[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
PROBLEMS WITH THE E-RATE PROGRAM: GAO REVIEW OF FCC MANAGEMENT AND
OVERSIGHT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MARCH 16, 2005
__________
Serial No. 109-7
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
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_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
RALPH M. HALL, Texas JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida Ranking Member
Vice Chairman HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia BART GORDON, Tennessee
BARBARA CUBIN, Wyoming BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
HEATHER WILSON, New Mexico BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING, ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman GENE GREEN, Texas
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey JAY INSLEE, Washington
MIKE ROGERS, Michigan TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee
Bud Albright, Staff Director
James D. Barnette, Deputy Staff Director and General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Oversight and Investigations
ED WHITFIELD, Kentucky, Chairman
CLIFF STEARNS, Florida BART STUPAK, Michigan
CHARLES W. ``CHIP'' PICKERING, Ranking Member
Mississippi DIANA DeGETTE, Colorado
CHARLES F. BASS, New Hampshire JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon JAY INSLEE, Washington
MIKE FERGUSON, New Jersey TAMMY BALDWIN, Wisconsin
MICHAEL C. BURGESS, Texas HENRY A. WAXMAN, California
MARSHA BLACKBURN, Tennessee JOHN D. DINGELL, Michigan,
JOE BARTON, Texas, (Ex Officio)
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Bennett, Thomas D., Assistant Inspector General for USF
Oversight, Federal Communications Commission............... 27
Carlisle, Jeffrey, Chief, Wireline Competition Bureau,
Federal Communications Commission.......................... 17
Goldstein, Mark L., Physical Infrastructure Issues,
Government Accountability Office........................... 6
Additional material submitted for the record:
Bennett, Thomas D., Assistant Inspector General for USF
Oversight, Federal Communications Commission, letter dated
April 21, 2005, enclosing response for the record.......... 62
Carlisle, Jeffrey, Chief, Wireline Competition Bureau,
Federal Communications Commission, letter dated May 12,
2005, enclosing response for the record.................... 63
(iii)
PROBLEMS WITH THE E-RATE PROGRAM: GAO REVIEW OF FCC MANAGEMENT AND
OVERSIGHT
----------
WEDNESDAY, MARCH 16, 2005
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:03 p.m., in
room 2123 of the Rayburn House Office Building, Hon. Ed
Whitfield (chairman) presiding.
Members present: Representatives Whitfield, Burgess, Black-
burn, Stupak, Inslee, and Baldwin.
Also present: Representative Engel.
Staff present: Mark Paoletta, chief counsel; Tom Feddo,
majority counsel; Peter Spencer, majority professional staff;
Jaylyn Jensen, senior legislative analyst; David Nelson,
minority investigator and economist; Edith Hollman, minority
counsel; Jessica McNeice, research assistant; and David Vogel,
staff assistant.
Mr. Whitfield. I would like to call this hearing to order
and welcome all of you to the Oversight and Investigations
Subcommittee hearing on problems with the E-Rate program, the
GAC review of FCC management and oversight. Today's hearing
will examine the Federal Communications Commission's management
and oversight of the E-Rate program. This subcommittee has done
much to expose for Congress a range of problems in the E-Rate
program management--problems that raise questions about the
program's effectiveness and whether the Nation's taxpayers can
be assured their tax dollar has been used efficiently.
During the past session of Congress, this subcommittee
conducted an extensive investigation of the E-Rate program.
Through this work, which was highlighted in three informative
hearings last summer and fall, the subcommittee identified a
number of expensive failures in the program. The subcommittee
spotlight exposed tens of millions of dollars in wasted E-Rate
spending. We saw ceiling-high pallets of useless wireless
equipment, sitting shrink-wrapped in a warehouse, and we
learned that the beneficiaries of that equipment, Puerto Rican
schoolchildren, had been deprived of any real benefit of E-
Rate, despite the program sending more than $100 million to
Puerto Rico's schools.
We learned of wasted opportunities in Texas where, for
instance, the El Paso Independent School District was convinced
by an E-Rate vendor--IBM in that situation--that it could use
$60 million in E-Rate funds for a single school year for about
50 schools. Twenty-four million dollars of this was spent on an
operation meant just to maintain the network. That district
soon found itself over its head in technology as it watched
millions of dollars of planning and preparation, including the
entire maintenance operation, simply disappear when funds dried
up after authorities discovered it had participated in an anti-
competitive process. The district struggles to this day to get
its E-Rate program back in order.
We saw the deceit spread by true--for lack of a better
term--E-Rate crooks, who sought to line their pockets in a
national scheme to funnel tens of millions of E-Rate funds to
particular companies, including NEC BNS, and Intertel, both of
which pleaded guilty last year to Federal fraud and conspiracy
charges. Examples like these were amplified by national news
stories of additional waste in Atlanta, Chicago, Houston, and
elsewhere that served to highlight what we learned were
fundamental weaknesses in the program--that is in the
application process, the technology planning, and the oversight
by the FCC. Some of these topics we will revisit today.
Against this backdrop, we turn, today, to the FCC, which
has been ultimately responsible for this $2 billion a year
program with both its successes and failures these past 7
years. In December 2003, as part of its E-Rate investigation,
the committee requested the GAO, the investigative arm of
Congress, to look at FCC management and oversight of the
program. GAO's findings and recommendations form the
centerpiece of today's hearing.
[The report is available at http://www.gao.gov/new.items/
d05151.pdf]
This will be a straightforward hearing with one panel of
witnesses. We will hear from Mark Goldstein, Director of
Physical Infrastructure Issues for GAO. We will hear from
Jeffrey Carlisle, who is Chief of the FCC's Wireline
Competition Bureau, which oversees the E-Rate program. And we
will hear from Tom Bennett, FCC's Assistant Inspector General
for Universal Service Fund Oversight. He will speak to the IG's
perspective on program weaknesses and also to efforts to
identity waste, fraud, and abuse in the program. At this time,
I would like to welcome the witnesses and say that I am hopeful
that we will able to obtain some clear answers about the state
of FCC management today.
The GAO report raises troubling questions about FCC's track
record over the 7 years of E-Rate operations, a time period
over which more than $9 billion were expended on E-Rate goods
and services, supposedly under FCC's watchful eyes; yet after
all of this money has been spent, and several billion more
promised or committed, we still have no real firm measure of
how effective this spending has been. I would like to
understand why the FCC has failed to, until recently, begin
addressing programmatic weaknesses long-identified by GAO and
the FCC/IG. Why hasn't the FCC taken a comprehensive look at
the program, its funding structure, and identify clearly the
rules necessary for ensuring sound financial and program
management. And what do these current findings say about FCC's
management of the billions of dollars of other universal
service funding mechanisms? If the patterns of problems we see
in E-Rate extend to other portions of universal service, I
would be interested in conducting additional investigatory work
in those areas to assist the full committee as it works to make
sure these programs work as Congress intended.
In the meantime, while the subcommittee's work is complete,
we are preparing a bipartisan staff report that I am confident
will assist the telecommunications subcommittee in its efforts
to overhaul the E-Rate program. Chairman Upton, I wish you well
in preparing such legislation--it will be his subcommittee--and
hope that you will find our work helpful in that regard. In my
view, the subcommittee's work demonstrates that legislation
should not be limited to changes that merely tinker around the
edges. E-Rate requires serious reforms, and the FCC may very
well turn out to be the wrong steward of this program.
Now, let me, again, welcome the witnesses. And I would now
like to recognize the Ranking Member Mr. Stupak of Michigan for
the purposes of making an opening statement.
Mr. Stupak. Well, thank you Mr. Chairman, and thank you for
holding this hearing and continuing this bipartisan examination
of the E-Rate program, the program set up to wire schools and
libraries across the country to the Internet. This program is
crucial to fulfill the promise of equal opportunity in America.
Without equal access to knowledge, the children of low-income,
underserved, and rural America will certainly never be able to
flourish in the 21st century economy.
You need only look at my Congressional district to see the
power of the E-Rate program. Last month, my constituent Mary
Crawford, representing a consortium of 64 libraries in the
Upper Peninsula, testified before a Congressional forum about
the importance of E-Rate. Through careful planning and prudent
use of E-Rate funds, libraries were among the first to bring
broadband to my district. Libraries in my district have seen
Internet usage increase more than 200 percent in the last 4.
More importantly, libraries have been revitalized, becoming
hubs of activity for teenagers, children, business owners, and
seniors.
Educators tell a similar story. Thanks to E-Rate funds, the
world is literally at the fingertips of children in my district
who live in some of the most rural areas of the United States.
Unfortunately, the power of the E-Rate program has not been
fully realized because of greed and incompetence--the greed of
a few bad vendors and the complete incompetence of the FCC. As
this investigation has demonstrated, large vendors have all too
often viewed the $2.2 billion set aside from the universal
service fund for the E-Rate program as a cookie jar to be
tapped at will. Some of the biggest names in corporate America
have been caught with their hands in the cookie jar. The U.S.
subsidiary of the Japanese giant Nippon Electric has pleaded
guilty to bid rigging in connection with E-Rate procurement.
These vendors have bilked the American public for uncounted
millions of dollars, while the schoolchildren in the defrauded
districts must do without the bridge across the digital divide
that Congress intended.
The FCC has permitted such abuses to flourish. The
Commission has ignored repeated warnings and recommendations
from the GAO and its own inspector general to reform the
program. Most importantly, the FCC has failed to implement--or
come to the Congress for the authority to implement remedies
that punish the bad actors. Instead, the FCC's actions to date
only punish the innocent victims of these scams.
The chairman brought up, but let me reiterate, the example
in Puerto Rico. One hundred million dollars was wasted over a
3-year period from 1998 to 200 by greedy vendors. Do you know
what $100 million bought? Two lousy computer connections. Yet
the sum total of FCC action to date has been to refuse any
further funding to the Puerto Rico school district. Thus, we
are now approaching the 8 years in which the children of Puerto
Rico will have completed their primary or secondary education
without the meaningful Internet access that was promised by
Congress in 1996, and not a penny has been recovered from the
vendors that received the E-Rate dollars that went into the
waste.
In Puerto Rico, rural America, and elsewhere, the digital
gap is widening, and the opportunity is evaporating. The FCC
merely fiddles with ill-conceived reform plans, such as the
sudden application of Gov GAAP accounting methods last year.
Without the intervention of Congress, that brainstorm would
have resulted in hundreds of millions of E-Rate dollars tied up
in bureaucracy instead of going to our communities. The
Commission cannot or will not use its authority to find these
greedy vendors. It will impose debarment sanctions only after
the justice department has obtained criminal convictions. In
all, too few cases have the FCC or the USAC been able to even
recover the funds that they know have been dispersed
improperly.
The FCC must find ways to deter waste and abuse from
occurring in the first place. The recommendations from the GAO
and the FCC inspector general's office that we will hear today
are minimal, first steps, steps that should have been taken
years ago.
This committee will have its own bipartisan recommendations
to offer shortly. I expect the changes that the Commission is
urged to make will be made and made promptly. I also anticipate
that we will have recommendation regarding statutory changes
that this committee and that the Congress should consider. As a
member of the telecommunications subcommittee, as well as being
the ranking Democratic member on this subcommittee, I look
forward to working with Chairman Barton, Chairman Upton, and
yourself, Mr. Chairman, as well as Ranking Members Dingell and
Markey to enact these reforms. Both the Congress and the FCC
have much to do to do a better job than what we have done to
date for the children that we promised to elevate out of the
digital divide that marks the difference between opportunity
and despair in the 21st century.
With that, Mr. Chairman, I yield back the balance of my
time, and I will ask unanimous consent the statement of the
Honorable John Dingell be made part of the record.
Thank you, Mr. Stupak, and at this time, I would like to
welcome the witnesses--oh, Ms. Baldwin, would like an opening
statement?
Ms. Baldwin. Thank you, Mr. Chairman.
As a new member of this subcommittee, I want to acknowledge
and commend the subcommittee for its work in prior sessions in
examining this issue and abuse in the E-Rate program in
general. I would like to begin by noting that the E-Rate
program can boast many, many success stories. Millions of
children in thousands of school districts across the country
have benefited from improved Internet access due to E-Rate
funding. I have heard about the way the E-Rate has been used in
school and libraries in my own district, and there should be no
doubt about the value of this program.
It is unfortunate that the actions of a few bad actors
tarnishes an otherwise worthy program. When a school district
fails to properly use E-Rate funds, not only do its students
suffer, others that could have benefited also lose. When
companies collude with school districts to rig bids, all kids
lose.
Reviewing the previous work of this subcommittee and the
GAO report released today raises very disturbing questions
about the management and oversight of this program. With so
much money at stake in so many different school districts, it
is, unfortunately, not surprising that some unscrupulous people
would attempt to abuse the system. These people should be
prosecuted to the full extent of the law.
What is of greater concern are the failures of the Federal
Communications Commission to properly safeguard public funds,
to provide adequate program goals, and guidelines, and conduct
sufficient auditing and oversight of E-Rate awards.
I am pleased that the subcommittee has examined this issue
so carefully, and I look forward to working with the chairman
and ranking member to make this program a success.
Mr. Whitfield. Thank you, Ms. Baldwin. Mr. Burgess, you are
recognized for an opening statement.
Mr. Burgess. I will submit mine for the record in the
interest of time, since we vote on.
Mr. Whitfield. Without objection.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress
from the State of Florida
Thank you Mr. Chairman, for holding this important hearing.
I share the concerns of all parties regarding abuse, waste and
fraud in the E-Rate program. We are talking about billions of dollars
here, money that should be going to help young children learn how to
bridge the digital divide.
Obviously, the GAO report is disturbing, and it doesn't pull any
punches in laying blame with the FCC, which has oversight over the
program.
But we in Congress have oversight over the FCC, so we are also
responsible for this debacle. That's why we had GAO conduct this study,
and why we are having this hearing. I commend the Chairman for holding
this hearing, as well as the other E-Rate related hearings that have
been held by this committee the last couple of years.
I would be remiss if during this hearing on abuse of the E-Rate
program that I did not bring up the report from Miami-Dade Public
Schools in my home state of Florida about the legal quagmire that they
appear to be in as a result of a Universal Service Administrative
Company (USAC) recovery process.
While I won't discuss the merits or specifics of this particular
case, the situation in Florida certainly raises general concerns that
can and should be addressed by this committee, the FCC and the USAC.
This is especially in regard to the procedural process used by the
USDAC and the FCC, which in this case seems to be hurting the local
school board.
Mr. Chairman, there are many questions that need to be answered at
this hearing by all parties involved. It is the intent of Congress that
schools and libraries have access to these funds to help
underprivileged children learn using 21st century technology. However,
the problems detailed in the GAO report and in other accounts defeat
the very goal of the E-Rate program. We must fix this problem before an
entire generation of children gets left behind.
Mr. Whitfield. As you can hear, it looks like we have a
vote on the floor, but before we do that, I would like to, at
this time--and by the way, the Chairman of the full committee
may come in. If he comes in, he will certainly be allowed to
give an opening statement as well, but in the meantime, I would
like to introduce the witnesses and welcome you to this panel.
First, we have Mr. Mark Goldstein, who is the Director of
Physical Infrastructure Issues at the Government Accountability
Office, and he will be giving the testimony related to the GAO
report, which was embargoed until today. We also have with us
Mr. Jeffrey Carlisle, who is the Wireline Competition Bureau at
the Federal Communications Commission; he is the Chief. We
understand that his mother is in the audience today, and we
welcome her as well to watch him testify. Also, Mr. Thomas
Bennett, who is the Assistant Inspector General for the
Universal Service Fund Oversight at the Federal Communications
Commission. And I might add, as you know, we are holding an
investigatory hearing, and it is the practice of this committee
that we take testimony under oath. And each of you certainly
has a right to an attorney being present, and I know that--it
is my understanding that Mrs. Emmanuelli-Perez is an attorney
that is accompanying you, Mr. Goldstein. Is that correct?
Mr. Goldstein. That is correct, Mr. Chairman.
Mr. Whitfield. Okay. Well, at this time--and Mr. Carlisle,
do you want an attorney to be present with you?
Mr. Carlisle. No, I will be fine.
Mr. Whitfield. Mr. Bennett?
Mr. Bennett. No.
Mr. Whitfield. Okay. Well, then, at this time, if you would
stand up with me, I would like to swear you in.
[Witnesses sworn.]
Mr. Whitfield. Thank you. You are now under oath, and you
may now give a 5-minute summary of your written statement.
And Mr. Goldstein, we will start with you.
TESTIMONY OF MARK L. GOLDSTEIN, PHYSICAL INFRASTRUCTURE ISSUES,
GOVERNMENT ACCOUNTABILITY OFFICE; JEFFREY CARLISLE, CHIEF,
WIRELINE COMPETITION BUREAU, FEDERAL COMMUNICATIONS COMMISSION;
AND THOMAS D. BENNETT, ASSISTANT INSPECTOR GENERAL FOR USF
OVERSIGHT, FEDERAL COMMUNICATIONS COMMISSION
Mr. Goldstein. Good afternoon, Mr. Chairman and members of
the subcommittee. I am Mark Goldstein, a director with GAO's
Physical Infrastructure team. Joining me today at the table is
Edda Emmanuelli-Perez, an Assistant General Counsel at GAO. We
appreciate the opportunity to come before you today to discuss
management and oversight of the Federal E-Rate program, which
provides schools and libraries across the country with funding
for telecommunications and Internet services.
We are releasing, today, our latest report concerning the
E-Rate program. Including today's hearing, GAO, since 1998, has
issued 12 reports and testimonies examining or relating to the
E-Rate program. Recently, this program has received
considerable scrutiny from your subcommittee due to multiple
cases of fraud, waste, and abuse that have come to light. The
FCC's Inspector General has testified before Congress
concerning a few particularly egregious cases.
Our work related to the E-Rate program has focused more on
internal controls and other management-related issues the
program faces. For the report being released today, we
evaluated: No. 1, the effect of the current structure of the E-
Rate program on the FCC's management of the program, No. 2,
FCC's development and use of performance goals and measures in
managing the program, and No. 3, the effectiveness of FCC's
oversight mechanisms.
These oversight mechanisms include FCC rulemaking
proceedings, audits of E-Rate beneficiaries, and the appeals
process within the E-Rate program. This afternoon I will
briefly summarize our findings, which are more fully detailed
in our report.
First, FCC established E-Rate as a multi-billion dollar
program, operating under an organizational structure unusual to
the Federal Government, and then never conducted a
comprehensive assessment to determine which Federal
requirements, policies, and practices apply to the program, to
USAC, and to the Universal Service Fund itself. FCC believes
that it has addressed, on a case-by-case basis, the
applicability of various Federal requirements. We believe that
addressing the applicability of statutes on a case-by-case
basis as issues have arisen has put FCC and the E-Rate program
in the position of reacting to problems as they occur, rather
than setting up an organization of internal controls designed
to ensure compliance with applicable laws. The laws
encompassing fiscal and accountability rules are not applied in
isolation, rather they are part of a framework that addresses
issues of financial and general management of Federal agencies
and programs. The E-Rate program was established over 7 years
ago, yet as illustrated by the recent problems related to the
applicability of the Antideficiency Act and its effect on
funding commitments, FCC is still analyzing whether certain
statutes and requirements apply to this program.
We believe it also remains to be resolved the extent to
which FCC has delegated some functions for the E-Rate program
to USAC. Because of the unusual program structure, USAC
operates and disburses funds under less explicit Federal ties
than many other Federal programs. We believe that FCC needs to
explore whether the disbursement policies and practices for the
E-Rate program are consistent with statutory and regulatory
requirements for the disbursement of public funds and whether
some of the functions carried out by USAC are inherently
governmental activities that should be performed by government
personnel.
We are encouraged that FCC just announced that it has
contracted with the National Academy of Public Administration
for NAPA to study and explore alternative models to the current
organizational and governance structure of the Universal
Service program. We believe this study will go a long way
toward addressing the concerns outlined in our report, and we
look forward to seeing the results of NAPA's efforts.
The second issue we examined was FCC's development and use
of performance goals and measures. GAO has made past
recommendations that FCC develop meaningful performance goals
and measures to assess the specific impact of E-Rate funds on
schools' and libraries' Internet access and to improve the
management of the program. When FCC did develop goals for the
program, they were related to levels of Internet connectivity
in schools; however, FCC failed to use measurements that
isolated the effects of E-Rate funding. The FCC has also failed
to put in place management-oriented goals and measures, despite
longstanding concerns about the program's effectiveness in key
areas. OMB, in its own assessment of the program, concluded
that there is no way to tell whether the program has resulted
in cost-effective deployment and uss of advanced
telecommunications services to schools and libraries. FCC told
us they are currently working on new performance goals and
measures and that they plan to seek OMB approval of those goals
and measures by the end of the fiscal year.
Third, we examined FCC's oversight mechanisms for the E-
Rate program. We found that FCC's rulemakings have often lacked
specificity and led to situations where USAC, in crafting the
detail needed to operate the program, has established
administrative procedures that arguably rise to the level of
policy decisions, even though USAC is prohibited by FCC rules
from making program policy. This has led to enforcement
problems. We found that the Commission has been slow to respond
to the findings coming out of beneficiary audits.
Last, we found that the E-Rate program has a significant
appeals backlog at FCC, due in part to a shortage of staff and
staff turnover. In commenting on our report, the Commission
stated that it has begun to redirect staff and hire additional
attorneys to Universal Service Fund oversight and program
management, including the resolution of E-Rate appeals. We are
particularly encouraged that FCC established a measurable goal
of resolving all backlogged E-Rate appeals by the end of this
year.
Our report details three recommendations for FCC action on
the E-Rate program. First, that they conduct a comprehensive
assessment to determine whether all necessary government
accountability requirements, policies, and practices have been
applied and are fully in place to protect the program and its
funding. Second, that they establish performance goals and
measures for the E-Rate program that are consistent with the
Government Performance and Results Act. And third, that they
develop a strategy for reducing the E-Rate appeals backlog.
