**The Low Income Program**

**Initial Statistical Analysis of Data from the 2006/2007**

**Compliance Audits**

By

Office of Inspector General

Federal Communications Commission

October 3, 2007

**Background and Introduction**

This report contains a statistical analysis of data from the 2006/2007
audits of the Low Income Universal Service ("LI") Program of the Federal
Communications Commission ("FCC" or "Commission"). The primary objective
of the Inspector general ("IG") in auditing the LI program was to
produce data to measure the level of compliance of LI beneficiaries with
Commission Rules and opinions interpreting those rules. To assess
compliance and risk, a stratified random sample of 60 Service Areas was
drawn and compliance attestation examinations/audits were completed. In
addition, the audits were intended to produce data that would provide
the basis for statistical estimates of the erroneous payment rate and
the amount of erroneous payments, under the Improper Payments
Information Act of 2002 ("IPIA").[^1] Under the IPIA, estimates of both
the erroneous payment rate and amount of erroneous payments may guide
the Commission in assessing risk associated with the LI Program. Under
IPIA standards, a program is at risk if the erroneous payment rate
exceeds 2.5 percent and the amount of erroneous payment is greater than
\$10 million.

Statistical results from this stratified random sample suggest that the
program is at risk. The erroneous payment rate is estimated at 9.5
percent with a margin of error ± 2.1 percent at the 90 percent
confidence level. [^2] Compliance with rules and regulations was
generally high (85 percent or more), exceptions included: advertised
supported services, link-up discount, determining consumer
qualifications, officer certification, Form 497 submission, and record
keeping.

**Low Income Program Description**

**Program Overview**

The LI Program of the Universal Service Fund ("USF"), which is
administered by the Universal Service Administrative Company ("USAC"),
is designed to ensure that quality telecommunications services are
available to low-income customers at just, reasonable, and affordable
rates. Similar programs have existed since at least 1985. The
Telecommunications Act of 1996 reiterated their importance by including
the principle that \"consumers in all regions of the nation, including
low income consumers . . . should have access to telecommunications and
information services . . .\"[^3]

In its May 8, 1997 First Report and Order in the USF proceeding,[^4] the
Commission established rules to govern Lifeline, Link Up, and Toll
Limitation Service (TLS) program support - the three components of the
LI Program.[^5] Lifeline support reduces eligible consumers\' monthly
charges for basic telephone service. Link Up support reduces the cost of
initiating new telephone service. Toll Limitation Service support allows
eligible consumers to subscribe to toll blocking or toll control at no
cost.

On June 30, 2000, the FCC amended its rules to \"increase access to
telecommunications services and subscribership among low-income
individuals living on American Indian and Alaska Native lands.[^6]\" As
a result of this order, residents of federal tribal lands receive up to
an additional \$25 in Lifeline support (Tier 4 support) and an
additional \$70 in Link Up support to cover 100 percent of all charges
between \$60 and \$130. These provisions bring the cost of basic local
telephone service for most tribal residents to \$1.00, the minimum
charge for tribal Lifeline service. The order also expanded the federal
default eligibility criteria to include low-income programs that
residents of tribal lands were most likely to receive assistance from.

On April 29, 2004, the FCC released the *Lifeline and Link Up Order*[^7]
further modifying the LI Program. The order expanded the eligibility
criteria for qualifying consumers to include an income-based criterion
and participation in National School Lunch free lunch program and
Temporary Assistance for Needy Families (TANF) as additional criteria.
By expanding the eligibility criteria to include an income-based
criterion, the Commission estimated that 1.17 million to 1.29 million
additional households that do not participate in the program-based
criteria would enroll in Lifeline based on the new criteria.

In addition, the *Lifeline and Link Up Order* adopted certification and
validation procedures that are designed to minimize potential abuse of
the Low Income Program. The FCC required carriers that serve in federal
default states to complete a verification of a statistically valid
sample of their Lifeline customers and submit the results to USAC by
June 22, 2005 and annually on that date. The *Lifeline and Link Up
Order* also clarified recordkeeping requirements and adopted outreach
guidelines for carriers.

**Overview of Administrative Process**

Consumers apply for Lifeline, Link Up, and Toll Limitation Service (TLS)
support through their local telephone company or a designated
agency.[^8] The companies then seek reimbursement from the federal USF
LI Program for the revenue they forgo by providing discounted service to
eligible low-income consumers.

Eligible telecommunications carriers ("ETCs") (incumbent local exchange
companies ("ILECs"), competitive local exchange companies ("CLECs"), and
wireless carriers so designated) that have provided eligible consumers
with Lifeline discounts file the Lifeline and Link-Up Worksheet (Form
497) with USAC to receive LI Program support, which reimburses them for
providing service at discounted rates. Carriers must file one Form 497
for each month for which they claim support. Carriers may either file
forms for three months on a quarterly basis or file one form monthly.

USAC pays companies based on a projection and then trues-up that amount
when it receives a company\'s support claim on Form 497. Carriers can
file original and revised Form 497s for up to 25 months depending on the
time of year. Carriers frequently file revisions to update their support
claims.

USAC routinely reviews carriers\' support claims to ensure they are
consistent with the Commission\'s rules. In addition to the review of
the data submitted on Form 497, USAC\'s Internal Audit Division conducts
Low Income beneficiary audits to ensure program compliance.

USAC disburses Low Income support payments once each month. The payment
amount disbursed to each company is a projection that is based on the
company\'s historical support claims for the past twelve months.

Two months prior to the start of each quarter, USAC is required to file
projections with the FCC for each support program. The Low Income
projection is calculated by applying a growth rate across all carriers
currently receiving low income support.

