Telecommunications: Greater Involvement Needed by FCC in the	 
Management and Oversight of the E-Rate Program (09-FEB-05,	 
GAO-05-151).							 
                                                                 
Since 1998, the Federal Communications Commission's (FCC) E-rate 
program has committed more than $13 billion to help schools and  
libraries acquire Internet and telecommunications services.	 
Recently, however, allegations of fraud, waste, and abuse by some
E-rate program participants have come to light. As steward of the
program, FCC must ensure that participants use E-rate funds	 
appropriately and that there is managerial and financial	 
accountability surrounding the funds. GAO reviewed (1) the effect
of the current structure of the E-rate program on FCC's 	 
management of the program, (2) FCC's development and use of	 
E-rate performance goals and measures, and (3) the effectiveness 
of FCC's oversight mechanisms in managing the program.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-151 					        
    ACCNO:   A17216						        
  TITLE:     Telecommunications: Greater Involvement Needed by FCC in 
the Management and Oversight of the E-Rate Program		 
     DATE:   02/09/2005 
  SUBJECT:   Accounting 					 
	     Aid for education					 
	     Aid for libraries					 
	     Fraud						 
	     Funds management					 
	     Internal controls					 
	     Internet						 
	     Performance measures				 
	     Program abuses					 
	     Program management 				 
	     Telecommunication					 
	     Program evaluation 				 
	     Appropriated funds 				 
	     Fees						 
	     Federal aid programs				 
	     FCC E-Rate Program 				 
	     Universal Service Fund				 

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GAO-05-151

United States Government Accountability Office

     GAO	Report to the Chairman, Committee on Energy and Commerce, House of
                                Representatives

February 2005

TELECOMMUNICATIONS

Greater Involvement Needed by FCC in the Management and Oversight of the E-Rate
                                    Program

                                       a

GAO-05-151

Highlights of GAO-05-151, a report to the Chairman, Committee on Energy
and Commerce, House of Representatives

Since 1998, the Federal Communications Commission's (FCC) E-rate program
has committed more than $13 billion to help schools and libraries acquire
Internet and telecommunications services. Recently, however, allegations
of fraud, waste, and abuse by some E-rate program participants have come
to light. As steward of the program, FCC must ensure that participants use
E-rate funds appropriately and that there is managerial and financial
accountability surrounding the funds. GAO reviewed (1) the effect of the
current structure of the Erate program on FCC's management of the program,
(2) FCC's development and use of Erate performance goals and measures, and
(3) the effectiveness of FCC's oversight mechanisms in managing the
program.

To strengthen FCC's management and oversight of the E-rate program, we are
recommending that FCC (1) determine comprehensively which federal
accountability requirements apply to E-rate; (2) establish E-rate
performance goals and measures; and (3) take steps to reduce the backlog
of beneficiary appeals. In response, FCC stated that it does not concur
with (1) because it maintains it has done this on a caseby-case basis. We
continue to believe that major issues remain unresolved. FCC concurs with
(2) and (3), noting that it is already taking steps on these issues.

www.gao.gov/cgi-bin/getrpt?GAO-05-151.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Mark L. Goldstein at (202)
512-2834 or [email protected].

February 2005

TELECOMMUNICATIONS

Greater Involvement Needed by FCC in the Management and Oversight of the E-Rate
Program

FCC established the E-rate program using an organizational structure
unusual to the government without conducting a comprehensive assessment to
determine which federal requirements, policies, and practices apply to it.
The E-rate program is administered by a private, not-for-profit
corporation with no contract or memorandum of understanding with FCC, and
program funds are maintained outside of the U.S. Treasury, raising issues
related to the collection, deposit, obligation, and disbursement of the
funding. While FCC recently concluded that the Universal Service Fund
constitutes an appropriation and is subject to the Antideficiency Act,
this raises further issues concerning the applicability of other fiscal
control and accountability statutes. These issues need to be explored and
resolved comprehensively to ensure that appropriate governmental
accountability standards are fully in place to help protect the program
and the fund from fraud, waste, and abuse.

FCC has not developed useful performance goals and measures for assessing
and managing the E-rate program. The goals established for fiscal years
2000 through 2002 focused on the percentage of public schools connected to
the Internet, but the data used to measure performance did not isolate the
impact of E-rate funding from other sources of funding, such as state and
local government. A key unanswered question, therefore, is the extent to
which increases in connectivity can be attributed to E-rate. In addition,
goals for improving E-rate program management have not been a feature of
FCC's performance plans. In its 2003 assessment of the program, OMB noted
that FCC discontinued E-rate performance measures after fiscal year 2002
and concluded that there was no way to tell whether the program has
resulted in the cost-effective deployment and use of advanced
telecommunications services for schools and libraries. In response to
OMB's concerns, FCC is currently working on developing new E-rate goals.

FCC's oversight mechanisms contain weaknesses that limit FCC's management
of the program and its ability to understand the scope of any waste,
fraud, and abuse within the program. According to FCC officials, oversight
of the program is primarily handled through agency rulemaking procedures,
beneficiary audits, and appeals decisions. FCC's rulemakings have often
lacked specificity and led to a distinction between FCC's rules and the
procedures put in place by the program administrator-a distinction that
has affected the recovery of funds for program violations. While audits of
E-rate beneficiaries have been conducted, FCC has been slow to respond to
audit findings and make full use of them to strengthen the program. In
addition, the small number of audits completed to date do not provide a
basis for accurately assessing the level of fraud, waste, and abuse
occurring in the program, although the program administrator is working to
address this issue. According to FCC officials, there is also a
substantial backlog of E-rate appeals due in part to a shortage of staff
and staff turnover. Because appeal decisions establish precedent, this
slowness adds uncertainty to the program.

Contents

  Letter

Results in Brief
Background
FCC Established an Unusual Program Structure without

Comprehensively Addressing the Applicability of Governmental Standards and
Fiscal Controls FCC Did Not Develop Useful Performance Goals and Measures
for Assessing and Managing the E-Rate Program FCC's Oversight Mechanisms
Are Not Fully Effective in Managing

the E-Rate Program Conclusions Recommendations for Executive Action Agency
Comments and Our Evaluation

1 4 7

11

19

27 36 37 38

Appendixes Appendix I: Appendix II: Appendix III:

Appendix IV: Appendix V:

Appendix VI:

Scope and Methodology

Fiscal Law Issues Involving the Universal Service Fund

Structure of the Universal Service Administrative Company

FCC Staffing Levels in Support of the E-Rate Program

Comments from the Federal Communications Commission

GAO's Comments

GAO Contacts and Staff Acknowledgments

GAO Contacts
Staff Acknowledgments

                                     41 44

                                       54

                                       57

                                     58 66

70 70 70

Tables             Table 1: E-Rate Program Discount Matrix               9 
               Table 2: Examples of E-Rate Beneficiary Audit Findings from 
                        Program Year 1998, Resolved in 2004                32 
               Table 3: Number of FCC Full-Time Equivalent (FTE) Positions 
                         Supporting E-Rate Program, Fiscal Years 1997-2004 57 
Figure     Figure 1: Relationship among Entities Involved in the E-Rate    
                                                                   Program 56

Contents

Abbreviations

CBO Congressional Budget Office
FCC Federal Communications Commission
FTE full-time equivalent
GovGAAP generally accepted accounting principles for federal agencies
IG inspector general
IPIA Improper Payments Information Act of 2002
NCES National Center for Education Statistics
NECA National Exchange Carrier Association
OMB Office of Management and Budget
PART Program Assessment Rating Tool
SLD Schools and Libraries Division
USAC Universal Service Administrative Company
USF Universal Service Fund

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.

A

United States Government Accountability Office Washington, D.C. 20548

February 9, 2005

The Honorable Joe Barton
Chairman
Committee on Energy and Commerce
House of Representatives

Dear Mr. Chairman:

Since 1998, the Federal Communications Commission's (FCC) universal
service "E-rate" program has committed more than $13 billion in funding to
help schools and libraries across the nation acquire telecommunications
and Internet services. Eligible schools and libraries can apply annually
to
receive support and can spend the funding on specific eligible services
and
equipment, including telephone services, Internet access services, and the
installation of internal wiring and other related items. For example, with
the help of E-rate funding, a school district in Alaska that lacked
certified
math teachers was able to provide students with math, algebra, and
geometry lessons through distance learning. Similarly, the State Library
of
Louisiana has used E-rate funding to help provide Internet connections for
use by patrons in all of Louisiana's public libraries. The E-rate program
processes around 40,000 applications from schools and libraries each year,
and many of these applicants rely heavily on E-rate support for their
telecommunications needs.

Recently, allegations have been made that some E-rate beneficiaries
(schools and libraries) and service providers (e.g., telecommunications
and
network equipment companies) have fraudulently obtained, wasted, or
abused E-rate funding. In May 2004, for example, one service provider
involved in E-rate projects in several states pleaded guilty to bid
rigging and
wire fraud and agreed to pay more than $20 million in criminal fines,
civil
payments, and restitution. In December 2004, another service provider
agreed to pay almost $9 million and plead guilty to charges related to a
scheme to defraud the E-rate program by inflating bids, agreeing to submit
false and fraudulent documents to hide the planned installation of
ineligible
items, and submitting false and fraudulent documents to defeat inquiry
into
the legitimacy of the funding request. Suspected instances of program
beneficiaries not paying their portion of service costs and of service
provider procurement irregularities are being investigated. In fact, FCC's
Inspector General (IG) has devoted special attention to the E-rate program
in his most recent reports to Congress. In his May 2004 report, the FCC IG
stated that he continues to have numerous concerns about the program and

believes that the program may be subject to a high risk of fraud, waste,
and abuse through noncompliance and program weakness.1

"Universal service" traditionally has meant providing residential
customers with affordable nationwide access to basic telephone service.
The Telecommunications Act of 1996 expanded the concept of universal
service to include assistance to schools and libraries in acquiring
telecommunications and Internet services; the act charged FCC with
establishing a universal service discount mechanism for schools and
libraries. The commission, in turn, created a large and ambitious program
that became commonly known as the E-rate program2 and gave the program a
$2.25 billion annual funding cap.3 The commission designated a
not-for-profit corporation, the Universal Service Administrative Company
(USAC), to carry out the day-to-day operations of the program, although
FCC retains responsibility for overseeing the program's operations and
ensuring compliance with the commission's rules.

The public has a vested interest in the proper management of the E-rate
program. The program is funded through statutorily mandated payments into
the Universal Service Fund4 by companies that provide interstate

1See FCC, Office of the Inspector General Semiannual Report to Congress,
October 1, 2003-March 31, 2004 (Washington, D.C.; May 3, 2004).

2The term "E-rate" evolved from some individuals referring to the program
as the "Education" rate.

3Because there was no historical record of what it would cost to provide
support to schools and libraries, FCC based the funding cap on data from
McKinsey and Company, the U.S. National Committee on Libraries and
Information Services, and others that sought to estimate the cost of
deploying and supporting the ongoing costs of a communications network for
public schools and libraries. The cap has remained the same since it was
established in May 1997.

4Contributions from companies providing interstate telecommunications
services are deposited into the federal Universal Service Fund, from which
disbursements are made for the various federal universal service programs,
including E-rate. Other universal service programs under the Universal
Service Fund are the High Cost program, the Low Income program, and the
Rural Health Care program. The High Cost program assists customers living
in high-cost, rural, or remote areas through financial support to
telephone companies, thereby lowering rates for local and long distance
service. The Low Income program assists qualifying low-income consumers
through discounted installation and monthly telephone services and free
toll limitation service. The Rural Health Care program assists health care
providers located in rural areas through discounts for telecommunications
services. For more information on the various universal service programs
see GAO,

Telecommunications: Federal and State Universal Service Programs and
Challenges to Funding, GAO-02-187 (Washington, D.C.: Feb. 4, 2002).

telecommunications services. The companies' "contribution factor" of how
much they must pay into the Universal Service Fund is established
quarterly by FCC. In practice, however, many of these companies pass this
contribution factor along to consumers through fees placed on their phone
bills. Also, during most of the program's history, the requests from
schools and libraries for E-rate funding have greatly exceeded the annual
amounts available from the program. Thus, any misuse of E-rate funding
wastes consumers' money and deprives those schools and libraries whose
requests for support were denied due to funding limitations. As the
steward of this program, FCC must ensure that beneficiaries use the funds
appropriately and that there is financial and managerial accountability
surrounding the fund.

Since 1998, we have issued eight reports and testimonies discussing
various aspects of the E-rate program.5 In light of ongoing concerns about
the E-rate program, you asked us in December 2003 to review the program.
We evaluated (1) the effect of the current structure of the E-rate program
on FCC's management of the program, (2) FCC's development and use of
performance goals and measures in managing the program, and (3) the
effectiveness of FCC's oversight mechanisms-rulemaking proceedings,
beneficiary audits, and reviews of USAC decisions (appeals)-in managing
the program. To address these issues, we interviewed officials from FCC's
Wireline Competition Bureau, Enforcement Bureau, Office of General
Counsel, Office of Managing Director, Office of Strategic Planning and
Policy Analysis, and Office of Inspector General. We also interviewed
officials from USAC. In addition, we interviewed officials from the Office
of

5See GAO, Telecommunications: FCC Lacked Authority to Create Corporations
to Administer Universal Service Programs, GAO/T-RCED/OGC-98-84
(Washington, D.C.: Mar. 31, 1998); Telecommunications: Court Challenges to
FCC's Universal Service Order and Federal Support for Telecommunications
for Schools and Libraries, GAO/RCED/OGC-98172R (Washington, D.C.: May 7,
1998); Schools and Libraries Corporation: Actions Needed to Strengthen
Program Integrity Operations before Committing Funds, GAO/T-RCED-98243
(Washington, D.C.: July 16, 1998); Telecommunications and Information
Technology: Federal Programs That Can Be Used to Fund Technology for
Schools and Libraries, GAO/T-HEHS-98-246 (Washington, D.C.: Sept. 16,
1998); Schools and Libraries Program: Actions Taken to Improve Operational
Procedures Prior to Committing Funds, GAO/RCED-99-51 (Washington, D.C.:
Mar. 5, 1999); Schools and Libraries Program: Application and Invoice
Review Procedures Need Strengthening, GAO-01-105 (Washington, D.C.: Dec.
15, 2000); Schools and Libraries Program: Update on E-rate Funding,
GAO-01-672 (Washington, D.C.: May 11, 2001); and Schools and Libraries
Program: Update on State-Level Funding by Category of Service, GAO-01-673
(Washington, D.C.: May 11, 2001). In addition, we touched upon the E-rate
program in Telecommunications Technology: Federal Funding for Schools and
Libraries, GAO/HEHS99-133 (Washington, D.C.: Aug. 20, 1999).

Management and Budget (OMB) and the Department of Education regarding
performance goals and measures. OMB had conducted its own assessment of
the E-rate program in 2003, which we also discussed with OMB officials. We
reviewed and analyzed FCC, USAC, and OMB documents related to the
management and oversight of the E-rate program. The information we
gathered was sufficiently reliable for the purposes of our review. We
conducted our work from December 2003 through December 2004 in accordance
with generally accepted government auditing standards. See appendix I for
a more detailed explanation of our scope and methodology.

