Telecommunications: Concerns Regarding the Structure and FCC's
Management of the E-Rate Program (16-MAR-05, GAO-05-439T).
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, 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. This testimony is based on
GAO's February 2005 report GAO-05-151, which 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 program oversight mechanisms.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-439T
ACCNO: A19536
TITLE: Telecommunications: Concerns Regarding the Structure and
FCC's Management of the E-Rate Program
DATE: 03/16/2005
SUBJECT: Accountability
Fraud
Funds management
Internal controls
Internet
Libraries
Performance measures
Program abuses
Program evaluation
Program management
Public schools
Risk management
Strategic planning
Telecommunication
Telecommunication industry
Program goals or objectives
FCC E-Rate Program
Universal Service Fund
******************************************************************
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GAO-05-439T
United States Government Accountability Office
GAO Testimony
Before the Subcommittee on Oversight and Investigations, Committee on
Energy and Commerce, House of Representatives
For Release on Delivery
Expected at 2:00 p.m. EST TELECOMMUNICATIONS
Wednesday, March 16, 2005
Concerns Regarding the Structure and FCC's Management of the E-Rate Program
Statement of Mark L. Goldstein, Director Physical Infrastructure Issues
GAO-05-439T
[IMG]
March 16, 2005
TELECOMMUNICATIONS
Concerns Regarding the Structure and FCC's Management of the E-Rate Program
What GAO Found
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 fraud,
waste, 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.
United States Government Accountability Office
Mr. Chairman and Members of the Subcommittee:
We are pleased to be here to discuss the results of our recently completed
review of the Federal Communications Commission's (FCC) universal service
program for schools and libraries. As you know, the Telecommunications Act
of 1996 expanded the concept of universal service to include assistance to
schools and libraries in acquiring telecommunications and Internet
services; the act charged FCC with establishing the universal service
discount mechanism for eligible schools and libraries. The commission, in
turn, created a large and ambitious program that became commonly known as
the "E-rate" program, and set the annual funding cap for the program at
$2.25 billion. FCC designated the Universal Service Administrative Company
(USAC), a private, not-forprofit corporation established under FCC's
rules, to carry out the day-today operations of the E-rate program. FCC
retains responsibility for overseeing the program's operations and
ensuring compliance with the commission's rules.
Since 1998, the E-rate program has committed more than $13 billion in
funding to help schools and libraries across the nation acquire
telecommunications and Internet services. Eligible schools and libraries
can apply annually to receive support, which can be used for specific
eligible services and equipment such as telephone services, Internet
access services, and the installation of internal wiring and other related
items. Recently, however, allegations have been made that some E-rate
beneficiaries (schools and libraries) and service providers (e.g.,
telecommunications and network equipment companies) have fraudulently
obtained, wasted, or abused E-rate funding. In May 2004, for example, one
service provider involved in E-rate projects in several states pleaded
guilty to bid rigging and wire fraud and agreed to pay more than $20
million in criminal fines, civil payments, and restitution.
In light of ongoing concerns about the E-rate program, we were asked to
review various aspects of the program. Specifically, we evaluated (1) the
effect of the current structure of the E-rate program on FCC's management
of the program, (2) FCC's development and use of performance goals and
measures in managing the program, and (3) the effectiveness of FCC's
oversight mechanisms-rulemaking proceedings, beneficiary audits, and
reviews of USAC decisions (appeals)-in managing the program.
Our testimony is based on a report, being released today, containing the
results of our review and recommendations for improving FCC's
management and oversight of the E-rate program.1 In summary, we found the
following:
o FCC established E-rate as a multibillion-dollar program operating
under an organizational structure unusual to the federal government, but
never conducted a comprehensive assessment to determine which federal
requirements, policies, and practices apply to the program, to USAC, and
to the Universal Service Fund itself. As a result, FCC has struggled with
determining which fiscal and accountability requirements apply to the
E-rate program. We believe that issues exist concerning the applicability
of certain statutes and the extent to which FCC has delegated certain
functions for the E-rate program to USAC-issues that FCC needs to explore
and resolve.
o FCC has not developed meaningful performance goals and measures for
assessing and managing the program. As a result, there is no way to tell
whether the program has resulted in the cost-effective deployment and use
of advanced telecommunications services for schools and libraries.
o FCC's program oversight mechanisms contain weaknesses that limit FCC's
management of the program and its ability to understand the scope of
waste, fraud, and abuse within the program. For example, FCC's rulemakings
have often lacked specificity and have led to situations where important
USAC administrative procedures have been deemed unenforceable by FCC.