The application process for Lifeline and Link -p varies by state. In
some states, consumers apply for Lifeline by contacting their local
telephone company directly. In others, consumers must apply through a
designated agency. For information on how to apply for Lifeline and Link
Up, consumers can visit USAC\'s Low Income Consumer website or call
their local telephone company directly.

As note previously, USAC, reimburses eligible telecommunications
carriers for providing Lifeline, Link Up, and Toll Limitation Service to
eligible low-income consumers. All ETCs receiving High Cost and LI
support must provide all of the services described in the Commission\'s
rules. A wireline or wireless telephone company seeking reimbursement
from the LI Program must be designated as an ETC by its state commission
or, in some cases, by the FCC. In addition, all ETCs providing LI
support services must ensure that their consumers are eligible for the
discount based on the applicable state or federal requirements.[^9]

Eligible telecommunications carriers must file the appropriate forms:
ETCs that have provided eligible consumers with Lifeline discounts file
the Lifeline and Link Up Worksheet (Form 497) with USAC to receive
support that reimburses them for providing service at discounted rates.
Additionally, as for all USF programs, ETCs must file: (1) Form 499-Q,
Quarterly Telecommunications Reporting Worksheet; (2) Form 499-A,\
Annual Telecommunications Reporting Worksheet; and (3)Form 498, Service
Provider Information Form.

**Compliance and IPIA Audits**

In early 2006, the Inspector General established two objectives that an
audit of the LI Program was to achieve. The primary objective was to
determine the extent of compliance with FCC rules, orders and
interpretive opinions. Because the LI program was considered to possibly
(although not definitely) be at risk[^10] based on analysis of 24
transactions from the 2003-06 period, the second objective of the audit
was to provide a statistical measure of the erroneous payment rate that
could better inform future decision making under the IPIA. In order to
determine compliance (as captured within the general administrative
process for approval described above), a compliance audit of each
recipient on a specific Service Area Provider was undertaken. With the
IG's use of a compliance attestation examination, the auditee
(management of the service provider) is required to sign an assertion
letter acknowledging its responsibility for compliance with applicable
requirements of Commission rules (e.g., 47 C.F.R §§ 54.400 - 54.417), as
well as FCC orders and to make specific assertions relative to an
applicant's compliance with those Rules. Auditors validated or
invalidated the assertions, and provide the cause(s) for the failure of
an assertion. That is, auditors determine whether a beneficiary of the
LI program is in compliance with FCC rules and, if the beneficiary is
not in compliance, the auditors provides the cause(s) of, or reason(s)
for non-compliance.

Table 1 contains the assertion letter that each auditee signed. Data
generated from the compliance attestation audits, which were based on
the assertions set out in Table 1 below, where then analyzed
statistically.