Results in Brief	FCC established E-rate as a multibillion-dollar program
operating under an organizational structure unusual to the federal
government, and then never conducted a comprehensive assessment to
determine which federal requirements, policies, and practices apply to the
program, to USAC, and to the Universal Service Fund itself. The E-rate
program's structure is unusual in a couple of ways: (1) It is administered
by a private, not-for-profit corporation that has no contract or
memorandum of understanding with FCC and (2) although the Universal
Service Fund is included in the federal budget, program funds are
maintained outside of the U.S. Treasury, raising issues related to the
collection, deposit, obligation, and disbursement of the funding. Because
of this unusual framework, FCC has struggled with determining which fiscal
and accountability requirements apply to the Erate program. FCC has
internally considered the applicability of a number of statutes on a
case-by-case basis and has concluded that the Universal Service Fund
constitutes an appropriation and that the fund is subject to the
Antideficiency Act. However, the laws encompassing fiscal and
accountability controls are not applied in isolation; rather, they are
part of a framework that addresses issues of financial and general
management of federal agencies and programs. FCC's conclusions concerning
the status of the Universal Service Fund raise further issues concerning
the applicability of other fiscal control and accountability statutes
(e.g., the Miscellaneous Receipts Statute, the Single Audit Act, and the
Cash Management Improvement Act) and the extent to which FCC has delegated
certain functions for the E-rate program to USAC-issues that FCC needs to
explore and resolve. Timely resolution of these issues in a comprehensive
fashion is necessary to ensure that the appropriate governmental
accountability safeguards are fully in place to help protect the E-rate
program and the Universal Service Fund from fraud, waste, and abuse.

Although $13 billion in E-rate funding has been committed during the past
7 years, FCC did not develop performance goals and measures that could be
used to assess the specific impact of these funds and improve the
management of the program. For fiscal years 2000 through 2002, FCC's goals
focused on achieving certain percentage levels of Internet access for
schools, public school instructional classrooms, and libraries. However,
the data that FCC used to report on its progress was limited to public
schools (rather than including private schools and libraries) and did not
isolate the impact of E-rate funding from other sources of funding, such
as state and local government. This is a significant measurement problem
because, over the years, the demand for internal connections funding by
applicants has exceeded the E-rate funds available for this purpose by
billions of dollars. Unsuccessful applicants had to rely on other sources
of support to meet their internal connection needs. Consequently, a
fundamental performance question that remains unanswered is how much of
the increase in public schools' access to the Internet can be attributed
to the E-rate program. This, in turn, makes it difficult to address other
questions about the program, such as its efficiency and cost-effectiveness
in supporting the telecommunications needs of schools and libraries. In
addition, goals for improving E-rate program management have not been a
feature of FCC's performance plans. For example, two such goals-related to
assessing competitive bidding requirements for vendor services and
improving participation by eligible schools and libraries in the
program-were planned but not carried forward. FCC did not include any
E-rate goals for fiscal years 2003 and 2004 in its recent annual
performance reports. OMB's own review of the program in 2003 concluded
that there was no way to tell whether the program has resulted in the
cost-effective deployment and use of advanced telecommunications services
for schools and libraries.6 In response, FCC staff have been working on
developing new performance measures for the E-rate program and plan to
finalize them and seek OMB approval in fiscal year 2005.

FCC's three key oversight mechanisms for the E-rate program-rulemaking
procedures, beneficiary audits, and reviews of USAC decisions (appeals
decisions)-are not fully effective in managing the program. FCC's
rulemakings have often lacked specificity and led to situations where
USAC, in crafting the details needed to operate the program, has

6OMB reviewed E-rate using its Program Assessment Rating Tool (PART),
which is a diagnostic tool intended to provide a consistent approach to
evaluating federal programs as part of the executive budget formulation
process.

established administrative procedures that arguably rise to the level of
policy decisions, even though USAC is prohibited from making program
policies. This creates a situation where important USAC administrative
procedures have been deemed unenforceable by FCC with regard to the
recovery of funds for violations of those procedures. While audits have
been conducted on E-rate beneficiaries, FCC has been slow to respond to
audit findings in the past. Also, neither FCC nor USAC have conducted a
large enough number of beneficiary audits to be able to statistically
support an accurate assessment of the level of waste, fraud, and abuse in
the program. FCC is examining a proposal by USAC for resolving audit
findings, and the FCC IG and USAC are planning to conduct a larger number
of audits that will allow for an estimation of the annual amount of
improper payments by the E-rate program. According to FCC officials, FCC's
oversight through appeals decisions suffers from a significant appeals
backlog due in part to a shortage of FCC staff and staff turnover. Thus,
issues raised on appeal may not be addressed in a timely manner. Because
appeals decisions are used as precedent, this slowness adds uncertainty to
the program and impacts beneficiaries.

To address the management and oversight problems we have identified, we
recommend that the Chairman of FCC: (1) conduct and document a
comprehensive assessment to determine whether all necessary government
accountability requirements, policies, and practices have been applied and
are fully in place to protect the E-rate program and universal service
funding; (2) establish meaningful performance goals and measures for the
E-rate program; and (3) develop a strategy for reducing the E-rate
program's appeals backlog, including ensuring that adequate staffing
resources are devoted to E-rate appeals.

We provided a draft of this report to FCC for comment. FCC said that it
took a number of steps in 2004 to improve its management and oversight of
the program, and anticipates taking additional steps during the coming
year. FCC concurred with our recommendations on establishing performance
goals and measures and developing a strategy for reducing the backlog of
appeals. FCC did not concur with our recommendation that it conduct a
comprehensive assessment concerning the applicability of government
accountability requirements, policies, and practices. FCC maintains that
it has already done so on a case-by-case basis. As noted in our report,
however, we believe that major issues remain unresolved, such as the
implications of FCC's determination that the Universal Service Fund
constitutes an appropriation under the current structure of the E-rate

program and the extent to which FCC has delegated some program functions
to USAC.

Background	The concept of "universal service" has traditionally meant
providing residential telephone subscribers with nationwide access to
basic telephone services at reasonable rates. Universal service programs
traditionally targeted support to low-income customers and customers in
rural and other areas where the costs of providing basic telephone service
were high. The Telecommunications Act of 1996 broadened the scope of
universal service to include, among other things, support for schools and
libraries. The act instructed FCC to establish a universal service support
mechanism to ensure that eligible schools and libraries have affordable
access to and use of certain telecommunications services for educational
purposes.7 In addition, Congress authorized FCC to "establish
competitively neutral rules to enhance, to the extent technically feasible
and economically reasonable, access to advanced telecommunications and
information services for all public and nonprofit elementary and secondary
school classrooms . . . and libraries. . . ."8 Based on this direction,
and following the recommendations of the Federal-State Joint Board on
Universal Service,9 FCC established the schools and libraries universal
service mechanism that is commonly referred to as the E-rate program. The
program is funded through statutorily mandated payments by companies that
provide interstate telecommunications services.10 Many of these companies,
in turn, pass their contribution costs on to their subscribers through a
line item on subscribers' phone bills.11 FCC capped funding for the E-rate
program at $2.25 billion per year, although funding requests by

747 U.S.C. S: 254(h)(1)(B).

847 U.S.C. S: 254(h)(2).

9The Federal-State Joint Board on Universal Service was established in
March 1996 to make recommendations to implement the universal service
provisions of the Telecommunications Act of 1996. The board is composed of
FCC commissioners, state utility commissioners, and a consumer advocate
representative.

10These companies include providers of local and long distance telephone
services, wireless telephone services, paging services, and pay phone
services. 47 C.F.R. S: 54.706.

11The line item is called various things by various companies, such as the
"federal universal service fee" or the "universal connectivity fee." Some
companies do not separate out universal service costs as a line item, but
instead just build it into their overall costs. Either way, consumers
ultimately pay for the various universal service programs, including
E-rate.

schools and libraries can greatly exceed the cap. For example, schools and
libraries requested more than $4.2 billion in E-rate funding for the 2004
funding year.

In 1998, FCC appointed USAC as the program's permanent administrator,12
although FCC retains responsibility for overseeing the program's
operations and ensuring compliance with the commission's rules. In
response to congressional conference committee direction,13 FCC has
specified that USAC "may not make policy, interpret unclear provisions of
the statute or rules, or interpret the intent of Congress."14 USAC is
responsible for carrying out the program's day-to-day operations, such as
maintaining a Web site that contains program information and application
procedures; answering inquiries from schools and libraries; processing and
reviewing applications; making funding commitment decisions and issuing
funding commitment letters; and collecting, managing, investing, and
disbursing E-rate funds. FCC permits-and in fact relies on-USAC to
establish administrative procedures that program participants are required
to follow as they work through the application and funding process. The
FCC IG has noted that program participants generally consider USAC the
primary source for guidance on the rules governing the E-rate program. See
appendix III for a more detailed explanation of the structure of USAC.

12In 1998, we issued a legal opinion on the then-current structure of the
E-rate program where FCC directed the creation of the Schools and
Libraries Corporation to administer the program. Under the Government
Corporation Control Act, an agency must have specific statutory authority
to establish a corporation. 31 U.S.C. S: 9102. We concluded that FCC did
not have authority to create a separate independent corporation to
administer the E-rate program. B-278820, Feb. 10, 1998. Subsequently, FCC
eliminated the Schools and Libraries Corporation as a separate entity and
restructured the universal service program to its present form. We have
not addressed FCC's authority to establish the current organizational
structure. In 1998, in view of the questions surrounding the establishment
of USAC itself, the commission requested statutory authorization from
Congress. No legislation was enacted. FCC has not sought any further
congressional authorization or direction on the nature of the Universal
Service Fund or the establishment of USAC.

13See S.1768, 105th Cong., S: 2004(b)(2)(A) (1998).

1447 C.F.R. S: 54.702(c).

Under the E-rate program, eligible schools, libraries, and consortia that
include eligible schools and libraries15 may receive discounts for
eligible services. Eligible schools and libraries may apply annually to
receive E-rate support. The program places schools and libraries into
various discount categories, based on indicators of need, so that the
school or library pays a percentage of the cost for the service and the
E-rate program funds the remainder. E-rate discounts range from 20 percent
to 90 percent. Schools and libraries in areas with higher percentages of
students eligible for free or reduced-price lunches through the National
School Lunch Program (or a federally approved alternative mechanism)
qualify for higher discounts on eligible services. Schools and libraries
located in rural areas16 also receive greater discounts in most cases, as
shown in table 1.

                    Table 1: E-Rate Program Discount Matrix

Percent

                        Source: 47 C.F.R. S: 54.505(c).
             Students                                                                             
             eligible                   less                                                      
 Urban Rural      for discount discount than 20  1-19 40  20-34 50  35-49 60  50-74 80            
               school                      1                                                      
                lunch                                                                             
              program                                                                   75-100 90 

15Eligibility of schools and libraries is defined at 47 U.S.C. S: 254.
Generally, educational institutions that meet the definition of "schools"
in the Elementary and Secondary Education Act of 1965 are eligible to
participate, as are libraries that are eligible to receive assistance from
a state's library administrative agency under the Library Services and
Technology Act. Examples of entities not eligible for support are home
school programs, private vocational programs, and institutions of higher
education. In addition, neither private schools with endowments of more
than $50 million nor libraries whose budgets are part of a school's budget
are eligible to participate. 20 U.S.C. S: 9122.

16An applicant is classified as rural based on the definition adopted by
the U.S. Department of Health and Human Services' Office of Rural Health
Policy.

FCC has defined four classes of services that are eligible for E-rate
support:

o 	telecommunications services, such as local, long-distance, and
international telephone service as well as high-speed data links (e.g.,
T-1 lines);

o 	Internet access services, such as broadband Internet access and e-mail
services;

o 	internal connections, such as telecommunications wiring, routers,
switches, and network servers that are necessary to transport information
to individual classrooms; and

o  basic maintenance on internal connections.

The list of specific eligible services within each class is updated
annually and posted on USAC's Web site. FCC's rules provide that requests
for telecommunications services and Internet access for all discount
categories shall receive first priority for the available funding
(Priority One services). The remaining funds are allocated to requests for
support for internal connections and basic maintenance (Priority Two
services), beginning with the most economically disadvantaged schools and
libraries, as determined by the discount matrix. Because of this
prioritization, not all requests for internal connections necessarily
receive funding.17

17Starting in funding year 2005, eligible entities will only be able to
receive support for internal connections in two out of every five funding
years. All requests for Priority One services that have been found
consistent with FCC rules through the Program Integrity Assurance review
process have been funded since the beginning of the program.

Prior to applying for discounted services, an applicant must conduct a
technology assessment and develop a technology plan to ensure that any
services it purchases will be used effectively.18 The applicant submits a
form to USAC setting forth its technological needs. Once the school or
library has complied with the commission's competitive bidding
requirements and entered into agreements with service providers for
eligible services, it must file a second form with USAC that details the
types and costs of the services being contracted for, the vendors
providing the services, and the amount of discount being requested. USAC
reviews the forms and issues funding commitment decision letters (USAC
could reduce the amount requested if the school or library has included
ineligible services in its application or has calculated its discount
category incorrectly19). Generally, it is the service provider that seeks
reimbursement from USAC for the discounted portion of the service.20

  FCC Established an Unusual Program Structure without Comprehensively
  Addressing the Applicability of Governmental Standards and Fiscal Controls

FCC established an unusual structure for the E-rate program but has never
conducted a comprehensive assessment of which federal requirements,
policies, and practices apply to the program, to USAC, or to the Universal
Service Fund itself. FCC recently began to address a few of these issues,
concluding that as a permanent indefinite appropriation, the Universal
Service Fund is subject to the Antideficiency Act and its issuance of
commitment letters constitutes obligations for purposes of the act. We
agree with FCC's determinations on these issues, as explained in detail in
appendix II. However, FCC's conclusions concerning the status of the
Universal Service Fund raise further issues relating to the collection,
deposit, obligation, and disbursement of those funds-issues that FCC

18Applicants do not actually have to submit any proof of having an
approved technology plan until much later in the process. Applicants that
seek discounts only for basic, long distance, or cellular telephone
services are not required to prepare a technology plan.

19The program relies on applicants to self-certify important information.
For example, in addition to calculating their own discount categories
based on USAC's formula, applicants must certify that they: (1) based
their requests on approved technology plans (if it was required); (2) have
sufficient funding to pay for the nondiscounted portion of eligible costs
and for ineligible resources, such as computers and software, that are
necessary to use the requested services; and (3) complied with all
applicable state and local laws or rules regarding procurement.

20The school or library could also pay the service provider in full and
then seek reimbursement from USAC for the discount portion.

needs to explore and resolve comprehensively rather than in an ad hoc
fashion as problems arise.

The Telecommunications Act of 1996 neither specified how FCC was to
administer universal service to schools and libraries nor prescribed the
structure and legal parameters of the universal service mechanisms to be
created. The Telecommunications Act required FCC to consider the
recommendations of the Federal-State Joint Board on Universal Service and
then to develop specific, predictable, and equitable support mechanisms.
Using the broad language of the act, FCC crafted an ambitious program for
schools and libraries-roughly analogous to a grant program-and gave the
program a $2.25 billion annual funding cap. To carry out the day-to-day
activities of the E-rate program, FCC relied on a structure it had used
for other universal service programs in the past-a not-for-profit
corporation established at FCC's direction that would operate under FCC
oversight. However, the structure of the E-rate program is unusual in
several respects compared with other federal programs:

o 	FCC appointed USAC as the permanent administrator of the Universal
Service Fund,21 and FCC's Chairman has final approval over USAC's Board of
Directors. USAC is responsible for administering the program under FCC
orders, rules, and directives. However, USAC is not part of FCC or any
other government entity; it is not a government corporation established by
Congress; and no contract or memorandum of understanding exists between
FCC and USAC for the administration of the E-rate program. Thus, USAC
operates and disburses funds under less explicit federal ties than many
other federal programs.

21USAC was appointed the permanent administrator subject to a review after
one year by FCC to determine that the universal service programs were
being administered in an efficient, effective, and competitively neutral
manner. 47 C.F.R. S: 54.701(a). This review was never conducted.

o 	Questions as to whether the monies in the Universal Service Fund should
be treated as federal funds have troubled the program from the start. Even
though the fund has been listed in the budget of the United States and,
since fiscal year 2004, has been subject to an annual apportionment from
OMB, the monies are maintained outside of Treasury accounts by USAC and
some of the monies have been invested.22 The United States Treasury
implements the statutory controls and restrictions involving the proper
collection and deposit of appropriated funds, including the financial
accounting and reporting of all receipts and disbursements, the security
of appropriated funds, and agencies' responsibilities for those funds.23

As explained below, appropriated funds are subject, unless specifically
exempted by law, to a variety of statutory controls and restrictions.
These controls and restrictions, among other things, limit the purposes
for which federal funds can be used and provide a scheme of accountability
for federal monies. Key requirements are in Title 31 of the United States
Code and the appropriate Treasury regulations,24 which govern fiscal
activities relating to the management, collection, and distribution of
public money.