There is also a significant backlog of E-rate appeals that adds
uncertainty to the program and impacts beneficiaries.
FCC has taken some important steps, particularly in recent months, to
address some of the areas of concern discussed in our report.
Nevertheless, we believe that FCC has not done enough to proactively
manage and provide a framework of government accountability for the
multibillion-dollar E-rate program.
Background The concept of "universal service" has traditionally meant
providing residential telephone subscribers with nationwide access to
basic telephone services at reasonable rates. The Telecommunications Act
of 1996 broadened the scope of universal service to include, among other
1Telecommunications: Greater Involvement Needed by FCC in the Management
and Oversight of the E-Rate Program, GAO-05-151 (Washington, D.C.: Feb. 9,
2005). The report is available on GAO's Web site at www.gao.gov.
things, support for schools and libraries. The act instructed the
commission to establish a universal service support mechanism to ensure
that eligible schools and libraries have affordable access to and use of
certain telecommunications services for educational purposes.2 In
addition, Congress authorized FCC to "establish competitively neutral
rules to enhance, to the extent technically feasible and economically
reasonable, access to advanced telecommunications and information services
for all public and nonprofit elementary and secondary school classrooms .
. . and libraries. . . ."3 Based on this direction, and following the
recommendations of a Federal-State Joint Board on Universal Service,4 FCC
established the schools and libraries universal service mechanism that is
commonly referred to as the E-rate program. The program is funded through
statutorily mandated payments by companies that provide interstate
telecommunications services.5 Many of these companies, in turn, pass their
contribution costs on to their subscribers through a line item on
subscribers' phone bills.6 FCC capped funding for the E-rate program at
$2.25 billion per year, although funding requests by schools and libraries
can greatly exceed the cap. For example, schools and libraries requested
more than $4.2 billion in E-rate funding for the 2004 funding year.
In 1998, FCC appointed USAC as the program's permanent administrator,
although FCC retains responsibility for overseeing the program's
operations and ensuring compliance with the commission's rules.7 In
response to congressional conference committee direction,8 FCC has
247 U.S.C. S: 254(h)(1)(B).
347 U.S.C. S: 254(h)(2).
4The 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.
5These 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.
6The 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.
7USAC was established at the direction of FCC and operates under FCC's
rules and policies.
8See S.1768, 105th Cong., S: 2004(b)(2)(A) (1998).
specified that USAC "may not make policy, interpret unclear provisions of
the statute or rules, or interpret the intent of Congress."9 USAC is
responsible for carrying out the program's day-to-day operations, such as
maintaining a Web site that contains program information and application
procedures; answering inquiries from schools and libraries; processing and
reviewing applications; making funding commitment decisions and issuing
funding commitment letters; and collecting, managing, investing, and
disbursing E-rate funds. FCC permits-and in fact relies on-USAC to
establish administrative procedures that program participants are required
to follow as they work through the application and funding process.
Under the E-rate program, eligible schools, libraries, and consortia that
include eligible schools and libraries10 may receive discounts for
eligible services. Eligible schools and libraries may apply annually to
receive Erate support. The program places schools and libraries into
various discount categories, based on indicators of need, so that the
school or library pays a percentage of the cost for the service and the
E-rate program funds the remainder. E-rate discounts range from 20 percent
to 90 percent. USAC reviews all of the applications and related forms and
issues funding commitment decision letters. Generally, it is the service
provider that seeks reimbursement from USAC for the discounted portion of
the service rather than the school or library.11
947 C.F.R. S: 54.702(c).
10Eligibility 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.
