, 052 2,797,163 3, 776, 331
    2, 649, 380 Nebraska 4,926, 858 4,196,382 6, 811, 847 3, 158, 944 Nevada
    5,380, 808 4,067,259 3, 147, 926 1, 899, 684 New Hampshire 1,619, 847
    1,269,193 1, 269, 103 617, 911 New Jersey 62,698, 153 53, 437, 478 42, 938,
    426 20, 413, 844 New Mexico 19,308, 898 12, 660, 849 29, 168, 906 20, 499,
    847 New York 172,068, 433 139,049,679 195, 037, 891 95, 404, 330

    (Continued From Previous Page)

    First program year (1998) Second program year (1999) Program funds

    Program funds Program funds

    authorized for Program funds

    authorized for State committed

    payment committed payment

    North Carolina 26,908, 604 21, 035, 624 37, 790, 543 23, 723, 984 North
    Dakota 2, 585, 531 2,191,752 2, 212, 311 1, 327, 158 Ohio 58,136, 696 50,
    030, 883 42, 615, 140 19, 290, 911 Oklahoma 33,696, 296 27, 887, 035 34,
    114, 998 22, 592, 264 Oregon 9,596, 037 7,558,639 11, 101,943 4, 133, 059
    Pennsylvania 52,219, 303 45, 341, 213 56, 633, 437 23, 731, 474 Puerto Rico
    47,646, 855 22, 056, 308 67, 842, 733 27, 497, 004 Rhode Island 6,010, 398
    5,843,552 7, 831, 110 3, 993, 011 South Carolina 26,365, 435 23, 001, 684
    32, 368, 742 19, 022, 935 South Dakota 2, 965, 172 2,010,585 2, 150, 742
    976, 252 Tennessee 51,665, 111 45, 767, 927 61, 632, 448 37, 864, 701 Texas
    129,802, 466 114,831,265 135, 891, 161 80, 295, 742 Utah 6,386, 095
    5,216,653 5, 430, 865 2, 296, 329 Vermont 2, 073, 329 1,303,886 1, 604, 751
    666, 551 Virginia 25,494, 960 21, 227, 017 25, 284, 943 12, 831, 582
    Washington 29,442, 396 22, 468, 500 31, 341, 756 13, 959, 886 West Virginia
    9,350, 687 5,519,416 9, 375, 906 2, 663, 463 Wisconsin 38,244, 130 31, 935,
    968 26, 134, 345 11, 898, 359 Wyoming 1, 221, 264 853,053 4, 989, 311 2,
    188, 798 American Samoa, Northern

    5,737, 792 b 4,920,320 5, 146, 738 3, 889, 492 Mariana Islands, U. S. Virgin
    Islands a

    Total $1,731,898, 012 $1, 394, 546, 877 $1,988, 829, 566 $1,009, 114, 854 a
    Guam did not request any program funds in the first and second program
    years.

    b The Northern Mariana Islands did not request any program funds the first
    program year. Source: SLD database.

    Application Sampling Methodology and

    Appendi xV

    Detailed Results One of the objectives mandated for inclusion in our review
    was to determine whether ineligible products and services had received e-
    rate funding support. From the 9, 770 applications for the second program
    year (1999), we reviewed a sample of 44 that received funding commitments
    for internal connections. This was the most recent complete funding year at
    the time of our review, and internal connections was the area most likely to
    include ineligible products and services. The 44 applications in our sample
    contained over 2, 300 separate requests for internal connections and
    accounted for $285 million of the $1.2 billion in second- year internal
    connections funding committed through November 1999. The applications were
    selected for review with probability proportionate to size, as measured by
    the number of dollars committed for internal connections. For example, an
    application with a $2 million commitment for internal connections was twice
    as likely to be selected for our review as an application with a $1 million
    internal connections commitment. The applications we reviewed included a
    geographically dispersed group of 22 states or territories. The amount of
    program funding committed for internal connections in these applications
    ranged from $57. 3 million to $5,527. The unweighted results of our review
    are presented in table 7.