Since the inception of the E-rate program, FCC has struggled with
identifying the nature of the Universal Service Fund and the managerial,
fiscal, and accountability requirements that apply to the fund. FCC's
Office of Inspector General first looked at the Universal Service Fund in
1999 as part of its audit of the commission's fiscal year 1999 financial
statement because FCC had determined that the Universal Service Fund was a
component of FCC for financial reporting purposes. During that audit, the
FCC IG questioned commission staff regarding the nature of the fund and,
specifically, whether it was subject to the statutory and regulatory
requirements for federal funds. In the next year's audit, the FCC IG noted

22The Universal Service Fund is included in the federal budget as a
special fund. OMB concluded that the fund does not constitute public money
subject to the Miscellaneous Receipts Statute, 31 U.S.C. S: 3302, and
therefore can be maintained outside the Treasury by a nongovernmental
manager. Letter from Mr. Robert G. Damus, OMB General Counsel to Mr.
Christopher Wright, FCC General Counsel, dated April 28, 2000.

23See 31 U.S.C. S:S: 331, 3301-3305 and the Treasury Financial Manual,
vol. I, which instructs federal agencies in areas of central accounting
and reporting, disbursing, deposit regulations, and other fiscal matters
necessary for the financial accounting and reporting of all receipts and
disbursements of the federal government.

24As set forth in part 31 of the Code of Federal Regulations or the
Treasury Financial Manual.

that the commission could not ensure that Universal Service Fund
activities were in compliance with all laws and regulations because the
issue of which laws and regulations were applicable to the fund was still
unresolved at the end of the audit.

FCC officials told us that the commission has substantially resolved the
IG's concerns through recent orders, including FCC's 2003 order that USAC
begin preparing Universal Service Fund financial statements consistent
with generally accepted accounting principles for federal agencies
(GovGAAP) and keep the fund in accordance with the United States
Government Standard General Ledger. While it is true that these steps and
other FCC determinations discussed below should provide greater
protections for universal service funding, FCC has addressed only a few of
the issues that need to be resolved. In fact, staff from the FCC's IG's
office told us that they do not believe the commission's GovGAAP order
adequately addressed their concerns because the order did not
comprehensively detail which fiscal requirements apply to the Universal
Service Fund and which do not.

FCC has, however, made some determinations concerning the status of the
Universal Service Fund and the fiscal controls that apply. FCC's
determinations, and our analysis, in brief, are discussed below. (See app.
II for our more thorough legal analysis of fiscal law issues involving the
Universal Service Fund.)

Status of funds as appropriated funds. In assessing the financial
statement reporting requirements for FCC components in 2000, FCC concluded
that the Universal Service Fund constitutes a permanent indefinite
appropriation (i.e., funding appropriated or authorized by law to be
collected and available for specified purposes without further
congressional action). We agree with FCC's conclusion. Typically, Congress
will use language of appropriation, such as that found in annual
appropriations acts, to identify a fund or account as an appropriation and
to authorize an agency to enter into obligations and make disbursements
out of available funds. Congress, however, appropriates funds in a variety
of ways other than in regular appropriations acts. Thus, a statute that
contains a specific direction to pay and a designation of funds to be used
constitutes an appropriation.25 In these statutes, Congress (1) authorizes
the collection of fees and their deposit into a particular fund, and (2)
makes

2563 Comp. Gen. 331 (1984); 13 Comp. Gen. 77 (1933).

the fund available for expenditure for a specified purpose without further
action by Congress. This authority to obligate or expend collections
without further congressional action constitutes a continuing
appropriation or a permanent appropriation of the collections.26 Because
the Universal Service Fund's current authority stems from a statutorily
authorized collection of fees from telecommunications carriers and the
expenditure of those fees for a specified purpose (that is, the various
types of universal service), it meets both elements of the definition of a
permanent appropriation.

Decision regarding the Antideficiency Act. As noted above, in October
2003, FCC ordered USAC to prepare financial statements for the Universal
Service Fund, as a component of FCC, consistent with GovGAAP, which FCC
and USAC had not previously applied to the fund. In February 2004, staff
from USAC realized during contractor-provided training on GovGAAP
procedures that the commitment letters sent to beneficiaries (notifying
them whether or not their funding is approved and in what amount) might be
viewed as "obligations" of appropriated funds.27 If so, and if FCC also
found the Antideficiency Act-which does not allow an agency or program to
make obligations in excess of available budgetary resources-to be
applicable to the E-rate program, then USAC would need to dramatically
increase the program's cash-on-hand and lessen the program's investments28
to provide budgetary authority sufficient to satisfy the Antideficiency
Act. As a result, USAC suspended funding commitments in August 2004 while
waiting for a commission decision on how to proceed. At the end of
September 2004-facing the end of the fiscal year-FCC decided that
commitment letters were obligations, that the Antideficiency Act did apply
to the program, and that USAC would need to immediately liquidate some of
its investments to come into compliance with the Antideficiency Act.
According to USAC officials, the liquidations cost the

26E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (D.C. Cir. 1965),
cert. denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 262 (1990); 73 Comp.
Gen. 321 (1994).

27An "obligation" is an action that creates a legal liability or definite
commitment on the part of the government to make a disbursement at some
later date.

28According to USAC, the Universal Service Fund was invested in a variety
of securities, including cash and cash equivalents, government and
government-backed securities, and high-grade commercial paper. USAC
generally did not seek the approval of the commission on particular
investments, although investments were made with FCC knowledge and
oversight through formal audits and informal meetings and review.

fund approximately $4.6 million in immediate losses and could potentially
result in millions in foregone annual interest income.

FCC was slow to recognize and address the issue of the applicability of
the Antideficiency Act, resulting in the abrupt decision to suspend
funding commitment decision letters and liquidate investments. In response
to these events, in December 2004, Congress passed a bill granting the
Universal Service Fund a one-year exemption from the Antideficiency Act.29
Nevertheless, FCC's conclusion on this issue was correct: Absent a
statutory exemption, the Universal Service Fund is subject to the
Antideficiency Act, and its funding commitment decision letters constitute
obligations for purposes of the act.

The Antidefiency Act applies to "official[s] or employee[s] of the United
States Government . . . mak[ing] or authorizing an expenditure or
obligation . . . from an appropriation or fund." 31 U.S.C. S: 1341(a). As
discussed above, the Universal Service Fund is an "appropriation or fund."
Even though USAC-a private entity whose employees are not federal officers
or employees-is the administrator of the program and the entity that
obligates and disburses money from the fund, application of the act is not
negated. This is because, as recognized by FCC, it, and not USAC, is the
entity that is legally responsible for the management and oversight of the
Erate program and because FCC's employees are federal officers and
employees of the United States subject to the Antideficiency Act. Thus,
the Universal Service Fund will again be subject to the Antideficiency Act
when the one-year statutory exemption expires, unless action is taken to
extend or make permanent the exemption.

An important issue that arises from the application of the Antideficiency
Act to the Universal Service Fund is what actions constitute obligations
chargeable against the fund. Under the Antideficiency Act, an agency may
not incur an obligation in excess of the amount available to it in an
appropriation or fund. Thus, proper recording of obligations with respect
to the timing and amount of such obligations permits compliance with the
Antideficiency Act by ensuring that agencies have adequate budget
authority to cover all of their obligations. Our decisions have defined an
"obligation" as a commitment creating a legal liability of the government,

29Universal Service Antideficiency Temporary Suspension Act, Pub. L. No.
108-494, S: 302, 118 Stat. 3986 (2004). The law exempts universal service
monies from the Antideficiency Act until December 31, 2005.

including a "legal duty . . . which could mature into a liability by
virtue of actions on the part of the other party beyond the control of the
United States. . . ."30

With respect to the Universal Service Fund, the funding commitment
decision letter provides the school or library with the authority to
obtain services from a provider with the commitment that the school or
library will receive a discount and the service provider will be paid for
the discounted portion with E-rate funding. Although the school or library
could decide not to seek the services or the discount, so long as the
funding commitment decision letter remains valid and outstanding, USAC and
FCC no longer control the Universal Service Fund's liability; it is
dependent on the actions taken by the school or library. Consequently, we
agree with FCC that a recordable obligation is incurred at the time of
issuance of the funding commitment decision letter indicating approval of
the applicant's discount.

While we agree with FCC's determinations that the Universal Service Fund
is a permanent appropriation subject to the Antideficiency Act and that
its funding commitment decision letters constitute recordable obligations
of the Universal Service Fund, there are several significant fiscal law
issues that remain unresolved. We believe that where FCC has determined
that fiscal controls and policies do not apply, the commission should
reconsider these determinations in light of the status of universal
service monies as federal funds. For example, in view of its determination
that the fund constitutes an appropriation, FCC needs to reconsider the
applicability of the Miscellaneous Receipts Statue, 31 U.S.C. S: 3302,
which requires that money received for the use of the United States be
deposited in the Treasury unless otherwise authorized by law. 31 FCC also
needs to assess

30See B-300480, April 9, 2003.

31Because OMB and FCC had believed the funds were not public monies "for
the use of the United States" under the Miscellaneous Receipts Statute,
neither OMB nor FCC viewed the Universal Service Fund as subject to that
statute.

the applicability of other fiscal control and accountability statutes
(e.g., the Single Audit Act and the Cash Management Improvement Act).32

Another major issue that remains to be resolved involves the extent to
which FCC has delegated some functions for the E-rate program to USAC. For
example, are the disbursement policies and practices for the E-rate
program consistent with statutory and regulatory requirements for the
disbursement of public funds?33 Are some of the functions carried out by
USAC, even though they have been characterized as administrative or
ministerial, arguably inherently governmental activities34 that must be
performed by government personnel? Resolving these issues in a
comprehensive fashion, rather than continuing to rely on reactive,
case-bycase determinations, is key to ensuring that FCC establishes the
proper foundation of government accountability standards and safeguards
for the E-rate program and the Universal Service Fund.

32For example, in October 2003, when the FCC ordered USAC to comply with
GovGAAP, it noted that the Universal Service Fund was subject to the Debt
Collection Improvement Act of 1996. In that same order, FCC stated that
"the funds may be subject to a number of federal financial and reporting
statutes" (emphasis added) and "relevant portions of the Federal Financial
Management Improvement Act of 1996," but did not specify which specific
statutes or the relevant portions or further analyze their applicability.
FCC officials also told us that they were uncertain whether procurement
requirements such as the Federal Acquisition Regulation (FAR) applied to
arrangements between FCC and USAC, but they recommended that those
requirements be followed as a matter of policy.

33See 31 U.S.C. S:S: 3321, 3322, 3325, and the Treasury Financial Manual.

34See OMB Circular A-76, May 29, 2003, which defines an inherently
governmental activity as requiring "the exercise of substantial discretion
in applying government authority and/or in making decisions for the
government." OMB Cir. A-76, Attachment A. Inherently governmental
activities include the establishment of procedures and processes related
to the oversight of monetary transactions or entitlements. OMB Circular
A-76 further states that "[e]xerting ultimate control over the
acquisition, use or disposition of United States government property . . .
including establishing policies or procedures for the collection, control,
or disbursement of appropriated and other federal funds" involves an
inherently governmental activity.

FCC Did Not Develop Although $13 billion in E-rate funding has been
committed to beneficiaries

during the past 7 years, FCC did not develop useful performance goals
andUseful Performance measures to assess the specific impact of these
funds on schools' and Goals and Measures for libraries' Internet access
and to improve the management of the program, Assessing and despite a
recommendation by us in 1998 to do so. At the time of our current

review, FCC staff was considering, but had not yet finalized, new
E-rateManaging the E-Rate goals and measures in response to OMB's concerns
about this deficiency in Program a 2003 OMB assessment of the program.

    FCC's Performance Goals and Measures Were Not Useful in Assessing the Impact
    of E-Rate Funds

One of the management tasks facing FCC is to establish strategic goals for
the E-rate program, as well as annual goals linked to them. The
Telecommunications Act of 1996 did not include specific goals for
supporting schools and libraries, but instead used general language
directing FCC to establish competitively neutral rules for enhancing
access to advanced telecommunications and information services for all
public and nonprofit private elementary and secondary school classrooms
and libraries.35 As the agency accountable for the E-rate program, FCC is
responsible under the Government Performance and Results Act of 1993
(Results Act) for establishing the program's long-term strategic goals and
annual goals, measuring its own performance in meeting these goals, and
reporting publicly on how well it is doing.36

3547 U.S.C. S: 254(h)(2)(A).

36For additional details on the Results Act and its requirements, see GAO,
Executive Guide: Effectively Implementing the Government Performance and
Results Act, GAO/GGD-96-118 (Washington, D.C.: June 1996).

In testimony before the Senate Committee on Commerce, Science, and
Transportation in July 1998, we stated that the E-rate program was
beginning its first funding year without clear and specific goals and
measures. FCC simply noted in its 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." This type of general statement, with no specific goals and
measures for agency accountability, is not in accord with the Results Act.
We recommended in our testimony that FCC develop specific E-rate goals and
measures before the end of fiscal year 1998, in time to gauge the effect
of the program's first year of operations.37 As we stated at that time,
performance measurement is critical to determining a program's progress in
meeting its intended outcomes. Without clearly articulated goals and
reliable performance data, Congress, FCC, and USAC would have a difficult
time assessing the effectiveness of the program and determining whether
operational changes were needed. Although FCC responded that our
recommendation was "reasonable," we noted in our subsequent March 1999
report on the program that FCC had not acted on our recommendation and
again stressed the importance of implementing it.38 FCC began including
specific E-rate goals and measures in its fiscal year 2000 budget estimate
submission to Congress and continued to set annual E-rate goals for fiscal
years 2001 and 2002. No annual goals for fiscal years 2003 or 2004 were
included in FCC's performance reports, however.39

The goals and measures that FCC set for fiscal years 2000 through 2002
were not useful in assessing the impact of E-rate program funding. The
goals focused on achieving certain percentage levels of Internet
connectivity during a given fiscal year for schools, public school

37See GAO, Schools and Libraries Corporation: Actions Needed to Strengthen
Program Integrity Operations before Committing Funds, GAO/T-RCED-98-243
(Washington, D.C.: July 16, 1998).

38See GAO, Schools and Libraries Program: Actions Taken to Improve
Operational Procedures Prior to Committing Funds, GAO/RCED-99-51
(Washington, D.C.: Mar. 5, 1999).

39FCC's fiscal year 2003 budget estimate to Congress (dated February 2002)
and its 2001 annual performance report (dated March 2002) included E-rate
goals for fiscal year 2003 of connecting 100 percent of public school
instructional classrooms and 85 percent of private school instructional
classrooms to the Internet. However, these goals for fiscal year 2003 were
dropped from subsequent budget submissions and annual performance reports.
FCC's last connectivity goal to be carried forward into subsequent budget
submissions and annual performance reports-that 93 percent of public
school instructional classrooms have Internet access-was for fiscal year
2002.

instructional classrooms, and libraries. For example, FCC set a fiscal
year 2001 goal of having 90 percent of public school instructional
classrooms connected to the Internet. FCC measured its performance in
meeting these goals using nationwide survey data from the Department of
Education's National Center for Education Statistics (NCES) on the
percentages of public schools and public school instructional classrooms
that are connected to the Internet. The percentages are based on a
nationally representative sample of approximately 1,000 public schools
that are surveyed about Internet access and Internet-related topics. A
fundamental problem with using these NCES percentages is that a nationally
representative sample covers both public schools that received E-rate
funding for internal connections and those that did not. The percentages,
therefore, do not directly measure the impact of E-rate funds, as opposed
to other sources of funding, on increases in the percentage of schools
connected to the Internet. This is a significant problem because the
applicants' requests for E-rate funds for internal connections have
exceeded the amounts available for that purpose by billions of dollars. As
a result, while E-rate funds for internal connections have been provided
on a priority basis to applicants eligible for very high discounts
(generally 70 percent to 80 percent or higher), funding has typically not
been available to meet the internal connections requests of the other
applicants. Only in the second funding year (1999) were funds sufficient
to cover eligible internal connections requests for applicants in all of
the discount bands. The applicants who were denied E-rate support for
internal connections have had to rely on other funding sources for their
internal connections needs, such as state and local government.