11The school or library could also pay the service provider in full and
then seek reimbursement from USAC for the discount portion.
FCC Established an Unusual Program Structure without Comprehensively
Addressing the Applicability of Governmental Standards and Fiscal Controls
FCC established an unusual structure for the E-rate program but has never
conducted a comprehensive assessment of which federal requirements,
policies, and practices apply to the program, to USAC, or to the Universal
Service Fund itself. FCC recently began to address a few of these issues,
concluding that as a permanent indefinite appropriation, the Universal
Service Fund is subject to the Antideficiency Act and that USAC's issuance
of commitment letters constitutes obligations for purposes of the act.
However, FCC's conclusions concerning the status of the Universal Service
Fund raise further issues relating to the collection, deposit, obligation,
and disbursement of those funds-issues that FCC needs to explore and
resolve comprehensively rather than in an ad hoc fashion as problems
arise.
The Telecommunications Act of 1996 neither specified how FCC was to
administer universal service to schools and libraries nor prescribed the
structure and legal parameters of the universal service mechanisms to be
created. To carry out the day-to-day activities of the E-rate program, FCC
relied on a structure it had used for other universal service programs in
the past-a not-for-profit corporation established at FCC's direction that
would operate under FCC oversight. However, the structure of the E-rate
program is unusual in several respects compared with other federal
programs:
o FCC appointed USAC as the permanent administrator of the Universal
Service Fund,12 and FCC's Chairman has final approval over USAC's Board of
Directors. USAC is responsible for administering the program under FCC
orders, rules, and directives. However, USAC is not part of FCC or any
other government entity; it is not a government corporation established by
Congress; and no contract or memorandum of understanding exists between
FCC and USAC for the administration of the E-rate program. Thus, USAC
operates and disburses funds under less explicit federal ties than many
other federal programs.
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
12USAC 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.
the Office of Management and Budget (OMB), the monies are maintained
outside of Treasury accounts by USAC and some of the monies have been
invested.13 The United States Treasury implements the statutory controls
and restrictions involving the proper collection and deposit of
appropriated funds, including the financial accounting and reporting of
all receipts and disbursements, the security of appropriated funds, and
agencies' responsibilities for those funds.14
Since the inception of the E-rate program, FCC has struggled with
identifying the nature of the Universal Service Fund and the managerial,
fiscal, and accountability requirements that apply to the fund. In the
past, FCC's Inspector General (IG) has noted that the commission could not
ensure that Universal Service Fund activities were in compliance with all
laws and regulations because the issue of which laws and regulations were
applicable to the fund was unresolved. During our review, FCC officials
told us that the commission has substantially resolved the IG's concerns
through recent orders, including FCC's 2003 order that USAC begin
preparing Universal Service Fund financial statements consistent with
generally accepted accounting principles for federal agencies (GovGAAP)
and keep the fund in accordance with the United States Government Standard
General Ledger.15 While it is true that these steps and other FCC
determinations should provide greater protections for universal service
funding, FCC has addressed only a few of the issues that need to be
resolved. In fact, staff from the FCC's IG's office told us that they do
not believe the commission's GovGAAP order adequately addressed their
concerns because the order did not comprehensively detail which fiscal
requirements apply to the Universal Service Fund and which do not.
13The 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.
14See 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.
15See FCC, Order, In the Matter of Application of Generally Accepted
Accounting Principles for Federal Agencies and Generally Accepted
Government Auditing Standards to the Universal Service Fund, FCC 03-232
(Washington, D.C.; Oct. 3, 2003).
FCC maintains that it has undertaken a timely and extensive analysis of
the significant legal issues associated with the status of the Universal
Service Fund and has generally done so on a case-by-case basis. We
recognize that FCC has engaged in internal deliberations and external
consultations and analysis of a number of statutes. However, we do not
believe that this was done in a timely manner or that it is appropriate to
do this on a case-by-case basis, which puts FCC and the program in the
position of reacting to problems as they occur rather than setting up an
organization and internal controls designed to ensure compliance with
applicable laws.