Thank you, Mr. Chairman, this concludes my opening
statement. I will be happy to respond to any questions that you
or members of the subcommittee may have.
[The prepared statement of Mark Goldstein follows:]
Prepared Statement of Mark L. Goldstein, Director, Physical
Infrastructure Issues, United States Government Accountability Office
Mr. Chairman and Members of the Subcommittee: We are pleased to be
here to discuss the results of our recently completed review of the
Federal Communications Commission's (FCC) universal service program for
schools and libraries. As you know, the Telecommunications Act of 1996
expanded the concept of universal service to include assistance to
schools and libraries in acquiring telecommunications and Internet
services; the act charged FCC with establishing the universal service
discount mechanism for eligible schools and libraries. The commission,
in turn, created a large and ambitious program that became commonly
known as the ``E-rate'' program, and set the annual funding cap for the
program at $2.25 billion. FCC designated the Universal Service
Administrative Company (USAC), a private, not-for-profit corporation
established under FCC's rules, to carry out the day-to-day operations
of the E-rate program. FCC retains responsibility for overseeing the
program's operations and ensuring compliance with the commission's
rules.
Since 1998, the E-rate program has committed more than $13 billion
in funding to help schools and libraries across the nation acquire
telecommunications and Internet services. Eligible schools and
libraries can apply annually to receive support, which can be used for
specific eligible services and equipment such as telephone services,
Internet access services, and the installation of internal wiring and
other related items. Recently, however, allegations have been made that
some E-rate beneficiaries (schools and libraries) and service providers
(e.g., telecommunications and network equipment companies) have
fraudulently obtained, wasted, or abused E-rate funding. In May 2004,
for example, one service provider involved in E-rate projects in
several states pleaded guilty to bid rigging and wire fraud and agreed
to pay more than $20 million in criminal fines, civil payments, and
restitution.
In light of ongoing concerns about the E-rate program, we were
asked to review various aspects of the program. Specifically, we
evaluated (1) the effect of the current structure of the E-rate program
on FCC's management of the program, (2) FCC's development and use of
performance goals and measures in managing the program, and (3) the
effectiveness of FCC's oversight mechanisms--rulemaking proceedings,
beneficiary audits, and reviews of USAC decisions (appeals)--in
managing the program.
Our testimony is based on a report, being released today,
containing the results of our review and recommendations for improving
FCC's management and oversight of the E-rate program.1 In
summary, we found the following:
---------------------------------------------------------------------------
\1\ Telecommunications: Greater Involvement Needed by FCC in the
Management and Oversight of the E-Rate Program, GAO05151 (Washington,
D.C.: Feb. 9, 2005). The report is available on GAO's Web site at
www.gao.gov.
FCC established E-rate as a multibillion-dollar program operating
under an organizational structure unusual to the federal
government, but never conducted a comprehensive assessment to
determine which federal requirements, policies, and practices
apply to the program, to USAC, and to the Universal Service
Fund itself. As a result, FCC has struggled with determining
which fiscal and accountability requirements apply to the E-
rate program. We believe that issues exist concerning the
applicability of certain statutes and the extent to which FCC
has delegated certain functions for the E-rate program to
USAC--issues that FCC needs to explore and resolve.
FCC has not developed meaningful performance goals and measures for
assessing and managing the program. As a result, there is no
way to tell whether the program has resulted in the cost-
effective deployment and use of advanced telecommunications
services for schools and libraries.
FCC's program oversight mechanisms contain weaknesses that limit
FCC's management of the program and its ability to understand
the scope of waste, fraud, and abuse within the program. For
example, FCC's rulemakings have often lacked specificity and
have led to situations where important USAC administrative
procedures have been deemed unenforceable by FCC. There is also
a significant backlog of E-rate appeals that adds uncertainty
to the program and impacts beneficiaries.
FCC has taken some important steps, particularly in recent months,
to address some of the areas of concern discussed in our report.
Nevertheless, we believe that FCC has not done enough to proactively
manage and provide a framework of government accountability for the
multibillion-dollar E-rate program.
BACKGROUND
The concept of ``universal service'' has traditionally meant
providing residential telephone subscribers with nationwide access to
basic telephone services at reasonable rates. The Telecommunications
Act of 1996 broadened the scope of universal service to include, among
other things, support for schools and libraries. The act instructed the
commission to establish a universal service support mechanism to ensure
that eligible schools and libraries have affordable access to and use
of certain telecommunications services for educational
purposes.2 In addition, Congress authorized FCC to
``establish competitively neutral rules to enhance, to the extent
technically feasible and economically reasonable, access to advanced
telecommunications and information services for all public and
nonprofit elementary and secondary school classrooms . . . and
libraries . . .'' 3 Based on this direction, and following
the recommendations of a Federal-State Joint Board on Universal
Service,4 FCC established the schools and libraries
universal service mechanism that is commonly referred to as the E-rate
program. The program is funded through statutorily mandated payments by
companies that provide interstate telecommunications
services.5 Many of these companies, in turn, pass their
contribution costs on to their subscribers through a line item on
subscribers' phone bills.6 FCC capped funding for the E-rate
program at $2.25 billion per year, although funding requests by schools
and libraries can greatly exceed the cap. For example, schools and
libraries requested more than $4.2 billion in E-rate funding for the
2004 funding year.
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\2\ 47 U.S.C. 254(h)(1)(B).
\3\ 47 U.S.C. 254(h)(2).
\4\ The Federal-State Joint Board on Universal Service was
established in March 1996 to make recommendations to implement the
universal service provisions of the Telecommunications Act of 1996. The
board is composed of FCC commissioners, state utility commissioners,
and a consumer advocate representative.
\5\ These companies include providers of local and long distance
telephone services, wireless telephone services, paging services, and
pay phone services. 47 C.F.R. 54.706.
\6\ The line item is called various things by various companies,
such as the ``federal universal service fee'' or the ``universal
connectivity fee.'' Some companies do not separate out universal
service costs as a line item, but instead just build it into their
overall costs. Either way, consumers ultimately pay for the various
universal service programs, including E-rate.
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In 1998, FCC appointed USAC as the program's permanent
administrator, although FCC retains responsibility for overseeing the
program's operations and ensuring compliance with the commission's
rules.7 In response to congressional conference committee
direction,8 FCC has specified that USAC ``may not make
policy, interpret unclear provisions of the statute or rules, or
interpret the intent of Congress.'' 9 USAC is responsible
for carrying out the program's day-to-day operations, such as
maintaining a Web site that contains program information and
application procedures; answering inquiries from schools and libraries;
processing and reviewing applications; making funding commitment
decisions and issuing funding commitment letters; and collecting,
managing, investing, and disbursing E-rate funds. FCC permits--and in
fact relies on--USAC to establish administrative procedures that
program participants are required to follow as they work through the
application and funding process.
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\7\ USAC was established at the direction of FCC and operates under
FCC's rules and policies.
\8\ See S.1768, 105th Cong., 2004(b)(2)(A) (1998).
\9\ 47 C.F.R. 54.702(c).
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Under the E-rate program, eligible schools, libraries, and
consortia that include eligible schools and libraries 10 may
receive discounts for eligible services. Eligible schools and libraries
may apply annually to receive E-rate support. The program places
schools and libraries into various discount categories, based on
indicators of need, so that the school or library pays a percentage of
the cost for the service and the E-rate program funds the remainder. E-
rate discounts range from 20 percent to 90 percent. USAC reviews all of
the applications and related forms and issues funding commitment
decision letters. Generally, it is the service provider that seeks
reimbursement from USAC for the discounted portion of the service
rather than the school or library.11
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\10\ Eligibility of schools and libraries is defined at 47 U.S.C.
254. Generally, educational institutions that meet the definition of
``schools'' in the Elementary and Secondary Education Act of 1965 are
eligible to participate, as are libraries that are eligible to receive
assistance from a state's library administrative agency under the
Library Services and Technology Act. Examples of entities not eligible
for support are home school programs, private vocational programs, and
institutions of higher education. In addition, neither private schools
with endowments of more than $50 million nor libraries whose budgets
are part of a school's budget are eligible to participate. 20 U.S.C.
9122.
\11\ The school or library could also pay the service provider in
full and then seek reimbursement from USAC for the discount portion.
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FCC ESTABLISHED AN UNUSUAL PROGRAM STRUCTURE WITHOUT COMPREHENSIVELY
ADDRESSING THE APPLICABILITY OF GOVERNMENTAL STANDARDS AND FISCAL
CONTROLS
FCC established an unusual structure for the E-rate program but has
never conducted a comprehensive assessment of which federal
requirements, policies, and practices apply to the program, to USAC, or
to the Universal Service Fund itself. FCC recently began to address a
few of these issues, concluding that as a permanent indefinite
appropriation, the Universal Service Fund is subject to the
Antideficiency Act and that USAC's issuance of commitment letters
constitutes obligations for purposes of the act. However, FCC's
conclusions concerning the status of the Universal Service Fund raise
further issues relating to the collection, deposit, obligation, and
disbursement of those funds--issues that FCC needs to explore and
resolve comprehensively rather than in an ad hoc fashion as problems
arise.
The Telecommunications Act of 1996 neither specified how FCC was to
administer universal service to schools and libraries nor prescribed
the structure and legal parameters of the universal service mechanisms
to be created. To carry out the day-to-day activities of the E-rate
program, FCC relied on a structure it had used for other universal
service programs in the past--a not-for-profit corporation established
at FCC's direction that would operate under FCC oversight. However, the
structure of the E-rate program is unusual in several respects compared
with other federal programs:
FCC appointed USAC as the permanent administrator of the Universal
Service Fund,12 and FCC's Chairman has final
approval over USAC's Board of Directors. USAC is responsible
for administering the program under FCC orders, rules, and
directives. However, USAC is not part of FCC or any other
government entity; it is not a government corporation
established by Congress; and no contract or memorandum of
understanding exists between FCC and USAC for the
administration of the E-rate program. Thus, USAC operates and
disburses funds under less explicit federal ties than many
other federal programs.
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\12\ USAC was appointed the permanent administrator subject to a
review after one year by FCC to determine that the universal service
programs were being administered in an efficient, effective, and
competitively neutral manner. 47 C.F.R. 54.701(a). This review was
never conducted.
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Questions as to whether the monies in the Universal Service Fund
should be treated as federal funds have troubled the program
from the start. Even though the fund has been listed in the
budget of the United States and, since fiscal year 2004, has
been subject to an annual apportionment from the Office of
Management and Budget (OMB), the monies are maintained outside
of Treasury accounts by USAC and some of the monies have been
invested.13 The United States Treasury implements
the statutory controls and restrictions involving the proper
collection and deposit of appropriated funds, including the
financial accounting and reporting of all receipts and
disbursements, the security of appropriated funds, and
agencies' responsibilities for those funds.14
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\13\ The Universal Service Fund is included in the federal budget
as a special fund. OMB concluded that the fund does not constitute
public money subject to the Miscellaneous Receipts Statute, 31 U.S.C.
3302, and therefore can be maintained outside the Treasury by a
nongovernmental manager. Letter from Mr. Robert G. Damus, OMB General
Counsel to Mr. Christopher Wright, FCC General Counsel, dated April 28,
2000.
\14\ See 31 U.S.C. 331, 3301-3305 and the Treasury Financial
Manual, vol. I, which instructs federal agencies in areas of central
accounting and reporting, disbursing, deposit regulations, and other
fiscal matters necessary for the financial accounting and reporting of
all receipts and disbursements of the federal government.
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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.
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\15\ See FCC, Order, In the Matter of Application of Generally
Accepted Accounting Principles for Federal Agencies and Generally
Accepted Government Auditing Standards to the Universal Service Fund,
FCC 03-232 (Washington, D.C.; Oct. 3, 2003).
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FCC maintains that it has undertaken a timely and extensive
analysis of the significant legal issues associated with the status of
the Universal Service Fund and has generally done so on a case-by-case
basis. We recognize that FCC has engaged in internal deliberations and
external consultations and analysis of a number of statutes. However,
we do not believe that this was done in a timely manner or that it is
appropriate to do this on a case-by-case basis, which puts FCC and the
program in the position of reacting to problems as they occur rather
than setting up an organization and internal controls designed to
ensure compliance with applicable laws.
As you know, Mr. Chairman, a problem with this ad hoc approach was
dramatically illustrated with regard to the applicability of the
Antideficiency Act to the Universal Service Fund. In October 2003, FCC
ordered USAC to prepare financial statements for the Universal Service
Fund, as a component of FCC, consistent with GovGAAP, which FCC and
USAC had not previously applied to the fund. In February 2004, staff
from USAC realized during contractor-provided training on GovGAAP
procedures that the commitment letters sent to beneficiaries (notifying
them whether their funding is approved and in what amount) might be
viewed as ``obligations'' of appropriated funds.16 If so
viewed, and if FCC also found the Antideficiency Act--which does not
allow an agency or program to make obligations in excess of available
budgetary resources--to be applicable to the E-rate program, then USAC
would need to dramatically increase the program's cash-on-hand and
lessen the program's investments 17 to provide budgetary
authority sufficient to satisfy the Antideficiency Act. As a result,
USAC suspended funding commitments in August 2004 while waiting for a
commission decision on how to proceed. At the end of September 2004--
facing the end of the fiscal year--FCC decided that commitment letters
were obligations; that the Antideficiency Act did apply to the program;
and that USAC would need to immediately liquidate some of its
investments to come into compliance with the Antideficiency Act.
According to USAC officials, the liquidations cost the fund
approximately $4.6 million in immediate losses and could potentially
result in millions in foregone annual interest income. In response to
these events, in December 2004, Congress passed a bill granting the
Universal Service Fund a one-year exemption from the Antideficiency
Act.18
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\16\ An ``obligation'' is an action that creates a legal liability
or definite commitment on the part of the government to make a
disbursement at some later date.
\17\ According to USAC, the Universal Service Fund was invested in
a variety of securities, including cash and cash equivalents,
government and government-backed securities, and high-grade commercial
paper. USAC generally did not seek the approval of the commission on
particular investments, although investments were made with FCC
knowledge and oversight through formal audits and informal meetings and
review.
\18\ Universal Service Antideficiency Temporary Suspension Act,
Pub. L. No. 108-494, 302, 118 Stat. 3986 (2004). The law exempts
universal service monies from the Antideficiency Act until December 31,
2005.
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As we explain more fully in our report, Mr. Chairman, we agree with
FCC's determinations that the Universal Service Fund is a permanent
appropriation subject to the Antideficiency Act and that its funding
commitment decision letters constitute recordable obligations of the
Universal Service Fund. However, there are several significant fiscal
law issues that remain unresolved. We believe that where FCC has
determined that fiscal controls and policies do not apply, the
commission should reconsider these determinations in light of the
status of universal service monies as federal funds. For example, in
view of its determination that the fund constitutes an appropriation,
FCC needs to reconsider the applicability of the Miscellaneous Receipts
Statute, 31 U.S.C. 3302, which requires that money received for the
use of the United States be deposited in the Treasury unless otherwise
authorized by law.19 FCC also needs to assess the
applicability of other fiscal control and accountability statutes
(e.g., the Single Audit Act and the Cash Management Improvement
Act).20
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\19\ Because OMB and FCC had believed the funds were not public
monies ``for the use of the United States'' under the Miscellaneous
Receipts Statute, neither OMB nor FCC viewed the Universal Service Fund
as subject to that statute.
\20\ For example, in October 2003, when FCC ordered USAC to comply
with GovGAAP, it noted that the Universal Service Fund was subject to
the Debt Collection Improvement Act of 1996. In that same order, FCC
stated that ``the funds may be subject to a number of federal financial
and reporting statutes'' (emphasis added) and ``relevant portions of
the Federal Financial Management Improvement Act of 1996,'' but did not
specify which specific statutes or the relevant portions or further
analyze their applicability. FCC officials also told us that they were
uncertain whether procurement requirements such as the Federal
Acquisition Regulation (FAR) applied to arrangements between FCC and
USAC, but they recommended that those requirements be followed as a
matter of policy.
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Another major issue that remains to be resolved involves the extent
to which FCC has delegated some functions for the E-rate program to
USAC. For example, are the disbursement policies and practices for the
E-rate program consistent with statutory and regulatory requirements
for the disbursement of public funds? 21 Are some of the
functions carried out by USAC, even though they have been characterized
as administrative or ministerial, arguably inherently governmental
activities 22 that must be performed by government
personnel? Resolving these issues in a comprehensive fashion, rather
than continuing to rely on reactive, case-by-case determinations, is
key to ensuring that FCC establishes the proper foundation of
government accountability standards and safeguards for the E-rate
program and the Universal Service Fund. We are encouraged that FCC just
announced that it has contracted with the National Academy of Public
Administration (NAPA) for NAPA to study and explore alternative models
to the current organizational and governance structure of the Universal
Service Fund program. We believe this study will go a long way toward
addressing the concerns outlined in our report and we look forward to
seeing the results of NAPA's efforts.
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\21\ See 31 U.S.C. 3321, 3322, 3325, and the Treasury Financial
Manual.
\22\ See OMB Circular A-76, May 29, 2003, which defines an
inherently governmental activity as requiring ``the exercise of
substantial discretion in applying government authority and/or in
making decisions for the government.''
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FCC DID NOT DEVELOP USEFUL PERFORMANCE GOALS AND MEASURES FOR ASSESSING
AND MANAGING THE E-RATE PROGRAM
Although $13 billion in E-rate funding has been committed to
beneficiaries during the past 7 years, FCC did not develop useful
performance goals and measures to assess the specific impact of these
funds on schools' and libraries' Internet access and to improve the
management of the program, despite a recommendation by us in 1998 to do
so. At the time of our current review, FCC staff was considering, but
had not yet finalized, new E-rate goals and measures in response to
OMB's concerns about this deficiency in a 2003 OMB assessment of the
program.
One of the management tasks facing FCC is to establish strategic
goals for the E-rate program, as well as annual goals linked to them.
The Telecommunications Act of 1996 did not include specific goals for
supporting schools and libraries, but instead used general language
directing FCC to establish competitively neutral rules for enhancing
access to advanced telecommunications and information services for all
public and nonprofit private elementary and secondary school classrooms
and libraries.23 As the agency accountable for the E-rate
program, FCC is responsible under the Government Performance and
Results Act of 1993 (Results Act) for establishing the program's long-
term strategic goals and annual goals, measuring its own performance in
meeting these goals, and reporting publicly on how well it is
doing.24
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\23\ 47 U.S.C. 254(h)(2)(A).
\24\ For additional details on the Results Act and its
requirements, see GAO, Executive Guide: Effectively Implementing the
Government Performance and Results Act, GAO/GGD-96-118 (Washington,
D.C.: June 1996). GAO first noted the lack of clear and specific E-rate
performance goals and measures in its July 1998 testimony before the
Senate Committee on Commerce, Science, and Transportation. See GAO,
Schools and Libraries Corporation: Actions Needed to Strengthen Program
Integrity Operations before Committing Funds, GAO/TRCED98243
(Washington, D.C.: July 16, 1998), pp. 15-16.
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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?
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\25\ See NCES, Internet Access in U.S. Public Schools and
Classrooms: 1994-2002, NCES-2004-011 (Washington, D.C.; October 2003).
This was the most recent update available at the time of our review.
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Performance goals and measures are used not only to assess a
program's impact but also to develop strategies for resolving mission-
critical management problems. However, management-oriented goals have
not been a feature of FCC's performance plans, despite long-standing
concerns about the program's effectiveness in key areas. For example,
two such goals--related to assessing how well the program's competitive
bidding process was working and increasing program participation by
low-income and rural school districts and rural libraries--were planned
but not carried forward.
FCC did not include any E-rate goals for fiscal years 2003 and 2004
in its recent annual performance reports. The failure to measure
effectively the program's impact on public and private schools and
libraries over the past 7 years undercuts one of the fundamental
purposes of the Results Act: to have federal agencies adopt a fact-
based, businesslike framework for program management and
accountability. The problem is not just a lack of data for accurately
characterizing program results in terms of increasing Internet access.
Other basic questions about the E-rate program also become more
difficult to address, such as the program's efficiency and cost-
effectiveness in supporting the telecommunications needs of schools and
libraries. For example, a review of the program by OMB in 2003
concluded that there was no way to tell whether the program has
resulted in the cost-effective deployment and use of advanced
telecommunications services for schools and libraries.26 OMB
also noted that there was little oversight to ensure that the program
beneficiaries were using the funding appropriately and effectively. In
response to these concerns, FCC staff have been working on developing
new performance goals and measures for the E-rate program and plan to
finalize them and seek OMB approval in fiscal year 2005.
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\26\ OMB reviewed E-rate using its Program Assessment Rating Tool
(PART), which is a diagnostic tool intended to provide a consistent
approach to evaluating federal programs as part of the executive budget
formulation process.
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FCC'S OVERSIGHT MECHANISMS ARE NOT FULLY EFFECTIVE IN MANAGING THE E-
RATE PROGRAM
FCC testified before Congress in June 2004 that it relies on three
chief components in overseeing the E-rate program: rulemaking
proceedings, beneficiary audits, and fact-specific adjudicatory
decisions (i.e., appeals decisions). We found weaknesses with FCC's
implementation of each of these mechanisms, limiting the effectiveness
of FCC's oversight of the program and the enforcement of program
procedures to guard against waste, fraud, and abuse of E-rate funding.