**Table 1**

+-----------------------------------------------------------------------+
|                                                                       |
+-----------------------------------------------------------------------+
| **[EXAMPLE ASSERTIONS LETTER]{.underline}**                           |
|                                                                       |
| **FY 2005 Example Assertions Letter for Study Area Code               |
| ([ADD)]{.underline}**                                                 |
|                                                                       |
| **Report of Management on Compliance with Applicable Requirements of  |
| 47 C.F.R. Section 54 of the Federal Communications Commission's       |
| Rules, Regulations and Related Orders**                               |
|                                                                       |
| Management of (name of telecommunications carrier) is responsible for |
| ensuring that the carrier is in compliance with applicable            |
| requirements of the Federal Communications Commission (FCC) rules at  |
| 47 C.F.R. §§ 54.101, 54.201 \-- 54.209, and 54.400 \-- 54.417 as well |
| as related FCC Orders.                                                |
|                                                                       |
| Management has performed an evaluation of the carrier's compliance    |
| with the applicable requirements of FCC rules at 47 C.F.R. §§ 54.101, |
| 54.201 \-- 54.209, and 54.400 \-- 54.417, and related FCC Orders with |
| respect to providing discounts to eligible low income consumers and   |
| seeking reimbursement from the Universal Service Fund (USF) during    |
| the year ended September 30, 2005.                                    |
|                                                                       |
| **The Carrier makes the following assertions with respect to Low      |
| Income Program reimbursements received from the USF for Study Area    |
| Code ([ADD)]{.underline} during the year ended September 30, 2005:**  |
|                                                                       |
| A.  Carrier Eligibility -- the (name of Telecommunications Carrier)   |
|     asserts that it:                                                  |
|                                                                       |
|     1.  is an eligible telecommunications carrier (ETC) (47 C.F.R. §§ |
|         54.201(a); *Definition of eligible telecommunications         |
|         carriers, generally,* which discusses carrier eligibility)    |
|         and provides the services required for eligibility            |
|         (54.101(a): *Services designated for support*, and (b):       |
|         *Requirement to offer all designated services*; which         |
|         describe the services that an eligible carrier must offer to  |
|         receive federal universal service support)                    |
|                                                                       |
|     2.  makes available Lifeline service, as defined in 54.401, to    |
|         qualifying low-income consumers (47 C.F.R. § 54.405(a):       |
|         *Carrier obligation to offer lifeline*, which discusses       |
|         carriers' obligations to offer, publicize, notify and allow   |
|         lifeline services)                                            |
|                                                                       |
| B.  Advertising Supported Services -- the (name of Telecommunications |
|     Carrier) asserts that it:                                         |
|                                                                       |
|     1.  publicizes the availability of supported services in a manner |
|         reasonably designed to reach those likely to qualify for the  |
|         service. Lifeline (47 C.F.R. § 54.405: *Carrier obligation to |
|         offer lifeline*,: *Link Up program defined* and Toll          |
|         Limitation Support services (47 C.F.R. § 54.201(d)(2):        |
|         *Definition of eligible telecommunications carriers,          |
|         generally,* which requires the advertising of the             |
|         availability of services)                                     |
|                                                                       |
| C.  Rate verification \-- the (name of Telecommunications Carrier)    |
|     asserts that it                                                   |
|                                                                       |
|     1.  provides discounts to qualifying subscribers for Lifeline     |
|         service and requests reimbursement from USAC according to the |
|         following requirements and maximums:                          |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| i.  Tier 1: Available to all eligible Lifeline subscribers equal to   |
|     the Incumbent Local Exchange Carrier's (ILEC's) actual federal    |
|     tariffed subscriber line charge (SLC), currently capped at \$6.50 |
|     per month (47 C.F.R. § 54.403 (a)(1): *Lifeline support amount,*  |
|     which discusses Tier 1 support)                                   |
|                                                                       |
| ii. (if carrier is a Competitive ETC), uses the subscriber line       |
|     charge of the Incumbent LEC and also uses a reasonable average    |
|     calculation if using the subscriber line charge(s) of multiple    |
|     Incumbents. 47 C.F.R. § 54.407: *Reimbursement for offering       |
|     Lifeline,* which discusses that carriers comply with USAC         |
|     administrative procedures -- in this case the FCC Form 497        |
|     requires that for multiple rates an average support amount should |
|     be used)                                                          |
|                                                                       |
| iii. Tier 2: \$1.75 per month available to qualified low-income       |
|      consumers, if the carrier received any non-federal approvals     |
|      necessary to implement the required rate reduction and passes    |
|      through the full amount of Tier 2 support to the qualifying      |
|      low-income consumer                                              |
|                                                                       |
| > (47 C.F.R. § 54.403 (a)(2): *Lifeline support amount,* which        |
| > discusses                                                           |
| >                                                                     |
| > Tier 2 support)                                                     |
|                                                                       |
| iv. Tier 3: An additional amount of federal Lifeline support equal to |
|     one-half the amount of any State-mandated Lifeline support, or    |
|     one half of any Lifeline support provided by the Service          |
|     Provider, up to a maximum of \$1.75 per month (47 C.F.R. § 54.403 |
|     (a)(3): *Lifeline support amount,* which discusses Tier 3         |
|     support)                                                          |
|                                                                       |
| v.  Tier 4: Additional federal Lifeline support of up to \$25 per     |
|     month to eligible residents of tribal lands, as defined in §      |
|     54.400 (e), as long as the amount does not bring the basic local  |
|     residential rate below \$1 per month per qualifying low-income    |
|     subscriber (47 C.F.R. § 54.403 (a)(4): *Lifeline support amount,* |
|     which discusses Tier 4 support)                                   |
|                                                                       |
|     1.  provides discounts to qualifying subscribers for Link Up      |
|         service and requests reimbursement from USAC according to the |
|         following requirements and maximums:                          |
|                                                                       |
|         i.  a reduction of half of the customary Carrier charge or    |
|             \$30, whichever is less, for commencing                   |
|             telecommunications service for a single                   |
|             telecommunications connection at a consumer's principal   |
|             place of residence (47 C.F.R. § 54.411 (a)(1): *Link Up   |
|             program defined*, which discussed the amount of the       |
|             reduction)                                                |
|                                                                       |
|         ii. for an eligible resident of Tribal lands, an additional   |
|             reduction of up to \$70 to cover 100 percent of the       |
|             charges between \$60 and \$130 for commencing             |