Even with these E-rate funding limitations, there has been significant
growth in Internet access for public schools since the program issued its
first funding commitments in late 1998. At the time, according to NCES
data, 89 percent of all public schools and 51 percent of public school
instructional classrooms already had Internet access. By 2002, 99 percent
of public schools and 92 percent of public school instructional classrooms
had Internet access.40 Yet although billions of dollars in E-rate funds
have been committed since 1998, adequate program data was not developed to
answer a fundamental performance question: How much of the increase since
1998 in public schools' Internet access has been a result of the E-rate

40See NCES, Internet Access in U.S. Public Schools and Classrooms:
1994-2002, NCES2004-011 (Washington, D.C.; October 2003). This was the
most recent update available at the time of our review.

program, as opposed to other sources of federal, state, local, and private
funding?

Another problem is that FCC did not consistently set annual goals for the
two other major groups of E-rate beneficiaries-libraries and private
schools. For example, FCC's budget submission to Congress in February 2000
included a fiscal year 2001 goal of having 90 percent of libraries
connected to the Internet. But this goal was dropped from FCC's subsequent
performance reports and budget estimate submissions, and no other library
connectivity goal was set. As for private schools, no specific Internet
connectivity goal was set for them until early 2002, when FCC included a
fiscal year 2003 goal of having 85 percent of private school instructional
classrooms connected to the Internet in both its fiscal year 2003 budget
estimate to Congress (dated February 2002) and its 2001 annual performance
report (dated March 2002). But these were the only instances where this
goal appeared. It was dropped from FCC's subsequent budget estimate
submissions and annual performance reports. In addition to these
goal-setting shortcomings, no performance measurement data for either
libraries' or private schools' Internet connectivity levels have been
included in any of FCC's annual budget estimate submissions or performance
reports.

The failure to measure the program's impact on public and private schools
and libraries over the past 7 years undercuts one of the fundamental
purposes the Results Act: to have federal agencies adopt a fact-based,
businesslike framework for program management and accountability. The
problem is not just a lack of data for accurately characterizing program
results in terms of increasing Internet access. Other basic questions
about the E-rate program also become more difficult to address, such as
the program's efficiency and cost-effectiveness in supporting the
telecommunications needs of schools and libraries.

E-Rate Management Performance goals and measures are used not only to
assess a program's Improvement Goals Not impact, but also to develop
strategies for resolving mission-critical Featured in FCC management
problems.41 Under the Results Act, managers should use

performance data to identify performance gaps and determine where
toPerformance Plans target their resources to improve overall mission
accomplishment.

41See, GAO, Agency Performance Plans: Examples of Practices That Can
Improve Usefulness to Decisionmakers, GAO/GGD/AIMD-99-69 (Washington,
D.C.: Feb. 26, 1999).

However, management-oriented goals have not been a feature of FCC's
performance plans, despite long-standing concerns about the program's
effectiveness in key areas. For example, E-rate applicants' technology
needs are posted on USAC's Web site to allow service providers an
opportunity to bid on them. FCC has maintained that absent competitive
bidding, the prices charged by service providers could be needlessly high,
unnecessarily depleting the program's funds and limiting its ability to
support other applicants. In the commission's fiscal year 2000 budget
estimate submission, FCC included a goal for ensuring that the program's
competitive bidding process led to bids by two or more service providers
for the majority of applicants. However, this goal was dropped from FCC's
subsequent budget submissions and annual performance reports. No other
goal was developed in its place to assess how well the competitive bidding
process is working.

In another example, FCC found that the E-rate participation rates for
urban low-income school districts and rural school districts fell below
the average participation rate for all eligible schools. In preparing our
December 2000 report on the E-rate program, FCC officials told us they had
finalized a new performance plan for the E-rate program that included
tactical goals targeted at increasing participation by both of these
groups, as well as rural libraries and libraries serving small areas.42
During our current review, when we asked FCC officials about the plan, we
were told that it had not been implemented and that none of the FCC staff
currently working on E-rate was familiar with the plan.

42See GAO, Schools and Libraries Program: Application and Invoice Review
Procedures Need Strengthening, GAO-01-105 (Washington, D.C.: Dec. 15,
2000).

Another ongoing program management issue is that a significant amount of
funds committed annually go unused by the applicants that requested them.
This is troubling because, as noted earlier, the demand for funding is
high and there is typically not enough money each year to meet all funding
requests for internal connections. In December 2000, we recommended that
FCC ascertain and address the difficulties that applicants may be having
in this regard. FCC responded that it would undertake an analysis, with
USAC, of the factors leading to funds being committed to applicants but
not used; and USAC responded that it would develop and pursue options for
narrowing the gap between commitments and disbursements, and discuss the
options with FCC. Here again was an opportunity to develop a performance
goal and measure to address this program management problem, but none was
developed.43 Similarly, no performance goals and measures have been
included in FCC's performance reports related to the management
responsibility of identifying and mitigating fraud, waste, and abuse of
program funds.

    FCC Is Currently Considering E-Rate Goals in Response to OMB's Concerns

OMB also has raised concerns about FCC's lack of E-rate performance goals
and measures. In its 2003 assessment of the E-rate program, OMB, using its
Program Assessment Rating Tool (PART), noted that FCC discontinued
specific E-rate program measures after fiscal year 2002.44 OMB's overall
PART rating for the E-rate program was "results not demonstrated." This
does not necessarily mean that the program is ineffective, but rather that
its effectiveness is unknown.45 OMB observed

43See GAO, Schools and Libraries Program: Application and Invoice Review
Procedures Need Strengthening, GAO-01-105 (Washington, D.C.: Dec. 15,
2000). FCC now allows unused E-rate funds to be carried over into a
subsequent funding year. For example, in June 2004, FCC announced that
$150 million in unused funds would be carried forward from funding year
2001 to increase funds for funding year 2004 in excess of the annual cap.
However, neither FCC nor USAC have dealt with identifying the underlying
causes of why millions of dollars in committed funds go unused and
determining whether changes in program rules and procedures are needed to
address difficulties that applicants may be having in using the funds
committed to them.

44OMB developed PART as a diagnostic tool to provide a consistent approach
to evaluating federal programs as part of the executive budget formulation
process. The goal of PART is to evaluate program performance, determine
the causes for strong or weak performance, and take action to remedy
deficiencies and achieve better results. OMB chose to review the E-rate
program because of the large amount of dollars involved.

45For a discussion of the PART assessment process, see GAO, Performance
Budgeting: Observations on the Use of OMB's Program Assessment Rating Tool
for Fiscal Year 2004 Budget, GAO-04-174 (Washington, D.C.: Jan. 30, 2004).

that the program lacked long-term, outcome-oriented performance goals and
efficiency measures against which to measure the program's success in
promoting connectivity and to improve and refine the program going
forward. Because of this, OMB stated that it is not clear what the end
goal of the E-rate program is or how to measure its effectiveness other
than incremental increases in the number of classrooms and libraries
connected to the Internet. While recognizing that E-rate funding is
generally going to the intended beneficiaries of the program, OMB
concluded that there was no way to tell whether the program has resulted
in cost-effective deployment and use of advanced telecommunications
services for schools and libraries. OMB also noted that there was little
oversight to ensure that the program beneficiaries were using the funding
appropriately and effectively. Among other things, OMB's report
recommended that for fiscal year 2005, FCC should develop a long-term
outcome goal for the program, and consider reinstituting a connectivity
measure and developing an efficiency measure.

FCC officials told us they have been working with OMB to respond to the
concerns raised in its PART assessment and that several FCC staff have
recently received training in the development of performance measures. At
the time of our review, FCC was considering goals that involve classroom
connectivity and program efficiency. As we discussed earlier, any
meaningful goals on connectivity would need to have associated measurement
data that could isolate the impact of E-rate funding on changes in
connectivity in order to assess the program's impact. It should be noted
that with 99 percent of public schools and 92 percent of public school
instructional classrooms connected to the Internet in 2002 (according to
the most current NCES report on public school connectivity at the time of
our review), applicants are moving past achieving initial connectivity to
maintaining and upgrading existing connections over the long term. As a
result, simple measures of Internet connectivity will be much less useful
indicators of the program's performance than in past years.

As for the program's efficiency in providing support for
telecommunications services, FCC staff told us they are considering a
measure that would calculate and track the E-rate disbursements for each
school (or school system) divided by the number of students, further
broken down by the eligible services categories. An efficiency measure
would be valuable, as there has been a long-standing concern about some
applicants requesting funding for technology that greatly exceeds their
needs (sometimes referred to as "goldplating"). While "E-rate
dollars-perstudent" ratios might be interesting data to assess in this
regard, a performance measure needs to have a goal associated with it in
order to be a meaningful tool for performance management. Currently, the
program rules do not expressly establish a clear test for
cost-effectiveness that could be used as a measurable goal, although in
late 2003, FCC asked for comment on whether it would be beneficial or
administratively feasible to develop such a test.46 At the time we
concluded our review, FCC planned to finalize performance measures for the
E-rate program and seek OMB approval in fiscal year 2005.

As noted above, OMB's PART assessment recommended that FCC develop a
long-term outcome goal for the program. "Outcomes" are the results or
benefits of the products or services provided by the program. A basic
policy issue associated with the E-rate program involves assessing the
extent to which the billions of dollars of support for telecommunications
services are providing the sought-after return on investment: improvement
in the quality of education. As we noted in our 2000 report on the
program, the complex issue of measuring educational outcomes lies outside
FCC's expertise and comes under the purview of the Department of
Education.47 FCC officials told us they have made initial contact with
staff at the Department of Education to discuss the development of a
long-term E-rate outcome measure. According to FCC's current timetable,
the collection and analysis of data for outcome measures would start with
funding year 2006.

46See FCC, Third Report and Order and Second Further Notice of Proposed
Rulemaking, FCC 03-323 (Washington, D.C.; Dec. 23, 2003), paragraph 87.

47See GAO, Schools and Libraries Program: Application and Invoice Review
Procedures Need Strengthening, GAO-01-105 (Washington, D.C.: Dec. 15,
2000).

FCC's Oversight FCC testified before Congress in June 2004 that it relies
on three chief

components in overseeing the E-rate program: rulemaking
proceedings,Mechanisms Are Not beneficiary audits, and fact-specific
adjudicatory decisions (i.e., appeals Fully Effective in decisions). We
found weaknesses with FCC's implementation of each of Managing the E-Rate
these mechanisms, limiting the effectiveness of FCC's oversight of the

program and the enforcement of program procedures to guard againstProgram
waste, fraud, and abuse of E-rate funding.

    FCC's Rulemakings Have Led to Problems with USAC's Procedures and
    Enforcement of Those Procedures

As part of its oversight of the E-rate program, FCC is responsible for
establishing new rules and policies for the program and making changes to
existing rules, as well as for providing the detailed guidance that USAC
requires to effectively administer the program. FCC carries out this
responsibility through its rulemaking process. FCC's E-rate rulemakings,
however, have often been broadly worded and lacking specificity. Thus,
USAC has needed to craft the more detailed administrative procedures
necessary to implement the rules. However, in crafting administrative
procedures, USAC is strictly prohibited under FCC rules from making
policy, interpreting unclear provisions of the statute or rules, or
interpreting the intent of Congress. We were told by FCC and USAC
officials that USAC does not put procedures in place without some level of
FCC approval. We were told that this approval is sometimes informal, such
as e-mail exchanges or telephone conversations between FCC and USAC staff.
This approval can come in more formal ways as well, such as when the
commission expressly endorses USAC operating procedures in commission
orders or codifies USAC procedures into FCC's rules.

However, two problems have arisen with USAC administrative procedures.
First, although USAC is prohibited from making policy, some USAC
procedures arguably rise to the level of policy decisions. Second, even
though USAC procedures are issued with some degree of FCC approval,
enforcement problems could arise when audits uncover violations of USAC
procedures by beneficiaries or service providers. The FCC IG has expressed
concern over situations where USAC administrative procedures have not been
formally codified because commission staff have stated that, in such
situations, there is generally no legal basis to recover funds from
applicants that failed to comply with the USAC administrative procedures.

Throughout the history of the program, USAC has found it necessary to
create additional procedures to effectively and efficiently process more
than 40,000 applications annually. However, these procedures sometimes

deal with more than just ministerial details. For example, procedures that
affect funding decisions arguably rise to the level of policy decisions.
In June 2004, USAC was able to identify at least a dozen administrative
procedures that, if violated by the applicant, would lead to complete or
partial denial of the funding request even though there was no precisely
corresponding FCC rule. The FCC IG stated in May 2004 in his Semiannual
Report to Congress that he believes the distinction between FCC rules and
USAC administrative procedures represents a weakness in program design,
fails to give program participants a clear understanding of the rules and
the consequences associated with rule violations, and complicates the
design and implementation of effective program oversight.

The critical nature of USAC's administrative procedures is further
illustrated by FCC's repeated codification of them throughout the history
of the program. For example, in 1999, USAC implemented a procedure known
as "the 30-percent policy."48 This procedure sought to avoid blanket
denials of funding requests because of minor errors in the eligibility of
the services requested, while at the same time prompting applicants to
prepare their applications carefully and make a conscientious effort to
exclude ineligible items. If more than 30 percent of the services for
which discounts were requested were ineligible, USAC denied the funding
request rather than undertake the administratively burdensome task of
correcting the request and refiguring the amount based only on the
eligible services requested. In April 2003, in the commission's Second
Report and Order in its E-rate docket, FCC codified USAC's 30-percent
policy, stating that the commission found the procedure "improves program
operation and is important in reducing the administrative costs of the
program."49 In fact, the procedures put in place by USAC generally appear
to be sensible and represent thoughtful administration of the E-rate
program. Nonetheless, USAC is prohibited from making program rules. FCC's
codification of USAC procedures-after those procedures have been put in
place and applied to program participants-raises concerns about whether
these

48Although FCC rules prohibit USAC from making policy, even the commission
referred to USAC's procedure as the 30-percent "policy." According to a
USAC official, USAC originally thought that it had to deny any application
that contained a request for an ineligible service or item. To avoid this,
USAC suggested a 10-percent threshold. During 1998, FCC staff suggested
that the threshold be set at 50 percent. In 1999, the threshold was
changed to 30 percent and later codified at that level.

49FCC, Second Report and Order and Further Notice of Proposed Rulemaking,
In the Matter of Schools and Libraries Universal Service Support
Mechanism, FCC 03-101 (Washington, D.C.; Apr. 30, 2003), paragraph 40.

procedures are more than ministerial and are, in fact, policy changes that
should be coming from FCC in the first place. Moreover, in its August 2004
order (in a section dealing with the resolution of audit findings), the
commission directs USAC to annually "identify any USAC administrative
procedures that should be codified in our rules to facilitate program
oversight."50 This process begs the question of which entity is really
establishing the rules of the E-rate program and raises concerns about the
depth of involvement by FCC staff with the management of the program.