    Table 7: Unweighted Results of GAO's Review of Internal Connections Funding
    Denied or Committed From 44 Applications From the Second Program Year,
    Through November 1999

    Dollars in millions

    Dollars denied or Unweighted results from 44 applications committed

    Total funding denied by SLD $20. 2 Committed Funding

    Funding based on requests with no evidence of ineligible $192. 5 services
    Funding based on requests with clear evidence of ineligible

    6.3 services Funding based on requests with evidence of ineligible or

    86. 4 potentially ineligible services a Total funding committed $285. 2

    Note: These results exclude applications on which SLD denied all requests
    for internal connections funding. a Dollars included in this category come
    from requests containing ineligible services with unknown

    costs or services whose eligibility could not be determined.

    We properly weighted the results from our sample shown in table 7 to
    represent the population of 9, 770 applications containing funds committed
    to internal connections. These estimates for the 9, 770 applications are
    presented in table 8. However, the estimates contain a substantial margin of
    error because there was great variation in the amounts of the errors we
    observed from one application to the next in our sample. As a result, we do
    not present the results of this analysis in the body of our report.

    Table 8: GAO's Estimates of Internal Connections Funding Denied or Committed
    From the Second Program Year, Through November 1999

    Dollars in millions

    Dollars SLD denied or committed Estimate Margin of error a Total funding
    denied by SLD b $135.7 $98. 2

    Committed Funding

    Funding based on requests with no evidence of $780.5 $138. 0 ineligible
    services Funding based on requests with clear evidence of

    87. 6 80. 5 ineligible services Funding based on requests with evidence of

    348.1 130. 1 ineligible or potentially ineligible services Total $1,216.3 c

    a Margin of error is reported at the 95- percent confidence level. b This
    estimate includes the amount SLD denied on applications when some internal
    connections funding was committed; it excludes amounts on applications with
    all requests for internal connections denied. c Not applicable.

    Administrative Costs of Selected Technology

    Appendi xVI

    Support Programs Table 9 provides information on the fiscal year 1998
    administrative costs of 10 federal programs that specifically target funds
    for technology. The first four technology programs target funds exclusively
    to schools and libraries. The other six programs have goals and activities
    that are targeted to technology, but not exclusively to schools and
    libraries. More detailed information on these and 25 other programs that
    schools and libraries could use as a source of funding for
    telecommunications and information technology in fiscal year 1998 is found
    in our August 1999 report on this subject. 1

    Table 9: Fiscal Year 1998 Administrative Costs for Selected Federal Programs
    That Target Technology

    Dollars in thousands

    Federal administrative costs as a percentage 1998 estimated

    1998 program of total program

    Program (Agency) Program goals administrative costs a funding b costs c

    Star Schools (Dept. To use distance learning to (1)

    $1, 175 $34, 000 3.3 of Education) improve instruction in mathematics,

    science, foreign languages, and other subjects, such as literacy skills and
    vocational education, and (2) serve underserviced populations, including the
    disadvantaged, illiterate, limited- English proficient, and individuals with
    disabilities.

    Technology To implement, evaluate, and

    740 106, 000 0.7 Innovation Challenge

    document innovative applications of Grants (Dept. of

    information and computer Education)

    technologies to support systemic educational reform.

    Technology Literacy To implement state strategies

    71 425,000 <0. 1 Challenge Fund

    designed to enable all schools to (Dept. of Education)

    integrate technology into the curriculum so that all students become
    technologically literate in reading, math, science, and other core academic
    skills essential for their success in the 21st century.

    1 Telecommunications Technology: Federal Funding for Schools and Libraries(
    GAO/ HEHS99- 133, Aug. 20, 1999).

    (Continued From Previous Page) Dollars in thousands

    Federal administrative costs as a percentage 1998 estimated

    1998 program of total program

    Program (Agency) Program goals administrative costs a funding b costs c

    E- Rate Program for To improve schools' and libraries'

    26,909 d 1, 108,982 e 2.4 e

    Schools and Libraries access to modern

    in discounts (FCC)

    telecommunications services. for the 12 mos.

    beginning Jan. 1, 1998.