|             telecommunications service for a single                   |
|             telecommunications connection at a consumer's principal   |
|             place of residence (47 C.F.R. § 54.411 (a)(3) ): *Link Up |
|             program defined*, which discussed the amount of the       |
|             additional reductions)                                    |
|                                                                       |
|     2.  allows eligible consumers to voluntarily subscribe to toll    |
|         blocking or toll control at no cost, and                      |
|                                                                       |
|         i.  maintains support, such as percent of participation, to   |
|             demonstrate that consumers voluntarily elected the        |
|             service (47 C.F.R. § 54.101(9): *Toll limitation for      |
|             qualifying low-income consumers,* which describes toll    |
|             limitation services, and 54.417(a): *Recordkeeping        |
|             requirements,* which require that carriers maintain       |
|             records to document compliance with FCC requirements)     |
|                                                                       |
|         ii. not charge a service deposit to customers electing the    |
|             service                                                   |
|                                                                       |
| > (47 C.F.R. § 54.401(c): *Lifeline defined,* which specifies that    |
| > carriers may not collect a service deposit in order to initiate     |
| > Lifeline service, if the qualifying low-income consumer voluntarily |
| > elects toll limitation service from the carrier)                    |
|                                                                       |
| iii. only claim the incremental cost of providing the service (47     |
|      C.F.R. §§ 54.403(c): *Lifeline support amount,* which specifies  |
|      that Lifeline support for providing toll limitation shall equal  |
|      the ETC's incremental cost of providing either toll blocking or  |
|      toll control, and 54.417(a): *Recordkeeping requirements,* which |
|      require that carriers maintain records to document compliance    |
|      with FCC requirements and *Federal-State Board on Universal      |
|      Service*, CC Docket No. 96-45, Report and Order, 12 FCC Rcd      |
|      8776, ¶¶ 385-389 (1997))                                         |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| D.  Consumer Qualification for Lifeline Service -- the (name of       |
|     Telecommunications Carrier) asserts that it:                      |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| 1.  maintains policies and procedures that are effectively            |
|     implemented to review and certify consumer eligibility for        |
|     Lifeline, Link Up and Toll Limitation services (47 C.F.R. §       |
|     54.410: *Certification and Verification of Consumer Qualification |
|     for Lifeline,* which discusses the certification and verification |
|     requirements). This includes that an officer of the carrier:      |
|                                                                       |
|     a.  in a state that mandates state Lifeline support, certifies    |
|         that the carrier is in compliance with state Lifeline income  |
|         certification procedures and that, to the best of his/her     |
|         knowledge, documentation of income was presented (47 C.F.R. § |
|         54.410(b)(1): *Certification and Verification of Consumer     |
|         Qualification for Lifeline,* which requires compliance with   |
|         state certification procedures to document consumer           |
|         eligibility)                                                  |
|                                                                       |
|     b.  in a state that does not mandate state Lifeline support,      |
|         certifies that the carrier has procedures in place to review  |
|         income documentation and that, to the best of his/her         |
|         knowledge, the carrier was presented with documentation of    |
|         the consumer's household income (47 C.F.R. § 54.410(b)(2):    |
|         *Certification and Verification of Consumer Qualification for |
|         Lifeline,* which requires compliance with state certification |
|         procedures to document consumer eligibility)                  |
|                                                                       |
|     c.  by June 22, 2005, in states that mandate state Lifeline       |
|         support, complies with state verification procedures to       |
|         validate consumers' continued eligibility for Lifeline (47    |
|         C.F.R. § 54.410 (c)(1): *Certification and Verification of    |
|         Consumer Qualification for Lifeline*, which requires          |
|         compliance with state verification procedures to document     |
|         consumer eligibility)                                         |
|                                                                       |
| 2.  by June 22, 2005, in states that do not mandate Lifeline support, |
|     has implemented procedures to verify the continued eligibility of |
|     a statistically valid random sample of their Lifeline consumers   |
|     and provided the results of the sample to the USAC. If verifying  |
|     income, an officer of the carrier certifies, under penalty of     |
|     perjury, that the carrier has income verification procedures in   |
|     place and that, to the best of his/her knowledge, the carrier was |
|     presented with corroborating income documentation. In addition,   |
|     the carrier has documentation that the consumer certified that    |
|     he/she continues to participate in the Lifeline qualifying        |
|     program or that the presented documentation accurately represents |
|     the consumer's household income and the number of individuals in  |
|     the household (47 C.F.R. § 54.410(c)(2): *Certification and       |
|     Verification of Consumer Qualification for Lifeline*, which       |
|     requires compliance with state verification procedures to         |
|     document consumer eligibility)                                    |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| E.  Submission of Lifeline and Link Up Worksheet (Form FCC 497) --    |
|     the (name of Telecommunications Carrier) asserts that it:         |
|                                                                       |
|     1.  submitted properly completed FCC Forms 497 for each month,    |
|         representing discounts actually provided to subscribers, for  |
|         the year ended September 30, 2005, and has the required       |
|         supporting documentation for the number of subscribers, rates |
|         and other information provided on the Form (47 C.F.R. 54.407: |
|         *Reimbursement for offering Lifeline,* which discusses        |
|         carrier reimbursement for providing Low Income Program        |
|         support and requires the carrier to keep accurate records in  |
|         the form directed by USAC and provide the records to USAC)    |
|                                                                       |
| F.  General Recordkeeping Requirements -- the (name of                |
|     Telecommunications Carrier) asserts that:                         |
|                                                                       |
|     1.  it maintains records to document compliance with all FCC and  |
|         state requirements governing the Lifeline and Link Up         |
|         programs (47 C.F.R. § 54.417(a): *Recordkeeping               |
|         requirements,* which require that carriers maintain records   |
|         to document compliance with all FCC and state requirements    |
|         governing the Low Income Program and provide documentation to |
|         FCC or USAC upon request)                                     |
|                                                                       |
|     2.  if it sells Lifeline connections to non-ETC resellers,        |
|         obtains certifications form the non-ETC reseller that it is   |
|         complying with the FCC's Lifeline and Link Up requirements    |
|         (*In the Matter of Lifeline and Link-Up*, WC Docket No.       |
|         03-109, Report and Order and Further Notice of Proposed       |
|         Rulemaking, 19 FCC Rcd 8302, ¶ 40 (2004), which clarified the |
|         recordkeeping obligations of non-ETC resellers that purchase  |
|         Lifeline-discounted wholesale services from ETCs to offer     |
|         discounted services to low-income consumers.                  |
+-----------------------------------------------------------------------+