The other problem with USAC administrative procedures is the question of
enforcement of those procedures through recovery of funds for procedural
violations. FCC has generally held that funds can be recovered from a
beneficiary or service provider only if an FCC rule was violated. In its
August 2004 order, after several years of E-rate audits by USAC and the
FCC IG, the commission attempted to clarify the rules of the program with
relation to recovery of funds. In the order, the commission describes nine
overall categories of statutory violations or FCC rule violations that
would result in fund recovery being sought, in whole or in part, from
beneficiaries or service providers. With respect to violations of USAC
operating procedures, FCC said in its August 2004 order that it intends to
evaluate whether there are USAC procedures that should be codified into
the commission's rules and whether violation of any of these codified
procedures should also be a basis for recovery of funding.51 The
commission noted that recovery of funds may not be appropriate for
violations of procedural rules codified to enhance operations.
Nevertheless, the commission stated that applicants will be required to
comply with procedural rules and that applications that do not comply will
be rejected. The commission noted, however, that if the codified
procedural rule violation "is inadvertently overlooked during the
application phase and funds are disbursed, the commission will not require
that they be recovered, except to the extent that such rules are essential
to

50FCC, Fifth Report and Order, In the Matter of Schools and Libraries
Universal Service Support Mechanism, FCC-04-190 (Washington, D.C.; Aug.
13, 2004), paragraph 78.

51In its August 2004 E-rate order, FCC directed USAC to submit to the
commission a list summarizing all current USAC administrative procedures
identifying, where appropriate, the specific rules or statutory
requirements that such procedures further, and those procedures that serve
to protect against waste, fraud, and abuse (FCC 04-190 at paragraph 80).
On October 29, 2004, USAC submitted to FCC a 52-page document listing the
USAC procedures that were currently used in making E-rate funding
decisions, but that were not explicitly stated in a commission rule. Under
the August 2004 FCC order, USAC is to produce such a document annually.

the financial integrity of the program, as designated by the agency, or
that circumstances suggest the possibility of waste, fraud, or abuse,
which will be evaluated on a case-by-case basis."52

Thus, even under the August 2004 FCC order, the commission did not clearly
address the treatment of beneficiaries who violate a USAC administrative
procedure that has not been codified. This creates a potentially unfair
situation when the procedure is one that can lead to denial of an
application. That is, if violation of the procedure is caught in the
application process, funding will be denied. However, if the violation
slips by in the application process, funding is granted, and the violation
is later caught during a beneficiary audit, no recovery of funding can be
attempted since there was no actual rule violation by the beneficiary.
Also, as noted earlier, the FCC order also leaves to USAC the initial
determination of which procedures should be codified rather than having
FCC make that determination. Lastly, FCC did not establish a time frame
for its review of USAC procedures.

    FCC Has Been Slow to Address Problems Raised by Audit Findings

FCC's use of beneficiary audits as an oversight mechanism has also had
weaknesses, although FCC and USAC are now working to address some of these
weaknesses. In December 2000, we recommended that USAC establish a quality
assurance function responsible for ensuring that its funding decisions
adhere to FCC's program eligibility rules.53 In response to our
recommendation, USAC increased both its in-house audit staff and the
number of beneficiary audits conducted by outside accounting firms. 54
Since 2000, there have been 122 beneficiary audits conducted by outside

52FCC 04-190, paragraph 19. The commission's actual sentence only referred
to "the procedural violation," but read in the context of the entire
paragraph, the commission appears to be discussing procedures that have
been codified into its rules.

53See GAO-01-105, 37.

54USAC also maintains a whistleblower hotline to provide the public with a
means of reporting activities that may violate E-rate program rules.
USAC's Special Investigations Team investigates every call to determine if
further action is required. Since 2001, USAC has received and followed up
on over 100 calls per year. In addition to the whistleblower hotline,
USAC, with support from FCC, created in May 2003 a 14-member Task Force on
the Prevention of Waste, Fraud and Abuse to share their perspectives on
where the program could be susceptible to waste, fraud, and abuse and what
specific steps could be taken to address those areas. The task force
released its report on September 22, 2003. Most of the task force's
recommendations have been implemented or are under consideration by USAC
or FCC.

firms, 57 by USAC staff, and 14 by the FCC IG (2 of which were performed
under agreement with the Inspector General of the Department of the
Interior).

Beneficiary audits are the most robust mechanism available to the
commission in the oversight of the E-rate program, yet FCC generally has
been slow to respond to audit findings and has not made full use of the
audit findings as a means to understand and resolve problems within the
program. First, audit findings can indicate that a beneficiary or service
provider has violated existing E-rate program rules. In these cases, USAC
or FCC can seek recovery of E-rate funds, if justified.55 In the FCC IG's
May 2004 Semiannual Report, however, the IG observes that audit findings
are not being addressed in a timely manner and that, as a result, timely
action is not being taken to recover inappropriately disbursed funds. The
IG notes that in some cases the delay is caused by USAC and, in other
cases, the delay is caused because USAC is not receiving timely guidance
from the commission (USAC must seek guidance from the commission when an
audit finding is not a clear violation of an FCC rule or when policy
questions are raised). Regardless, the recovery of inappropriately
disbursed funds is important to the integrity of the program and needs to
occur in a timely fashion.

Second, under GAO's Standards for Internal Controls in the Federal
Government,56 agencies are responsible for promptly reviewing and
evaluating findings from audits, including taking action to correct a
deficiency or taking advantage of the opportunity for improvement. Thus,
if an audit shows a problem but no actual rule violation, FCC should be
examining why the problem arose and determining if a rule change is needed
to address the problem (or perhaps simply addressing the problem through a
clarification to applicant instructions or forms). FCC has been slow,
however, to use audit findings to make programmatic changes. For example,
table 2 below shows audit findings from the 1998 program year that were
only recently resolved by FCC's August 2004 rulemaking.

55USAC, through its duties as administrator of the fund, initially seeks
recovery of erroneously disbursed funds. In addition, the commission
adopted rules in April 2003 to provide for suspension and debarment from
the program for persons convicted of criminal violations or held civilly
liable for certain acts arising from their E-rate participation.
Debarments would be for a period of three years unless circumstances
warrant a longer debarment period in order to protect the public interest.

56GAO/AIMD-00-21.3.1

Table 2: Examples of E-Rate Beneficiary Audit Findings from Program Year
1998, Resolved in 2004

Types of audit findings included in beneficiary Issue audits

Record retention-competitive Copies of contracts could not be provided
upon

bidding 	request. In addition, evidence could not be provided of
compliance with competitive bidding requirements.

Services provided within funding year Services delivered after the last date to
                               receive services.

Record retention-equipment and E-rate equipment could not be identified because

services fixed asset details were insufficient to identify specific
equipment.

Technology plans	Beneficiary was not monitoring its technology plan
implementation.

Source: GAO analysis of USAC audit reports.

As table 2 illustrates, audit findings related to the lack of record
retention by beneficiaries were a problem. Given that the E-rate program
operates similarly in some ways to a grant program, FCC should have had in
place a record retention policy at the start of the program as a basic
accountability measure since record retention is fundamental to an audit
trail. In fact, early in the program, FCC did create rules on beneficiary
and service provider document retention, but the rules contained a
potentially enormous loophole. Under FCC's rules, program participants
were required only to maintain "the kind of procurement records that they
maintain for other purchases."57 Thus, if a school or library had no
record retention policy for other purchases, they did not need to retain
records related to Erate purchases. FCC proposed a more comprehensive
record retention policy in December 2003 and released it for comment. In
August 2004-7 years into the existence of the E-rate program-FCC adopted
record retention rules that call for beneficiaries and service providers
to retain Erate program-related records for at least five years.

57At the same time, however, applicants had to certify on FCC Form 471
that they would retain for 5 years any and all worksheets and other
records that they relied upon to fill out their applications and, if
audited, would make such records available to USAC. We were told by FCC
that the form does not carry the force of a rule.

In its August 2004 order, the commission concluded that a standardized,
uniform process for resolving audit findings was necessary, and directed
USAC to submit to FCC a proposal for resolving audit findings. FCC also
instructed USAC to specify deadlines in its proposal "to ensure audit
findings are resolved in a timely manner."58 USAC submitted its Proposed
Audit Resolution Plan to FCC on October 28, 2004. The plan memorializes
much of the current audit process and provides deadlines for the various
stages of the audit process. FCC released the proposed audit plan for
public comment in December 2004.59

In addition to the Proposed Audit Resolution Plan, the commission
instructed USAC to submit a report to FCC on a semiannual basis
summarizing the status of all outstanding audit findings. The commission
also stated that it expects USAC to identify for commission consideration
on at least an annual basis all audit findings raising management concerns
that are not addressed by existing FCC rules. Lastly, the commission took
the unusual step of providing a limited delegation to the Wireline
Competition Bureau (the bureau within FCC with the greatest share of the
responsibility for managing the E-rate program) to address audit findings
and to act on requests for waivers of rules warranting recovery of
funds.60 These actions could help ensure, on a prospective basis, that
audit findings are more thoroughly and quickly addressed. However, much
still depends on timely action being taken by FCC, particularly if audit
findings suggest the need for a rulemaking.

58FCC 04-190, paragraph 74. 59Comments were due January 5, 2005; reply
comments were due January 20, 2005. 60FCC 04-190, paragraph 75.

In addition to problems with responding to audit findings, the audits
conducted to date have been of limited use because neither FCC nor USAC
have conducted an audit using a statistical approach that would allow them
to project the audit results to all E-rate beneficiaries. Thus, at
present, no one involved with the E-rate program has a basis for making a
definitive statement about the amount of waste, fraud, and abuse in the
program.61 Of the various groups of beneficiary audits conducted to date,
all were of insufficient size and design to analyze the amount of fraud or
waste in the program or the number of times that any particular problem
might be occurring programwide. FCC's IG and USAC are currently working to
address this problem by following OMB's guidance on the Improper Payments
Information Act of 2002 (IPIA). IPIA requires that agencies annually
estimate the amount of improper payments for programs and activities
susceptible to significant improper payments. In response to IPIA, FCC and
USAC are currently in the process of soliciting and evaluating responses
to a Request for Proposals issued to procure the services of an
independent auditor to conduct approximately 250 beneficiary audits in the
E-rate program.

We examined the methodology used by FCC's IG and USAC for arriving at a
sample size of 250, and it appears that they properly used OMB guidance
under IPIA in determining the sample size. However, because the effort is
still in the beginning stages, they were not able to provide additional
information on the sample design, such as the method of sample selection,
stratification criteria, and estimation methods. Sample design will be
critical in determining the value of the information gained from the
audits. In addition, FCC IG officials estimated the cost at approximately
$50,000 per audit. With an anticipated total cost of $12.5 million (250
audits at $50,000 per audit), this is an expensive effort. If the cost of
the 250 audits varies by the size of the grant, the sample design could be
optimized based on variable cost, which may either yield a tighter
precision of the estimate of the amount of improper payments or reduce the
total cost of the audit. It should also be noted that because this
represents a sizable increase from

61In testimony before the House Subcommittee on Oversight and
Investigations of the Committee on Energy and Commerce in June 2004, FCC's
Inspector General submitted a prepared statement that said the "results of
audits that have been performed and the allegations under investigation
lead us to believe the program may be subject to unacceptably high risk of
fraud, waste and abuse. . . ." At the same hearing, the Chief of FCC's
Office of Strategic Planning and Policy Analysis and the Deputy Chief of
FCC's Wireline Competition Bureau submitted a prepared statement saying
that FCC had "enabled implementation of the [E-rate] statutory goals with
a minimum of fraud, waste, and abuse."

prior audits, FCC may face an even greater challenge in resolving the
audit findings in a timely manner.

Lastly, we were told by USAC officials that they have recently contracted
with a consulting firm to conduct approximately 1,000 site visits a year
to program beneficiaries beginning in mid-January 2005. Although these are
not audits, USAC testified in June 2004 that the site visits will allow
USAC to assess more fully, in real time, how E-rate funds are being used,
to learn about and publicize best practices in education technology and
program compliance, and to help ensure that products and services have in
fact been delivered and are being used effectively. For each visit, the
selected vendor will, among other things, conduct a physical inspection of
equipment and services purchased with E-rate funds. A checklist, outlining
the steps for review, is to be followed for each visit to ensure
consistency. The deliverables will include a formal report on each
beneficiary visited, a monthly report on best practices observed and
outreach suggestions, and immediate notification to USAC in instances
where significant noncompliance is discovered.

    FCC Has Been Slow to Act on Some E-Rate Appeals

Under FCC's rules, program participants can seek review of USAC's
decisions,62 although FCC's appeals process for the E-rate program has
been slow in some cases. Because appeals decisions are used as precedent,
this slowness adds uncertainty to the program and impacts beneficiaries.
FCC rules state that FCC is to decide appeals within 90 days, although FCC
can extend this period. There is currently a substantial appeals backlog
at FCC (i.e., appeals pending for longer than 90 days). Out of 1,865
appeals to FCC from 1998 through the end of 2004, approximately 527
appeals remain undecided, of which approximately 458 (25 percent) are
backlog appeals.63

62Virtually all of the decisions made by FCC and USAC in their management
and administration of the E-rate program may be subject to petition for
reconsideration or appeal by beneficiaries. Moreover, schools and
libraries have the option of multiple appeal levels, including USAC, the
Wireline Competition Bureau, and the commission.

63The bulk of the appeals are to USAC, which received a total of 16,782
appeals from the beginning of the program through 2003. Of these,
646-roughly 4 percent-remained undecided as of September 20, 2004.

Perhaps of most concern are the subset of appeals dealing with recovery of
funding erroneously committed to schools and libraries.64 According to
USAC, recovery has been slowed, in part, because FCC has not been timely
in resolving these types of appeals from beneficiaries. In fact, through
October 2004, of the approximately $36 million in E-rate funding for which
USAC has brought recovery actions since the beginning of the program, only
$3.2 million has been recovered and approximately $14.4 million is tied up
in appeals with FCC.65 This is money that might be placed back into the
E-rate program for disbursement to applicants.

We were told by FCC officials that some of the backlog is due to staffing
issues. FCC officials said they do not have enough staff to handle appeals
in a timely manner. FCC officials also noted that there has been frequent
staff turnover within the E-rate program, adding some delay to appeals
decisions because new staff necessarily take time to learn about the
program and the issues. (See app. IV for additional information on FCC
staffing levels in support of the E-rate program.) Additionally, we were
told that another factor contributing to the backlog is that the appeals
have become more complicated as the program has matured. For example,
applicants are increasingly appealing decisions concerning eligible
services. These appeals can be difficult to resolve because the technology
needs of participants in the program can be complex. Lastly, some appeals
may be tied up if the issue is currently in the rulemaking process.

The appeals backlog is of particular concern given that the E-rate program
is a technology program. An applicant who appeals a funding denial and
works through the process to achieve a reversal and funding two years
later might have ultimately won funding for outdated technology.

Conclusions	FCC has not done enough to proactively manage and provide a
framework of government accountability for the multibillion-dollar E-rate
program. FCC established an unusual structure for the E-rate program but
has never conducted a comprehensive assessment of which federal
requirements,

64When USAC finds that funds were disbursed to a beneficiary or service
provider in error or that fraud, waste, or abuse has taken place, USAC
must seek to recover the funds through cash payments.

65Approximately $8.9 million in recoveries is tied up in appeals with
USAC, $8.7 million is in various stages of the improperly dispersed funds
recovery process, and $800,000 has been referred to FCC.

policies, and practices apply to the program, to USAC, or to the Universal
Service Fund. FCC has recently begun to address a few of these issues,
concluding that the Universal Service Fund constitutes an appropriation
and that the Fund is subject to the Antideficiency Act. Nevertheless,
fundamental issues affecting the E-rate program remain to be resolved.
Resolving these issues in a comprehensive fashion is key to ensuring that
FCC applies the appropriate government accountability standards and
safeguards to the E-rate program and to the Universal Service Fund.