    Special Education To promote the development,

    786 34, 023 2. 3 Technology and

    demonstration, and utilization of Media Services for

    technology and to support Individuals with

    educational media activities for Disabilities (Dept. of

    children with disabilities. Education)

    Public To extend telecommunications

    1,823 (included in program 21, 767 8.4 Telecommunications

    services, including public funding) Facilities Program

    broadcasting and nonbroadcast (Dept. of Commerce)

    technologies; increase public broadcasting services and facilities available
    to, operated by, and owned by minorities and women; strengthen the
    capability of existing public television and radio stations; and facilitate
    the development of a variety of technology- oriented distance learning
    projects.

    Telecommunications To promote the development,

    3,271 (included in program 21, 782 15. 0 and Information

    widespread availability, and use of funding) Infrastructure

    advanced telecommunications and Assistance Program

    information technologies to serve (Dept. of Commerce)

    the public interest. Distance Learning

    To enhance learning and health care 2, 010 12, 500 13.9 and Telemedicine

    opportunities for rural residents. Grants (Dept. of Agriculture) Information
    Systems

    To foster the use of computer and 97 1,550 5. 9

    and Access Grants telecommunications technologies to

    (National Institutes of coordinate and disseminate health

    Health) information.

    Connections to the Encourage Internet connections for

    4 147 2. 6 Internet (National

    highly innovative strategies with Science Foundation)

    potential for accelerating network development.

    a Administrative costs are in addition to program funding except where
    noted. In those cases, administrative costs are included in program funding.
    b Program funding includes all funding available as grants and includes- but
    may not be limited to-

    funds spent on technology.

    c Administrative costs as a percentage of total program costs are calculated
    by dividing the 1998 administrative costs by the sum of the 1998 program
    funding and the 1998 administrative costs, except for programs that pay
    administrative costs out of program funds. In those cases, the
    administrative cost as a percentage of program funding is calculated by
    dividing the 1998 administrative cost by the 1998 program funding. d
    Includes both FCC's and SLD's administrative costs.

    e The e- rate program was funded for the 18- month period from Jan. 1, 1998,
    through June 30, 1999, and the administrative costs are for the 12- month
    period from Jan. 1, 1998, through Dec. 31, 1998. In order to calculate
    administrative costs as a percentage of total program costs on an annual
    basis, the 18- month figure of $1.66 billion was reduced by one- third to
    $1.1 billion. Even though funding commitments were not made until late 1998
    and early 1999, the applicants were being reimbursed the discounted portion
    of the bills they paid in full as early as Jan. 1998. Therefore, the one-
    third reduction is a reasonably accurate estimate.

    Comments From the Federal Communications Commission and Univeral Service

    Appendi xVII Administrative Company

    See comment 1.

    See comment 2. See comment 3.

    The following are GAO's comments on the Universal Service Administrative
    Company's letter dated November 22, 2000.

    GAO's Comments 1. While our methodology was designed to select more high-
    dollar applications than would be expected under a random sample, a
    significant

    number of the applications we reviewed were for less than $500,000. Twelve
    of the 44 were for amounts under $250,000, and another 7 were for amounts
    between $250, 000 and $500,000. We found errors in these applications as
    well. Also, we did not attempt to measure the complexity of any application.

    2. While we agree that some of the funding we classify as “committed
    in error” was for services that are themselves eligible, we disagree
    that such funding should be excluded from the level of error. Our
    methodology followed SLD's quality assurance procedures, which require the
    complete denial of any request in which at least 30 percent of the amount
    requested is ineligible. In addition, the $20 million SLD denied to the
    applications in our sample includes funding that SLD denied under this
    procedure. Therefore, when comparing the $20 million SLD denied with the $6
    million it should have denied but did not deny, it is appropriate to include
    all reasons for denial.

    3. We excluded from our sample any applications that were denied in full
    because there was no chance that funds would have been committed in error.
    This exclusion is consistent with SLD's internal goals, which measure
    improper funding as a percentage of funds committed. USAC's response states
    that SLD denied $700 million for the second program year. This amount
    represents the total amount denied for all reasons and all categories of
    service. The portion of this total that relates to denials for internal
    connections is $400 million.

    Appendi xVI II

    GAO Contacts and Staff Acknowledgments GAO Contacts Stanley J. Czerwinski,
    (202) 512- 7631 John P. Finedore, (202) 512- 6248 Acknowledgments Other key
    contributors to this report were Karen Bracey, Krista Ely, D.