**Sample Design**

The LI program sample design was a two-stage, stratified simple random
sample of 60 SACs from a population data base of 1,555. The three strata
were defined in terms of "total amount disbursed" as follows, with the
number N of SACs in the population and number n in the random sample in
parentheses:

1\. Amount disbursed less than \$500,000 (N=1,439, n=42.)

2\. Amount disbursed from \$500,000 to less than \$25,000,000. (N=112,
n=14.)

3\. Amount disbursed from \$25,000,000 and up. (N=4, n=4.)

Based on the analysis of the 24 audits of transaction data from 2003-06,
it was estimated that a stratified sample of size 45 (32, 9, and 4 in
the strata above) would produce a margin of error for the error rate of
2.5 percent at the 90 percent confidence level, assuming a full audit of
all customers of the selected providers. USAC decided to increase the
sample size to 60 to provide an extra margin of safety to account for
the second stage of sampling as explained in the next paragraph.

Since it would be an almost impossible task to examine all twelve
monthly statements from all customers of the service providers chosen in
the first stage of sampling, a program to randomly sample customer
statements throughout the year was developed using experimental design
techniques. As it would be difficult for a provider to sample customers
scattered throughout the year, the design featured assigning two months
at random to each provider and then randomly select customer statements
for audit in the assigned months. Specifically, the 66 possible pairings
of months of the year were randomly sorted and assigned to each of the
60 service providers chosen in the first stage of sampling. This
resulted in each of the twelve months being assigned between 7 (July)
and 11 (May, August, December) times. A random sample of a minimum of 30
to 60 customer invoices were selected and audited for each of the two
months assigned to a provider. (This minimum number of invoices depended
on the number of customers receiving benefits, and was chosen so that
the margin of error for a specific provider was less than 2.5 percent
assuming an improper payment rate of 5 percent, which was considered
conservative in light of previous audits.) If the number of customers in
a month was less than 30, then all invoices for that month were audited.
At the discretion of the audit companies, the minimum sample sizes were
increased in some cases.) In order to adequately capture all seven
components of the Low Income program: Tiers I-IV, TLS, Tribal and
Non-Tribal Link-up, the sample of customer invoices was stratified when
necessary so that at least 20-30 statements covering each component was
audited.

**Sample Selection**

The sample of providers was chosen using SAS PROC SURVEYSELECT.

The assignment of months to selected providers was carried out by
listing all 66 possible pairs of months, randomly sorting the list and
assigning the sorted list in order to each of the 60 selected providers.
The expected (in the probability sense) number of times each month would
be assigned to a provider is 10 (=60\*\[2/12\]). Due to the randomness
of the assignment process, the realized frequencies varied from 7 (July)
to 11 (May, August, December).

The sample of customers within each assigned month was chosen at random
by the audit companies after creating a database listing of all
customers for the month.

There were no issues associated with sampling.

**Estimation Formulas**[^11]

The LI sample design was stratified into three strata. One stratum
consisted of the four Service Providers with disbursements of
\$25,000,000 or more, all of which were audited. Simple random samples
were selected from the two strata.

To estimate the amount and proportion of erroneous payments in the
population, the *separate ratio estimator* was used*.* The remainder of
this section gives the formulas used to compute the separate ratio
estimator and its margin of error.

The following notation is used:

![](media/image1.wmf){width="0.16666666666666666in" height="0.25in"}=
amount disbursed to Serving Area *i*.

![](media/image2.wmf){width="0.16666666666666666in" height="0.25in"}=
absolute value of improper payment amount to Serving Area *i*.

![](media/image3.wmf){width="2.25in" height="0.25in"}

![](media/image4.wmf){width="3.1527777777777777in" height="0.25in"}

![](media/image5.wmf){width="3.0in" height="0.25in"}

![](media/image6.wmf){width="2.236111111111111in" height="0.25in"}

![](media/image7.wmf){width="0.9027777777777778in"
height="0.4722222222222222in"}= sample mean disbursement *x* in stratum
*h*.

![](media/image8.wmf){width="0.9166666666666666in"
height="0.4722222222222222in"}= sample mean of improper payments *y* in
stratum *h*.

![](media/image9.wmf){width="0.7222222222222222in"
height="0.4861111111111111in"} Proportion of erroneous payments in
stratum *h*.

![](media/image10.wmf){width="0.7222222222222222in"
height="0.3055555555555556in"}= estimate of total erroneous payments in
stratum *h*.

![](media/image11.wmf){width="0.69375in" height="0.4027777777777778in"}=
separate ratio estimator of total erroneous payments.

![](media/image12.wmf){width="0.4861111111111111in"
height="0.5138888888888888in"} = separate ratio estimator: population
proportion of erroneous payments

![](media/image13.wmf){width="0.9166666666666666in"
height="0.2916666666666667in"} = residual for serving area in stratum
*h*.

![](media/image14.wmf){width="0.9305555555555556in"
height="0.4722222222222222in"}= sample mean residual in stratum *h*.

![](media/image15.wmf){width="1.6527777777777777in"
height="0.4722222222222222in"}= sample variance of residuals *d* in
stratum *h*.

![](media/image16.wmf){width="2.625in" height="0.5833333333333334in"} =
90 percent margin of error for separate ratio estimate of the
proportion.

**Estimation Results**

The erroneous payment rate is estimated at 9.5 percent with a margin of
error ± 2.1 percent at the 90 percent confidence level.

Compliance with rules and regulations was generally high (85 percent or
more), exceptions being: (1) advertise supported services; (2) Link-Up
discount; (3) determining consumer qualifications; (4) officer
certification; (5) Form 497 submission; and (6) record keeping. See
Table 2 for details.

**Table 2**

  ----------------------------- -- ----------- --------------- --------------- -------
  **[LOW INCOME PROGRAM                                                        
  COMPLIANCE\*]{.underline}**                                                  

  **ASSERTION**                                                                

                                               Materially      Non-Material    

  A.1                              Compliant   Non-Compliant   Non-Compliant   Other

  LOW INCOME ELIGIBILITY           100%                                        

                                                                               

                                               Materially      Non-Material    

  A.2                              Compliant   Non-Compliant   Non-Compliant   Other

  OFFER LIFELINE                   100%                                        

                                                                               

                                               Materially      Non-Material    

  B.1                              Compliant   Non-Compliant   Non-Compliant   Other

  ADVERTISE SUPPORTED SERVICES     70.5%       20.7%           8.8%            

                                                                               

                                               Materially      Non-Material    

  C.1.i                            Compliant   Non-Compliant   Non-Compliant   Other

  TIER 1 RATE                      90.7%       4.9%            4.4%            

                                                                               

                                               Materially      Non-Material    

  C.1.ii                           Compliant   Non-Compliant   Non-Compliant   Other

  TIER 1 USE OF ILEC RATE          94.7%       2.9%            2.4%            

                                                                               

                                               Materially      Non-Material    

  C.1.iii                          Compliant   Non-Compliant   Non-Compliant   Other