FCC's Rulemakings Have Led to Problems with USAC's Procedures and
Enforcement of Those Procedures
As part of its oversight of the E-rate program, FCC is responsible
for establishing new rules and policies for the program or making
changes to existing rules, as well as providing the detailed guidance
that USAC requires to effectively administer the program. FCC carries
out this responsibility through its rulemaking process. FCC's E-rate
rulemakings, however, have often been broadly worded and lacking
specificity. Thus, USAC has needed to craft the more detailed
administrative procedures necessary to implement the rules. However, in
crafting administrative procedures, USAC is strictly prohibited under
FCC rules from making policy, interpreting unclear provisions of the
statute or rules, or interpreting the intent of Congress. We were told
by FCC and USAC officials that USAC does not put procedures in place
without some level of FCC approval. We were also told that this
approval is sometimes informal, such as e-mail exchanges or telephone
conversations between FCC and USAC staff. This approval can come in
more formal ways as well, such as when the commission expressly
endorses USAC operating procedures in commission orders or codifies
USAC procedures into FCC's rules. However, two problems have arisen
with USAC administrative procedures.
First, although USAC is prohibited under FCC rules from making
policy, some USAC procedures deal with more than just ministerial
details and arguably rise to the level of policy decisions. For
example, in June 2004, USAC was able to identify at least a dozen
administrative procedures that, if violated by the applicant, would
lead to complete or partial denial of the funding request even though
there was no precisely corresponding FCC rule. The critical nature of
USAC's administrative procedures is further illustrated by FCC's
repeated codification of them throughout the history of the program.
FCC's codification of USAC procedures--after those procedures have been
put in place and applied to program participants--raises concerns about
whether these procedures are more than ministerial and are, in fact,
policy changes that should be coming from FCC in the first place.
Moreover, in its August 2004 order (in a section dealing with the
resolution of audit findings), the commission directs USAC to annually
``identify any USAC administrative procedures that should be codified
in our rules to facilitate program oversight.'' This process begs the
question of which entity is really establishing the rules of the E-rate
program and raises concerns about the depth of involvement by FCC staff
with the management of the program.
Second, even though USAC procedures are issued with some degree of
FCC approval, enforcement problems could arise when audits uncover
violations of USAC procedures by beneficiaries or service providers.
The FCC IG has expressed concern over situations where USAC
administrative procedures have not been formally codified because
commission staff have stated that, in such situations, there is
generally no legal basis to recover funds from applicants that failed
to comply with the USAC procedures. In its August 2004 order, the
commission attempted to clarify the rules of the program with relation
to recovery of funds. However, even under the August 2004 order, the
commission did not clearly address the treatment of beneficiaries who
violate a USAC administrative procedure that has not been codified.
FCC Has Been Slow to Address Problems Raised by Audit Findings
FCC's use of beneficiary audits as an oversight mechanism has also
had weaknesses, although FCC and USAC are now working to address some
of these weaknesses. Since 2000, there have been 122 beneficiary audits
conducted by outside firms, 57 by USAC staff, and 14 by the FCC IG (2
of which were performed under agreement with the Inspector General of
the Department of the Interior). Beneficiary audits are the most robust
mechanism available to the commission in the oversight of the E-rate
program, yet FCC generally has been slow to respond to audit findings
and has not made full use of the audit findings as a means to
understand and resolve problems within the program.
First, audit findings can indicate that a beneficiary or service
provider has violated existing E-rate program rules. In these cases,
USAC or FCC can seek recovery of E-rate funds, if
justified.27 In the FCC IG's May 2004 Semiannual Report,
however, the IG observes that audit findings are not being addressed in
a timely manner and that, as a result, timely action is not being taken
to recover inappropriately disbursed funds.28 The IG notes
that in some cases the delay is caused by USAC and, in other cases, the
delay is caused because USAC is not receiving timely guidance from the
commission (USAC must seek guidance from the commission when an audit
finding is not a clear violation of an FCC rule or when policy
questions are raised). Regardless, the recovery of inappropriately
disbursed funds is important to the integrity of the program and needs
to occur in a timely fashion.
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\27\ USAC, through its duties as administrator of the fund,
initially seeks recovery of erroneously disbursed funds. In addition,
the commission adopted rules in April 2003 to provide for suspension
and debarment from the program for persons convicted of criminal
violations or held civilly liable for certain acts arising from their
E-rate participation. Debarments would be for a period of three years
unless circumstances warrant a longer debarment period in order to
protect the public interest.
\28\ See FCC, Office of the Inspector General Semiannual Report to
Congress, October 1, 2003-March 31, 2004 (Washington, D.C.; May 3,
2004).
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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.
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\29\ GAO/aimd-00-21.3.1.
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In its August 2004 order, the commission concluded that a
standardized, uniform process for resolving audit findings was
necessary, and directed USAC to submit to FCC a proposal for resolving
audit findings. FCC also instructed USAC to specify deadlines in its
proposal ``to ensure audit findings are resolved in a timely manner.''
30 USAC submitted its Proposed Audit Resolution Plan to FCC
on October 28, 2004. The plan memorializes much of the current audit
process and provides deadlines for the various stages of the audit
process. FCC released the proposed audit plan for public comment in
December 2004.31
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\30\ FCC, Fifth Report and Order, In the Matter of Schools and
Libraries Universal Service Support Mechanism, FCC-04-190 (Washington,
D.C.; Aug. 13, 2004), para. 74.
\31\ Comments were due January 5, 2005; reply comments were due
January 20, 2005.
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In addition to the Proposed Audit Resolution Plan, the commission
instructed USAC to submit a report to FCC on a semiannual basis
summarizing the status of all outstanding audit findings. The
commission also stated that it expects USAC to identify for commission
consideration on at least an annual basis all audit findings raising
management concerns that are not addressed by existing FCC rules.
Lastly, the commission took the unusual step of providing a limited
delegation to the Wireline Competition Bureau (the bureau within FCC
with the greatest share of the responsibility for managing the E-rate
program) to address audit findings and to act on requests for waiver of
rules warranting recovery of funds.32 These actions could
help ensure, on a prospective basis, that audit findings are more
thoroughly and quickly addressed. However, much still depends on timely
action being taken by FCC, particularly if audit findings suggest the
need for a rulemaking.
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\32\ FCC 04-190, para. 75.
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In addition to problems with responding to audit findings, the
audits conducted to date have been of limited use because neither FCC
nor USAC have conducted an audit effort using a statistical approach
that would allow them to project the audit results to all E-rate
beneficiaries. Thus, at present, no one involved with the E-rate
program has a basis for making a definitive statement about the amount
of waste, fraud, and abuse in the program.33 Of the various
groups of beneficiary audits conducted to date, all were of
insufficient size and design to analyze the amount of fraud or waste in
the program or the number of times that any particular problem might be
occurring programwide. At the time we concluded our review, FCC and
USAC were in the process of soliciting and reviewing responses to a
Request for Proposal for audit services to conduct additional
beneficiary audits.
---------------------------------------------------------------------------
\33\ In testimony before the House Subcommittee on Oversight and
Investigations of the Committee on Energy and Commerce in June 2004,
FCC's Inspector General submitted a prepared statement that said the
``results of audits that have been performed and the allegations under
investigation lead us to believe the program may be subject to
unacceptably high risk of fraud, waste and abuse.'' At the same
hearing, the Chief of FCC's Office of Strategic Planning and Policy
Analysis and the Deputy Chief of FCC's Wireline Competition Bureau
submitted a prepared statement that said that FCC had ``enabled
implementation of the [E-rate] statutory goals with a minimum of fraud,
waste, and abuse.''
---------------------------------------------------------------------------
FCC HAS BEEN SLOW TO ACT ON SOME E-RATE APPEALS
Under FCC's rules, program participants can seek review of USAC's
decisions,34 although FCC's appeals process for the E-rate
program has been slow in some cases. Because appeals decisions are used
as precedent, this slowness adds uncertainty to the program and impacts
beneficiaries. FCC rules state that FCC is to decide appeals within 90
days, although FCC can extend this period. At the time of our review
there was a substantial appeals backlog at FCC (i.e., appeals pending
for longer than 90 days). Out of 1,865 appeals to FCC from 1998 through
the end of 2004, approximately 527 appeals remain undecided, of which
458 (25 percent) are backlog appeals.35
---------------------------------------------------------------------------
\34\ Virtually all of the decisions made by FCC and USAC in their
management and administration of the E-rate program may be subject to
petition for reconsideration or appeal by beneficiaries. Moreover,
schools and libraries have the option of multiple appeal levels,
including USAC, the Wireline Competition Bureau, and the commission.
\35\ The bulk of the appeals are to USAC, which received a total of
16,782 appeals from the beginning of the program through 2003. Of
these, 646--roughly 4 percent--remained undecided as of September 20,
2004.
---------------------------------------------------------------------------
We were told by FCC officials that some of the backlog is due to
staffing issues. FCC officials said they do not have enough staff to
handle appeals in a timely manner. FCC officials also noted that there
has been frequent staff turnover within the E-rate program, which adds
some delay to appeals decisions because new staff necessarily take time
to learn about the program and the issues. Additionally, we were told
that another factor contributing to the backlog is that the appeals
have become more complicated as the program has matured. Lastly, some
appeals may be tied up if the issue is currently in the rulemaking
process.
The appeals backlog is of particular concern given that the E-rate
program is a technology program. An applicant who appeals a funding
denial and works through the process to achieve a reversal and funding
two years later might have ultimately won funding for outdated
technology. FCC officials told us that they are working to resolve all
backlogged E-rate appeals by the end of calendar year 2005.
In summary, Mr. Chairman, we remain concerned that FCC has not done
enough to proactively manage and provide a framework of government
accountability for the multibillion-dollar E-rate program. Lack of
clarity about what accountability standards apply to the program causes
confusion among program participants and can lead to situations where
funding commitments are interrupted pending decisions about applicable
law, such as happened with the Antideficiency Act in the fall of 2004.
Ineffective performance goals and measures make it difficult to assess
the program's effectiveness and chart its future course. Weaknesses in
oversight and enforcement can lead to misuse of E-rate funding by
program participants that, in turn, deprives other schools and
libraries whose requests for support were denied due to funding
limitations.
To address these management and oversight problems identified in
our review of the E-rate program, our report recommends that the
Chairman of FCC direct commission staff to (1) conduct and document a
comprehensive assessment to determine whether all necessary government
accountability requirements, policies, and practices have been applied
and are fully in place to protect the E-rate program and universal
service funding; (2) establish meaningful performance goals and
measures for the E-rate program; and (3) develop a strategy for
reducing the E-rate program's appeals backlog, including ensuring that
adequate staffing resources are devoted to E-rate appeals.
SCOPE AND METHODOLOGY
We conducted our work from December 2003 through December 2004 in
accordance with generally accepted government auditing standards. We
interviewed officials from FCC's Wireline Competition Bureau,
Enforcement Bureau, Office of General Counsel, Office of Managing
Director, Office of Strategic Planning and Policy Analysis, and Office
of Inspector General. We also interviewed officials from USAC. In
addition, we interviewed officials from OMB and the Department of
Education regarding performance goals and measures. OMB had conducted
its own assessment of the E-rate program in 2003, which we also
discussed with OMB officials. We reviewed and analyzed FCC, USAC, and
OMB documents related to the management and oversight of the E-rate
program. The information we gathered was sufficiently reliable for the
purposes of our review. See our full report for a more detailed
explanation of our scope and methodology.
Mr. Chairman, this concludes my prepared statement. I would be
pleased to respond to any questions that you or other Members of the
Subcommittee may have.
Mr. Whitfield. Mr. Goldstein, thank you, and we have about
6 minutes remaining on a vote on the floor. We are going to
have a series of votes, so we are going to suspend this
hearing. And Mr. Carlisle, when we come back, we will pick up
with your testimony, and then yours, Mr. Bennett. So we will be
recessed for a period of time for us to make these votes.
[Brief recess.]
Mr. Whitfield. We will reconvene this hearing, and I
apologize to the witness for the interruption for votes. I
would also note that the chairman of the full committee, the
Energy and Commerce Committee, Joe Barton, will not be able to
be here, but we are going to submit his opening statement for
the record.
And with that, Mr. Carlisle, I will call on your for you
opening statement.
TESTIMONY OF JEFFREY CARLISLE
Mr. Carlisle. Good morning, Mr. Chairman, and distinguished
members of the subcommittee. Thank you for giving me the
opportunity to discuss with you the GAO report regarding FCC
management and oversight of the E-Rate program. We believe that
the GAO report provides us a good opportunity to focus on areas
in the E-Rate program and our management of it that need
attention in order to ensure that oversight of the Universal
Service Fund meets the highest standards of government
accountability. We look forward to continuing to work with GAO
to improve our process. And indeed, as our response GAO
details, and as I will summarize here, we are continuing
existing and have initiated new measures to address issues
identified by the GAO. In doing so, we are doing nothing more
than acknowledging the need to undertake a serious review of
the FCC's management and oversight of Universal Service.
Indeed, doing so is the only way to ensure that we are doing
our jobs to act as safeguards of the public's interest and its
money.
The GAO report made three recommendations that have been
summarized in the statement of Mr. Goldstein; I will not repeat
them here. On January 14, we provided a response to the GAO
report. In the first area, in the first recommendation, of
assessing government accountability requirements, our response
details analyses that have been performed by the FCC of 15
separate statues and the regulations thereunder, including the
Antideficiency Act, the Miscellaneous Receipts Act, The
Improper Payments Information Act, the Single Audit Act, and
the Cash Management Improvement Act. We have shared these
analyses with GAO and specifically asked GAO to if it disagrees
with them and welcome its expert guidance and expect fully to
continue to work with them.
In the second area, establishing government accountability
requirements, we are in full agreement with this recommendation
and are already working to address it. We are working with OMB
and its program-assessment rating tool process to establish
better and more comprehensive ways for measuring E-Rate
performance. We anticipate including revised performance
measures for the High-Cost Fund and the E-Rate Program in the
FCC's fiscal year 2007 budget submission.
In the third area, developing a strategy to reduce our
backlog of E-Rate appeals, we have taken several steps outlined
in the response and are already seeing process. We have
prioritized pending cases and reassigned agency resources in
order to bring more attorneys and other professionals to bear
on outstanding cases. On January 1, our backlog--defined as
cases pending for longer than 90 days--stood at 458 cases.
Since then, we have resolved 100 cases. These results are due
in large part to the addition of four new staff members of the
E-Rate team during the first quarter of this year. With this
increased staff level, we are now resolving between 60 and 70
cases a month, with a goal of increasing that rate to 80 to 90
cases a month. In all, we are on track to reduce our backlog to
zero by the end of this year.
I will also take this opportunity to emphasize some of the
additional steps the agency is taking to improve oversight.
Last year, we adopted rules codifying certain USAC procedures
regarding technology plans and document retention, and we will
soon recommended that the Commission adopt a notice of proposed
rulemaking to codify a substantial number of additional
procedures. Following on an initiative by our Office of the
Managing Director, begun in Fall of last year, we have recently
retained the National Academy of Public Administration to
evaluate the management structure of the program. On a separate
track, the bureau is considering making a recommendation to the
Commission to adopt a notice of proposed rulemaking that would
solicit public comment on this issue and also present specific
questions as to current structure and management of each of the
funds. We are also considering making a recommendation to the
Commission to adopt an order that would expand audit coverage
of the entities receiving the largest financial benefits from
the E-Rate program. As is reflected in the President's budget
for the next fiscal year, we are also seeking additional
resources so that we can hire the staff necessary to improve
oversight of the program and review of beneficiary audits.
Thank you, Mr. Chairman, for the opportunity to speak with
you today. I look forward to your questions.
[The prepared statement of Jeffrey Carlisle follows:]
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Mr. Whitfield. Thank you, Mr. Carlisle. And at this time,
Mr. Bennett, if you would, give your opening statement.
TESTIMONY OF THOMAS D. BENNETT
Mr. Bennett. Mr. Chairman and members of the subcommittee,
I appreciate the opportunity to come before you today to
discuss oversight of the Universal Service Fund program, and
more specifically the E-Rate program. This is the third time
the FCC/OIG has testified before this subcommittee on oversight
of the Universal Service Fund program. In my testimony, I will
briefly summarize OIG involvement in the USF oversight, discuss
concerns that the OIG has regarding the program, and provide an
update on OIG oversight activities.
The FCC/OIG first looked at the USF in 1999 as part of our
audit of the Commission's fiscal year 1999 financial statement.
Starting with that audit, the Office of Inspector General has
continued to devote considerable resources to oversight of the
USF. Due to materiality and our assessment of audit risk, we
have focused much of our attention on the USF mechanism for
funding telecommunications and information services for schools
and libraries--the schools and libraries program also known as
the E-Rate program.
Despite limited resources, the OIG has implemented an
aggressive, independent oversight program. Our oversight
program includes audits conducted using internal resources,
audits conducted by other Federal Offices of Inspector General
under reimbursable agreement, review of audit work conducted by
auditors with the Universal Service Administrative Company, and
active participation in Federal investigations of E-Rate fraud.
In addition to conducing audits, we are providing audit support
to a number of investigations of E-Rate recipients and service
providers. To implement the investigative component of our
plan, we established a working relationship with the anti-trust
division of the Department of Justice. We are also supporting
several investigations being conducted by Assistant United
States attorneys. We are currently supporting 17 investigations
and monitoring an additional 15 investigations.
Allegations being investigated in these cases include:
procurement irregularities, including lack of a competitive
process and bid rigging; false claims; service providers
billing for goods and services not provided; ineligible items
being funded; and beneficiaries not paying the local portion of
the costs, resulting in inflated costs for goods and services
to the program and potential kickback issues.
In the past year, there have been a number of significant
law enforcement actions involving the E-Rate program. In May
2004, NEC Business Network Solutions, Inc. plead guilty and
agreed to pay a total $20.6 million criminal fine, civil
settlement, and restitution related to charges of collusion and
wire fraud involving the E-Rate program. In December 2004,
Inter-Tel technologies, Inc. plead guilty and agreed to pay a
total $8.71 million criminal fine, civil settlement, and
restitution related to charges of bid rigging and wire fraud in
connection with the E-Rate program. The NEC and Inter-Tel cases
are part of a large, ongoing investigation. In October 2004,
Qasim Bokhari and Haider Bokhari plead guilty to charges of
conspiracy, fraud, and money laundering involving the E-Rate
program. This past January Qasim Bokhari and Haider Bokhari
were each sentenced to 6-year prison terms.
Our involvement in E-Rate audits and investigations has
highlighted numerous concerns with the program. General
concerns include lack of clarity regarding program rules and
lack of timely and effective resolution of audit findings.
Specific concerns regarding program design include weaknesses
in program competitive procurement requirements, ineffective
use of purchased goods and services, over-reliance on applicant
certifications, weaknesses in technology planning, and issues
relating to discount calculation and payment.
I am pleased to report that concerns that we have raised
about the E-Rate program have received considerable attention
at the Commission. Most notably, on August 4, 2004, the
Commission adopted the fifth report and order on the school and
libraries universal service support mechanism. In the Fifth
Report and Order, the Commission resolved a number of issues
arising from audits of the E-rate program and programmatic
concerns, including concerns about E-Rate certifications raised
by the OIG.
The primary obstacle to implementation of effective OIG
oversight has been a lack of adequate resources to conduct
audits and provide audit support to investigation. This lack of
resources has prevented us from conducting an audit using a
statistical approach that would allow us to project the audit
results to all E-Rate beneficiaries. Today, I am happy to
report that we have made significant progress in addressing our
resource concerns. In January, we added two new staff to the
USF team and the OIG has been advised that we will be receiving
two additional staff. Last summer, we began working with USAC
to establish a three-way contract, under which the OIG and USAC
can obtain access to audit resources to conduct USF audits. We
released a request for proposal in November 2004 and expect to
complete the contractor selection process very soon.
We are also currently working with USAC and a public
accounting firm to conduct the fourth large-scale audit of E-
Rate beneficiaries. One hundred beneficiaries are being audited
as part of this project. The project was initiated in August
2004 and is expected to be completed next summer. The Office of
Inspector General remains committed to meeting our
responsibility for providing effective, independent oversight
of the Universal Service Fund, and we believe we have made
significant progress.
While the Commission has taken steps to address
programmatic weaknesses, more work remains to be done. Through
our participation in the fourth large-scale round of E-Rate
beneficiary audits with USAC and through audits that we
anticipate conducting under our three-way agreement with USAC,
we are moving forward to evaluate the state of the program and
identify opportunities for programmatic improvements.
Thank you. I will be happy to answer any of your questions.
[The prepared statement of Thomas D. Bennett follows:]
Prepared Statement of Thomas D. Bennett, Assistant Inspector General
for USF Oversight, Federal Communications Commission
Mr. Chairman and Members of the Subcommittee, I appreciate the
opportunity to come before you today to discuss oversight of the
Universal Service Fund (USF) program and more specifically the E-rate
program. My name is Tom Bennett and I am the Assistant Inspector
General for USF Oversight with the FCC Office of Inspector General
(OIG). This is the third time that the FCC OIG has testified before the
subcommittee on oversight of the Universal Service Fund (USF) program.
In my testimony, I will briefly summarize OIG involvement in USF
oversight, discuss concerns that the OIG has regarding the program, and
provide an update on OIG oversight activities.
OIG OVERSIGHT OF THE UNIVERSAL SERVICE FUND (USF)
The FCC OIG first looked at the USF in 1999 as part of our audit of
the Commission's FY 1999 financial statement. During that audit, we
questioned the Commission regarding the nature of the USF and,
specifically, whether it was subject to the statutory and regulatory
requirements for federal funds. Starting with that inquiry, the Office
of Inspector General has continued to devote considerable resources to
oversight of the USF.
Due to materiality and our assessment of audit risk, we have
focused much of our attention on the USF mechanism for funding
telecommunications and information services for schools and libraries,
also known as the ``Schools and Libraries Program'' or the ``E-rate''
program. Applications for E-rate funding have increased from 30,675 in
funding year 1998 to 43,050 for the current funding year. Applications
have been received from schools and libraries in each of the 50 states,
the District of Columbia, and most territories and included 15,255
different service providers. Requested funding has increased from
$2,402,291,079 in funding year 1998 to $4,538,275,093 for the current
funding year.