As you know, Mr. Chairman, a problem with this ad hoc approach was
dramatically illustrated with regard to the applicability of the
Antideficiency Act to the Universal Service Fund. In October 2003, FCC
ordered USAC to prepare financial statements for the Universal Service
Fund, as a component of FCC, consistent with GovGAAP, which FCC and USAC
had not previously applied to the fund. In February 2004, staff from USAC
realized during contractor-provided training on GovGAAP procedures that
the commitment letters sent to beneficiaries (notifying them whether their
funding is approved and in what amount) might be viewed as "obligations"
of appropriated funds.16 If so viewed, and if FCC also found the
Antideficiency Act-which does not allow an agency or program to make
obligations in excess of available budgetary resources- to be applicable
to the E-rate program, then USAC would need to dramatically increase the
program's cash-on-hand and lessen the program's investments17 to provide
budgetary authority sufficient to satisfy the Antideficiency Act. As a
result, USAC suspended funding commitments in August 2004 while waiting
for a commission decision on how to proceed. At the end of September
2004-facing the end of the fiscal year- FCC decided that commitment
letters were obligations; that the Antideficiency Act did apply to the
program; and that USAC would need to immediately liquidate some of its
investments to come into compliance with the Antideficiency Act. According
to USAC officials, the liquidations cost the fund approximately $4.6
million in immediate losses and could
16An "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.
17According 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.
potentially result in millions in foregone annual interest income. In
response to these events, in December 2004, Congress passed a bill
granting the Universal Service Fund a one-year exemption from the
Antideficiency Act.18
As we explain more fully in our report, Mr. Chairman, we agree with FCC's
determinations that the Universal Service Fund is a permanent
appropriation subject to the Antideficiency Act and that its funding
commitment decision letters constitute recordable obligations of the
Universal Service Fund. However, there are several significant fiscal law
issues that remain unresolved. We believe that where FCC has determined
that fiscal controls and policies do not apply, the commission should
reconsider these determinations in light of the status of universal
service monies as federal funds. For example, in view of its determination
that the fund constitutes an appropriation, FCC needs to reconsider the
applicability of the Miscellaneous Receipts Statute, 31 U.S.C. S: 3302,
which requires that money received for the use of the United States be
deposited in the Treasury unless otherwise authorized by law.19 FCC also
needs to assess the applicability of other fiscal control and
accountability statutes (e.g., the Single Audit Act and the Cash
Management Improvement Act).20
Another major issue that remains to be resolved involves the extent to
which FCC has delegated some functions for the E-rate program to USAC. For
example, are the disbursement policies and practices for the E-rate
program consistent with statutory and regulatory requirements for the
disbursement of public funds?21 Are some of the functions carried out by
18Universal 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.
19Because 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.
20For example, in October 2003, when FCC ordered USAC to comply with
GovGAAP, it noted that the Universal Service Fund was subject to the Debt
Collection Improvement Act of 1996. In that same order, FCC stated that
"the funds may be subject to a number of federal financial and reporting
statutes" (emphasis added) and "relevant portions of the Federal Financial
Management Improvement Act of 1996," but did not specify which specific
statutes or the relevant portions or further analyze their applicability.
FCC officials also told us that they were uncertain whether procurement
requirements such as the Federal Acquisition Regulation (FAR) applied to
arrangements between FCC and USAC, but they recommended that those
requirements be followed as a matter of policy.
21See 31 U.S.C. S:S: 3321, 3322, 3325, and the Treasury Financial Manual.
FCC Did Not Develop Useful Performance Goals and Measures for Assessing and
Managing the E-Rate Program
USAC, even though they have been characterized as administrative or
ministerial, arguably inherently governmental activities22 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. We are encouraged
that FCC just announced that it has contracted with the National Academy
of Public Administration (NAPA) for NAPA to study and explore alternative
models to the current organizational and governance structure of the
Universal Service Fund program. We believe this study will go a long way
toward addressing the concerns outlined in our report and we look forward
to seeing the results of NAPA's efforts.