In managing the program, FCC has not developed specific and meaningful
goals and measures to assess the impact of E-rate funding, address mission
critical management problems, and establish the direction of the program
as schools and libraries move beyond initial Internet connectivity to
longterm maintenance concerns. Moreover, FCC has consistently shifted many
important responsibilities onto USAC, such as identifying which
administrative procedures should be adopted as commission rules and
handling resolutions of audit findings. Combined with the weaknesses in
FCC's oversight mechanisms, these problems create barriers to enforcement,
uncertainty about what the program's requirements really are, and
questions about the soundness of the program's structure and
accountability amid recent cases of fraud, waste, and abuse. This mixture
of E-rate problems-related both to the structure of the program and to
FCC's shortcomings in carrying out key E-rate management
responsibilities-indicates the need for corrective actions by FCC.

Finally, regardless of the problems with the E-rate program, schools and
libraries across the country use E-rate funds for their purchases of
telecommunications services. Any reassessment of the program must take the
needs of the beneficiaries into account. It is particularly important that
efforts to protect the program from fraud, waste, and abuse do not result
in a program that is excessively burdensome on program participants.

Recommendations for 	Given the critical importance of telecommunications
technologies to schools and libraries, we recommend that the Chairman of
the Federal

Executive Action	Communications Commission direct FCC staff to take the
following three actions:

1.	Conduct and document a comprehensive assessment to determine whether
all necessary government accountability requirements, policies, and
practices have been applied and are fully in place to

protect the program and the funding. The assessment should include, but
not be limited to

o 	the implications of FCC's determination that the Universal Service Fund
constitutes an appropriation by identifying the fiscal controls that apply
and do not apply to the Universal Service Fund, including the collection,
deposit, obligation, and disbursement of funds; and

o 	an evaluation of the legal authority for the organizational structure
for carrying out the E-rate program, including the relationship between
FCC and USAC and their respective authorities and roles in implementing
the E-rate program.

Because of the complexities posed by FCC's arrangements with USAC and the
questions that flow from these arrangements, FCC may want to request an
advance decision from the Comptroller General under 31 U.S.C. S: 3529.
Section 3529 provides the heads of agencies and certifying and disbursing
officers of the government an opportunity to request decisions from the
Comptroller General on matters of appropriations law in order to ensure
compliance with fiscal law.

2.	Establish performance goals and measures for the E-rate program that
are consistent with the Government Performance and Results Act. FCC should
use the resulting performance data to develop analyses of the actual
impact of E-rate funding and to determine areas for improved program
operations.

3.	Develop a strategy for reducing the E-rate program's appeals backlog,
including ensuring that adequate staffing resources are devoted to Erate
appeals resolution.

  Agency Comments and Our Evaluation

We provided a draft of this report to FCC for review and comment. In its
comments, which are reprinted in appendix V, FCC noted that it took a
number of steps during 2004 to improve its management and oversight of the
E-rate program. These included the adoption of new rules regarding the
recovery of improperly disbursed funds; the implementation of new
accounting requirements related to the Universal Service Fund; new efforts
to deter waste, fraud, and abuse; and work with the FCC IG to develop a
plan for conducting hundreds of additional beneficiary audits. FCC
commented that it has strengthened its oversight and management of USAC
through the establishment of a high-level working group to

coordinate oversight and has adopted rules codifying certain USAC
procedures. FCC also noted that it is currently evaluating USAC's existing
operations and administrative procedures to determine which should be
codified into FCC rules.

FCC reaffirmed its belief that the current structure of USAC is consistent
with congressional intent and guidance, adding that it nevertheless
intends to consider whether to modify the manner in which the Universal
Service Fund is administered. During the coming year, FCC anticipates
examining whether and how to modify its existing administrative structure
and processes as they apply to the E-rate program. FCC intends to consider
other administrative structures and their implications, including those
relying on contractual arrangements. Other actions under consideration
include initiating a notice-and-comment rulemaking proceeding to assess
the management of the E-rate program and the Universal Service Fund;
retaining an outside contractor to evaluate the program and make
recommendations for improving its administration; and requiring certain
beneficiaries to obtain an independent audit of their compliance with FCC
rules.

Regarding our recommendations, FCC officials told us they did not concur
with our recommendation to conduct a comprehensive assessment concerning
the applicability of government accountability requirements, policies, and
practices. FCC maintains that it has conducted timely and extensive
analysis of significant legal issues related to the status of the fund on
a case-by-case basis, and provided examples. Although we recognize that
FCC has engaged in internal deliberations and external consultations and
analyses of a number of statutes, we do not believe this has been done in
a timely manner or that it is appropriate to do so on a case-by-case
basis. A definitive determination on the entire framework of laws that
apply or do not apply to this program and to the Universal Service Fund
itself would enable FCC to make proactive operational decisions on what
steps it should take and what internal controls it should have in place.
As noted in our report, we continue to believe that major issues remain
unresolved such as defining the relationship between FCC and USAC and
their respective authorities and roles in implementing the E-rate program
and identifying whether other actions taken in the universal service
programs constitute obligations and ensuring that those are properly
recorded. FCC officials told us that they concurred with our
recommendations for establishing performance goals and measures and
developing a strategy for reducing the backlog of appeals, noting that the
commission is already taking steps to address these recommendations.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this letter. At that time, we will send copies to
interested congressional committees; the Chairman, FCC; the Chief
Executive Officer, USAC; and other interested parties. We also will make
copies available to others upon request. In addition, this report will be
available at no cost on the GAO Web site at http://www.gao.gov. If you
have any questions about this report, please contact me at (202) 512-2834
or [email protected]. Key contributors to this report are listed in
appendix VI.

Sincerely yours,

Mark L. Goldstein Director, Physical Infrastructure Issues

Appendix I

Scope and Methodology

Our objectives were to review and evaluate: (1) the effect of the current
structure of the E-rate program on the Federal Communications Commission's
(FCC) management of the program, (2) FCC's establishment of and use of
goals and performance measures in managing the program, and (3) the
effectiveness of FCC's oversight mechanisms-rulemaking proceedings,
beneficiary audits, and reviews of the Universal Service Administrative
Company's (USAC) decisions (appeals)-in managing the program.

To provide information on the effect of the current structure of the
E-rate program, we reviewed provisions of the Telecommunications Act, as
well as documents and records used by FCC to implement and administer the
Erate program. We also assessed the extent to which FCC had established
managerial and financial government accountability standards, safeguards,
and legal relationships for the E-rate program and the Universal Service
Fund. Additionally, we interviewed officials from FCC's Wireline
Competition Bureau, Office of General Counsel, Office of Managing
Director, and Office of Inspector General. We also interviewed officials
from the Office of Management and Budget (OMB) and USAC, the not-forprofit
corporation that administers the E-rate program under FCC oversight.

To respond to the second objective on FCC's use of goals and performance
measures in managing the program, we reviewed provisions of the Government
Performance and Results Act of 1993, as well as documents and records used
by FCC to establish goals and performance measures- budget justifications,
performance plans, and strategic plans. We also reviewed OMB's Program
Assessment Rating Tool that assessed FCC's performance goals and related
measures for the E-rate program. In addition, we discussed this issue with
officials from FCC's Wireline Competition Bureau, Office of Managing
Director, Office of Strategic Planning and Policy Analysis, and Office of
Inspector General. We also interviewed officials from the Office of
Management and Budget and Department of Education.

Finally, to evaluate FCC's oversight mechanisms for managing the program,
we reviewed relevant documents relating to all three oversight mechanisms:
(1) rulemaking proceedings, (2) beneficiary audits, and (3) fact-specific
adjudicatory decisions (i.e., appeals decisions). Specifically, we
reviewed FCC orders and provisions of the Code of Federal Regulations,
which sets forth FCC's rulemaking process. In addition, we reviewed
relevant USAC documents and policies, including its procedures

Appendix I Scope and Methodology

that are in place to aid in the administration of the program. To assess
FCC's oversight mechanism of auditing, we reviewed the FCC Inspector
General's (IG) Semi-Annual Reports to Congress, GAO's Standards for
Internal Controls in the Federal Government, recent FCC orders, and
beneficiary audits used to assess program compliance. Our statistician
also examined the methodology (based on interviews with and documentation
provided by FCC and USAC) that the FCC IG and USAC have proposed for the
next round of beneficiary audits. To gain an understanding of how FCC
manages appeals, we reviewed relevant documents and gathered data from FCC
and USAC regarding the number of outstanding appeals and USAC recovery
actions tied up in FCC appeals.

To assess the reliability of the FCC appeals data and USAC recovery
actions tied up in FCC appeals, we (1) reviewed related documentation, (2)
conducted electronic testing of the source databases, and (3) interviewed
knowledgeable agency officials about the quality of the data.1 We found
that one database was limited in producing reports that track historical
trends. However, this limitation was minor in the context of our
engagement. As a result, we determined that the data were sufficiently
reliable for the purposes of this report. Finally, we discussed this issue
with officials from FCC's Wireline Competition Bureau, Office of General
Counsel, Office of Managing Director, Office of Inspector General, and
USAC.

We also reviewed internal memorandums provided by FCC's Office of General
Counsel to determine how FCC has applied federal requirements, policies,
and practices to the E-rate program and to the Universal Service Fund. We
interviewed FCC officials to obtain their views concerning whether monies
in the Universal Service Fund should be treated as federal funds and the
effect of using government accounting standards on the fund.

Funding commitments since the inception of the program, the number of USAC
appeals, and USAC recoveries tied up in appeals to USAC were used only as
background information in the report to provide context for our findings;
therefore, the data were not verified for data reliability purposes.
However, to assess the reliability of funding for which USAC has brought
recovery actions, we (1) reviewed related documentation, (2) conducted
electronic testing of the source databases, and (3) interviewed

1We also cross-walked the number of FCC appeals and FCC commitment
adjustment appeals back to the respective source databases.

Appendix I Scope and Methodology

knowledgeable agency officials about the quality of the data. As a result,
we determined that the data were sufficiently reliable for the purposes of
this report. We also determined that other relevant documents and records
that we gathered were sufficiently reliable for the purposes of our
review.

Our review was performed from December 2003 through December 2004 in
accordance with generally accepted government auditing standards.

Appendix II

Fiscal Law Issues Involving the Universal Service Fund

There have been questions from the start of the E-rate program regarding
the nature of the Universal Service Fund (USF) and the applicability of
managerial, fiscal, and financial accountability requirements to USF. FCC
has never clearly determined the nature of USF, and the Office of
Management and Budget (OMB), the Congressional Budget Office (CBO), and
GAO have at various times noted that USF has not been recognized or
treated as federal funds for several purposes.1 However, FCC has never
confronted or assessed these issues in a comprehensive fashion and has
only recently begun to address a few of these issues. In particular, FCC
has recently concluded that as a permanent indefinite appropriation, USF
is subject to the Antideficiency Act and its funding commitment decision
letters constitute obligations for purposes of the Antideficiency Act. As
explained below, we agree with FCC's determination. However, FCC's
conclusions concerning the status of USF raise further issues related to
the collection, deposit, obligation, and disbursement of those
funds-issues that FCC needs to explore and resolve.

Background	Universal service has been a basic goal of telecommunications
regulation since the 1950s, when FCC focused on increasing the
availability of reasonably priced, basic telephone service. See Texas
Office of Public Utility Counsel v. FCC, 183 F.3d 393, 405-406 (5th Cir.,
1999), cert. denied sub nom; Celpage Inc. v. FCC, 530 U.S. 1210 (2000).
FCC has not relied solely on market forces, but has used a combination of
explicit and implicit subsidies to achieve this goal. Id. Prior to 1983,
FCC used the regulation of AT&T's internal rate structure to garner funds
to support universal service. With the breakup of AT&T in 1983, FCC
established a Universal Service Fund administered by the National Exchange
Carrier Association (NECA). NECA is an association of incumbent local
telephone companies, also established at the direction of FCC. Among other
things, NECA was to

1See GAO, Schools and Libraries Program: Application and Invoice Review
Procedures Need Strengthening, GAO-01-105, 41. FCC's IG has also raised
questions regarding the nature of USF. FCC's IG first looked at USF in
1999 as part of its audit of the commission's fiscal year 1999 financial
statement. During that audit, the FCC IG questioned commission staff
regarding the nature of the fund and, specifically, whether USF was
subject to the statutory and regulatory requirements for federal funds. In
the next year's audit, the FCC IG noted that the commission could not
ensure that USF activities were in compliance with all laws and
regulations because the issue of which laws and regulations were
applicable to USF was still unresolved at the end of the audit. In the FCC
IG's reports on FCC's financial statements from fiscal years 1999 to 2003,
the IG consistently recommended that FCC management formally define in
writing the financial management roles and responsibilities of FCC and
USAC to avoid confusion and misunderstanding.

Appendix II
Fiscal Law Issues Involving the Universal
Service Fund

administer universal service through interstate access tariffs and the
revenue distribution process for the nation's local telephone companies.
At that time, NECA, a nongovernmental entity, privately maintained the
Universal Service Fund outside the U.S. Treasury.

Section 254 of the Telecommunications Act of 1996 codified the concept of
universal service and expanded it to include support for acquisition by
schools and libraries of telecommunications and Internet services. Pub. L.
No. 104-104, S: 254, 110 Stat. 56 (1996) (classified at 47 U.S.C. S: 254).
The act defines universal service, generally, as a level of
telecommunications services that FCC establishes periodically after taking
into account various considerations, including the extent to which
telecommunications services are essential to education, public health, and
public safety. 47 U.S.C. S: 254 (c)(1). The act also requires that "every
telecommunications carrier that provides interstate telecommunications
services shall contribute . . . to the specific, predictable, and
sufficient mechanisms" established by FCC "to preserve and advance
universal service." Id., S:254 (d). The act did not specify how FCC was to
administer the E-rate program, but required FCC, acting on the
recommendations of the Federal-State Joint Board, to define universal
service and develop specific, predictable, and equitable support
mechanisms.

FCC designated the Universal Service Administrative Company (USAC), a
nonprofit corporation that is a wholly owned subsidiary of NECA, as the
administrator of the universal service mechanisms.2 USAC administers the
program pursuant to FCC orders, rules, and directives. As part of its
duties, USAC collects the carriers' universal service contributions, which
constitute the Universal Service Fund, and deposits them to a private bank
account under USAC's control and in USAC's name. FCC has directed the use
of USF to, among other things, subsidize advanced telecommunications
services for schools and libraries in a program commonly referred to as
the

2In 1998, we issued a legal opinion on the then-current structure of the
E-rate program where FCC directed the creation of the Schools and
Libraries Corporation to administer the universal service program. Under
the Government Corporation Control Act, an agency must have specific
statutory authority to establish a corporation. 31 U.S.C. S: 9102. We
concluded that FCC did not have authority to create a separate independent
corporation to administer the E-rate program. B-278820, Feb. 10, 1998.
Subsequently, FCC eliminated the Schools and Libraries Corporation as a
separate entity, and restructured the universal service program to its
present form.

Appendix II
Fiscal Law Issues Involving the Universal
Service Fund

E-rate program.3 Pursuant to the E-rate program, eligible schools and
libraries can apply annually to receive support and can spend the funding
on specific eligible services and equipment, including telephone services,
Internet access services, and the installation of internal wiring and
other related items. Generally, FCC orders, rules, and directives, as well
as procedures developed by USAC, establish the program's criteria. USAC
carries out the program's day-to-day operations, such as answering
inquiries from schools and libraries; processing and reviewing
applications; making funding commitment decisions and issuing funding
commitment decision letters; and collecting, managing, investing, and
disbursing E-rate funds.

Eligible schools and libraries may apply annually to receive E-rate
support. The program places schools and libraries into various discount
categories, based on indicators of need. As a result of the application of
the discount rate to the cost of the service, the school or library pays a
percentage of the cost for the service and the E-rate program covers the
remainder. E-rate discounts range from 20 percent to 90 percent.