OIG Oversight
During FY 2001, we worked with Commission staff as well as with the
Defense Contract Audit Agency (DCAA) and the Universal Service
Administrative Company (USAC), to design an audit program that would
provide the Commission with programmatic insight into compliance with
rules and requirements on the part of E-rate program beneficiaries and
service providers. Our program was designed around two corollary and
complementary efforts. First, we would conduct reviews on a statistical
sample of beneficiaries large enough to allow us to derive inferences
regarding beneficiary compliance at the program level. Second, we would
establish a process for vigorously investigating allegations of fraud,
waste, and abuse in the program.
Several obstacles have impeded our ability to implement effective,
independent oversight of the program. The primary obstacle has been a
lack of adequate resources to conduct audits and provide audit support
to investigations. Despite limited resources, the OIG has implemented
an aggressive independent oversight program. My oversight program
includes: (1) audits conducted using internal resources; (2) audits
conducted by other federal Offices of Inspector General under
reimbursable agreements; (3) review of audit work conducted by USAC;
and (4) active participation in federal investigations of E-rate fraud.
One-hundred and thirty five (135) audits have been completed by the
OIG, USAC internal auditors, or USAC contract auditors in which the
auditors have reached a conclusion about beneficiary compliance. Of the
135 audits, auditors determined that beneficiary were not compliance in
48 audits (36%) and generally compliant in an additional 22 audits
(16%). Beneficiaries were determined to be compliant in 65 audits
(48%). Recommended fund recoveries for those audits where problems were
identified total over $17 million.
OIG Audits Using Internal Resources
The FCC OIG has completed thirteen (13) audits that we initiated
during fiscal year 2002 using auditors detailed from the Commission's
Common Carrier Bureau (since reorganized as the Wireline Competition
Bureau). For these thirteen (13) audits, we concluded that applicants
were compliant with program rules in five (5) of the audits, that
applicants were generally compliant in two (2) of the audits, and that
the applicants were not compliant with program rules in six (6) of the
audits. We have recommended recovery of $1,794,792 as shown below:
----------------------------------------------------------------------------------------------------------------
Potential
Report Date Applicant Conclusion Fund
Recovery
----------------------------------------------------------------------------------------------------------------
09/11/0.................................. Enoch Pratt Free Library.... Compliant.................. $0
02/03/03................................. Robeson County Public Compliant.................. 0
Schools.
02/05/03................................. Wake County Public Schools.. Compliant.................. 0
08/27/03................................. Albemarle Regional Library.. Compliant.................. 0
12/22/03................................. St. Matthews Lutheran School Not Compliant.............. 136,593
12/22/03................................. Prince William County Generally Compliant........ 5,452
Schools.
12/22/03................................. Arlington Public School Generally Compliant........ 7,556
District.
03/24/04................................. Immaculate Conception School Not Compliant.............. 68,846
04/06/04................................. Children's Store Front Not Compliant.............. 491,447
School.
05/19/04................................. St. Augustine School........ Not Compliant.............. 21,600
05/25/04................................. Southern Westchester BOCES.. Compliant.................. 0
06/07/04................................. United Talmudical Academy... Not Compliant.............. 934,300
08/12/04................................. Annunciation Elementary Not Compliant.............. 129,003
School.
-----------
$1,794,797
===========
----------------------------------------------------------------------------------------------------------------
Audits Conducted by Other Federal Offices of Inspector General
On January 29, 2003, the FCC OIG and USAC executed a Memorandum of
Understanding (MOU) with the Department of the Interior (DOI) OIG. The
MOU is a three-way agreement among the Commission, DOI OIG, and USAC
for reviews of schools and libraries funded by the Bureau of Indian
Affairs and other universal service support beneficiaries under the
audit cognizance of DOI OIG. Under the agreement, auditors from the
Department of the Interior perform audits for USAC and the FCC OIG. In
addition to audits of schools and libraries, the agreement allows for
the DOI OIG to consider requests for investigative support on a case-
by-case basis. We have issued two (2) final audit reports under this
MOU, three (3) draft audit reports, and have completed fieldwork on two
(2) additional audits. For the audit where we determined that the
applicant was not compliant, we have recommended recovery of
$2,084,399. A summary of completed audits is as follows:
----------------------------------------------------------------------------------------------------------------
Potential
Report Date Applicant Conclusion Fund
Recovery
----------------------------------------------------------------------------------------------------------------
11/06/03................................. Santa Fe Indian School...... Compliant.................. $0
01/07/04................................. Navajo Preparatory Academy.. Not Compliant.............. 2,084,399
----------------------------------------------------------------------------------------------------------------
We have also established a working relationship with the Office of
Inspector General at the Education Department (Education OIG). In
January 2004, Education OIG presented a plan for an audit of
telecommunication services at the New York City Department of Education
(NYCDOE). Because of the significant amount of E-rate funding for
telecommunication services at NYCDOE, Education OIG has proposed that
they be reimbursed for this audit under a three-way MOU similar to the
existing MOU with DOI OIG. In April 2004, the Universal Service Board
of Directors approved the MOU. In June 2004, the MOU was signed and the
audit was initiated.
Review of USAC Audits
We have reviewed work performed by USAC's Internal Audit Division
and performed the procedures necessary under our audit standards to
rely on that work. In December 2002, USAC established a contract with a
public accounting firm to perform agreed-upon procedures at a sample of
seventy-nine (79) beneficiaries from funding year 2000. The sample of
beneficiaries was selected by the OIG. In a departure from the two
previous large-scale rounds of E-rate beneficiary audits conducted by
USAC contractors, the agreed-upon procedures being performed under this
contract would be performed in accordance with both the Attestation
Standards established by the American Institute of Certified Public
Accountants (AICPA) Standards and Generally Accepted Government
Auditing Standards, issued by the Comptroller General (GAGAS or
``Yellow Book'' standards). In March 2003, we signed a contract with a
public accounting firm to provide audit support services for USF
oversight to the OIG. The first task order that we established under
this contract was for the performance of those procedures necessary
under ``Yellow Book'' standards to determine the degree to which we can
rely on the results of that work (i.e., to verify that the work was
performed in accordance with the AICPA and GAGAS standards). Many of
the audit findings raised by this body of work are reflected in the
section addressing concerns with the E-rate program.
Support to Investigations
In addition to conducting audits, we are providing audit support to
a number of investigations of E-rate recipients and service providers.
To implement the investigative component of our plan, we established a
working relationship with the Antitrust Division of the Department of
Justice (DOJ). The Antitrust Division has established a task force to
conduct USF investigations comprised of attorneys in each of the
Antitrust Division's seven (7) field offices and the National Criminal
Office. We are also supporting several investigations being conducted
by Assistant United States Attorneys.
We are currently supporting seventeen (17) investigations and
monitoring an additional fifteen (15) investigations. Allegations being
investigated in these cases include the following:
Procurement irregularities--including lack of a competitive process
and bid rigging;
False Claims--Service Providers billing for goods and services not
provided;
Ineligible items being funded; and
Beneficiaries not paying the local portion of the costs resulting in
inflated costs for goods and services to the program and
potential kickback issues.
In the past year, there have been a number of significant law
enforcement actions involving the E-rate program:
In May 2004, NEC-Business Network Solutions Inc. (NEC/BNS) pled
guilty and agreed to pay a total $20.6 million criminal fine,
civil settlement and restitution relating to charges of
collusion and wire fraud involving the E-rate program. NEC/BNS
was charged with allocating contracts and rigging bids for E-
Rate projects at five different school districts in Michigan,
Wisconsin, Arkansas, and South Carolina, in violation of the
Sherman Antitrust Act. NEC/BNS was also charged with wire fraud
by entering into a scheme to defraud the E-Rate program and the
San Francisco Unified School District by inflating bids,
agreeing to submit false and fraudulent documents to hide the
fact that it planned on installing ineligible items, agreeing
to donate ``free'' items that it planned to bill E-rate for,
and submitting false and fraudulent documents to defeat inquiry
into the legitimacy of the funding request. In May 2004, NEC/
BNS filed a petition for waiver of program suspension and
debarment rules. In July 2004, the Commission sought comment on
NEC/BNS's petition for waiver. The Commission has not taken
action on NEC/BNS's petition.
In December 2004, Inter-Tel Technologies Inc. pled guilty and agreed
to pay a total of $8.71 million in criminal fines, civil
settlement, and restitution relating to charges of bid rigging
and wire fraud in connection with the E-Rate program. Inter-Tel
was charged with one count of allocating contracts and
submitting rigged bids for E-Rate projects at two different
school districts in Michigan and California. Inter-Tel also was
charged with one count of wire fraud and aiding and abetting by
willfully entering into a scheme to defraud the E-Rate program
in San Francisco by inflating bids, agreeing to submit false
and fraudulent documents to hide the planned installation of
ineligible items, and submitting false and fraudulent documents
to defeat inquiry into the legitimacy of the funding request.
In January 2005, Inter-Tel received a notice of suspension and
of proposed debarment from the E-rate program. The NEC/BNS and
Inter-Tel cases are part of a large, on-going investigation.
In October 2004, Qasim Bokhari and Haider Bokhari pled guilty to
charges of conspiracy, fraud, and money laundering involving
the E-rate program. According to court papers, in 2001, Qasim
Bokhari and his company submitted applications for E-Rate
Program funding on behalf of 21 schools in the Milwaukee and
Chicago areas totaling more than $16 million. Qasim Bokhari and
his company eventually received more than $1.2 million for
goods and services that were not provided to three of these
schools. Additionally, according to the charges, Qasim Bokhari,
Haider Bokhari, and Raza Bokhari conspired to conduct numerous
financial transactions involving the proceeds of the fraud to
conceal and disguise the source of the proceeds. These alleged
financial transactions include wiring more than $600,000 to
Pakistan, purchasing a residence, and acquiring several
automobiles. In January 2005, Qasim Bokhari and Haider Bokhari
were each sentenced to six-year prison terms. In February 2005,
Qasim Bokhari and Haider Bokhari received notices of suspension
and proposed debarment from the E-rate program.
CONCERNS WITH THE E-RATE PROGRAM
OIG involvement in E-rate audits and investigations has highlighted
numerous concerns with this program. These include general programmatic
and management concerns as well as specific concerns related to program
design. General concerns include:
lack of clarity regarding program rules, and;
lack of timely and effective resolution of audit findings.
Specific concerns regarding program design include;
weaknesses in program competitive procurement requirements;
ineffective use of purchased goods and services;
over-reliance on certifications;
weaknesses in technology planning; and
issues relating to discount calculation and payment.
Lack of Clarity Regarding Program Rules
Under Commission staff oversight, USAC has implemented numerous
policies and procedures to administer the E-rate program. In some
cases, the Commission has adopted these USAC operating procedures, in
other cases however, USAC procedures have not been formally adopted by
the FCC. In those cases where USAC implementing procedures have not
been formally adopted by the Commission, it is the position of
Commission staff that there is no legal basis for recovery of funds
when applicants fail to comply with these procedures. To further
complicate matters, we have been advised that, in some cases, USAC may
have exceeded their authority in establishing program requirements. We
are concerned about the distinction that Commission staff makes between
program rules and USAC implementing procedures for a number of reasons.
First, we believe that this distinction represents a weakness in
program design. Within their authority under program rules,
USAC has established implementing procedures to ensure that
program beneficiaries comply with program rules and that the
objectives of the program are met. In those cases where USAC
has established implementing procedures that are not supported
by program rules, USAC and the Commission have no mechanism for
enforcing beneficiary compliance.
Second, we believe that it is critical that participants in the E-
rate program have a clear understanding of the rules governing
the program and the consequences that exist if they fail to
comply with those rules. We do not believe that it is possible
under the current structure for applicants to have a clear
understanding of program rules. We are concerned that the
Commission has not determined the consequences of beneficiary
non-compliance in many cases and that, in those instances where
the Commission has addressed the issue of consequences for non-
compliance, the consequences associated with clear violations
of program rules do not appear to be consistent.
Third, a clear understanding of the distinction between program rules
and USAC implementing procedures is necessary for the design
and implementation of effective oversight. It is necessary for
the timely completion of audits and the timely resolution of
audit findings and implementation of corrective action
resulting from audits. This matter is further complicated by
the Commission's position that USAC may have exceeded their
authority in establishing some of the implementing procedures.
As a result, we have determined that it is necessary, as part
of the E-rate beneficiary audit process, to examine USAC
authority for establishing procedures for which we are
evaluating beneficiary compliance.
Lack of Timely and Effective Resolution of Audit Findings from E-rate
Beneficiary Audits
Since our involvement in this program, I have become increasingly
concerned about efforts to resolve audit findings and to recover funds
resulting from E-rate beneficiary audits. It has been our observation
that audit findings are not being resolved in a timely manner and that,
as a result, actions to recover inappropriately disbursed funds are not
being taken in a timely manner. In some cases, it appears that audit
findings are not being resolved because USAC is not taking action in a
timely manner. In other cases, findings are not being resolved because
USAC is not receiving guidance from the Commission that is necessary to
resolve findings. USAC is prohibited under program rules from making
policy, interpreting unclear provisions of the statute or rules, or
interpreting the intent of Congress. As a result of this prohibition,
USAC must seek guidance from the Commission when audit findings are not
clearly violations of Commission rules.
The second large-scale audit of E-rate beneficiaries was conducted
by the public accounting firm of Arthur Andersen under contract to
USAC. In 2001, USAC contracted with Arthur Andersen to conduct audits
at twenty-five (25) beneficiaries from funding years 1999 and 2000. E-
rate disbursements to these beneficiaries totaled $322 million. Arthur
Andersen provided a draft audit report summarizing the results of these
audits on May 31, 2002. The final report, including responses from the
USAC Schools and Libraries Division, was released by the Schools and
Libraries Committee of the USAC Board of Directors on April 23, 2003,
eleven months after the draft report was provided by Arthur Andersen.
The audit report disclosed monetary findings at fourteen (14) of the
twenty-five (25) beneficiaries including $11.4 million dollars in
inappropriate disbursements and unsupported costs. As of September 30,
2003, USAC had recovered $1,927,579 in inappropriate disbursements and
unsupported costs and initiated recovery actions for another
$1,353,741, of which $709,013 is under appeal. We have been advised
that USAC initiated recovery actions for the remaining $8,059,141.
The final report adopted by the Universal Service Board also
identified eleven (11) policy issues, relating to thirty-three (33)
separate findings, for which USAC determined that FCC policy guidance
was required. The dollar value of potential fund recoveries associated
with these thirty-three (33) findings was not available because, in
most cases, the final report indicated that those amounts had not been
determined. Policy issues identified included the lack of fixed asset
and associated records, maintenance of connectivity once it is
established, technology plan approver control and requirements,
insufficient documentation including lack of invoice detail and vendor
payment information, incomplete or insufficient competitive bidding
documentation, monitoring of technology plan goals and objectives, and
physical security of equipment. Although the final report was released
on April 23, 2003, USAC did not request policy guidance from Commission
staff until October 2003. In January 2004, Commission staff provided
``informal'' guidance to USAC related to E-rate beneficiary audits
being conducted by KPMG. These informal comments included reference to
four (4) of the eleven (11) Arthur Anderson round 2 policy questions
raised by USAC in their October 2003 request. On March 4, 2004,
Commission staff provided guidance to USAC on the eleven (11) policy
issues, almost two years after the draft report was submitted by Arthur
Andersen. Many of the policy questions raised in USAC's request for
guidance address issues identified in other audits including other E-
rate beneficiary audits conducted by USAC's Internal Audit Division and
those conducted by the FCC OIG.
Weaknesses in Program Competitive Procurement Requirements
Program rules require that applicants use a competitive procurement
process to select vendors. In establishing this requirement, the
Commission recognized that ``(c)ompetitive bidding is the most
efficient means for ensuring that eligible schools and libraries are
informed about all of the choices available to them'' and that
``(a)bsent competitive bidding, prices charged to schools and libraries
may be needlessly high, with the result that fewer eligible schools and
libraries would be able to participate in the program or the demand on
universal service support mechanisms would be needlessly great.''
Applicants are required to submit a form 470 identifying the
products and services needed to implement the technology plan. The form
470 is posted to the USAC web page to notify service providers that the
applicant is seeking the products and services identified. Applicants
must wait at least 28 days after the form 470 is posted to the web site
and consider all bids they receive before selecting the service
provider to provide the services desired. In addition, applicants must
comply with all applicable state and local procurement rules and
regulations and competitive bidding requirements. The form 470 cannot
be completed by a service provider who will participate in the
competitive process as a bidder and the applicant is responsible for
ensuring an open, fair competitive process and selecting the most cost-
effective provider of the desired services. Further, although no
program rule establishes this requirement, applicants are encouraged by
USAC to save all competing bids for services to be able to demonstrate
that the bid chosen is the most cost-effective, with price being the
primary consideration.
Although the programs competitive bidding requirements were
intended to ensure that schools and libraries are informed about all of
the choices available to them, we have observed numerous instances in
which beneficiaries are not following the program's competitive bidding
requirements or are not able to demonstrate that competitive bidding
requirements are being followed. We question whether the rules are
adequate to ensure a competitive process is followed. In addition, weak
recordkeeping requirements to support the procurement process, as well
as other aspects of the E-rate application, offer little protection to
the program. We believe that the competitive procurement requirements
are based on some faulty assumptions. For example,
Form 470s will have enough information for meaningful proposals from
prospective service providers.
Service providers are reviewing and considering posted form 470s
(particularly for smaller schools).
``Applicable'' state and local procurement regulations exist and
those regulations are consistent with program rules.
Ineffective Use of Purchased Goods and Services
Site visits are conducted during most E-rate beneficiary audits.
Site visits are conducted for several reasons including to evaluate the
eligibility of facilities where equipment is installed, verify that
equipment is installed and operational, and to verify that equipment is
being used for its intended purpose. Examples of concerns identified
during audits and investigations are as follows:
Goods and services not being provided.
Unauthorized substitution of goods and services.
Goods and services being provided to ineligible facilities (e.g.,
non-instructional building including dormitories, cafeterias,
and administrative facilities).
Equipment not being installed or not operational. Program rules
require that nonrecurring services be installed by a specified
date. However, there is no specific FCC rule requiring
beneficiaries to use equipment in a particular way, or for a
specified period of time, or to full efficiency. Commission
staff have provided guidance stating that if the equipment was
uninstalled (i.e., still in a box) that would represent a rule
violation. However, Commission staff have also provided
guidance stating that the rules do not require that
beneficiaries effectively utilize the services provided or that
the beneficiaries maintain continuous network or Internet
connectivity once internal connections are installed.
Over-reliance on Certifications
The E-rate program is heavily reliant on applicant and service
provider certifications. For example, on the form 470, applicants
certify that the support received is conditional upon the ability of an
applicant to secure access to all of the resources, including
computers, training, software, maintenance, and electrical connections,
necessary to use effectively the services that will be purchased under
this mechanism. On the form 471, applicants make several important
certifications. Applicants certify that they have ``complied with all
applicable state and local laws regarding procurement of services for
which support is being sought'' and that ``the services that the
applicant purchases--will not be sold, resold, or transferred in
consideration for money or any other thing of value.'' Other
certifications are required on various program forms.
My office started to raise concerns about perceived weaknesses in
the competitive procurement process and over reliance on certifications
shortly after we became involved in program oversight. We first became
concerned about the competitive procurement process as a result of our
involvement in the Metropolitan Regional Education Service Agency
(MRESA) investigation. During that investigation we observed how
weaknesses in competitive bidding requirements and reliance on self
certification were exploited resulting in, at a minimum, a significant
amount of wasteful spending. We continued to express our concerns as we
designed our oversight program, developed a program for auditing
beneficiaries, and supported E-rate fraud investigations. In fact, we
established a working relationship with the Antitrust Division of the
Department of Justice in a large part because of the number of
investigations that we were supporting that involved allegations
regarding the competitive procurement process.
Our level of concern regarding both the competitive procurement
process and reliance on self-certification was heightened as we started
to work with the Antitrust Division. During our discussions with
Antitrust, they expressed a general concern with the lack of
information regarding the competitive process and specific concerns
regarding applicant and service provider certifications. We started to
pursue issues raised by the Antitrust Division with Commission staff in
the fall of 2002. I am pleased to report today that the Commission has
addressed many of the recommendations from Antitrust and is considering
action on other recommendations.
Weaknesses in Technology Planning
Program rules require that applicants prepare a technology plan and
that the technology plan be approved. The approved technology plan is
supposed to include a sufficient level of information to justify and
validate the purpose of a request for E-rate funding. USAC implementing
procedures state that approved technology plans must establish the
connections between the information technology and the professional
development strategies, curriculum initiatives, and library objectives
that will lead to improved education and library services. Although the
technology plan is intended to serve as the basis for an application,
we have observed many instances of non-compliance with program rules
and USAC procedures related to the technology planning process.
Examples of technology planning concerns identified during audits and
investigations are as follows:
Technology plans are not being reviewed and approved in accordance
with program rules.
Technology plans do not address all required plan elements in
accordance with USAC implementing procedures for technology
planning. Commission staff has provided guidance that failure
to comply with USAC implementing procedures for technology
plans is not a rule violation and does not warrant recovery of
funds. As part of the current round of beneficiary audits, we
are attempting to determine if USAC had the authority to
establish these requirements.
Applicants not being able to provide documentation to support the
review and approval of technology plan.
USAC guidance on technology planning states that ``(i)n the event
of an audit, you may be required to produce a certification similar to
the SLD sample ``Technology Plan Certification Form,'' in order to
document approval of your technology plan.'' Numerous audits have
included findings beneficiaries were unable to provide documentation to
demonstrate the review and approval of technology plans. Although
program rules require that applicants have a technology plan and that
the plan be approved, the rules do not require that the applicant
maintain specific documentation regarding the approval process.