  TIER 2 RATE                      88.5%       9.3%            2.2%            

                                                                               

                                               Materially      Non-Material    

  C.1.iv                           Compliant   Non-Compliant   Non-Compliant   Other

  TIER 3 RATE                      84.6%       10.3%           5.1%            

                                                                               

                                               Materially      Non-Material    

  C.1.v                            Compliant   Non-Compliant   Non-Compliant   Other

  TIER 4 RATE                      93.4%       6.6%                            

                                                                               

                                               Materially      Non-Material    

  C.2.i                            Compliant   Non-Compliant   Non-Compliant   Other

  LINK UP DISCOUNT                 73.5%       23.6%           2.9%            

                                                                               

                                               Materially      Non-Material    

  C.2.ii                           Compliant   Non-Compliant   Non-Compliant   Other

  LINK UP DISCOUNT - TRIBAL        93.7%       6.3%                            

                                                                               

                                               Materially      Non-Material    

  C.3.i                            Compliant   Non-Compliant   Non-Compliant   Other

  SUPPORT OF TOLL ELECTION         87.8%       9.8%            2.5%            

                                                                               

                                               Materially      Non-Material    

  C.3ii                            Compliant   Non-Compliant   Non-Compliant   Other

  NO DEPOSIT FOR LIFELINE          97.3%       2.7%                            

                                                                               

                                               Materially      Non-Material    

  C.3.iii                          Compliant   Non-Compliant   Non-Compliant   Other

  CLAIMS ONLY INCREMENTAL COST     93.9%       6.1%                            

                                                                               

                                               Materially      Non-Material    

  D.1                              Compliant   Non-Compliant   Non-Compliant   Other

  DETERMINATION OF CONSUMER        58.9%       32.2%           8.9%            
  QUALIFICATION                                                                

                                                                               

                                               Materially      Non-Material    

  D.2                              Compliant   Non-Compliant   Non-Compliant   Other

  VERIFY ELIGIBILITY               96.0%       4.0%                            
  STATISTICALY (NON-MANDATED)                                                  

                                                                               

                                               Materially      Non-Material    

  D.1.a                            Compliant   Non-Compliant   Non-Compliant   Other

  OFFICER CERTIFICATION (STATE     74.4%       22.7%           2.9%            
  MANDATED)                                                                    

                                                                               

                                               Materially      Non-Material    

  D.1.b                            Compliant   Non-Compliant   Non-Compliant   Other

  PROCEDURES FOR QUALIFICATION     88.2%       11.8%                           
  (NON-MANDATED)                                                               

                                                                               

                                               Materially      Non-Material    

  D.1.c                            Compliant   Non-Compliant   Non-Compliant   Other

  VERIFY CONTINUED ELIGIBILITY     86.2%       11.2%           2.6%            
  (MANDATED)                                                                   

                                                                               

                                               Materially      Non-Material    

  E.1                              Compliant   Non-Compliant   Non-Compliant   Other

  ACCURATE SUBMISSION OF FORM      55.6%       26.2%           18.2%           
  497                                                                          

                                                                               

                                               Materially      Non-Material    

  F.1                              Compliant   Non-Compliant   Non-Compliant   Other

  RECORDKEEPING REQUIREMENTS       62.6%       23.7%           13.7%           

                                                                               

                                               Materially      Non-Material    

                                   Compliant   Non-Compliant   Non-Compliant   Other

  CERTIFICATION FROM RESELLERS     98.4%       1.6%                            

                                                                               

                                                                               

  \* Weighted Percent Totals                                                   
  ----------------------------- -- ----------- --------------- --------------- -------

**Causes of Non-Compliance**

When there was non-compliance on any assertion, data were collected on
causes of non-compliance. Table 3 contains all 21 possible causes of
non-compliance. Data were collected such that, if an auditor found
multiple causes of non-compliance, all causes of non-compliance
information would be presented.

Table 3

  -----------------------------------------------------------------------

  1-Imprecise FCC Rule/s

  2-Contradictory FCC Rule/s

  3-Overly Complex FCC Rules

  4-Disregarded FCC Rule/s

  5-Followed State Rule/s (apparent conflict with FCC Rule/s)

  6-Followed USAC Procedures (apparent conflict with FCC Rule/s)

  7-Inadequate Documentation Retention

  8-Inadequate Auditee Processes and/or Polices and Procedures

  9-Inadequate Systems for Collecting, Reporting, and/or Monitoring Data

  10-Insufficient Resources/Time to Complete Task/Activity

  11-Failure to Review/Monitor Work, Material, or Data/Application
  Submitted by Consultant/Agent

  12-Applicant/Auditee Weak Internal Controls

  13-Applicant/Auditee Data Entry Error

  14-Service Provider Weak Internal Controls

  15-Service Provider Data Entry Error

  16-Service Provider Error (other)

  17-USAC Error

  18-SOLIX Error

  19-NECA Error

  20-Force Majeure (Acts of God and Nature)

  21-Other
  -----------------------------------------------------------------------

Table 4

  ----------------------- ---- --- --- --- --- ------------------ --- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
  **LOW INCOME PROGRAM**                       REASON FOR                                                                                   
                                               NON-COMPLIANCE\*                                                                             

  Assertion               N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  B.1                                                                                                                                       

  ADVERTISE SUPPORTED     N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21
  SERVICES                                                                                                                                  

  Materially              14   1   0   0   8   0                  0   1    6    0    0    0    2    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

  Non-materially          4    0   0   0   0   0                  0   0    3    0    0    0    0    0    0    0    0    0    0    0    0    1
  non-compliant                                                                                                                             

                                                                                                                                            

  C.1.i                                                                                                                                     

  TIER 1 RATE             N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              3    0   0   0   0   0                  0   0    1    0    0    1    1    1    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