Once the school or library has complied with the program's requirements
and entered into agreements with vendors for eligible services, the school
or library must file a form with USAC noting the types and costs of the
services being contracted for, the vendors providing the services, and the
amount of discount being requested. USAC reviews the forms and issues
funding commitment decision letters.4 The funding commitment decision
letters notify the applicants of the decisions regarding their E-rate
discounts. These funding commitment decision letters also notify the
applicants that USAC will send the information on the approved E-rate
discounts to the providers so that "preparations can be made to begin
implementing . . . E-rate discount(s) upon the filing [by the applicant]
of . . . Form 486." The applicant files FCC Form 486 to notify USAC that
services have started and USAC can pay service provider invoices.
Generally, the service provider seeks reimbursement from USAC for the
discounted portion of the service, although the school or library also
could pay the service provider in full and then seek reimbursement from
USAC for the discount portion.

3The term "E-rate" evolved from some individuals referring to the program
as the "Education" rate.

4USAC could reduce the amount requested if the school or library has
included ineligible services in its application or has calculated its
discount category incorrectly.

                                  Appendix II
                   Fiscal Law Issues Involving the Universal
                                  Service Fund

  What Is the Universal Service Fund?

The precise phrasing of the questions regarding the nature of USF has
varied over the years, including asking whether they are federal funds,
appropriated funds, or public funds and, if so, for what purposes? While
the various fiscal statutes may use these different terms to describe the
status of funds, we think the fundamental issue is what statutory controls
involving the collection, deposit, obligation, and disbursement of funds
apply to USF. As explained below, funds that are appropriated funds are
subject, unless specifically exempted by law, to a variety of statutory
provisions providing a scheme of funds controls. See B-257525, Nov. 30,
1994; 63 Comp. Gen. 31 (1983); 35 Comp. Gen. 436 (1956); B-204078.2, May
6, 1988. On the other hand, funds that are not appropriated funds are not
subject to such controls unless the law specifically applies such
controls. Thus, we believe the initial question is whether USF funds are
appropriated funds.

FCC has concluded that USF constitutes a permanent indefinite
appropriation. We agree with FCC's conclusion. Typical language of
appropriation identifies a fund or account as an appropriation and
authorizes an agency to enter into obligations and make disbursements out
of available funds. For example, Congress utilizes such language in the
annual appropriations acts. See 1 U.S.C. S: 105 (requiring regular annual
appropriations acts to bear the title "An Act making appropriations. .
."). Congress, however, appropriates funds in a variety of ways other than
in regular annual appropriation acts.5 Indeed, our decisions and those of
the courts so recognize.

5Congress has recognized that an appropriation is a form of budget
authority that makes funds available to an agency to incur obligations and
make expenditures in a number of different statutes. For example, see 2
U.S.C. S: 622(2)(A)(i) (budget authority includes "provisions of law that
make funds available for obligation and expenditure . . . including the
authority to obligate and expend the proceeds of offsetting receipts and
collections") and 31 U.S.C. S: 701(2)(C) (appropriations include "other
authority making amounts available for obligation or expenditure").

Appendix II
Fiscal Law Issues Involving the Universal
Service Fund

Thus, a statute that contains a specific direction to pay, and a
designation of funds to be used, constitutes an appropriation. 63 Comp.
Gen. 331 (1984); 13 Comp. Gen. 77 (1933). In these statutes, Congress (1)
authorizes the collection of fees and their deposit into a particular
fund, and (2) makes the fund available for expenditure for a specified
purpose without further action by Congress. This authority to obligate or
expend collections without further congressional action constitutes a
continuing appropriation or a permanent appropriation of the collections.
E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (D.C. Cir. 1965),
cert. denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 262 (1990); 73 Comp.
Gen. 321 (1994). Our decisions are replete with examples of permanent
appropriations, such as revolving funds and various special deposit funds,
including mobile home inspection fees collected by the Secretary of
Housing and Urban Development,6 licensing revenues received by the
Commission on the Bicentennial,7 tolls and other receipts deposited in the
Panama Canal Revolving Fund,8 user fees collected by the Saint Lawrence
Seaway Development Corporation,9 user fees collected from tobacco
producers to provide tobacco inspection, certification and other
services,10 and user fees collected from firms using the Department of
Agriculture's meat grading services.11 It is not essential for Congress to
expressly designate a fund as an appropriation or to use literal language
of "appropriation," so long as Congress authorizes the expenditure of fees
or receipts collected and deposited to a specific account or fund.12 In
cases where Congress does not intend these types of collections or funds
to be considered "appropriated funds," it explicitly states that in law.
See e.g., 12 U.S.C. S: 244 (the Federal Reserve Board levies assessments
on its member banks to pay for its expenses and "funds derived from such
assessments shall not be construed to be government funds or appropriated
moneys"); 12 U.S.C. S: 1422b(c) (the Office of Federal Housing Enterprise
Oversight levies assessments upon the Federal Home Loan Banks and from
other sources to pay its

659 Comp. Gen. 215 (1980).
7B-228777, Aug. 26, 1988.
8B-204078.2, May 6, 1988 and B-257525, Nov. 30, 1994.
9B-193573, Jan. 8, 1979; B-193573, Dec. 19, 1979; B-217578, Oct. 16, 1986.
1063 Comp. Gen. 285 (1984).
11B-191761, Sept. 22, 1978.
12B-193573, Dec. 19, 1979.

                                  Appendix II
                   Fiscal Law Issues Involving the Universal
                                  Service Fund

expenses, but such funds "shall not be construed to be government funds or
appropriated monies, or subject to apportionment for the purposes of
chapter 15 of title 31, or any other authority").

Like the above examples, USF's current authority stems from a statutorily
authorized collection of fees from telecommunications carriers, and
expenditures for a specified purpose-that is, the various types of
universal service.13 Thus, USF meets both elements of the definition of a
permanent appropriation.

We recognize that prior to the passage of the Telecommunications Act of
1996, there existed an administratively sanctioned universal service fund.
With the Telecommunications Act of 1996, Congress specifically expanded
the contribution base of the fund, statutorily mandated contributions into
the fund, and designated the purposes for which the monies could be
expended. These congressional actions established USF in a manner that
meets the elements for a permanent appropriation and Congress did not
specify that USF should be considered anything other than an
appropriation.14

  Does the Antideficiency Act Apply to USF?

Appropriated funds are subject to a variety of statutory controls and
restrictions. These controls and restrictions, among other things, limit
the purposes for which they may be used and provide a scheme of funds
control. See e.g., 63 Comp. Gen. 110 (1983); B-257525, Nov. 30, 1994; B

13The United States Court of Appeals for the Fifth Circuit has recognized
the governmental character of the funds. Texas Office of Public Utility
Counsel v. FCC, 183 F.3d 393, 426-428 (5th Cir., 1999), cert. denied sub
nom; Celpage Inc. v. FCC, 530 U.S. 1210, 2212 (2000). The Fifth Circuit
held that USF funds are statutorily mandated special assessments
supporting a federal program mandated by Congress. FCC has also requested
that the Department of Justice recognize that USF are federal funds for
purposes of representing FCC and the United States in litigation involving
USF, such as the False Claims Act.

14The Senate passed a "sense of the Senate" provision that stated,
"Federal and State universal service contributions are administered by an
independent nonfederal entity and are not deposited into the federal
Treasury and therefore are not available for federal appropriations." See
section 614, H.R. 2267, as passed by the Senate (Oct. 1, 1997). However,
the purpose of that resolution was to respond to an attempt to withhold
USF payments as a means to balance the federal budget or achieve budget
savings. We understand section 614, H.R. 2267 intended to insulate USF
from budgetary pressures and not to express a view on the proper fiscal
treatment of USF. Our interpretation of USF as a permanent appropriation
is consistent with the intent that USF is only available for universal
service and could only be changed if Congress amended the law to permit
USF to be used for other purposes.

Appendix II
Fiscal Law Issues Involving the Universal
Service Fund

228777, Aug. 26, 1988; B-223857, Feb. 27, 1987; 35 Comp. Gen. 436 (1956).
A key component of this scheme of funds control is the Antideficiency Act.
B223857, Feb. 27, 1987. The Antideficiency Act15 has been termed "the
cornerstone of congressional efforts to bind the executive branch of
government to the limits on expenditure of appropriated funds."16
Primarily, the purpose of the Antideficiency Act is to prevent the
obligation and expenditure of funds in excess of the amounts available in
an appropriation or in advance of the appropriation of funds. 31 U.S.C. S:
1341(a)(1). FCC has determined that the Antideficiency Act applies to USF,
and as explained below, we agree with FCC's conclusion.

The Antideficiency Act applies to "officer[s] or employee[s] of the United
States Government . . . mak[ing] or authoriz[ing] an expenditure or
obligation . . . from an appropriation or fund." 31 U.S.C. S: 1341(a). As
established above, USF is an "appropriation or fund." The fact that USAC,
a private entity whose employees are not federal officers or employees, is
the administrator of the E-rate program and obligates and disburses funds
from USF is not dispositive of the application of the Antideficiency Act.
This is because, as the FCC recognizes, it, not USAC, is the entity that
is legally responsible for the management and oversight of the E-rate
program and FCC's employees are federal officers and employees of the
United States subject to the Antideficiency Act.17

Where entities operate with funds that are regarded as appropriated funds,
such as some government corporations, they, too, are subject to the
Antideficiency Act. See e.g., B-223857, Feb. 27, 1987 (funds available to
Commodity Credit Corporation pursuant to borrowing authority are subject
to Antideficiency Act); B-135075-O.M., Feb. 14, 1975 (Inter-American
Foundation). The Antideficiency Act applies to permanent

1531 U.S.C. S:S: 1341, 1342 and 1517.

16Hopkins & Nutt, The Anti-Deficiency Act (Revised Statutes 3679) and
Funding Federal Contracts: An Analysis, 80 Mil. L. Rev. 51, 56 (1978).

17Under FCC's rules, USAC is prohibited from making policy, interpreting
unclear provisions of the statute or rules, or interpreting the intent of
Congress. 47 C.F.R. S: 54.702(c). As addressed below, one of the issues
that remains to be resolved is whether USAC is authorized to take the
actions that obligate and disburse USF funds pursuant to FCC orders,
rules, and directives or whether FCC must implement additional steps to
ensure that obligations and disbursements are specifically authorized by
FCC officials and employees.

                                  Appendix II
                   Fiscal Law Issues Involving the Universal
                                  Service Fund

appropriations such as revolving funds18 and special funds. 72 Comp. Gen.
59 (1992) (Corps of Engineers Civil Works Revolving Fund subject to
Antideficiency Act); B-120480, Sep. 6, 1967, B-247348, June 22, 1992, and
B260606, July 25, 1997 (GPO revolving funds subject to Antideficiency
Act); 71 Comp. Gen. 224 (1992) (special fund that receives fees,
reimbursements, and advances for services available to finance its
operations is subject to Antideficiency Act).

Where Congress intends for appropriated funds to be exempt from the
application of statutory controls on the use of appropriations, including
the Antideficiency Act, it does so expressly. See e.g., B-193573, Jan. 8,
1979; B193573, Dec. 19, 1979; B-217578, Oct. 16, 1986 (Saint Lawrence
Seaway Development Corporation has express statutory authority to
determine the character and necessity of its obligations and is therefore
exempt from many of the restrictions on the use of appropriated funds that
would otherwise apply); B-197742, Aug. 1, 1986 (Price-Anderson Act
expressly exempts the Nuclear Regulatory Commission from Antideficiency
Act prohibition against obligations or expenditures in advance or in
excess of appropriations). There is no such exemption for FCC or USF from
the prohibitions of the Antideficiency Act. Thus, USF is subject to the
Antideficiency Act.

  Do the Funding Commitment Decision Letters Issued to Schools and Libraries
  Constitute Obligations?

An important issue that arises from the application of the Antideficiency
Act to USF is what actions constitute obligations chargeable against the
fund. Understanding the concept of an obligation and properly recording
obligations are important because an obligation serves as the basis for
the scheme of funds control that Congress envisioned when it enacted
fiscal laws such as the Antideficiency Act. B-300480, Apr. 9, 2003. For
USF's schools and libraries program, one of the main questions is whether
the funding commitment decision letters issued to schools and libraries
are properly regarded as obligations. FCC has determined that funding
commitment decision letters constitute obligations. And again, as
explained below, we agree with FCC's determination.

Under the Antideficiency Act, an agency may not incur an obligation in
excess of the amount available to it in an appropriation or fund. 31
U.S.C.

18Revolving funds are funds authorized by law to be credited with
collections and receipts from various sources that generally remain
available for continuing operations of the revolving fund without further
congressional action. See 72 Comp. Gen. 59 (1992).

Appendix II
Fiscal Law Issues Involving the Universal
Service Fund

S: 1341(a). Thus, proper recording of obligations with respect to the
timing and amount of such obligations permits compliance with the
Antideficiency Act by ensuring that agencies have adequate budget
authority to cover all of their obligations.19 B-300480, Apr. 9, 2003. We
have defined an "obligation" as a "definite commitment that creates a
legal liability of the government for the payment of goods and services
ordered or received." Id. A legal liability is generally any duty,
obligation or responsibility established by a statute, regulation, or
court decision, or where the agency has agreed to assume responsibility in
an interagency agreement, settlement agreement or similar legally binding
document. Id. citing to Black's Law Dictionary 925 (7th ed. 1999). The
definition of "obligation" also extends to "[a] legal duty on the part of
the United States which constitutes a legal liability or which could
mature into a legal liability by virtue of actions on the part of the
other party beyond the control of the United States. . . ." Id. citing to
42 Comp. Gen. 733 (1963); see also McDonnell Douglas Corp. v. United
States, 37 Fed. Cl. 295, 301 (1997).

The funding commitment decision letters provided to applicant schools and
libraries notify them of the decisions regarding their E-rate discounts.
In other words, it notifies them whether their funding is approved and in
what amounts. The funding commitment decision letters also notify schools
and libraries that the information on the approved E-rate discounts is
sent to the providers so that "preparations can be made to begin
implementing . . . E-rate discount(s) upon the filing [by applicants] of .
. . Form 486." The applicant files FCC Form 486 to notify USAC that
services have started and USAC can pay service provider invoices. At the
time a school or library receives a funding commitment decision letter,
the FCC has taken an action that accepts a "legal duty . . . which could
mature into a legal liability by virtue of actions on the part of the
grantee beyond the control of the United States." Id. citing 42 Comp. Gen.
733, 734 (1963). In this instance, the funding commitment decision letter
provides the school or library with the authority to obtain services from
a provider with the commitment that it will receive a discount and the
provider will be reimbursed for the discount provided. While the school or
library could decide not to seek the services or the discount, so long as
the funding

19Legal liability for obligational accounting and to comply with the
Antideficiency Act and the Recording Statute, 31 U.S.C. S: 1501 is
distinct from accounting liabilities and projections booked in its
proprietary accounting systems for financial statement purposes. For
proprietary accounting purposes, a liability is probable and measurable
future outflow or other sacrifice of resources as a result of past
transactions or events. See B-300480, Apr. 9, 2003, and FASAB Statement of
Federal Financial Accounting Standards Number 1.

Appendix II
Fiscal Law Issues Involving the Universal
Service Fund

commitment decision letter remains valid and outstanding, USAC and FCC no
longer control USF's liability; it is dependent on the actions taken by
the other party-that is, the school or library. In our view, a recordable
USF obligation is incurred at the time of issuance of the funding
commitment decision letter indicating approval of the applicant's
discount. Thus, these obligations should be recorded in the amounts
approved by the funding commitment decision letters. If at a later date, a
particular applicant uses an amount less than the maximum or rejects
funding, then the obligation amount can be adjusted or deobligated,
respectively.