Discount Calculation and Payment of the Non-Discount Portion
The E-rate program allows eligible schools and libraries to receive
telecommunications services, Internet access, and internal connections
at discounted rates. Discounts range from 20% to 90% of the costs of
eligible services, depending on the level of poverty and the urban/
rural status of the population served, and are based on the percentage
of students eligible for free and reduced lunches under the National
School Lunch Program (NSLP) and other approved alternative methods. A
number of audits have identified audit findings that applicants have
not followed program requirements for discount rate calculation or were
unable to support the discount rate calculated.
Applicants are required to pay the non-discount portion of the cost
of the goods and services to their service providers and service
providers are required to bill applicants for the non-discount portion.
The discount rate calculation and program requirement for payment of
the non-discount portion are intended to ensure that recipients avoid
unnecessary and wasteful expenditures and encourage schools to seek the
best pre-discount rate. Examples of concerns identified during audits
and investigations are as follows:
Applicant not paying the non-discount portion;
Applicant not paying the non-discount portion in a timely manner; and
Service providers not billing recipients for the non-discount
portion.
I am pleased to report that concerns that we have raised about the
E-rate program have received considerable attention at the Commission.
Most notably, on August 4, 2004, the Commission adopted the Fifth
Report and Order on the Schools and Libraries Universal Service Support
Mechanism. In the Fifth Report and Order, the Commission resolved a
number of issues arising from audits of the E-rate program and
programmatic concerns raised by my office. In the introduction to the
Fifth Report and Order, the Commission included the following statement
regarding actions taken in the order:
First, we set forth a framework regarding what amounts should
be recovered by the Universal Service Administrative Company
(USAC or Administrator) and the Commission when funds have been
disbursed in violation of specific statutory provisions and
Commission rules. Second, we announce our policy regarding the
timeframe in which USAC and the Commission will conduct audits
or other investigations relating to use of E-rate funds. Third,
we eliminate the current option to offset amounts disbursed in
violation of the statute or a rule against other funding
commitments. Fourth, we extend our red light rule previously
adopted pursuant to the Debt Collection Improvement Act (DCIA)
to bar beneficiaries or service providers from receiving
additional benefits under the schools and libraries program if
they have failed to satisfy any outstanding obligation to repay
monies into the fund. Fifth, we adopt a strengthened document
retention requirement to enhance our ability to conduct all
necessary oversight and provide a stronger enforcement tool for
detecting statutory and rule violations. Sixth, we modify our
current requirements regarding the timing, content and approval
of technology plans. Seventh, we amend our beneficiary
certification requirements to enhance our oversight and
enforcement activities. Eighth, we direct USAC to submit a plan
for timely audit resolution, and we delegate authority to the
Chief of the Wireline Competition Bureau to resolve audit
findings. Finally, we direct USAC to submit on an annual basis
a list of all USAC administrative procedures to the Wireline
Competition Bureau (Bureau) for review and further action, if
necessary, to ensure that such procedures effectively serve our
objective of preventing waste, fraud and abuse.
UPDATE ON OIG OVERSIGHT ACTIVITIES
As I discussed earlier in this testimony, the primary obstacle to
implementation of effective, independent oversight has been a lack of
adequate resources to conduct audits and provide audit support to
investigations. This lack of resources has prevented us from completing
the body of work necessary to assess fraud, waste, and abuse at the
program level.
Since our initial involvement in independent oversight of the USF
as part of our conduct of the FY 1999 financial statement audit, we
have added four (4) staff auditor positions and organized USF oversight
activities under an Assistant Inspector General for USF Oversight. This
represents dedication of five (5) of the ten (10) auditors on the staff
of the FCC OIG to USF oversight. In addition to the OIG staff dedicated
to USF oversight, two (2) audit staff members responsible for financial
audit are also involved in USF oversight as part of the financial
statement audit process. In January 2005, we were advised that the OIG
would receive two (2) additional staff for USF oversight. We are in the
process of hiring these additional staff.
We have also requested appropriated funding to obtain contract
support for our USF oversight activities. In our FY 2004 budget
submission, we requested $2 million for USF oversight. That request was
increased to $3 million in the President's budget submission for FY
2004. This funding was not included in the Commission's final budget
for FY 2004 and report language indicated that monies for USF audits
should come from the fund itself.
Based largely on that report language, we began to explore
alternatives for obtaining access to contract audit support to
implement the USF oversight portions of our audit plan. We have been
working with USAC since last summer to establish a three-way contract
under which the OIG and USAC can obtain audit resources to conduct USF
audits. Under this contract, we intend to conduct the body of audits
necessary to assess fraud, waste, and abuse at the program level by
conducting a statistically valid sample of audits for each of the four
USF funding mechanisms. The objectives of the audits are to: (1) detect
waste, fraud, and abuse by beneficiaries of the universal service
support mechanisms, (2) deter waste, fraud, and abuse by beneficiaries
of the universal service support mechanisms, (3) generate insights
about the compliance of beneficiaries with applicable law and the
quality of administration of the universal service support mechanisms
and (4) identify areas for improvement in the compliance of
beneficiaries with applicable law and in the administration of the
universal service mechanisms. An additional objective is to identify
improper payments as defined by the Office of Management and Budget to
estimate error rates for the Improper Payments Improvement Act of 2002
(IPIA). I am pleased today to report that we are close to selecting a
public accounting firm, or firms, to provide support for our USF
oversight activities, including E-rate audits and support to E-rate
investigations. We released a Request for Proposal in November 2004 and
expect to complete the selection process very soon.
We are also working with USAC and a public accounting firm under
contract to USAC to conduct the fourth large-scale audit of E-rate
beneficiaries. One-hundred beneficiaries are being audited as part of
this project. The project was initiated in August 2004 and is expected
to be completed next summer.
CONCLUSION
The Office of Inspector General remains committed to meeting our
responsibility for providing effective independent oversight of the USF
and we believe we have made significant progress. While the Commission
has taken steps to address programmatic weaknesses, more work remains
to be done. Through our participation in the fourth large-scale round
of E-rate beneficiary audits with USAC and through audits that we
anticipate conducting under our three-way agreement with USAC, we are
moving forward to evaluate the state of the program and identify
opportunities for programmatic improvements.
Mr. Whitfield. Thank you, Mr. Bennett, and we appreciate
the testimony of all of you.
Listening to the testimony this afternoon emphasizes, once
again, what I consider to be some significant problems with
this program. We have heard mentioned today procurement
irregularities, false claims, purchase of ineligible items of
the E-Rate program, local match not being made, civil fines and
criminal fines totally $20 million, totaling $8 million in
another instance, people going to prison. And yet this was a
program, I think, that started with great promise, certainly
sufficient funding to make a significant difference in the
lives of a lot of young people; and yet report after report
after report points out serious shortcomings in the oversight
of this program.
One issue that I would like to discuss--and there will be
many more, of course--but the National Exchange Carrier
Association is a body of about 900 companies that provide
Internet services, phone services, whatever. And a subsidiary
of that is the Universal Service Administrative Company. And
the carriers, themselves, that go to the local school boards or
libraries and talk to them about the various equipment that is
available to them, they do certification themselves; the
schools do certification themselves; the libraries certify
themselves. Do you not see an inherent conflict of interest
with this Universal Service Corporation that is administering
this program being a subsidiary of the companies that benefit
by selling the equipment? I would just ask all three of you
that question to start off with. Do you see an inherent
conflict in that setup?
Mr. Goldstein. Mr. Chairman, we didn't really look at that,
per se, but I think what is important is that structural
clarity is obviously required in this program at a lot of
levels. We think it is clear, particularly between the FCC and
USAC, that while they have tried to make a number of changes in
the last couple years to improve the program--and the August
order that the other gentleman at the table had mentioned has
helped to improve some of the structural issues--there are many
issues that still remain. I am sure that the issue that you
referred to may partly be suffering from the same kind of
question. But we did not specifically look at that, and so it
is difficult for me to comment.
Mr. Whitfield. Well, what is your impression, Mr. Carlisle,
of that issue?
Mr. Carlisle. NECA is an entity that predated the 1996 act
that was established not to represent rural carriers so much as
it was established to coordinate pooling of payments, of costs
among them, so that they could recover their costs through
common tariff filings.
So NECA is an independent entity. I do not see that there
is specifically a conflict of interest. Now, there may be other
reasons to change the structure of USAC and how it manages the
fund, but I don't see that, specifically, as being an issue. I
could certainly talk about it in further detail with your staff
if you would like.
Mr. Whitfield. But from your perspective, you don't see any
conflict at all?
Mr. Carlisle. I don't know that that has been--I don't see
a conflict, given how NECA was set up and what its intent is.
Is there a possibility that you have carriers--you do have
carriers on the USAC board, for example, but you also have
representatives from State consumer groups, and you have other
entities on the board as well--representatives from the schools
and library community. So it certainly bears looking into, and
we can talk about the issues relating to NECA specifically, in
detail with your----
Mr. Whitfield. Do you have any thoughts on this, Mr.
Bennett?
Mr. Bennett. This was actually an area that, when we first
got involved in oversight of USF, it was certainly something
that we had questions about. As we got more involved, our focus
began to shift toward, how the funds were being used; so it is
not something we have really explored in some time.
Mr. Whitfield. Well, Mr. Goldstein, and you, Mr. Bennett,
you all are involved in a lot of studies and oversight
investigations in a lot of different programs. When you read
these GAO reports, and when you go back and you look at the
hearings from last year, you see these criminal convictions and
these civil convictions. It appears that--and not being able to
determine how much this program specifically contributed to
connecting these schools and libraries, it seems pretty
frustrating to me. In comparing this to other investigations,
do you find this to be a blatantly badly administered program
compared to other investigations you have done?
Mr. Goldstein. I would say, Mr. Chairman, that I think
there are a number of issues which are outlined in the report
that are problems that have been surfaced now for a number of
years. At the same time, I think that FCC and USAC have tried
to make progress, particularly in the last couple of years. I
think they have gotten a better handle on how portions of this,
being Federal funds, are going to be connected to various laws.
As they have tried to work out procedures that ought to be
codified, they have dealt with other issues.
But I think, really, at the bottom of it, though, is an
issue with respect to what is trying to be achieved. The goals
and the performance measures for this program have never really
been developed, frankly, and until or unless that is done, it
is difficult to know what the program is achieving and what its
connection to connectivity in the schools really is, so I think
that is----
Mr. Whitfield. Mr. Carlisle, do you agree that the goals
have never really been clearly articulated?
Mr. Carlisle. Of the program?
Mr. Whitfield. Yes.
Mr. Carlisle. I believe the goals of the program--what we
were told by the statute to do was to facilitate the funding of
telecommunications services in schools; that was the goal that
we were given.
In terms of the FCC having effective metrics to ensure that
that goal was being met, I would absolutely agree that
effective metrics for that were never adopted by the
Commission. We adopted a metric that basically looked at gross
Internet connections; but as GAO points out, it doesn't really
break out what effect the fund, itself, had on that and what
would have been the effect if the fund had never been in place.
So I agree. We need to get those metrics in place.
Mr. Whitfield. Well, you know, you hear, repeatedly, that
one of the primary obstacles for the FCC is lack of resources;
and yet you look at the money that is available in this fund--
over $14 billion, $9 billion committed--why hasn't the FCC
every come forward and asked for additional resources, even
from the fund, to help provide adequate oversight and to remove
some of these errors?
Mr. Carlisle. I think I should give you my answer in two
parts.
First of all, we have come to Congress, repeatedly, to ask
for additional resources in order to improve our oversight, and
we have another request in 2006 submission. In terms of use of
the fund--this is the second part of the answer. In terms of
use of the fund, my understanding from our general counsel's
office is that 31-USC-1351 prohibits an agency from
transferring funds between accounts in the budget.
Mr. Whitfield. Well, why don't we change that?
Mr. Carlisle. That would allow us to do so, and I think
that has been discussed before.
Mr. Whitfield. Yes, but we have lost millions of dollars in
this program, and it seems to me that changing a law to allow
you to use those funds would not be something that would be all
that difficult.
Mr. Carlisle. If Congress would like to do that, I would be
absolutely thrilled.
Mr. Whitfield. Mr. Goldstein and Mr. Bennett, I noticed
that in the letter that was submitted as the testimony for the
FCC that they mentioned--in the GAO report it said that the FCC
has not done a comprehensive assessment of what Federal
requirements, policies, and practices apply to the E-Rate
program. The FCC responded to your report by stating that it
has undertaken timely and extensive analysis of the significant
legal issues related to the status of the Universal Service
Fund on a case-by-case basis. Mr. Goldstein, what is your
concern with the FCC's case-by-case approach?
Mr. Goldstein. We have a couple of concerns, Mr. Chairman.
We recognize that the Commission has, indeed, gone through a
process on an ad hoc basis where they have tried to determine
which laws applied to the Universal Service Fund. The problem
is, from our perspective, twofold. One is that they didn't do
it comprehensively. They haven't taken a look at the entire
financial management structure that would accrue to funds that
are considered to be Federal funds, and when this became a
permanent and definite appropriation, it seems to us that they
had to take a look at that from the perspective of how these
various laws would apply and to do so, not in isolation, but
together, because some of them have impacts on other laws.
There is a framework, frankly, we believe, of how the laws are
applied to be able to protect the program and the funds
themselves.
Second of all, over time, this program has obviously
changed considerably I think it is important to note that back
1998, the Commission did what I would call a kind of cursory
look at the Anti-deficiency Act--and whether it applied to the
fund. That was before there was a determination that these were
Federal funds. And they really, as far as we can tell, never
went back, until last year, to look again. In other words, the
passage of time, in addition to the framework, need to be
looked at together, over time, vigilantly, to make sure that
these kinds of things are dealt with forthrightly and that the
funds are protected in the way that the government expects
Federal funds to be protected.
Mr. Whitfield. Thank you, my time has expired. Mr. Stupak?
Mr. Stupak. Thank you, Mr. Chairman. Mr. Carlisle, I would
like to follow up a couple of questions that the Chairman had
asked.
You indicated that you have come to Congress to ask for
more people, correct? To do your work? I need yes or no.
Mr. Carlisle. Yes.
Mr. Stupak. Okay. But yet, you pay for USAC out of this
fund, don't you?
Mr. Carlisle. Yes.
Mr. Stupak. You don't have to come to Congress to get
authorization to pay USAC.
Mr. Carlisle. That is correct.
Mr. Stupak. So you could put more auditors in USAC to help
find these deficiencies or problems within this program, could
you not?
Mr. Carlisle. I believe USAC has hired additional personnel
in order to deal with this, and that is being reflected in
their increased administrative costs over the last year.
Mr. Stupak. Yes. Right. But the point is, if you were
aggressive, you don't really need to come to Congress. If you
can hire USAC, you certainly can hire auditors for USAC to make
sure that these discrepancies were not there.
Mr. Carlisle. But even if USAC does have a full team of
auditors and goes out and finds problems with the program, at
some point, we bear operational or we bear programmatic
responsibility to review those findings.
Mr. Stupak. Sure.
Mr. Carlisle. And at the same time as handing the policy on
the program, how funds are distributed, who receives the funds,
how we get the funds in----
Mr. Stupak. Sure.
Mr. Carlisle. [continuing] that is a lot of responsibility.
And so getting additional resources into USAC helps, but it
doesn't solve the problem for us. We need additional resources
in the FCC to deal to with it.
Mr. Stupak. Hindsight is always 20/20, but if USAC would
have been set up differently, maybe you wouldn't have had all
problems if you had ongoing audits because I mean it seems
like, you know, when no one is watching the store, that is when
it gets robbed. Right?
Mr. Carlisle. I think the--well, I have to agree with you
that if USAC had been set up differently from the beginning, we
may very well have avoided some of these problems.
Mr. Stupak. Well, how about the FCC? Does that come
underneath the Single Audit Act?
Mr. Carlisle. Pardon me?
Mr. Stupak. Is FCC subject to the Single Audit Act?
Mr. Carlisle. Yes, I believe so.
Mr. Stupak. Okay. Well, then, why wouldn't you use that Act
because any expenditure over $300,000 is required to be
audited, and that Act expressly allows you to pay for auditors
from the funds from which the money came from.
Mr. Carlisle. Well, I believe we are going through
processes where we are using funds from the USF to pay for
audits. For example, the audits under the Improper Payment
Improve Act--later on this year, we are going to be conducting
hundreds of those audits. Those audits are being conducted
under a 3-way agreement between our inspector general----
Mr. Stupak. Sure.
Mr. Carlisle. --USAC, and the auditors.
Mr. Stupak. Right.
Mr. Carlisle. [continuing] and those auditors are being
paid for out of the fund.
Mr. Stupak. Right. Well, my question was in the past 8 or 9
years that the fund has been there, why wasn't that Single
Audit Act looked at because, again, any expenditure over
$300,000 has to be audited; and if the FCC is subject to it,
that would give you more personnel because you can take the
money out of that fund. Again, hindsight is always 20/20, but I
can just point to two examples where I think the FCC could have
done a better job, and the existing law is there where the
funds would have been made available.
Mr. Carlisle. Well, with regard to the use of the Single
Audit Act historically, I will be happy to talk to our Office
of the General Counsel and get back to your staff about that.
Mr. Stupak. Mr. Goldstein, is that a fair assessment of the
Single Audit Act that they could have done that?
Mr. Goldstein. The Single Audit Act could be used, sir, and
my understanding of it--and counsel can certainly help me--is
that it involves anything related to law, to grants, to loans,
cooperative agreements, and ``other assistance.''
Mr. Stupak. Sure.
Mr. Goldstein. And this would certainly fall into that
category, as it seems to us.
Mr. Stupak. Well, Mr. Carlisle, let me ask you this: you
know the chairman and I and others have brought up the $100
million of Puerto Rico, $67 million from the El Paso, and the
FCC has been aware of these cases for some time. Yet from
everything we can gather, the FCC has only recovered--$36
million in overcharges have been identified--not recovered, but
at least identified. And if you have been aware of these cases
for some time, why has no determination been made, then,
regarding the refunds due to the E-Rate program, much less any
steps for recovery on these two cases?
Mr. Carlisle. You are talking about El Paso, specifically?
Mr. Stupak. Well, sure. El Paso and Puerto Rico, I mean. I
know you tried to do some stuff on Puerto Rico, but if you take
these two cases, there is $167 million that has sort of been
wasted, and only $36 million in overcharges have been
identified. I would think we would find a lot more, so I guess
I am asking you why has no determination been made regarding
recovery of funds? And let us start with El Paso because I
don't think anything has been done on that case, $67 million.
Mr. Carlisle. I am actually more familiar with the facts of
the Puerto Rico case.
Mr. Stupak. Okay.
Mr. Carlisle. On El Paso, I will not be able to provide any
details at this time. On Puerto Rico, however, I believe KPMG
is going to be finishing its final audit report within the next
month or so, and it is going to be submitted for consideration
at the USAC board meeting.
Mr. Stupak. Will they identify that could possibly be
recovered?
Mr. Carlisle. I believe so. We will see when we see their
actual final audit report. I have not seen a draft of it.
Mr. Stupak. Okay. I spoke of the $36 million that has been
identified. Of that $36 million, only $3.2 million has actually
been recovered; $14.4 million is tied up in appeals. This is
money that could have gone back into the E-Rate. Why have we
only been able to recover $3.2 million? I mean how long has
this program been going on now? Eight years at $2 billion a
year, that is about $16 billion; and of all the money spent and
problems we have, we only got about $3 million ever recovered--
$3.2 million.
Mr. Carlisle. I would have to actually check on the $3.2
million number. However, in terms of the process for recovery,
like any other audit and recovery process, there is a process
to it to ensure that the beneficiaries actually have a fair
opportunity to take a look at the audit reports. They have the
ability to challenge the audit findings. If USAC comes out with
an audit finding that warrants recovery, they can appeal that
to the Commission.
Mr. Stupak. Sure.
Mr. Carlisle. And Commission review of that can take some
time.
Mr. Stupak. Take some time.
Mr. Carlisle. And so I think that is probably the primary
reason why you haven't seen recovery tracking the total amount
that has been identified. However, I am hopeful that we will
move forward very quickly over the next year to increase that
that.
Mr. Stupak. In the responder saying the FCC Wireline
Competition Bureau cannot provide Congress or the public with
any indication as to the magnitude of the potential of waste,
fraud, and abuse within the E-Rate program? Is that correct?
Mr. Carlisle. Where do you get that understanding? I
don't--was that something that we said, if I may ask?
Mr. Stupak. It was in one of the report we read that the
FCC Wireline Competition Bureau cannot provide Congress or the
public with any indication as to the magnitude of a potential
waste, fraud, and abuse within the E-Rate program. So if that
is correct, how do you propose to provide us with a meaningful
counting of the FCC's stewardship of the E-Rate program?
Mr. Carlisle. Well, first, as to a concept as to the amount
of waste, fraud, and abuse in the program: I believe we are
getting a sense of that as a result of the audits that have
been conducted so far.
Mr. Stupak. What is that sense? What do you think? 10
percent? 20 percent?
Mr. Carlisle. Well, if we look at the audits that have been
conducted so far----
Mr. Stupak. Sure.
Mr. Carlisle. [continuing] as the IG stated in their
testimony, they found that there were compliance issues with
about 36 percent of the audits that they have conducted. If you
look at the total amount of dollars disbursed that would be
recoverable because of those compliance issues, it comes out to
somewhere, I believe, between 3 and 5 percent of the dollars
disbursed, and I believe that is actually confirmed by the
results of our most recent round of--I believe it was the KPMG
audits, which saw that out of the total numbers of dollars
disbursed that were audited, about 3-percent recovery was
warranted.