Although $13 billion in E-rate funding has been committed to beneficiaries
during the past 7 years, FCC did not develop useful performance goals and
measures to assess the specific impact of these funds on schools' and
libraries' Internet access and to improve the management of the program,
despite a recommendation by us in 1998 to do so. At the time of our
current review, FCC staff was considering, but had not yet finalized, new
E-rate goals and measures in response to OMB's concerns about this
deficiency in a 2003 OMB assessment of the program.
One of the management tasks facing FCC is to establish strategic goals for
the E-rate program, as well as annual goals linked to them. The
Telecommunications Act of 1996 did not include specific goals for
supporting schools and libraries, but instead used general language
directing FCC to establish competitively neutral rules for enhancing
access to advanced telecommunications and information services for all
public and nonprofit private elementary and secondary school classrooms
and libraries.23 As the agency accountable for the E-rate program, FCC is
responsible under the Government Performance and Results Act of 1993
(Results Act) for establishing the program's long-term strategic goals and
22See 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."
2347 U.S.C. S: 254(h)(2)(A).
annual goals, measuring its own performance in meeting these goals, and
reporting publicly on how well it is doing.24
For fiscal years 2000 through 2002, FCC's goals focused on achieving
certain percentage levels of Internet connectivity during a given fiscal
year for schools, public school instructional classrooms, and libraries.
However, the data that FCC used to report on its progress was limited to
public schools (thereby excluding two other major groups of
beneficiaries-private schools and libraries) and did not isolate the
impact of E-rate funding from other sources of funding, such as state and
local government. This is a significant measurement problem because, over
the years, the demand for internal connections funding by applicants has
exceeded the E-rate funds available for this purpose by billions of
dollars. Unsuccessful applicants had to rely on other sources of support
to meet their internal connection needs. Even with these E-rate funding
limitations, there has been significant growth in Internet access for
public schools since the program issued its first funding commitments in
late 1998. At the time, according to data from the Department of
Education's National Center for Educational Statistics (NCES), 89 percent
of all public schools and 51 percent of public school instructional
classrooms already had Internet access. By 2002, 99 percent of public
schools and 92 percent of public school instructional classrooms had
Internet access.25 Yet although billions of dollars in E-rate funds have
been committed since 1998, adequate program data was not developed to
answer a fundamental performance question: How much of the increase since
1998 in public schools' Internet access has been a result of the E-rate
program, as opposed to other sources of federal, state, local, and private
funding?
Performance goals and measures are used not only to assess a program's
impact but also to develop strategies for resolving mission-critical
management problems. However, management-oriented goals have not
24For additional details on the Results Act and its requirements, see GAO,
Executive Guide: Effectively Implementing the Government Performance and
Results Act, GAO/GGD-96-118 (Washington, D.C.: June 1996). GAO first noted
the lack of clear and specific E-rate performance goals and measures in
its July 1998 testimony before the Senate Committee on Commerce, Science,
and Transportation. See GAO, Schools and Libraries Corporation: Actions
Needed to Strengthen Program Integrity Operations before Committing Funds,
GAO/T-RCED-98-243 (Washington, D.C.: July 16, 1998), pp. 15
16.
25See 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.
been a feature of FCC's performance plans, despite long-standing concerns
about the program's effectiveness in key areas. For example, two such
goals-related to assessing how well the program's competitive bidding
process was working and increasing program participation by lowincome and
rural school districts and rural libraries-were planned but not carried
forward.
FCC did not include any E-rate goals for fiscal years 2003 and 2004 in its
recent annual performance reports. The failure to measure effectively the
program's impact on public and private schools and libraries over the past
7 years undercuts one of the fundamental purposes of the Results Act: to
have federal agencies adopt a fact-based, businesslike framework for
program management and accountability. The problem is not just a lack of
data for accurately characterizing program results in terms of increasing
Internet access. Other basic questions about the E-rate program also
become more difficult to address, such as the program's efficiency and
cost-effectiveness in supporting the telecommunications needs of schools
and libraries. For example, a review of the program by OMB in 2003
concluded that there was no way to tell whether the program has resulted
in the cost-effective deployment and use of advanced telecommunications
services for schools and libraries.26 OMB also noted that there was little
oversight to ensure that the program beneficiaries were using the funding
appropriately and effectively. In response to these concerns, FCC staff
have been working on developing new performance goals and measures for the
E-rate program and plan to finalize them and seek OMB approval in fiscal
year 2005.