  Non-materially          2    0   0   0   0   0                  0   0    1    1    0    0    1    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  C.1.ii                                                                                                                                    

  TIER 1 USE OF ILEC RATE N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              2    0   0   0   0   0                  0   0    1    0    0    0    1    1    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

  Non-materially          1    0   0   0   1   0                  0   0    0    0    0    0    0    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  C.1.iii                                                                                                                                   

  TIER 2 RATE             N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              5    0   0   0   0   0                  0   0    3    1    0    1    1    1    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

  Non-materially          1    0   0   0   0   0                  0   0    0    1    0    0    0    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  C.1.iv                                                                                                                                    

  TIER 3 RATE             N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              6    0   0   0   0   0                  0   0    3    1    0    1    2    1    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

  Non-materially          3    0   0   0   0   0                  0   0    1    2    0    0    0    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  C.1.v                                                                                                                                     

  TIER 4 RATE             N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              4    0   0   0   0   0                  0   0    1    1    0    0    2    1    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  C.2.i                                                                                                                                     

  LINK UP DISCOUNT        N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              15   0   0   0   0   0                  0   1    8    2    0    0    5    1    0    0    0    0    0    0    0    1
  non-compliant                                                                                                                             

  Non-materially          2    0   0   0   1   0                  0   0    0    0    0    0    1    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  C.2.ii                                                                                                                                    

  LINK UP DISCOUNT-TRIBAL N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              2    0   0   0   0   0                  0   0    1    0    0    0    2    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  C.3.i                                                                                                                                     

  SUPPORT OF TOLL         N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21
  ELECTION                                                                                                                                  

  Materially              7    0   0   0   0   0                  0   0    4    2    0    0    2    1    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

  Non-materially          1    0   0   0   0   0                  0   0    0    1    0    0    0    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  C.3.ii                                                                                                                                    

  NO DEPOSIT FOR LIFELINE N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              2    0   0   0   0   0                  0   0    2    0    0    0    0    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  C.3.iii                                                                                                                                   

  CLAIMS ONLY INCREMENTAL N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21
  COST                                                                                                                                      

  Materially              5    0   0   0   0   0                  0   1    3    0    0    0    2    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  D.1 DETERMINATION OF                                                                                                                      
  CONSUMER                                                                                                                                  

  QUALIFICATION           N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              24   2   0   0   7   0                  0   10   14   2    0    0    5    0    1    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

  Non-materially          5    0   0   0   1   0                  0   1    1    0    0    0    0    0    0    0    0    0    0    0    0    2
  non-compliant                                                                                                                             

                                                                                                                                            

  D.2 VERIFY ELIGIBILITY                                                                                                                    
  STATISTICALLY                                                                                                                             

  (NON-MANDATED)          N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              1    0   0   0   0   0                  0   1    0    0    0    0    0    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  D.1.a                                                                                                                                     

  OFFER CERTIFICATION     N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21
  (STATE-MANDATED)                                                                                                                          

  Materially              11   0   0   0   2   0                  0   2    10   1    0    0    1    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

  Non-materially          1    0   0   0   0   0                  0   0    0    1    0    0    0    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  D.1.b PROCEDURES FOR                                                                                                                      
  QUALIFICATION                                                                                                                             

  (NON-MANDATED)          N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              4    1   0   0   2   0                  0   2    2    0    0    0    3    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  D.1.c VERIFY CONTINUED                                                                                                                    
  ELIGIBILITY                                                                                                                               

  (MANDATED)              N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21

  Materially              5    0   0   0   0   0                  0   3    3    0    0    0    1    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

  Non-materially          1    0   0   0   0   0                  0   0    0    1    0    0    0    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  E.1                                                                                                                                       

  ACCURATE SUBMISSION OF  N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21
  FORM 497                                                                                                                                  

  Materially              23   1   0   0   5   0                  1   0    11   11   0    0    5    1    1    1    0    0    0    0    0    0
  non-compliant                                                                                                                             

  Non-materially          10   0   0   0   1   0                  0   3    1    3    0    1    0    1    0    0    1    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  F.1                                                                                                                                       

  RECORDKEEPING           N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21
  REQUIREMENTS                                                                                                                              

  Materially              20   0   0   0   2   0                  0   17   3    0    0    0    2    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

  Non-materially          7    0   0   0   0   0                  0   6    1    0    0    0    1    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

  F.2                                                                                                                                       

  CERTIFICATION FROM      N    1   2   3   4   5                  6   7    8    9    10   11   12   13   14   15   16   17   18   19   20   21
  RESELLERS                                                                                                                                 

  Materially              3    0   0   0   3   0                  0   0    0    0    0    0    0    0    0    0    0    0    0    0    0    0
  non-compliant                                                                                                                             

                                                                                                                                            

                                                                                                                                            

  \* Cause                                                                                                                                  

  1-Imprecise FCC Rule/s                                                                                                                    

  2-Contradictory FCC                                                                                                                       
  Rule/s                                                                                                                                    

  3-Overly Complex FCC                                                                                                                      
  Rules                                                                                                                                     

  4-Disregarded FCC                                                                                                                         
  Rule/s                                                                                                                                    

  5-Followed State Rule/s                                                                                                                   
  (apparent conflict with                                                                                                                   
  FCC Rule/s)                                                                                                                               

  6-Followed USAC                                                                                                                           
  Procedures (apparent                                                                                                                      
  conflict with FCC                                                                                                                         
  Rule/s)                                                                                                                                   

  7-Inadequate                                                                                                                              
  Documentation Retention                                                                                                                   

  8-Inadequate Auditee                                                                                                                      
  Processes and/or                                                                                                                          
  Polices and Procedures                                                                                                                    