Mr. Stupak. So that is about, if my math is correct, about
$500 million; yet nationwide, we have identified about $36
million.
Mr. Carlisle. As a result of the audits that we conducted--
and some of those were audits--I believe some of the audits
that were conducted were as a result of specific issues that
were identified, so it was not a random sampling. The KPMG
audit was a random sampling. So in terms of how that lines up,
I would have to look at the details myself and get back to you.
Mr. Stupak. Okay. If I can go back to El Paso for a
minute--and maybe Mr. Bennett will want to help you on that
one. Over the course of the subcommittee's investigation into
the El Paso School System, we learned that El Paso persuaded
USAC to fund a $27 million, state-of-the-art, network-
maintenance-system support center for 53 of the districts'
school that keep the networks so-called up and running. And you
know, I think the Chairman brought it up--it was switches and
routers and cables; all should have been conveyed by vendor
warranties--or at least the first year after installation
should have been warranted. They spend the $27 million, and it
only operates for about 3 months, and the system sort of
crashes.
And in order to ensure that this type of deceit does not
happen again, what mechanisms can the FCC put in to make sure
that--first of all, $27 million, there is a Cadillac plan was
way too much for the school, and that is why the whole system
crashed. What do you have in there to make sure that you don't
have that kind of rip off again by vendors? And I will use El
Paso as an example.
Mr. Carlisle. Well, I believe there are several steps that
the Commission has taken and will continue to take in order to
protect against that. First of all, in the Fifth Report and
Order that was released last year, the Commission codified
rules regarding technology plans that the schools are supposed
to have in order to determine the equipment that is appropriate
for them. These plans have to be consistent with Department of
Education guidelines. That is in place now. And they are also
required to retain documents related to the development of the
technology plan.
Separately, when USAC goes through the 35,000--actually it
is approaching 40,000, now--applications a year for E-Rate
funding, they actually have a system very similar to, for
example, the system that the SEC uses to identify possible
insider trading transactions. Flags will go up if certain
parameters are not met when a bid is submitted. So we actually
have the ability to take a look at that and prevent the actual
application from being approved. So there are steps that are
taken before the funding every goes out; and then there are
steps that can be taking after the funding goes out through the
auditing of the program.
Mr. Stupak. Well, I know my time is up. Can I just ask one
more question? Okay.
The El Paso system--just a little more on El Paso here. On
El Paso School System, if it had a 1-year warranty, it crashes
after 3 months, have you done anything to try and go after this
$27 million? It seems like you have a warranty, you have a
great legal to ground to go after it. Has anything been sought
to recover any of that money?
Mr. Carlisle. I am sorry. I am going to have to get back to
you on details about that. I am just not familiar enough with
the details of the case. I am sorry about that.
Mr. Stupak. Thank you, Mister----
Mr. Whitfield. The gentleman's time is expired. The
gentlelady from Tennessee, Ms. Blackburn.
Ms. Blackburn. Thank you, Mr. Chairman, and thank you to
each of you for being here today. We have been interested to
read your testimony and interested to have you here with us.
And Director Goldstein, I think I will begin with you, if you
don't mind.
From my time I served on government reform, I have come to
really appreciate you guys----
Mr. Goldstein. Thank you very much.
Ms. Blackburn. [continuing] and the work that you. You all
have indicated that there may be 35 programs--or at least 35
other programs that provide funding for technology in schools
and that this funding could move as high as $12 billion. Is
that correct?
Mr. Goldstein. Are you referring to an older report of
ours? Are you----
Ms. Blackburn. Yes.
Mr. Goldstein. Yes. This is----
Mr. Blackburn. Okay.
Mr. Goldstein. In a report that we issued a number of years
ago, that is correct.
Ms. Blackburn. Okay. Great. Have any of these other
programs had the financial problems that E-Rate has?
Mr. Goldstein. I am not sure that we have tracked them
since then, so I think it is pretty difficult for us to tell.
This is a report that was issued some time ago about other
kinds of programs. And obviously, they have, no doubt, changed
over the years, so I would hesitate to characterize what kinds
of problems they may have today. Whether they had problems at
that time, obviously, is another issue; but we haven't tracked
them in a way that would help us to answer that question.
Ms. Blackburn. Okay. So you have not tracked the
effectiveness of those programs?
Mr. Goldstein. No, ma'am.
Ms. Blackburn. Okay. Is it too much for me to ask if you
would respond to me on those programs and the financial
management of those programs so that we will know what is still
in effect? I see the individuals who are with you and seated
behind you kind of nodding their heads----
Mr. Goldstein. I hope they are nodding their heads, yes.
Ms. Blackburn. [continuing] making some comments, and I
think that would be helpful to us.
Mr. Goldstein. We will be happy to get back to you and to
figure out how we can----
Ms. Blackburn. That would be great.
Mr. Goldstein. [continuing] help you with that.
Ms. Blackburn. That would be great. I think as we look at
E-Rate that that would be helpful to have that information
because if there is a way to begin to measure some
effectiveness moving forward, I think it would serve us well.
Another thing on E-Rate, funded, primarily, through the
Universal Service Fee, and that is capped at $2.25 billion per
year. And the tax started out at 3 percent in 1998 and is now
at 9 percent. Is that correct?
Mr. Carlisle. May I?
Ms. Blackburn. Yes. Go ahead, please, Mr. Carlisle.
Mr. Carlisle. It is actually, for the first quarter of the
year, it is at 10.7 percent.
Ms. Blackburn. 10.7? Thank you for that. That is important.
I have just left a telecommunications subcommittee hearing, and
you know, as we look at the Telecom Act, I think that applies
to us.
Okay. Mr. Goldstein, to you again: does the FCC's
administration of the E-Rate program comply with the FFMIA?
Mr. Goldstein. One of the things we are trying to ask FCC
to do is to go back and look at the various financial laws and
make that determination. We are not in a position to
specifically determine----
Ms. Blackburn. You are not? Mr. Carlisle, I saw your
interest peaked a bit by that question. Do you have an answer
for that one?
Mr. Carlisle. I believe the Office of the General Counsel
made a determination and communicated in a letter--and I am
going to forget exactly to whom it was sent--but it made a
determination in 2000 the FFMIA did apply to the fund.
Ms. Blackburn. And do they comply?
Mr. Carlisle. We have no reason to believe they are not in
compliance.
Ms. Blackburn. Okay. Great. Wonderful. And Mr. Goldstein,
another one for you.
Going back to all of the programs--let me loop this back
into my first question, going back into the technology funding.
With the 35 programs that have been in existence--as you
respond to me on that, I would like to know--we are looking at
waste, fraud, and abuse, and we are looking at where our
opportunities for savings exist. I would like to know how much
efficiency could be gained if you were take all 35 of these
various and sundry programs with the different--probably
different levels of effectiveness, and if they were rolled and
consolidated into one program--more or less what our
administrative savings would be and what we could gain from
that oversight, what we could address through rules, what we
would need to address through legislation. So that would be
helpful.
Mr. Goldstein. We would be happy to take a preliminary
look, come talk to you and your staff, and see what we can do
from there.
Ms. Blackburn. Okay. That will be great.
Mr. Carlisle, has the FCC consulted with school and
libraries on the programs' goals and measures of those goals?
And what ought to be done next with the program, now that 90
percent of the schools are--they have connectivity.
Mr. Carlisle. Usually the way that we interface with the
schools and libraries is through the notice and comment
process, when we are adopting rules related to the program, and
so we do always have the opportunity to get input from them. We
also have regular calls--my staff has regular calls with the
national coordinating bodies for schools and libraries
participating in the program. So we do have the opportunity to
talk to them about the goals of the program and how they
change, and we are looking forward to receiving further comment
from them as we continue to modify the program.
Ms. Blackburn. Will E-rate have outlived its usefulness
when we see most of the service going wireless?
Mr. Carlisle. Well, certainly, that may be, in some cases,
a more cost-effective way of providing broadband to schools, as
opposed to running actual wires out to schools located at a
distance. Now, it may be that even it is more cost effective,
it may be very expensive for some schools to actually buy that
equipment; there may still be a gap between what the schools
are able to pay and what the technology costs. So I would hope,
that as technology becomes more ubiquitous and cheaper over
time, you would see less of a need for extremely high funding
requests for equipment, over time. But is a valid question; as
we do reach a level of--for example, 94-percent penetration of
broadband services to schools--how should the funding program
change? Should it become more targeted? Should we be looking at
more cost-effective technologies? And we have solicited comment
on some of those issues; we hope to solicit comment on more of
them very soon.
Ms. Blackburn. Do you feel that, even with these other 35
funding programs that have been there over the past decade, do
you think that the E-rate Program is the main reason or the
primary cause of most of the schools in underserved areas being
connected to the Internet?
Mr. Carlisle. Well, I think if you look at where the U.S.
was in--say for 1999--or 1998, I believe, the numbers stood at
something like somewhere under 60 percent of the schools were
connected to the Internet. Now, it is 94 percent. Do I believe
that the program had a--that amount would have gone up over
time. There is no question. I believe the program, however, did
certainly--it must have had an impact in term of accelerating
the deployment of broadband to these schools. Now, GAO has
appropriately raised the issue that our performance metrics
didn't serve to measure that difference, and we are trying to
come up with that.
Ms. Blackburn. Mr. Goldstein, would you like to comment on
that?
Mr. Goldstein. Thank you. I think Mr. Carlisle has said it
fairly succinctly. While it is certainly true that the number
of schools that have been hooked up to the Internet and
received other services has obviously increased by various
measures, the FCC is unable to tell us how much of those
increases are due to the E-rate Program. They were unable to
isolate the effect of E-rate funding on connectivity in their
performance measures because they did not have those measures
in place or any ways to validate them. So that is the case
today.
Ms. Blackburn. All right. Thank you.
Mr. Carlisle, has OMB done a PART analysis on the E-rate
Program?
Mr. Carlisle. Well, we have gone through the process with
them, I believe, last year, and I believe last year they said
that, as part of their PART analysis, that we did not have--
they could not make a judgment that the program was effective
because we didn't have performance measurements. After that, we
started working with them very closely and have been working
with them in order to develop new management and also program-
performance metrics.
Ms. Blackburn. So they rendered it ineffective, and you all
are taking steps in what timeline? What is your timeline for
bringing it into a compliance or up to a certain level of
effectiveness?
Mr. Carlisle. I believe we will have a set of metrics
within the next few months brought together, certainly by the
end of this fiscal year. Because of the way the PART process
operates, I believe they will actually be used by the agency in
fiscal year 2007, which is in our response to the GAO report.
Ms. Blackburn. So your timeline, then, would bear out that
you would have a compliance by 2007.
Mr. Carlisle. We would hope so, yes.
Ms. Blackburn. Thank you. My time has expired. Thank you,
Mr. Chairman.
Mr. Whitfield. Mr. Inslee, would you like time for
questions?
Mr. Inslee. I would. Thank you--and answers, too.
I am sorry. I haven't been able to join you for this whole
hearing, so my apologies if my questions are redundant. This
has been a pretty startling report to read, in some of these
revelations, to see--and I have looked at a lot of GAO reports,
and perfection is never attained and always sought for, and we
never get there, and so we recognize criticisms for every
potential project; but this one is really disturbing to me. And
I will just be very candid with the FCC on this. Looking at
these multiple sort of structural failures, I am very glad that
we are raising these funds for this incredible need that we
need in our schools, but I am honestly questioning whether this
is the right agency to be responsible for the distribution of
these funds. I think it is incredibly important program, and it
has an incredible demand in our schools. I think the fund is
appropriate and want to see it remain. But I really wonder if
having a regulatory agency responsible for distributing funds
to other local agencies is really the right mix for the talents
of the FCC and whether there is another agency in the Federal
Government that is more adept at that type of procedure, of
establishing audit trails, criteria for funding, a good,
competitive bidding process, matrixes for determining
performance--that is a skill set, you know, that I just really
wonder whether this agency has, given its sort of historic
regulatory function. Now, that is a broad question. You know,
what assurance do we have that it wouldn't be better for us to
go to an agency who really has one its principal focuses the
distribution of funds to other agencies? Is there some inherent
difficulty for a regulatory agency to be given that type of
responsibility? Anyone can answer that. The FCC might go first,
but----
Mr. Carlisle. I think you are actually asking exactly the
right question. When this program was established in 1996, it
was given to an independent regulatory agency that has an
annual budget of about $250 million. Alright? Nothing near the
size of--for example, the Department of Education, the
Department of Agriculture--any executive branch Agency.
Moreover, it is a regulatory agency which is largely populated
with regulatory attorneys and economists, not people who have
had extensive experience with grant-making programs. So as a
result, the FCC did the best it could in setting up the
program. Now, I think it is a valid criticism that should it
have asked for more help early on, should have gotten outside
help, should have gotten outside consultants, talked with NAPA,
the National Academy of Public Administration, earlier?
Absolutely. At this point and I believe for the last couple of
years, we have focused on trying to undo some of the effect of
that process we started out with. But to a certain extent, I
think you are raising a very valid question about whether or
not the FCC is the appropriate holder for this responsibility.
Mr. Goldstein. I would add a couple of points. First, I
think the GAO has long been concerned, since we have done quite
a few reports over the years, that there are a lot of
structural issues, a lot of administrative issues, surrounding
USAC and FCC and the E-rate Program, that things have never
worked, nearly, in the way they could have, particularly early
on.
We are not in a position to say whether or not this is
something that ought to be sent to another agency. We are very
happy to see that FCC is going to have NAPA take a look at this
because it is certainly time that an outside entity helped them
determine what are some of the other ways that these kinds of
programs could be delivered, how these funds could be managed,
and how could this program be more effective. I think it is
important that there be a number of attributes to this program,
wherever it ends up and however it's finally managed. I think
it has to have structural clarity between any of the entities
that are involved in it; it has to have financial management
and internal controls that apply to Federal funds and that work
effectively; it has to have clear program goals and performance
measures; it should continue to have minimal burdens for the
beneficiaries, as minimal as possible; and it ought to have
extremely effective oversight through rulemaking, through the
audit process, through appeals processes, through an effective
Inspector General that has enough funds to do the job, if
indeed the program continues to reside at the FCC.
Mr. Inslee. If another agency was going to take over
responsibility for distribution--and I am not proposing that at
the minute. It is just an honest, open-minded questions. Would
that in some way damage the ability to collect the funds from
the payers? There is no difficulty there we would encounter, is
there?
Mr. Carlisle. No, at the present time, we collect the funds
through the 499 form, which is filed by telecommunications
carriers every year on, I believe, a semi-annual basis. There
is no reason why that form and its return couldn't be lodged
somewhere else.
Mr. Inslee. I noted a newspaper article that suggested that
of the $14.6 billion that had been collected or awarded, only
$9.2 billion has been spent. Is that a correct
characterization? Are those real terms? And if so, you know,
what are we to make of that, and what is the principal reason
for that?
Mr. Carlisle. I believe those numbers are approximately
correct. Historically, we have known that every year the amount
of funds disbursed does not match the amount of funds
committed, and lags it every year; and there are a number of
reasons for this.
Quite frequently, when funds are actually committed to the
schools through a final commitment decision letter, usually the
school does not come back with an invoice to claim the funds
for a number of months. In some cases, it could be 1 or 2
months, but in many cases, it might be 12 months or 18 months,
once the actual work--and usually on priority 2, wiring work,
it usually takes about that long.
Now, there is certainly an issue that we need to consider
as to whether that indicates that our processes aren't
efficient enough, but I think there is also an issue that is
just inevitable: that equipment prices go down; schools decide
that they don't want to do certain work; contractors aren't
available; and the funds don't get used. So there is always
going to be a situation, no matter how efficient our processes
are, where your disbursements in a program of this type may lag
commitments. However, programmatically, we have handled this.
And in order to make sure we continue to be able to make funds
available to schools, if we have unused funds from year to
year, they roll over to the next year and increase the cap. So
the cap for this year is not $2.25 billion; it is $2.4 billion.
And that additional money, we believe, will actually allow us
to provide more funding to schools that otherwise wouldn't have
received it.
Mr. Inslee. Mr. Bennett, did you have response to that kind
of issue?
Mr. Bennett. No; no response at all.
Mr. Inslee. Got you. Thank you, gentleman and lady. Thank
you.
Mr. Whitfield. Thank you, Mr. Inslee, and I am delighted
that the chairman of the full committee, Mr. Barton of Texas,
was able to join us, and I will call on him now for an opening
statement or any comments he might want to make.
Chairman Barton. Well, thank you, Mr. Chairman, and thank
you for continuing the series of hearings that we have held on
this program. We would also like to thank our GAO witnesses for
the report that they are releasing today.
I don't really have an opening statement, other than what
we are going to submit for the record. I will say I think the
E-Rate program is broken; I am not sure it can be fixed. I
think we ought to seriously look at significantly restructuring
the program. We are going to have a Telecommunications Act this
summer that we are going to put before the committee, and there
will certainly be a component of it that deals with the E-Rate
program.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy
and Commerce
Thank you Chairman Whitfield. This afternoon we consider the
results of a study by the Government Accountability Office of the E-
rate program. I appreciate the GAO's hard work in building this report,
as it will help lay the groundwork for repairing the flawed E-rate
program.
Last year, in the three hearings held during the 108th Congress, we
examined specific examples of E-rate waste, fraud, and abuse. I have
said from the beginning of my chairmanship of this committee that we
would not shy from conducting an aggressive and bipartisan
investigation of E-rate--whether it be the FCC's poor management and
oversight of E-rate, or program abuse by schools or vendors. I am
pleased to say that we have done exactly that.
The 1996 Telecommunications Act Conference Report explained that
the overarching reason for providing schools and libraries with a
telecommunications discount was to ``assure that no one is barred from
benefiting from the power of the information age.'' In the abstract,
everyone can appreciate a program intended to give schools and
libraries financial assistance so they can afford Internet access and
other telecom services necessary for improving the educational
environment of our children.
However, if this is our goal, we also have to ensure that the
program is cost-effective, efficient, and--most importantly--actually
reaching that goal. But the Subcommittee's work has revealed a program
containing powerful incentives for waste, fraud, and abuse. And, as
we'll hear today, there are also very serious issues regarding the
structure and management of the E-rate program. While every player--
schools, equipment vendors, telephone companies, and consultants--has
an obligation to responsibly participate in E-rate, the FCC and USAC
have obligations as well. Unfortunately, they have been lackluster
stewards of the program, to say the least.
Today's GAO report and testimony describe how the FCC mismanaged
the E-rate program. The report explains that the FCC never conducted a
comprehensive review to determine which federal financial and
accounting statutes, as well as other laws and policies, apply to E-
rate. As we have said before, E-rate is not a small-money program--it
is funded at $2.25 billion per year. So, given the size of this multi-
billion dollar program and its significant burden on telephone rate-
payers, I am bewildered that the FCC would respond to the GAO by
maintaining that the FCC has conducted a comprehensive evaluation of
the program--``on a case by case basis.'' I hope the FCC will be able
to answer why E-rate has never received the sort of review that the GAO
clearly thinks is required.
The GAO also reports that the FCC has never implemented useful
performance goals and measures for E-rate. In fact, according to the
GAO, ``a key unanswered question is the extent to which increases in
connectivity can be attributed to E-rate.'' After committing over $14
billion, and actually disbursing nearly $9 billion, the fact that
nobody has any idea about how helpful this money has been in getting
schools and libraries connected to the Internet is simply stunning.
What's more, I am told that recent statistics show that as of 2003,
nearly 100% of public schools and 93% of public school instructional
classrooms have Internet access. Given this rate of connectivity, the
FCC's poor oversight, and the fact that--after seven years--the agency
has no idea to what extent E-rate has had an impact in our schools, the
FCC will be hard pressed to convince me that the E-rate program belongs
in its hands. These statistics also bring to the forefront the question
of what is E-rate's mission going forward?
Finally, the GAO report confirms the Subcommittee's concerns
regarding the weaknesses in the FCC's oversight mechanisms--pointing
out that the FCC has been slow to respond to audit findings, has a
massive backlog of beneficiary funding appeals, and promulgates rules
that are often unclear or unspecific, leading to serious problems in
enforcing the program's rules.
In sum, the GAO's testimony and report reinforce the Subcommittee's
work during its E-rate oversight of the last two years. E-rate seems to
be rudderless, and I fear that the waste, fraud, and abuse we have seen
so far may be just the tip of the iceberg. No one responsible for the
program knows how deep the problems run. I look forward to hearing the
FCC's response to the GAO's report today. Clearly, based upon the work
of our investigation, and the GAO's report, the Congress needs to move
expeditiously on legislation to reform the E-rate program. I look
forward to Telecommunications Subcommittee Chairman Upton's work in
this regard. We must ensure that this money is spent wisely, and for
its intended purpose.
I'm pleased to see that the FCC's Assistant Inspector General for
Universal Service Fund Oversight will testify today, and describe both
his continuing concerns and the latest developments in rooting out
program waste, fraud and abuse.
Thank you, Mr. Chairman. I yield back the remainder of my time. ###
Chairman Barton. I guess my question to this panel--I have
2 or 3 general questions. In hindsight, was it an appropriate
role of the Congress to expand the concept of universal service
to require that we connect our schools and libraries to the
Internet? Is that a reasonable expansion of the definition of
universal service?
Mr. Goldstein. Mr. Barton, I think it was, in that you have
seen--again notwithstanding the issue that it is difficult to
determine whether E-Rate, specifically, or how much of it,
specifically, aided the connectivity of schools--we have seen
the growth of technology in schools, and we have seen poorer
schools become more adept using technologies, and we have seen
a lot of really good benefits in terms of schools in rural
areas being able to have different kinds of benefits that they
might not have otherwise had and the educational benefits that
accrue to them.
Chairman Barton. Wouldn't a lot of that have happened
anyway?