FCC testified before Congress in June 2004 that it relies on three chief
components in overseeing the E-rate program: rulemaking proceedings,
beneficiary audits, and fact-specific adjudicatory decisions (i.e.,
appeals decisions). We found weaknesses with FCC's implementation of each
of these mechanisms, limiting the effectiveness of FCC's oversight of the
program and the enforcement of program procedures to guard against waste,
fraud, and abuse of E-rate funding.
FCC's Oversight Mechanisms Are Not Fully Effective in Managing the E-Rate
Program
26OMB reviewed E-rate using its Program Assessment Rating Tool (PART),
which is a diagnostic tool intended to provide a consistent approach to
evaluating federal programs as part of the executive budget formulation
process.
FCC's Rulemakings Have Led to Problems with USAC's Procedures and
Enforcement of Those Procedures
As part of its oversight of the E-rate program, FCC is responsible for
establishing new rules and policies for the program or making changes to
existing rules, as well as providing the detailed guidance that USAC
requires to effectively administer the program. FCC carries out this
responsibility through its rulemaking process. FCC's E-rate rulemakings,
however, have often been broadly worded and lacking specificity. Thus,
USAC has needed to craft the more detailed administrative procedures
necessary to implement the rules. However, in crafting administrative
procedures, USAC is strictly prohibited under FCC rules from making
policy, interpreting unclear provisions of the statute or rules, or
interpreting the intent of Congress. We were told by FCC and USAC
officials that USAC does not put procedures in place without some level of
FCC approval. We were also told that this approval is sometimes informal,
such as e-mail exchanges or telephone conversations between FCC and USAC
staff. This approval can come in more formal ways as well, such as when
the commission expressly endorses USAC operating procedures in commission
orders or codifies USAC procedures into FCC's rules. However, two problems
have arisen with USAC administrative procedures.
First, although USAC is prohibited under FCC rules from making policy,
some USAC procedures deal with more than just ministerial details and
arguably rise to the level of policy decisions. For example, in June 2004,
USAC was able to identify at least a dozen administrative procedures that,
if violated by the applicant, would lead to complete or partial denial of
the funding request even though there was no precisely corresponding FCC
rule. The critical nature of USAC's administrative procedures is further
illustrated by FCC's repeated codification of them throughout the history
of the program. FCC's codification of USAC procedures-after those
procedures have been put in place and applied to program participants-
raises concerns about whether these procedures are more than ministerial
and are, in fact, policy changes that should be coming from FCC in the
first place. Moreover, in its August 2004 order (in a section dealing with
the resolution of audit findings), the commission directs USAC to annually
"identify any USAC administrative procedures that should be codified in
our rules to facilitate program oversight." This process begs the question
of which entity is really establishing the rules of the E-rate program and
raises concerns about the depth of involvement by FCC staff with the
management of the program.
Second, even though USAC procedures are issued with some degree of FCC
approval, enforcement problems could arise when audits uncover violations
of USAC procedures by beneficiaries or service providers. The
FCC IG has expressed concern over situations where USAC administrative
procedures have not been formally codified because commission staff have
stated that, in such situations, there is generally no legal basis to
recover funds from applicants that failed to comply with the USAC
procedures. In its August 2004 order, the commission attempted to clarify
the rules of the program with relation to recovery of funds. However, even
under the August 2004 order, the commission did not clearly address the
treatment of beneficiaries who violate a USAC administrative procedure
that has not been codified.