    Allan Rogers, Teresa Russell, James R. Sweetman, Jr., Michael R. Volpe,
    Edward Warner, and Mindi Weisenbloom.

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    GAO United States General Accounting Office

    Page 1 GAO- 01- 105 Schools and Libraries Program

    Contents

    Contents Page 2 GAO- 01- 105 Schools and Libraries Program

    Page 3 GAO- 01- 105 Schools and Libraries Program United States General
    Accounting Office

    Washington, D. C. 20548 Page 3 GAO- 01- 105 Schools and Libraries Program

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    Appendix I

    Appendix I FCC's Authority to Set and Modify E- Rate's Annual Funding Level

    Page 41 GAO- 01- 105 Schools and Libraries Program

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    Appendix II

    Appendix II Competitive Bidding Requirements

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    Appendix II Competitive Bidding Requirements

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    Appendix II Competitive Bidding Requirements

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    Appendix III

    Appendix III Additional Eligible Students and Facilities

    Page 47 GAO- 01- 105 Schools and Libraries Program

    Appendix III Additional Eligible Students and Facilities

    Page 48 GAO- 01- 105 Schools and Libraries Program

    Page 49 GAO- 01- 105 Schools and Libraries Program

    Appendix IV

    Appendix IV Funding Commitments and Authorized Payments, 1998- 99

    Page 50 GAO- 01- 105 Schools and Libraries Program

    Appendix IV Funding Commitments and Authorized Payments, 1998- 99

    Page 51 GAO- 01- 105 Schools and Libraries Program

    Appendix IV Funding Commitments and Authorized Payments, 1998- 99

    Page 52 GAO- 01- 105 Schools and Libraries Program

    Appendix IV Funding Commitments and Authorized Payments, 1998- 99

    Page 53 GAO- 01- 105 Schools and Libraries Program

    Page 54 GAO- 01- 105 Schools and Libraries Program

    Appendix V

    Appendix V Application Sampling Methodology and Detailed Results

    Page 55 GAO- 01- 105 Schools and Libraries Program

    Page 56 GAO- 01- 105 Schools and Libraries Program

    Appendix VI

    Appendix VI Administrative Costs of Selected Technology Support Programs

    Page 57 GAO- 01- 105 Schools and Libraries Program

    Appendix VI Administrative Costs of Selected Technology Support Programs

    Page 58 GAO- 01- 105 Schools and Libraries Program

    Page 59 GAO- 01- 105 Schools and Libraries Program

    Appendix VII

    Appendix VII Comments From the Federal Communications Commission and
    Univeral Service Administrative Company

    Page 60 GAO- 01- 105 Schools and Libraries Program

    Appendix VII Comments From the Federal Communications Commission and
    Univeral Service Administrative Company

    Page 61 GAO- 01- 105 Schools and Libraries Program

    Appendix VII Comments From the Federal Communications Commission and
    Univeral Service Administrative Company

    Page 62 GAO- 01- 105 Schools and Libraries Program

    Appendix VII Comments From the Federal Communications Commission and
    Univeral Service Administrative Company

    Page 63 GAO- 01- 105 Schools and Libraries Program

    Appendix VII Comments From the Federal Communications Commission and
    Univeral Service Administrative Company

    Page 64 GAO- 01- 105 Schools and Libraries Program

    Appendix VII Comments From the Federal Communications Commission and
    Univeral Service Administrative Company

    Page 65 GAO- 01- 105 Schools and Libraries Program

    Appendix VII Comments From the Federal Communications Commission and
    Univeral Service Administrative Company

    Page 66 GAO- 01- 105 Schools and Libraries Program

    Appendix VII Comments From the Federal Communications Commission and
    Univeral Service Administrative Company

    Page 67 GAO- 01- 105 Schools and Libraries Program

    Page 68 GAO- 01- 105 Schools and Libraries Program

    Appendix VIII

    United States General Accounting Office Washington, D. C. 20548- 0001

    Official Business Penalty for Private Use $300

    Address Correction Requested Bulk Rate

    Postage & Fees Paid GAO Permit No. GI00
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