Mr. Goldstein. Yes, sir, but I do think that there is a lot
of money that has come through this program. Some of it has, as
Mr. Carlisle has said, undoubtedly had a benefit. It is just
difficult to determine how much.
Chairman Barton. Okay. Anybody else want to make a comment
on that?
The second general question: now that we have had this
program in operation for a number of years, what data is there
and how many schools and libraries are now up and running,
actually have Internet connections, and they are working? Are
we at 100 percent, 90 percent, 80 percent? Where are we?
Mr. Carlisle. I believe our most recent data from the 706
Report to Congress indicates that 94 percent of schools, and
approximately the same number of libraries--I believe it might
be even 95 percent of libraries have high-speed connections to
the Internet.
Chairman Barton. Okay. Well, so I think the universal
service requirement for telephone--and correct me if I am
wrong. But I think telephone service, where we have had
universal service requirement for, I guess, 60 years, is a
little bit less than that. I think it is around 92, 93 percent.
Is that right?
Mr. Carlisle. I believe we just published in our Telephone
Penetration Report that it is somewhere between 93 and 94
percent----
Chairman Barton. Okay.
Mr. Carlisle. [continuing] at this time. Yes.
Chairman Barton. On the other hand, television sets in
home, which has no universal service requirement, is about 99
percent. And cell phones, which are certainly no requirement,
are probably close to 100 percent, especially if you have a
teenager who just has to have one so that she can talk to his
or her boyfriend or girlfriend. Is there any reason to continue
this program past where it is? If we have basically penetrated
the market, what public good is to be served by continuing the
program? We have done what we set out to accomplish, even
though we did it very inefficiently and messily.
Mr. Carlisle. When you say ``this program'' do you mean
only E-Rate or do you mean E-Rate and High Cost?
Chairman Barton. You can define it either way.
Mr. Carlisle. Okay. Since the hearing is focusing on E-
Rate, I will focus on E-Rate; and if you would like me to
address High Cost, I can do that as well.
From a point of view of program management, once you
achieve an extremely high penetration level, you can go two
ways. You can either say, alright. We have done our job.
Everybody is on their own from now on. If you do that, though,
you have to acknowledge that there will be recurring costs of
continuing to receive the service from the service providers,
but there will also be costs in terms of continuing to keep the
network maintained and upgraded, at some point replaced. So you
can either say, look. Everybody is on their own. Or you can say
there will continue to be a certain amount of targeted funding
in order to maintain the networks. I think it is a valid
question to say is our priority to funding appropriately
targeted to do that, and we will be soliciting comment on that.
Chairman Barton. Well, I mean I don't know where the votes
are. I was a part of the debate in 1996 and the Telco Act, and
my recollection was that Congressman Field and Congressman
Synar were the proponents of this, but I could be corrected.
Mr. Markey and some others are not here, but they were part of
that debate, too. So we didn't put a lot of thought into it.
And it is obvious that the program had done good because we
have a lot of schools and libraries that are now connected, and
the majority of them have operated within the system; but there
has been so much fraud and corruption and waste and gold-
plating. And I mean I don't need to repeat all of our other
hearings, but now that we are 94 percent, I really question
whether we should do anything, other than maybe have some
subsidy for low-income schools and libraries to help them, you
know, pay the ongoing costs; but above and beyond that, turn it
over to the local and State communities and let them do the
upgrades and the things that need to be done. We have done the
major job, which was to get the connection. You know, I am only
one vote, so I don't know where the votes are.
But I guess my last question to the GAO: if you had to make
a decision to where to put this if we decide to continue the
program, is there a better place to have it than the FCC?
Mr. Goldstein. Congressman, I am not really sure where you
would put it. I indicated, earlier, that we are really pleased
that NAPA is going to study this issue for the FCC and that
hopefully they will come to some conclusions that the FCC can
use and that Congress can use in understanding the future of
the program. I think that is about as much as I would want to
say at this point. We haven't studied, specifically, options
like NAPA is going to do. As I had mentioned earlier, there are
certain attributes that any program, regardless of where it is
going to be placed, ought to have, including better structural
clarity, financial-management controls, better oversight, and
the ability to have more of an auditing capability--things like
that, regardless of where it goes, that it needs to have,
whether that is within FCC or some other part of the government
or some other structure.
Chairman Barton. Well, I will ask Mr. Carlisle. Do you want
to keep it?
Mr. Carlisle. I would only want to keep it if we can
continue the progress that we have made within the last couple
of years to improve oversight over the program, oversight and
management of the program. If we can continue that pace of
improvement, then I think we should keep it.
The only other logical place for it to go--and I won't make
any friends over there by saying this--would be the Department
of Education.
Chairman Barton. Okay. Mr. Bennett, you are the assistant
inspector general for the FCC. Should the FCC be allowed to
keep it, given their absolutely dismal records, until very
recently, in even caring about the program in terms of its
management?
Mr. Bennett. I think from our perspective we have been
looking at the program within the context of it being at the
FCC and focusing on the weaknesses in the design of the program
and trying to make recommendations. Certainly, we have been
frustrated with the time it has taken to address some of the
weakness that we have talked about. However, as I indicated in
my testimony, the Commission has started to give consideration
to these matters. At the same time, we have worked very closely
with USAC.
We are very close to having in place a contract, under
which we are going to be able to do the number of audits that
we believe needs to be done to get a handle on the level of
waste, fraud, and abuse in the program. So I feel like we have
made important progress. We are now poised to do this large
body of work. We want to do that work and basically design
oversight based on the results of that work.
Chairman Barton. Well, my time is about to expire. I will
say, on the record, before I turn it back to Chairman
Whitfield, again, because of, in my opinion, the lack of
direction that we gave to this program in the implementing
legislation in the 1996 Telecommunications Act, the Congress
and the House and this committee bear some responsibility for
what has happened. I can't put all of the responsibility on the
executive branch. So that when we get to the Telecommunications
Restructuring Act of 2005 later this summer, we are going to
put more thought into this and almost certainly give more
direction, if the collective decision of the committee is to
maintain the program.
With that, Mr. Chairman, I yield back.
Mr. Whitfield. Thank you, Mr. Chairman, and at this time, I
will recognize Mr. Engle for 10 minutes.
Mr. Engel. Well, thank you Mr. Chairman. I appreciate the
opportunity to participate, and I will be brief.
I really just have one question that I would like to ask
Mr. Carlisle. It is about the schools in my hometown in New
York City. E-Rate, obviously, has helped wire all of our
schools in over 80 percent of the classrooms. I, obviously,
like everybody else, want to make sure that E-Rate is free of
fraud and abuse, and I want to ensure that the program
continues to provide service to needy kids. But why has--I am
told of a problem that USAC has chosen to suspend payments for
several months now to New York City schools while conducting a
routine audit. I am told--and you can correct me if that is not
the case, that previous audits have shown no abuse of the E-
Rate program. So I don't disagree with conducting audits, but I
want to know why it is taking so long and why payments are
being held off while this happening. It is really to a point of
crisis, where the schools are worried because the payments have
been withheld; they cannot pay their bills; and they are very
much afraid that they are going to be shut down.
Mr. Carlisle. I recently had a meeting with the New York
City Department of Education on exactly this issue, and we
have, my staff, has discussed the issue with USAC. My
understanding is that the New York City Department of Education
has had a call with USAC to discuss moving forward on
processing their funds. Now, I cannot here say exactly when
that is going to happen, but my understanding is that the
process is moving forward as a result of those discussions that
we have had.
Mr. Engel. Well, I would like to continue to work on this
with you, and after the hearing, I am wondering if we can be in
touch----
Mr. Carlisle. Absolutely.
Mr. Engel. [continuing] because I am told that things
really are at a breaking point, and I haven't been told that
things are moving along and that they have, you know, been in
touch and that things are proceeding. I am told just the
opposite, so perhaps I have gotten some miscommunication, but I
have had a lot of people feel strongly, and they are very
frighten about the prospect of this dragging on any further, so
I would welcome the opportunity to dialog with you.
Mr. Carlisle. These are all very recent developments, and I
will be happy to follow up with you on this.
Mr. Engel. All right. Thank you very much. And I thank you,
Mr. Chairman. That is all I have.
Mr. Carlisle. Yes, sir.
Mr. Whitfield. Dr. Burgess, you are recognized for 10
minutes.
Mr. Burgess. Thank you, Mr. Chairman. I apologize to the
panel for being out of the room for part of this.
Mr. Goldstein, the FCC recently contracted with the
National Academy of Public Administration to examine a
structure of the current Universal Service program and its
alternatives. Would you characterize this as a positive
development?
Mr. Goldstein. Yes, sir. It is a very positive development.
We think it will help the FCC and potentially the Congress to
determine what kind of a structure would most be appropriate to
a program that has not always worked very well, and that, while
it has improved over the last couple of years, still has a
considerable way to go to do better in providing timely funds
to beneficiaries, making sure they can determine how the
program is measured in terms of the delivery of its services,
and how it is effectively structured to ensure that it is
working well from both a financial and a legal perspective.
Mr. Burgess. Well, in regards to measuring, what will be
the metrics to ensure that this has been an effective movement?
Mr. Goldstein. I think that it is really up for FCC to
decide that, working with the various stakeholders in the
program. There are various ways, hopefully, that they can
determine how to measure it. The problem has been, in the past,
for some of the reasons we have discussed here, that these
measures haven't really been adopted. And GAO has looked at
this a number of times over the years, and it has been,
frankly, kind of either a nonexistent or a relatively haphazard
approach to performance. To developing metrics, they have, at
times, had some metrics, but they haven't been metrics that
would be useful in isolating E-Rate funding. At other times,
there have been metrics that would be put into, say, budget
submissions, but then they were never in the performance plans
and then would disappear all together. We are pleased the FCC
is working, at this point with OMB to try to develop more
effective metrics that are supposed to be completed by the end
of this year.
Mr. Burgess. Mr. Bennett, would you care to comment on the
use of those metrics?
Mr. Bennett. Only to concur with what Mr. Goldstein has
indicated.
Mr. Burgess. Do you think we will be able to tell that we
are doing and effective job at the end of this?
Mr. Bennett. I think if we design the metrics correctly, we
will be able to tell.
Mr. Burgess. Will we be able to tell from here, in
Congress, that it has been effective? Well, Mr. Bennett, does
the USAC have sufficient authority to operate the program
effectively?
Mr. Bennett. I think that is an area that has been of some
concern to us. Talking from the audit perspective, one of the
things that we learned in the conduct of audits and our
involvement in investigations has been the difference that
exists between the program rules, as they are contained in Part
54 of Title 47 of the Code of Federal Regulations and the rules
that USAC has created under their authority. And this
disconnect that exists between the rules contained in Part 54
of Title 47 and USAC implementing procedures has created a
situation where if an applicant doesn't comply with an
implementing procedure, there may be no way to enforce
compliance; there may be no legal basis for recovering funds
related to those issues. And that has been an area of concern
for us. As we indicated in my testimony last August, the
Commission adopted the Fifth Report and Order and has started
to adopt and recognize some of the USAC implementing
procedures, and we think that is an important step.
Mr. Burgess. Thank you, Mr. Chairman. I will yield back.
Mr. Whitfield. We are going to do another round here for
those interested. And I would just make the comment that the
very first sentence in the GAO report says, ``the FCC
established the E-Rate program using an organizational
structure unusual to the government, without conducting a
comprehensive assessment to determine which Federal
requirements, policies, and practices apply to it.'' And since
the inception of the program, all of the reports, all of the
oversight reports, the Congressional reports--there has been a
disagreement and differences of opinions about which policies
apply and which policies do not apply.
Then, as Mr. Carlisle made the statement, ``the FCC is a
regulatory body with a regulatory expertise. They do not really
have the expertise to process applications.'' In addition to
that, we have had all of these various criminal activities
going on with entities being convicted, and then we have got
NEC BNS that was convicted of wire-fraud and bid-rigging, as an
example; and they, after being convicted last May, asked the
FCC to waive its pending debarment from the program, and since
then, the FCC has not yet issued a decision on their debarment,
as an example, which it seems to me should be pretty clear, but
there may be some factors there that I do not know about. But
Mr. Carlisle, why would it take the FCC so long to make a
decision about that issue?
Mr. Carlisle. My understanding is that waiver proceeding is
being handled by the Enforcement Bureau right now, and they
have been considering that waiver petition in the context of
the DOJ's investigation of NEC, so they have spoken with DOJ
about their concerns about the information that they have
received from NEC over time in their investigation, and they
are taking those considerations into account.
I would point out, however, that during the pendency of the
waiver, and in fact, predating the filing of their waiver, NEC
has not participated in the program. They have voluntarily
said, we are not going to participate in the program until this
is resolved. So they actually have not been involved in E-Rate
or in any bids on E-Rate for over a year now.
Mr. Whitfield. Well, I am glad to hear that because I don't
think they should be----
Mr. Carlisle. Right.
Mr. Whitfield. [continuing] participating in program. I
might, also, just make the comment that basically, the
priority-1 needs, I think, have been met through this program,
and so we are moving into new areas, and I think the questions
raised by Mr. Inslee and the chairman of the committee and Mr.
Stupak--all of those comments are warranted because as we move
forward, I think we have to reevaluate this program. Do we
continue this program? Do we keep it at the FCC? Do we move it
to the Department of Education? What do we need to make it more
effective and less fraud and abuse?
And this committee, after this hearing, is going to submit
a report, a bipartisan report, to the chairman of the
Telecommunications Committee as they prepare to revisit the
entire telecommunications issues later this year. And so I
think this has been a helpful, constructive hearing going over
the GAO report, and I think we are back to the very starting
point, from my perspective, of where do we go with this E-Rate
program? It is a useful program, an important program, and
there is a lot of money; and so we want to be sure that we move
forward in the most constructive, effective, efficient way that
we can.
And with that, I will turn it over to Mr. Stupak.
Mr. Stupak. Well, thank you, Mr. Chairman. And if I can
pick on your first question there, when you said that on the
GAO report that was released today, the first sentence, ``FCC
established the E-Rate program using an organizational
structure unusual to the government, without conducting a
comprehensive assessment to determine which Federal
requirements, policies, and practices apply to it.'' In fact,
that is the first GAO recommendation. Isn't that, Mr.
Goldstein, your first recommendations to the FCC to actually
use Federal requirements, policies, and practices?
Mr. Goldstein. Yes, sir. We would like them to do a
comprehensive assessment--that is correct--along the lines that
we have been talking about----
Mr. Stupak. Right.
Mr. Goldstein. [continuing] so that they can determine how
best to structure the program and to apply to the program those
laws and policies and procedures that should have been applied
long ago and to do so--even in instances where they did apply
them--in a more comprehensive manner that has a framework
surrounding it and so that all of the various laws that apply
are applied in tandem.
Mr. Stupak. But in reading the GAO, Mr. Carlisle, it says
the FCC doesn't accept that recommendation; you would rather do
it on a case-by-case basis. Is that correct?
Mr. Carlisle. Well, I think we don't accept the
recommendation that we have never done the assessment. We have
done assessments of whether various statutes apply to the
program, and we may not have done them in the way that GAO is
recommending that we have done them, but we have done them. And
so the question, now that we have the GAO recommendation, is
what exactly does it mean to do a comprehensive assessment. Is
it merely a retread of the analyses that we have already done,
or is it something that is potentially more useful? And I have
already spoken with Mr. Goldstein about following up with him
and GAO to get more detail as to the sort of process they would
like us to engage in, so I can make sure it is an appropriate
process.
Mr. Stupak. Well, yes. I think if you do that comprehensive
study, then some of the laws we spoke about--the Single Audit
Act, some of the others that we spoke of here today--would
apply to everybody, and I think if it is applied on everybody,
you could move these applications faster, get through these
appeals quick, and actually, everyone knows the rules we are
all playing by, as opposed to a case-by-case review. Because
you know--and let me ask this one. Maybe it would be fair to
ask Mr. Bennett. In order to do competitive bidding here--it is
my understanding that the current E-Rate competitive bidding
process consists of or is based upon the assumption that you
post a form on the Internet. It says 470, Form 470, on USAC's
website for 28 days. And do you believe that promotes, you
know, a competitive bidding process? Posting a forum for 28
days?
Mr. Bennett. Well, we have been concerned about the
competitive bidding process almost as long as we have been
looking at this program. Actually, there are a couple things
that happen. The Form 470 is posted for 28 days. The program
rules require that the applicant comply with State and local
procurement regulations, and that has given us some concern as
well. In some cases, there may not be any applicable State and
local procurement regulations. In other cases, we may have
concerns about the State and local procurement regulations that
exist. So we have been concerned about competitive procurement
and talking about our concerns regarding competitive
procurement for some time.
Mr. Stupak. I guess it goes back to our first statement.
Maybe if we had a comprehensive assessment to determine what do
we do on other Federal programs--I am sure we don't use Form
470--we will probably get better compliance and less waste.
Because this is a great program, I don't want to see it go
anywhere. I think the FCC is capable of handling it. I just
would hope that the rules that the rest of the government lives
by, FCC would live by, especially with this program, because as
I said, I believe in this program; it is a great program, and
it has really helped in my district.
Mr. Carlisle, it is my understanding--and I know the
chairman had a lot of good questions, and I was dying to
interrupt him to try to point out a couple of things. So let me
ask you these questions, because I do believe in this program.
It is a great program.
The needs of the E-Rate and the need for money for this
program doesn't go away, even if 100 percent of every school
and every library in the United State is wired. Correct?
Mr. Carlisle. I believe that is correct.
Mr. Stupak. I mean besides upgrades--I am on
telecommunications, a number of others were talking about VOIP,
and we have got wireless and tomorrow there will be some new
technology, and all parts of America should have access to it,
and one way of doing it is the Universal Service Fund, through
the E-Rate, through our libraries and that--but is it correct
that two-thirds of the money, though, that is spent in this
program really goes to pay the telephone bill for libraries,
pay the service provider, the Internet provider? Isn't that
where two-thirds of the money goes?
Mr. Carlisle. There are two separate types of funding.
There is priority-1 funding, which is exactly the kind of
recurring charges that you just mentioned. And then there is
priority-2 funding, which is wiring.
Mr. Stupak. Okay.
Mr. Carlisle. Under the statute--the statute makes clear
that the priority-1 types of funding are to be supported
through the program.
Mr. Stupak. Correct.
Mr. Carlisle. It provides the FCC discretion about
priority-2 funding, and we exercised that discretion and said,
okay. It should be funded.
Mr. Stupak. Sure.
Mr. Carlisle. But yes, that is approximately the break out,
two-thirds to one-third, and historically that has been the
case. That has been a consistent point over time.
Mr. Stupak. So to all due respect to Chairman, if he would
like to see the upgrades paid by State and local governments,
that may be one thing; but the biggest cost here to a lot of
these taxpayers is just the access cost of the program through
the platform that they are using at the time. Is that basically
correct? Two-thirds of the money goes that way? To there?
Mr. Carlisle. I am sorry. I have actually been told that
the numbers are actually closer to 50/50, as----
Mr. Stupak. 50/50, though?
Mr. Carlisle. [continuing] as opposed to one-third.
However, you know, 50 percent is still a lot.
Mr. Stupak. It is still a lot of money----
Mr. Carlisle. And I think if that is the case, however, the
statute would actually have to be changed in order for us to
make a significant shift in priority there.
Mr. Stupak. Well, I don't want to make that significant
shift because I like it at two-thirds----
Mr. Carlisle. Well, okay.
Mr. Stupak. [continuing] but if it is 50--my small
district--I mean I don't have a city over 20,000 people. I mean
most of mine are 2,000 or 3,000, and they now have access to
the Internet because of this program. And now, if you suddenly
say, well, your monthly support bill, or your bill to the
telephone company or the service provider, Internet provider--
you have to pay, they are not going to have money for the
upgrades. They are probably going to lose the process. In
Michigan, we are cutting school aid; we are not expanding it,
unfortunately. Unfortunately.
Mr. Bennett, one more question, if I may. And I don't mean
to end on a negative note here, because I do believe in this
program. But it is painfully obvious that certification
contained in the E-Rate forms have failed to deter abuse by
predatory vendors and irresponsible school officials. On
September 22, the inspector general testified before this
subcommittee oversight and investigation that reliance on
beneficiary self-certification is a serious vulnerability. Why
do you believe that self-certification is a serious weakness in
the program, and then what can we do to improve upon that?
Mr. Bennett. We had a couple of concerns with
certification. One was what we viewed as an over-reliance on
certifications--that is relying on certification without
following up and reviewing documents. Excuse me.
The other issue we had with certifications was the design
of the certifications themselves. When we got involved with the
Antitrust Division of Department of Justice, primarily because
of concerns related to the competitive process, we sat down
with their attorneys; their attorneys looked at these various
forms and raised concerns to us about the way the
certifications were written, their concern being can they
indict people for making false statements based on the
certifications, and they had concerns about the way things were
structured. They brought those concerns to us. We brought those
concerns to the Commission, and the Commission has--actually,
starting with the Fifth Report and Order last August and moving
forward--begun to address modifying the certifications in those
forms.
So it was really two things. It was the design of the
forms, which is being addressed. There are still some open
issues that the Wireline Competition Bureau is looking at, but
it is also the process itself, that is relying on
certifications while doing no follow up and looking at no
additional documentation.
USAC has done a great deal to address their application-
review process. In the earliest days, there was very little
documentation provided or reviewed. That has changed
significantly, so I mean we have seen improvement on both
fronts.
Mr. Stupak. Well, let me ask you this: it is my
understanding USAC might do one set of procedures, but those
procedures may not have been approved by FCC. And if USAC says
do this, and FCC says, well, we haven't certified that
procedure; we haven't done that, then, doesn't that really
allow the discrepancy here, really allowing schools and vendors
to really get around this whole process, and there is no
enforcement then?
Mr. Bennett. It creates a problem when we are trying to
enforce----
Mr. Stupak. Sure.