Additional issues that remain to be resolved by FCC include whether other
actions taken in the universal service program constitute obligations and
the timing of and amounts of obligations that must be recorded. For
example, this includes the projections and data submissions by USAC to FCC
and by participants in the High Cost and Low Income Support Mechanisms to
USAC. FCC has indicated that it is considering this issue and consulting
with the Office of Management and Budget. FCC should also identify any
other actions that may constitute recordable obligations and ensure those
are properly recorded.

Appendix III

Structure of the Universal Service Administrative Company

Various policies to promote universal service-providing residential
customers with affordable, nationwide access to basic telephone service-
have generally been around since the 1950s. Congress codified and made
significant changes to universal service policy in the Telecommunications
Act of 1996. However, Congress did not prescribe a structure for
administering the universal service programs and instead called for a
Federal-State Joint Board on Universal Service (Joint Board) to make
recommendations to FCC.1

At the time of the act, the National Exchange Carrier Association (NECA)
was responsible for administering the existing universal service
mechanisms providing support for high-cost areas and low-income
individuals. NECA is an association of incumbent local telephone companies
that was established at FCC's direction in 1983 (in anticipation of the
breakup of the Bell System) to administer interstate access tariffs and
the revenue distribution process for the nation's nearly 1,000 local
telephone companies. In November 1996, the Joint Board recommended that,
in the interest of providing services to schools and libraries and health
care providers quickly, FCC should appoint NECA as the temporary
administrator of universal service to these groups, subject to changes in
NECA's governance to make NECA more representative of the
telecommunications industry as a whole. Under the Joint Board's
recommendation, NECA would continue this role until a permanent
administrator was appointed. The Joint Board recommended that FCC
establish an advisory board to select and oversee a neutral third-party
administrator for all universal service programs and suggested criteria to
be used in that selection. The Joint Board further recommended that FCC
allow NECA to change its membership and governance in a manner that would
allow it to compete for the role of permanent administrator in the
advisory board's selection process.

On the basis of the Joint Board's recommendations, FCC agreed in a May
1997 order to appoint NECA as the temporary administrator, subject to
changes in NECA's governance. It also agreed to create a federal advisory
committee, whose sole responsibility would be to recommend an
administrator, and directed that the administrator should select a
contractor to manage the application process for schools and libraries.
NECA later determined that developing a satisfactory board structure to be

1GAO, Telecommunications: FCC Lacked Authority to Create Corporations to
Administer Universal Service Programs, GAO/T-RCED/OGC-98-84 (Washington,
D.C.: Mar. 31, 1998).

Appendix III
Structure of the Universal Service
Administrative Company

able to bid for the permanent administrator role might not be possible.
Thus, NECA proposed to FCC in January 1997 that it be allowed to establish
a separate subsidiary to administer universal service.

In July 1997, FCC issued an order directing NECA to create two independent
nonprofit corporations-one to administer the program for schools and
libraries (the Schools and Libraries Corporation) and one to administer
the program for rural health care providers (the Rural Health Care
Corporation). FCC's order further specified that these corporations would
continue to administer the programs even after the appointment of a
permanent administrator. To carry out billing, collecting, and
disbursement activities for these programs, FCC directed NECA to create a
nonprofit subsidiary. FCC further directed that the subsidiary create a
special committee of its board of directors to administer the universal
service programs for high-cost areas and low-income individuals. NECA
created the Universal Service Administrative Company (USAC) as the
subsidiary.

In November 1998, FCC changed the universal service structure in response
to legal concerns about FCC's authority to create the two independent
corporations and Congress's directive that a single entity administer
universal service support.2 FCC appointed an existing body, USAC, as the
permanent administrator of the program and directed the Schools and
Libraries Corporation and the Rural Health Care Corporation to merge with
USAC by January 1, 1999. Under this merger, the staff of the Schools and
Libraries Corporation became part of a new Schools and Libraries Division
(SLD) within USAC, carrying out essentially the same functions as before,
such as processing and reviewing E-rate applications. However, SLD
contracts out most of its billing, collecting, and disbursement activities
to USAC. In addition, in 2000 NECA formed an unaffiliated, for-profit
corporation, NECA Services Inc., to pursue new business opportunities.
USAC later contracted most of its application processing, client support,
and review functions to NECA Services Inc. See figure 1.

2GAO, Schools and Libraries Program: Actions Taken to Improve Operational
Procedures Prior to Committing Funds, GAO/RCED-99-51 (Washington, D.C.:
Mar. 5, 1999).

Appendix III
Structure of the Universal Service
Administrative Company

      Figure 1: Relationship among Entities Involved in the E-Rate Program

                   Source: GAO analysis of USAC information.

Appendix IV

FCC Staffing Levels in Support of the E-Rate Program

Table 3: Number of FCC Full-Time Equivalent (FTE)a Positions Supporting
E-Rate Program, Fiscal Years 1997-2004

                                  Fiscal years

FCC
bureau/office 1997 1998 1999 2000 2001 2002 2003 2004

                 Enforcement Bureaub Office of General Counsel

     Professional     N/A    N/A    N/A    N/A    N/A    N/A    0.50     0.75 
      Managerial      N/A    N/A    N/A    N/A    N/A    N/A    0.20     0.50 
    Administrative    N/A    N/A    N/A    N/A    N/A    N/A    0.20     0.30 
       Subtotal                                                 0.90     1.55 

    Professional 0.65-0.70 0.30-0.40 0.80-0.90 0.55-0.60 0.30-0.35 0.35-0.40
                              0.30-0.40 0.30-0.40

  Managerial 0.65 0.10-0.15 0.40 0.40 0.20-0.23 0.20-0.25 0.25-0.30 0.10-0.15

  Subtotal 1.30-1.35 0.40-0.55 1.20-1.30 0.95-1 0.50-0.58 0.55-0.65 0.55-0.70
                     0.40-0.55 Office of Managing Director

              Professional 0.00 0.00 0.25 0.50 0.50 1.00 1.00 1.10

               Managerial 0.00 0.00 0.25 0.25 0.25 0.30 0.30 0.30

                          Office of Strategic Planning

                Subtotal 0.00 0.00 0.50 0.75 0.75 1.30 1.30 1.40
Professional           0.10           Subtotal           0.10            Wireline        Professional            13.00           Managerial           1.30           Administrative           2.50           Front            0.50                           Subtotal            17.30                                             19.10-19.15                         
1.50c     0.10 0.10 0.10 0.50 0.50   1.50   0.10 0.10 0.10 0.50 0.50 Competition          4.00     6.00 10.00 10.00 8.00 5.80    0.30    0.30 0.30 2.00 1.00 1.00      1.20      1.60 2.20 2.80 2.20 2.20 office           0.50           managerial        6.00   8.40 13.00 15.30 12.03 10.33   Total                         16.65-16.73             
                       0.10                              0.10             Bureau                                  9.00                                1.00                                    2.80            0.50  0.50 0.50 1.00 0.83 1.33                                     13.80             8.80-8.85 8.90-9.05 14.80-14.90 15.75-15.85 15.28-15.43 14.18-14.33

Source: FCC.

Notes: N/A = not applicable.

aFull-time equivalent (FTE) is a measure of federal civilian employment.
One FTE is equal to 1 workyear of 2,080 hours.

bAll E-rate related investigation and audit work performed by FCC's
Enforcement Bureau is contained in the figures for 2003 and 2004. The
Enforcement Bureau was established in 1999 and first assigned an audit
function in the commission's 2002 reorganization.

cThis estimate is for all universal service programs.

Appendix V

Comments from the Federal Communications Commission

Note: GAO comments supplementing those in the report text appear at the
end of this appendix.

Now on pp. 36 and 37.

Now on p. 37.

Appendix V Comments from the Federal Communications Commission

Now on pp. 37 and 38.

Now on p. 38.

Appendix V Comments from the Federal Communications Commission Appendix V
Comments from the Federal Communications Commission

                                 Now on p. 12.

                                 See comment 1.

                                 Now on p. 11.

                                 See comment 2.

Appendix V Comments from the Federal Communications Commission Appendix V
Comments from the Federal Communications Commission

Now on pp. 17 and 18. See comment 3.

See comment 4.

Appendix V Comments from the Federal Communications Commission

Now on pp. 19 and 25. See comment 5.

Now on p. 19.

Now on p. 26.

See comment 6. See comment 7.

Now on pp. 20 and 21.

Appendix V Comments from the Federal Communications Commission

         Appendix V Comments from the Federal Communications Commission

The following are GAO's comments on the Federal Communications
Commission's letter dated January 14, 2005.

  GAO's Comments 1.

2.

As stated in our report, we have not addressed FCC's authority to
establish the current organizational structure. We recognize that FCC has
reported to Congress on its implementation of the current organizational
structure and it believes that structure is consistent with congressional
intent and conforms to congressional guidance. However, at the time this
structure was established by FCC, numerous issues such as the status of
the Universal Service Fund as federal funds-specifically a permanent
indefinite appropriation-and the applicability of fiscal statutes such as
the Antideficiency Act had not been resolved. It is critical to the
management of federal funds that the funds be properly collected,
deposited, obligated, and expended by authorized parties in accordance
with those determinations regarding the status of the funds. Thus, we
believe FCC should consider whether the current organizational structure
and roles and responsibilities of FCC and USAC are consistent with law and
comply with fiscal and accountability requirements for federal funds. FCC
states that it intends to consider whether to modify the manner in which
the Universal Service Fund is administered, including possible changes to
the underlying administrative structure. We believe this would be a
positive step toward carrying out our recommendation.

FCC states that it has undertaken a timely and extensive analysis of the
significant legal issues related to the status of the Universal Service
Fund and has generally done so on a case-by-case basis. We recognize that
FCC has engaged in internal deliberations and external consultations and
analysis of a number of statutes. However, we do not believe this has been
done in a timely manner or that it is appropriate to do so on a
case-by-case basis.

Addressing the applicability of the statutes on a case-by-case basis, as
issues have arisen, has put FCC and the program in the position of
reacting to problems as they occur rather than setting up an organization
and internal controls designed to ensure compliance with applicable laws.
The laws encompassing fiscal and accountability controls are not applied
in isolation; rather, they are part of a framework that addresses issues
of financial and general management of federal agencies and programs. The
E-rate program was established over seven years ago, yet FCC is still
analyzing whether certain statutes

Appendix V Comments from the Federal Communications Commission

or requirements apply to the program and what actions it must take to
implement those statutes and ensure compliance with them. The recent
issues involving the Antideficiency Act best illustrate the problem with
this case-by-case approach. As explained in our report, it was not until
the fall of 2004 that the applicability and consequences of the
Antideficiency Act were resolved. Moreover, this was not the first time
issues regarding the Antideficiency Act had been raised. In July 1998, a
question had been raised regarding USAC's authority to commecially borrow
funds. At that time, USAC was instructed to refrain from commercial
borrowing while FCC was examining the applicability of the Antideficiency
Act to USAC's operations. While FCC determined that USAC should not borrow
commercially in 1998, the question of whether there were other
consequences for the E-rate program regarding the applicability of the
Antideficiency Act was not addressed. Had FCC taken a comprehensive
approach to the application of fiscal and accountability statutes such as
the Antideficiency Act when the program was created or soon thereafter,
FCC would have been in a position to determine what steps they should have
taken and what internal controls they should have had in place to ensure
compliance with those statutes. For example, with respect to the
Antideficiency Act, they could have determined whether actions they were
taking were obligations that needed to be recorded and, if so, made any
necessary changes to the program to ensure that they had sufficient
amounts in the Universal Service Fund to cover those obligations.

Furthermore, while certain determinations may have been made internally,
they have neither been analyzed nor definitively determined in FCC's
orders on the E-rate program. In addition, USAC has not always received
instruction on how to carry out all of these requirements. For example, as
noted in our report, in its October 2003 order applying GovGAAP to the
Universal Service Fund, FCC stated that "the Funds may be subject to a
number of federal financial and reporting statutes" (emphasis added) and
"relevant portions of the Federal Financial Management Improvement Act of
1996," but did not specify which specific statutes or the relevant
portions or further analyze their applicability.

3.	In our report, we list several examples of fiscal control and
accountability statutes. FCC states in its letter that it has already made
a determination of each statute's applicability to the Universal Service
Fund. We agree that FCC has made a determination involving the

Appendix V Comments from the Federal Communications Commission

applicability of the Improper Payments Information Act, and we therefore
deleted our references to this act. We recognize that FCC has consulted
with other agencies such as OMB and Treasury regarding the applicability
of the Miscellaneous Receipts Act, the Single Audit Act, and the Cash
Management Improvement Act. However, we believe that where FCC has
determined that fiscal controls and policies do not apply, the commission
should reconsider these determinations in light of the status of universal
service monies as federal funds. Such a reconsideration is particularly
important in the case of the Miscellaneous Receipts Act, where OMB and FCC
determined in 2000 that the act did not apply because the funds were not
public monies for the use of the United States.

Our recommendation focuses on a proactive, comprehensive analysis and
determination of legal requirements rather than a continued approach of
reactive case-by-case determinations. A definitive determination on the
entire framework of laws that apply or do not apply to this program would
enable FCC to make operational decisions on what steps they should take
and what internal controls they should have in place to ensure compliance
with applicable laws.

4.	As stated in our report, due to the complexities posed by these issues,
GAO remains available to provide an advance decision to FCC under 31
U.S.C. S: 3529.

5.	Our report does not note that "FCC had established some performance
measures, but determined that it needed to establish better and more
comprehensive ways of measuring E-rate performance." It also does not note
that the reason FCC stopped using the number of public schools connected
to the Internet was that it was no longer a useful measure of the program.
Our report states that prior to fiscal year 2000, FCC had no specific
goals and measures for the program; that for fiscal years 2000 through
2002, the goals and measures set by FCC were not useful for assessing the
impact of E-rate program funding because the measures used did not
directly measure the impact of E-rate funding; and that since fiscal year
2002 there have been no E-rate performance goals and measures at all. In
its letter, FCC states that it is actively working to re-establish
performance goals and measures that are consistent with the Government
Performance and Results Act. Our finding is that FCC never established
E-rate goals and measures that were consistent with the act in the first
place, despite our recommendation in 1998 (and reiterated in 1999) to do
so. In a

Appendix V Comments from the Federal Communications Commission

multibillion-dollar program now entering its eighth funding year, this is
a serious management deficiency.

In its letter, FCC notes that it needs to seek comment from stakeholders
regarding performance measures. GAO's guidance on implementing the Results
Act supports this approach: Stakeholder involvement in defining goals is
particularly important in a political environment, and the involvement of
Congress is indispensable. While we understand the time involved in
crafting useful performance goals and measures and complying with the
notice-and-comment requirements of the Administrative Procedure Act, we
urge FCC to move as quickly as possible in its efforts.

6.	Our draft report included appeals numbers that were different from
those in FCC's letter. It appears that our numbers included waiver
requests as well as appeals. We have changed our report to reflect the
numbers included in FCC's letter, which, according to FCC, are current as
of January 1, 2005. This numerical difference does not reflect any
material change.

7.	We are encouraged that FCC has begun redirecting staff and hiring
additional attorneys to Universal Service Fund oversight and program
management, including the resolution of E-rate appeals. It is a
particularly positive step that FCC has established a measurable goal of
resolving all backlogged E-rate appeals by the end of calendar year 2005.

Appendix VI

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	John Finedore, (202) 512-6248 Teresa Russell, (214) 777-5604
Faye Morrison, (202) 512-6448

Staff 	In addition to those named above, Carol Anderson-Guthrie, Andy
Clinton, Derrick Collins, Sandra DePaulis, Edda Emmanuelli-Perez, Chad
Factor,

Acknowledgments	Moses Garcia, Lynn Gibson, Karen O'Conor, Mindi
Weisenbloom, and Alwynne Wilbur made key contributions to this report.

GAO's Mission	The Government Accountability Office, the audit, evaluation
and investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people. GAO
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and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
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accountability, integrity, and reliability.

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