  9-Inadequate Systems                                                                                                                      
  for Collecting,                                                                                                                           
  Reporting, and/or                                                                                                                         
  Monitoring Data                                                                                                                           

  10-Insufficient                                                                                                                           
  Resources/Time to                                                                                                                         
  Complete Task/Activity                                                                                                                    

  11-Failure to                                                                                                                             
  Review/Monitor Work,                                                                                                                      
  Material, or                                                                                                                              
  Data/Application                                                                                                                          
  Submitted by                                                                                                                              
  Consultant/Agent                                                                                                                          

  12-Applicant/Auditee                                                                                                                      
  Weak Internal Controls                                                                                                                    

  13-Applicant/Auditee                                                                                                                      
  Data Entry Error                                                                                                                          

  14-Service Provider                                                                                                                       
  Weak Internal Controls                                                                                                                    

  15-Service Provider                                                                                                                       
  Data Entry Error                                                                                                                          

  16-Service Provider                                                                                                                       
  Error (other)                                                                                                                             

  17-USAC Error                                                                                                                             

  18-SOLIX Error                                                                                                                            

  19-NECA Error                                                                                                                             

  20-Force Majeure (Acts                                                                                                                    
  of God and Nature)                                                                                                                        

  21-Other                                                                                                                                  

                                                                                                                                            

  \*\*N is the sample                                                                                                                       
  size sample size                                                                                                                          

                                                                                                                                            
  ----------------------- ---- --- --- --- --- ------------------ --- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----

Causality Code #8: 'Inadequate auditee processes and/or policies and
procedures' is by far the greatest 'cause' of non-compliance. Other
frequently cited causes depend on the nature of the rule/regulation.

**Qualitative Discussion and Conclusions**

The Low Income Program of USF appears to be at risk. The estimated
erroneous payment rate is 9.5 percent. There was, however, general
compliance with FCC Rules and Regulations (85 percent or more) with
several notable exceptions. The percentage of carriers that did not
materially comply with the requirement to advertise supported services
was 20.7 percent, and the percentage of carriers that non-materially
comply with this requirement was 8.8 percent. There was non compliance
on Assertion C.2.i which is associated with link-up, and 23.6 percent of
carriers were materially non-compliant 2.9 percent of carriers were
non-materially non-compliant.

There was non-compliance on Assertion D1 which requires carriers to
determine qualifications of consumers. 32.2 percent of carriers were
materially non-compliant and 8.9 percent were non-materially,
non-compliant. A non-compliance rate of 41.1 percent suggests that there
are incentives for both consumers and carriers to unnecessarily transact
this subsidized service.

The non-compliance rate on Assertion D1a (officer certification) was
relatively high at 25.6 percent of the population of carriers. In
addition, the requirement of accurately submitting Form 497 was violated
by 44.4 percent of the population of carrier, with material
non-compliance at 26.2 percent. Assertion F1 concerns record keeping,
and on this rule 37.4 percent of carriers were non-compliant with 23.7
percent materially non-compliant.

Where auditors could render opinions on compliance/non-compliance with
FCC rules more frequently observed causes of non-compliance are:
Inadequate documentation, inadequate systems for collecting & reporting
and inadequate auditee processes; and Applicant/Auditee Weak Internal
Controls.

Under the IPIA, estimates of both the erroneous payment rate and amount
of erroneous payment are intended guide the Commission in assessing risk
that is associated with the Low Income Program. Under IPIA standards, a
program is at risk if the erroneous payment rate exceeds 2.5 percent and
the amount of erroneous payment is greater than \$10 million. To assess
compliance and risk, a stratified random sample of 60 SACs was drawn and
compliance attestation examinations/audits were completed. The
statistical results from this stratified random suggest that the program
is at risk, and there are significant administrative problems in the
program. As noted above, the erroneous payment error rate is 9.5
percent.

[^1]: Pub. L. 107-300, 116 Stat. 2350.

[^2]: During the period audited, nearly \$795.8 million were disbursed
    to recipients under the Low Income program,

[^3]: 47 U.S.C. § 254(b)(3).

[^4]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Report and Order, 12 FCC Rcd 8776 (FCC 97-157) (1977).

[^5]: The Commission's LI rules are codified at 47 C.F.R. § 54.400-417.

[^6]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Twelfth Report and Order, Memorandum Opinion and Order, 15
    FCC Rcd. 12208 (FCC 00-208) (2000).

[^7]: Interstate Common Line Support for Lifeline and Link-Up, WC Docket
    No. 03-109, Report and Order, 19 FCC Rcd. 8302 (FCC 04-87) (2004)
    ("*Lifeline and Link-Up Order*").

[^8]: Eligibility for Lifeline, Link Up, and Toll Limitation Service
    (TLS) varies by state. Individuals who reside in states that have
    their own discount programs qualify for federal Lifeline, Link Up,
    and TLS support if they meet the eligibility criteria established by
    their state.

[^9]: States have primary responsibility for designating
    telecommunications providers as ETCs. A carrier seeking ETC
    designation on non-tribal lands must first consult with its state
    utility regulator to see if the state utility regulator has ETC
    jurisdiction and procedures in place for seeking ETC status. If not,
    the carrier may petition the FCC and must provide an affirmative
    statement from the state utility regulator to that effect. A carrier
    seeking ETC designation on tribal lands may directly petition the
    FCC for designation without first seeking designation from its state
    utility regulator.

[^10]: FCC Report to Congress on Improper Payments, March 31, 2004.

[^11]: *See* W.G. Cochran, *Sampling Techniques*, 3^rd^ edition, John
    Wiley & Sons, New York (1977).