Mr. Bennett. [continuing] compliance with the rules. If
there are no financial consequences for beneficiary
noncompliance, then it is very difficult for us to send a
message that applicants need to comply with the rules.
Mr. Stupak. And if FFC doesn't bless those rules, certify
them, then the is really no need to comply because they can
say, hey, FCC hasn't even approved this, so you can't enforce
this upon us. Right?
Mr. Bennett. That is correct, and it has been--this is
really a concern that we identified through our involvement in
audits. And you know, in the Fifth Report and Order last August
the Commission did adopt a number of the USAC implementing
procedures where we had been identifying concerns.
Mr. Stupak. Well, it looks like we are moving in the right
direction, and it looks like with USAC--and I do believe that
more money can put into USCA to put auditors in--and also with
the Single Audit Act. Hopefully, we have identified some ways
we can keep this viable program going. I salute the GAO for
their report. It has been a good report--OIG--and let us work
together and get this thing going. This is a great program.
Mr. Whitfield. Thank you, Mr. Stupak. Dr. Burgess, do you
have any other questions?
Mr. Burgess. Thank you, Mr. Chairman. Yes, I would just ask
the question, again, that Chairman Barton asked. Is it time to
revisit the concept, here, and ask if this would not be better
handled at the local level, and perhaps Congress just be
involved from a monitoring or oversight standpoint and not
involved in a primary way in this program?
Mr. Goldstein. I can't say one way or the other that it
ought to be at a particular level of government or even in a
particular agency. As I have indicated, it is important to look
at the program and try to understand how we can make it better.
The kinds of issues that Mr. Stupak was just referring to with
respect to how there are differences in procedures that USAC
handles versus rules that the FCC puts in place gets at the
heart of the structural issues when you have a nonprofit,
private entity essentially all but making policy and then
turning around to the agency in charge and saying, these are
the things that we think you ought to put into code. It gets at
a lot of the issues of structure here.
So I think there is still a lot of work that does need to
be done to try and improve the structure. Again, where that
structure best ends up--whether it is in a Federal agency,
whether it is some kind of contract entity, whether it is with
the State and local government--I think that NAPA will help FCC
grapple with some of those issues. Then it is a question of
trying to implement it in a way that gets to really protect
Federal funds and a program that has done some good for the
country.
Mr. Burgess. Well, Mr. Bennett--just going through your
testimony. And you seem to detail a lot of areas where someone
has fallen down on the job. You discussed the auditing
agreement, the 3-way auditing agreement that you are about the
implement. Will this address concerns about a statistically
representative audit? Is this going to do the job?
Mr. Bennett. It will. This will finally give us the ability
to make statements about programmatic compliance, program-wide.
Up to this point, audits have been in some cases random, in
some cases targeted; but as GAO pointed out in their report, we
have never done the necessary body of audits to make a
statement about beneficiary compliance, program-wide, so we are
very pleased to report today that we are close to reaching an
agreement and moving forward with those audits.
Mr. Burgess. Mr. Bennett, given the findings of the GAO and
the inspector general's work regarding the Universal Service
funds, how do the management issues that we are addressing
today reflect on management and potential problems for other
funding mechanisms?
Mr. Bennett. Well, as I said in my testimony, the
Commission has begun to take the concerns that we have raised
very seriously, and we have seen, you know, a lot of movement
on addressing some of these concerns. We have been focused on
not only working with management to address these concerns, but
trying to get the process in place to do the audits that we
believe are necessary to not only evaluate beneficiary
compliance, but identify additional opportunities for
programmatic improvement.
Mr. Burgess. Thank you. Mr. Chairman, I will yield back the
balance of my time.
Mr. Whitfield. Thank you, Dr. Burgess, and that will
conclude today's hearing. I might add, though, that Mr. Stupak
raised this issue of competitive bidding. And another issue
that we can consider, of course, is that the Federal
acquisition regulations has been a particularly effective
method to ensure competitive bidding, and that might be
something that we can look at as well. But we have a lot of
issues on our plate relating to this great program.
And Mr. Goldstein, we want to thank you--Mr. Carlisle and
Mr. Bennett, for your testimony. And Ms. Perez, we want to
thank you for keeping Mr. Goldstein out of trouble. And then, I
want to thank Mr. Carlisle's mother for being here, and I hope
that you found it so stimulating you will come back again. Yes.
And the record will stay open for 30 days, and we will be
entering the report into the record. Thank you all very much.
[Whereupon, at 4:42 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Federal Communications Commission
Washington, D.C. 20554
April 21, 2005
The Honorable Ed Whitfield
Chairman, Subcommittee on Oversight and Investigations
Committee on Energy and Commerce
United States House of Representatives
Washington, DC 20515
Dear Chairman Whitfield: Thank you for your concern regarding
reports of waste, fraud and abuse in the Schools and Libraries
universal service support mechanism of the Universal Service Fund
(USF), otherwise known as the E-rate program. I appreciated the
opportunity to appear before the Subcommittee on March 16, 2005 to
discuss the steps that the FCC Office of Inspector General has taken to
establish effective, independent oversight of this program. As I
indicated during the hearing, we believe that we have made significant
progress in ensuring adequate oversight of the USF, however, we
recognize that much additional work remains to be done. I am writing
this letter in response to your letter dated April 15, 2005 that
included additional questions from the Honorable Marsha Blackburn. My
response to each of those questions is as follows:
Question #1--What is your estimate of the number of locations with
e-rate contracts that have had questionable financial dealings?
Response--The FCC Office of Inspector General has not completed the
body of work necessary to estimate the number of locations with E-rate
contracts that have had questionable financial dealings. However, as a
result of our involvement in E-rate audits and investigations, we have
become concerned about the effectiveness of the program's requirements
for competitive procurement. On the audit side, numerous of the audits
completed by the FCC OIG, auditors from USAC, and others have
identified findings related to competitive procurement. In our role
supporting investigations related to the program, we are currently
supporting twenty-two (22) investigations and monitoring an additional
eight (8) investigations. Many of these investigations involve
allegations related to questionable financial dealings including
procurement irregularities such as lack of a competitive process and
bid rigging; false claims in which service providers are billing the
program for goods and services that are not provided; ineligible items
being funded; and beneficiaries not paying the local portion of the
costs resulting in inflated costs for goods and services to the program
and potential kickback issues. In fact, the Antitrust Division of the
Department of Justice established an E-rate fraud task force largely
because of the number of E-rate cases involving competitive
procurement.
Question #2--Mr. Bennett, in your testimony, in agreement with GAO,
that FCC fails to timely act on audit findings. What is their current
time frame to act on audit findings as compared to other audits for
other programs your office performs?
Response--The Commission is required to resolve audit findings
within six-months from the date of the final audit report. This
requirement applies to all FCC OIG audit reports including E-rate
beneficiary audits. The concern that we raised in our testimony, and
that GAO referred to in their report, relates to our observation that
audit findings are not being resolved in a timely manner and that, as a
result, actions to recover inappropriately disbursed funds are not
being taken in a timely manner. As we stated in our testimony, we
believe that audit findings are not being resolved in a timely manner
because, in some cases, USAC is not taking action in a timely and
because USAC is not receiving guidance from the Commission that is
necessary to resolve findings.
Question #3--Does FCC or USAC have any procedures to enforce
beneficiary compliance with rules and regulations.
Response--The Commission and USAC have many procedures to enforce
beneficiary compliance with program rules and regulations. The
Commission uses the rulemaking process, adjudication of USAC decisions,
and audits of E-rate recipients to enforce compliance with program
rules. USAC employs a variety of procedures--including the application
review process, program integrity assurance process, and site visits--
to enforce compliance. However, although there are procedures to
enforce compliance to program rules and regulations, we remain
concerned about beneficiary compliance because of the lack of clarity
regarding the rules and regulations governing the program.
Question #4--In your opinion, do you think e-rate has significant
waste, fraud, and abuse within the program?
Response--As I indicated in my response to the first question, the
FCC Office of Inspector General has not done the body of work necessary
to assess fraud, waste, and abuse at the program level. However, as a
result of our involvement in audit and investigations, we are concerned
about the level of fraud, waste, and abuse in this program.
Question #5--How much would it cost to audit every beneficiary
every year?
Response--We believe that it would be very expensive to audit every
beneficiary every year. We are currently in the process of establishing
a three-way agreement with USAC and a public accounting firm to conduct
audits of the four USF funding mechanisms, including E-rate. We have
conducted a preliminary estimate of the cost to conduct a statistically
valid number of audits. Based on our experience and USAC's experience
conducting E-rate beneficiary audits, we have used an estimated cost of
$50,000 per audit to estimate the total cost of this project. There
have been over 43,000 applications for funding in the current funding
year.
Question #6--What would be the most efficient method of overseeing
disbursement of e-rate projects?
Response--We believe that effective, independent oversight of this
program is the most efficient method of overseeing disbursements.
During FY 2001, we worked with Commission staff as well as with the
Defense Contract Audit Agency (DCAA) and the Universal Service
Administrative Company (USAC), to design an audit program that would
provide the Commission with programmatic insight into compliance with
rules and requirements on the part of E-rate program beneficiaries and
service providers. Our program was designed around two corollary and
complementary efforts. First, we would conduct reviews on a statistical
sample of beneficiaries large enough to allow us to derive inferences
regarding beneficiary compliance at the program level. Second, we would
establish a process for vigorously investigating allegations of fraud,
waste, and abuse in the program. As we discussed in our testimony, we
are very close to establishing a contract under which we will obtain
access to the resources necessary to implement the oversight program
that we have designed. We believe that this oversight program will
allow us to detect and deter waste, fraud, and abuse by beneficiaries
of the universal service support mechanisms. In addition, the program
will generate insights about the compliance of beneficiaries with
applicable law and the quality of administration of the universal
service support mechanisms and identify areas for improvement in the
compliance of beneficiaries with applicable law and in the
administration of the universal service mechanisms.
We look forward to continuing to work with the Committee and
Subcommittee on oversight of this program. Please do not hesitate to
contact me if you have further questions.
Sincerely,
Thomas Bennett
Assistant IG for USF Oversight
______
Federal Communications Commission
Washington, D.C. 20554
May 12, 2005
The Honorable Ed Whitfield
Chairman
Subcommittee on Oversight and Investigations
Committee on Energy and Commerce
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515
Dear Chairman Whitfield: Thank you for your April 15, 2005 letter
concerning former Wireline Competition Bureau Chief Jeffrey Carlisle's
appearance before the Subcommittee on Oversight and Investigations at
the March 16, 2005 hearing. Please find attached written responses to
post-hearing questions included in your letter posed by the Honorable
Cliff Stearns and the Honorable Marsha Blackburn.
Please do not hesitate to contact me if I can be of further
assistance concerning this matter.
Sincerely,
Thomas J. Navin
Acting Chief, Wireline Competition Bureau
Enclosures
QUESTIONS FROM THE HONORABLE CLIFF STEARNS
Question 1. Is USAC governed by the FCC rules of procedure and
practice?
Response. The Commission's rules of procedure and practice
generally apply to parties and participants in Commission proceedings.
The Universal Service Administrative Company (USAC) assists the
Commission in its administration of the universal service program, but
it is not permitted to participate as a party in the Commission's
proceedings. 47 C.F.R. 54.702(d). In the performance of its functions
with respect to the universal service program, USAC is therefore not
governed by the rules of practice and procedure that apply generally to
parties in proceedings before the Commission. The Commission has
adopted specific procedural rules that apply to parties in proceedings
before USAC. See, e.g., 47 C.F.R. 54.719, 54.720, 54.721.
Question 2. Does the FCC ex parte rules apply to USAC recovery
processes and suspension determinations and appeals from such USAC
actions?
Response. The Commission's ex parte rules apply only in proceedings
before the Commission. See 47 C.F.R. 1.1200 (a). Pursuant to section
1.1204(a)(12)(iii) of the Commission rules, presentations between
Commission staff and USAC relating to the administration of universal
service support mechanisms, including recovery processes and appeals,
are exempt from ex parte requirements. 47 C.F.R. 1.1204(a)(12)(iii).
The ex parte rules do apply to a party if that party appeals a USAC
decision to the Commission.
Question 3. Does the FCC staff discuss pending appeals at the FCC
from USAC actions with USAC staff? Shouldn't the FCC ex parte rules
apply to pending USAC appeals at the FCC?
Response. The Commission's ex parte rules place restrictions on
communications between parties or others and decision-making personnel.
47 C.F.R. 1.1206(a), 1.1208. The rules do not, however, prohibit or
place restrictions on discussions among decision-makers. In this
respect, USAC is treated in the same manner as Commission staff, who
are treated as decision makers and may talk freely to the Commission
about administrative appeals from the staff's own decisions. See 47
C.F.R. 1.1202 (c) (definition of decision-making personnel). The
Commission staff is likewise permitted to discuss with USAC pending
appeals from USAC decisions. Thus, although the Commission's ex parte
rules do apply to parties in USAC appeal proceedings at the Commission,
those rules do not restrict USAC's discussions with the Commission.
Question 4. As I understand it, the FCC rules and procedures assure
parties of due process by providing them with an opportunity to review
allegations of violations and having an opportunity to respond prior to
the FCC making a determination. Doesn't this same procedure apply to
USAC and its consideration of potential program violations and
subsequent actions by USAC including recovery actions and suspension of
funding requests?
Response. In Commission proceedings in which the Commission seeks
to impose monetary sanctions (``forfeitures'') for rule violations, the
Communications Act sets forth specific statutory procedures that
provide for notice and an opportunity to respond and other due process
protections. See 47 U.S.C. 503. In contrast, the Commission's
recovery procedures for debts owed to the government, including matters
involving payments from the universal service fund, assure parties of
due process by following the notification and other administrative
appeal procedures mandated by the Debt Collection Act. Changes to the
Board of Directors of the National Exchange Carrier Association, Inc.,
Federal-State Joint Board on Universal Service, 15 FCC Rcd 22975
(2000); recon. granted 19 FCC Rcd 15252 (2004); modified in Schools and
Libraries Universal Service Support Mechanism, Fifth Report and Order,
19 FCC Rcd 15808 (2004). In addition, specific Commission rules provide
for notice and an opportunity to respond to allegations of
``prohibitive conduct'' in certain proceedings involving appeals of
actions taken by USAC. See 47 C.F.R. 54.721(d). The Commission's
rules also permit, and sometimes require, USAC to withhold
disbursements pending the disposition of administrative appeals in
recovery proceedings. See 47 C.F.R. 54.725.
Question 5. The FCC has a long history of handling confidential
information from various parties subject to FCC rules and regulations
including having a model protective order available to parties.
Shouldn't USAC have these same procedures and protective orders
available for adverse parties in recovery and/or suspension
proceedings?
Response. Protective orders and other procedures may be available,
where appropriate, in Commission regulatory proceedings that involve
adverse parties and where the materials subject to a protective order
are relevant to the Commission's decision. Such procedures are not used
for preliminary administrative actions taken by USAC involving debt
collection or related matters, nor has the Commission had occasion to
routinely use such procedures in appeals from debt collection actions
in its own proceedings. Such proceedings to recover money owed to the
government by debtors are generally governed by the separate federal
laws and procedures for debt collection and do not normally involve
adverse parties or necessitate the disclosure of confidential
information to parties using protective orders. The Commission's
policies are intended to protect, insofar as possible, the
confidentiality of proprietary information submitted by carriers and
others.
Question 6. In the Puerto Rico case, it is my understanding that
the FCC restricted USAC's authority to suspend pending and future
funding applications only when there were allegations of program
violations related to the funding requests or the proposed service
provider. Has USAC been following the FCC's mandate in tailoring its
suspension orders?
Response. In accordance with its standard operating procedures,
USAC committed and disbursed funds on behalf of the Puerto Rico
Department of Education (PRDOE) for Funding Years (FYs) 1998-2000. On
December 5, 2001, USAC suspended payments on behalf of PRDOE for FYs
1998-2000 based on an audit that identified apparent program violations
involving PRDOE funding. After consultation with the Wireline
Competition Bureau, USAC also suspended consideration of PRDOE's
applications for FY 2001 and 2002, and it required PRDOE to respond to
the findings of the USAC-initiated audit. Subsequent to that audit,
USAC became aware of a number of local and federal law enforcement
investigations involving activities of the PRDOE. On January 30, 2003,
PRDOE petitioned the Commission to direct USAC to resume processing
PRDOE's applications for FY 2001 and 2002.1
---------------------------------------------------------------------------
\1\ See Letter from Dr. Cesar A. Rey Hernandez, Secretary, PRDOE,
to Jane Mago, General Counsel, Federal Communications Commission, dated
January 30, 2003. See also Wireline Competition Bureau Seeks Comment on
a Petition by Puerto Rico Department of Education to Release Funds
Associated With Schools and Libraries Universal Service Support
Mechanism for Funding Years 2001 and 2002, CC Docket No. 02-6, Public
Notice, 18 FCC Rcd 10467 (Wireline Comp. Bur. 2003). Comments, all in
support of PRDOE's Petition, were submitted by the Hon. Anibal Acevedo-
Vila, Resident Commissioner, Commonwealth of Puerto Rico, U.S. House of
Representatives; Centennal Communications Corp.; and The Hispanic
Information and Telecommunications Network, Inc. PRDOE had selected the
Puerto Rico Telephone Company (PRTC) for telecommunications service and
Internet access and Data Research Communications Company for Internet
access and internal connections for FY 2001. PRDOE selected PRTC for
telecommunications service, Internet access, and internal connections
and Sprint for telecommunications service for FY 2002.
---------------------------------------------------------------------------
On November 25, 2003, the Commission released the Order addressing
PRDOE's request, providing direction for treating applications
involving potential program violations. Specifically, the Commission
concluded that, ``to guard against waste, fraud, and abuse, it is
reasonable for USAC to generally defer action on applications upon
receiving evidence of potential program violations, including evidence
acquired from an active law enforcement investigation related to the E-
rate related activities of the applicant or any of the service
providers utilized by that applicant, until such time as questions
raised by the evidence can be resolved.'' 2
---------------------------------------------------------------------------
\2\ Petition of the Puerto Rico Department of Education to Release
Funds Associated with the Schools and Libraries Universal Service
Support Mechanisms for Years 2001 and 2002, Federal-State Joint Board
on Universal Service, CC Docket No. 02-6, Order, 18 FCC Rcd 25417,
25422, para. 15 (2003) (Puerto Rico Order).
---------------------------------------------------------------------------
Consistent with the Commission's directive as articulated in
various orders,3 USAC has developed principles for treating
entities under investigation for program violations. 4 These
principles balance the goal of preventing waste, fraud, and abuse
against the need to ensure due process and fundamental fairness, as
well as respect for the integrity of law enforcement investigations.
---------------------------------------------------------------------------
\3\ See generally Schools and Libraries Universal Service Support
Mechanism, CC Docket 02-6, Notice of Proposed Rulemaking, 17 FCC Rcd
1914 (2002); Request for Immediate Relief filed by the State of
Tennessee, Federal-State Joint Board on Universal Service, Changes to
the Board of Directors of the National Exchange Carrier Association,
Inc., CC Docket Nos. 96-45 and 97-21, Order, 18 FCC Rcd 13581 (2003);
Puerto Rico Order.
\4\ Principles for Treating Entities Under Investigation Relating
to Their Participation in the Schools and Libraries Universal Service
Support Mechanism http://www.sl.universalservice.org/reference/
investigation.asp.
---------------------------------------------------------------------------
QUESTIONS FROM THE HONORABLE MARSHA BLACKBURN
Question 1. In 2003, IBM had sought to handle almost $1 billion on
E-rate projects, but it was later held until completion of an
investigation. What was the outcome of this investigation?
Response. For FY 2002 (July 1, 2002-June 30, 2003), eighteen
applicants sought approximately $500 million for contracts employing
IBM as a systems integrator or in other substantial capacities. In
response to a tip from a whistleblower in mid-2002, USAC began
investigating these applications, and as a result of that and
subsequent related investigations, denied the funding requests. Nine of
the applicants representing $268 million in IBM contracts appealed
those USAC decisions to the Commission.
In December 2003, the Commission upheld USAC denial of $251 million
in funding requests to eight of the nine applicants.5
Although the Commission concluded that the practices followed in
various applications were not consistent with the competitive bidding
rules, the Commission found that good cause existed to re-open the
filing window for FY 2002 to allow the applicants that appealed SLD's
denial of their funding requests to re-bid for services. Four of the
applicants sought re-bids for the FY 2002 requests. While the
Commission permitted IBM to re-bid on those applications, its single
bid was unsuccessful.
Question 2. Some school districts have wired their own schools
because the funds they need to match the e-rate program would have cost
them more. Does USAC perform any cost-benefit fair market value
analysis of wiring an individual school, library or a local district?
Response. USAC does not perform a cost-benefit fair market value
analysis of wiring for any individual school, library, or local
district. As noted in the Universal Service Order, the Commission's
competitive bidding requirements are designed to assist schools and
libraries in receiving the best value for their limited
funds.6 Under the competitive bidding requirements,
applicants must select the most cost-effective offerings, and price
must be the primary factor in determining whether a particular vendor
is the most cost-effective.7 In addition to the competitive
bidding requirements, program beneficiaries must pay the non-discounted
share of the supported services and have resources necessary for
sufficient computer equipment, software, staff training, internal
connections, maintenance and electrical capacity to make use of the
supported services. These safeguards help ensure that participants
employ cost-effective services.
------
5 Request for Review of the Universal Service
Administrator by Ysleta Independent School District, CC Docket Nos. 96-
45 and 97-21, Order, 18 FCC Rcd 26407 (2003).
6 Federal-State Joint Board on Universal Service, CC
Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, 9027-29, paras.
475-480 (1997) (Universal Service Order).
7 Universal Service Order, 12 FCC Rcd at 9029-30, para.
481; 47 C.F.R. 54.511(a).