FCC Has Been Slow to Address Problems Raised by Audit Findings
FCC's use of beneficiary audits as an oversight mechanism has also had
weaknesses, although FCC and USAC are now working to address some of these
weaknesses. Since 2000, there have been 122 beneficiary audits conducted
by outside firms, 57 by USAC staff, and 14 by the FCC IG (2 of which were
performed under agreement with the Inspector General of the Department of
the Interior). Beneficiary audits are the most robust mechanism available
to the commission in the oversight of the E-rate program, yet FCC
generally has been slow to respond to audit findings and has not made full
use of the audit findings as a means to understand and resolve problems
within the program.
First, audit findings can indicate that a beneficiary or service provider
has violated existing E-rate program rules. In these cases, USAC or FCC
can seek recovery of E-rate funds, if justified.27 In the FCC IG's May
2004 Semiannual Report, however, the IG observes that audit findings are
not being addressed in a timely manner and that, as a result, timely
action is not being taken to recover inappropriately disbursed funds.28
The IG notes that in some cases the delay is caused by USAC and, in other
cases, the delay is caused because USAC is not receiving timely guidance
from the commission (USAC must seek guidance from the commission when an
audit finding is not a clear violation of an FCC rule or when policy
questions are raised). Regardless, the recovery of inappropriately
27USAC, 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.
28See FCC, Office of the Inspector General Semiannual Report to Congress,
October 1, 2003-March 31, 2004 (Washington, D.C.; May 3, 2004).
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,29 agencies are responsible for promptly reviewing and
evaluating findings from audits, including taking action to correct a
deficiency or taking advantage of the opportunity for improvement. Thus,
if an audit shows a problem but no actual rule violation, FCC should be
examining why the problem arose and determining if a rule change is needed
to address the problem (or perhaps simply addressing the problem through a
clarification to applicant instructions or forms). FCC has been slow,
however, to use audit findings to make programmatic changes. For example,
several important audit findings from the 1998 program year were only
recently resolved by an FCC rulemaking in August 2004.
In its August 2004 order, the commission concluded that a standardized,
uniform process for resolving audit findings was necessary, and directed
USAC to submit to FCC a proposal for resolving audit findings. FCC also
instructed USAC to specify deadlines in its proposal "to ensure audit
findings are resolved in a timely manner."30 USAC submitted its Proposed
Audit Resolution Plan to FCC on October 28, 2004. The plan memorializes
much of the current audit process and provides deadlines for the various
stages of the audit process. FCC released the proposed audit plan for
public comment in December 2004.31
In addition to the Proposed Audit Resolution Plan, the commission
instructed USAC to submit a report to FCC on a semiannual basis
summarizing the status of all outstanding audit findings. The commission
also stated that it expects USAC to identify for commission consideration
on at least an annual basis all audit findings raising management concerns
that are not addressed by existing FCC rules. Lastly, the commission took
the unusual step of providing a limited delegation to the Wireline
Competition Bureau (the bureau within FCC with the greatest share of the
responsibility for managing the E-rate program) to address audit findings
and to act on requests for waiver of rules warranting recovery of funds.32
29GAO/AIMD-00-21.3.1.
30FCC, Fifth Report and Order, In the Matter of Schools and Libraries
Universal Service Support Mechanism, FCC-04-190 (Washington, D.C.; Aug.
13, 2004), para. 74.
31Comments were due January 5, 2005; reply comments were due January 20,
2005.
32FCC 04-190, para. 75.
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.
In addition to problems with responding to audit findings, the audits
conducted to date have been of limited use because neither FCC nor USAC
have conducted an audit effort using a statistical approach that would
allow them to project the audit results to all E-rate beneficiaries. Thus,
at present, no one involved with the E-rate program has a basis for making
a definitive statement about the amount of waste, fraud, and abuse in the
program.33 Of the various groups of beneficiary audits conducted to date,
all were of insufficient size and design to analyze the amount of fraud or
waste in the program or the number of times that any particular problem
might be occurring programwide. At the time we concluded our review, FCC
and USAC were in the process of soliciting and reviewing responses to a
Request for Proposal for audit services to conduct additional beneficiary
audits.
FCC Has Been Slow to Act on Some E-Rate Appeals
Under FCC's rules, program participants can seek review of USAC's
decisions,34 although FCC's appeals process for the E-rate program has
been slow in some cases. Because appeals decisions are used as precedent,
this slowness adds uncertainty to the program and impacts beneficiaries.
FCC rules state that FCC is to decide appeals within 90 days, although FCC
can extend this period. At the time of our review there was a substantial
appeals backlog at FCC (i.e., appeals pending for longer than 90 days).
Out of 1,865 appeals to FCC from 1998 through the end of 2004,
33In testimony before the House Subcommittee on Oversight and
Investigations of the Committee on Energy and Commerce in June 2004, FCC's
Inspector General submitted a prepared statement that said the "results of
audits that have been performed and the allegations under investigation
lead us to believe the program may be subject to unacceptably high risk of
fraud, waste and abuse." At the same hearing, the Chief of FCC's Office of
Strategic Planning and Policy Analysis and the Deputy Chief of FCC's
Wireline Competition Bureau submitted a prepared statement that said that
FCC had "enabled implementation of the [E-rate] statutory goals with a
minimum of fraud, waste, and abuse."
34Virtually 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.
approximately 527 appeals remain undecided, of which 458 (25 percent) are
backlog appeals.35
We were told by FCC officials that some of the backlog is due to staffing
issues. FCC officials said they do not have enough staff to handle appeals
in a timely manner. FCC officials also noted that there has been frequent
staff turnover within the E-rate program, which adds some delay to appeals
decisions because new staff necessarily take time to learn about the
program and the issues. Additionally, we were told that another factor
contributing to the backlog is that the appeals have become more
complicated as the program has matured. Lastly, some appeals may be tied
up if the issue is currently in the rulemaking process.
The appeals backlog is of particular concern given that the E-rate program
is a technology program. An applicant who appeals a funding denial and
works through the process to achieve a reversal and funding two years
later might have ultimately won funding for outdated technology. FCC
officials told us that they are working to resolve all backlogged E-rate
appeals by the end of calendar year 2005.
In summary, Mr. Chairman, we remain concerned that FCC has not done enough
to proactively manage and provide a framework of government accountability
for the multibillion-dollar E-rate program. Lack of clarity about what
accountability standards apply to the program causes confusion among
program participants and can lead to situations where funding commitments
are interrupted pending decisions about applicable law, such as happened
with the Antideficiency Act in the fall of 2004. Ineffective performance
goals and measures make it difficult to assess the program's effectiveness
and chart its future course. Weaknesses in oversight and enforcement can
lead to misuse of E-rate funding by program participants that, in turn,
deprives other schools and libraries whose requests for support were
denied due to funding limitations.
To address these management and oversight problems identified in our
review of the E-rate program, our report recommends that the Chairman of
FCC direct commission staff to (1) conduct and document a comprehensive
assessment to determine whether all necessary
35The 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.
Scope and Methodology
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 conducted our work from December 2003 through December 2004 in
accordance with generally accepted government auditing standards. We
interviewed officials from FCC's Wireline Competition Bureau, Enforcement
Bureau, Office of General Counsel, Office of Managing Director, Office of
Strategic Planning and Policy Analysis, and Office of Inspector General.
We also interviewed officials from USAC. In addition, we interviewed
officials from OMB and the Department of Education regarding performance
goals and measures. OMB had conducted its own assessment of the E-rate
program in 2003, which we also discussed with OMB officials. We reviewed
and analyzed FCC, USAC, and OMB documents related to the management and
oversight of the E-rate program. The information we gathered was
sufficiently reliable for the purposes of our review. See our full report
for a more detailed explanation of our scope and methodology.
Mr. Chairman, this concludes my prepared statement. I would be pleased to
respond to any questions that you or other Members of the Subcommittee may
have.
GAO Contact and For further information about this testimony, please
contact me at (202) 512-2834. Edda Emmanuelli-Perez, John Finedore, Faye
Morrison, andStaff Mindi Weisenbloom also made key contributions to this
statement.
Acknowledgments
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