December 4,  1998

                    DISSENTING STATEMENT OF 
              COMMISSIONER HAROLD FURCHTGOTT-ROTH

     Re:  Proposed First Quarter 1999 Universal Service Contribution Factors And Proposed
     Actions; (CC Docket No. 96-45).

     Today, the Commission releases a Public Notice announcing the proposed universal
service contribution factors for the first quarter of 1999 that will automatically go into effect if the
Commission takes no action within 14 days.  I dissent from the proposed contribution levels for a
variety of reasons, but most notably because of the Commission's refusal to evaluate with a critical
eye the excessive expenses of the Schools and Libraries Corporation.  While acknowledging that
the other new universal service program should have its budget undergo increased scrutiny, in this
Public Notice the Commission blindly accepts the establishment of a new bureaucracy to
"administer" the schools and libraries program at a cost to taxpayers of more than $40 million
annually.  Such an incredible budget ensures that more money will flow to another Washington
bureaucracy -- the Schools and Libraries Corporation ("SLC") -- than will flow to 37 of the
states, even if every application from every school in those states for the schools and libraries
program were full funded.  

     I.   Today, the Commission Approves a Bloated New Adjunct Bureaucracy -- the
     Schools and Libraries Corporation -- with an Annualized Budget of Over $40
     Million of Taxpayer Money with Virtually No Public Oversight.

     By issuing this Public Notice today, the Commission "approves" the projected expenses
for the universal service support programs.  I object to the exorbitant and unjustified
administrative expenses of the Schools and Libraries Corporation and the further increase in their
budget proposed by this Public Notice.  At the very least, the Commission should require that a
more detailed budget be filed with the Commission and reviewed for the expenditure of public
funds.  

     Under today's scheme, the administrative expenses of the Schools and Libraries
Corporation will increase again from $4.9 million per quarter to $10.2 million per quarter, an
increase of more than 100%.  And this is at a time when Congress has called for a more
"streamlined" and "efficient" corporate structure.  Indeed, Section 2005(b)(2)(A) of Senate Bill
1768, which prompted several universal service corporate structural revisions, provides for an
extremely limited administrative entity:

          [T]he entity proposed by the Commission to administer the programs -- (i) is
     limited to implementation of the FCC rules for applications for discounts and
     processing the applications necessary to determine eligibility for discounts under
     section 254(h) of the Communications ct of 1934 (47 U.S.C. 254(h)) as
     determined by the Commission; (ii) may not administer the program in any manner
     that requires that entity to interpret the intent of Congress in establishing the
     programs or interpret any rule promulgated by the Commission  in carrying out the
     programs, without appropriate consultation and guidance from the Commission.

In light of this more limited administrative function, I fail to see the need for a 100% increase in
funding.  Indeed, I wonder whether the overly bureaucratic structure adopted by the Commission,
with its formal divisions and multiple committees overseeing them, has contributed in any way to
these expenses.  Even more importantly, if the overall entity is now prohibited from setting policy
and limited to the function of processing applications, then how can this bureaucracy need an
increase in funding of this magnitude?  Moreover, it appears from the budget that the bulk of the
actual processing of the applications is contracted out to other entities.  If that is so, and the
Corporation is limited to only processing applications, then what is the Corporation's other
functions that could require several million dollars?  Is the Corporation spending several million
dollars a quarter merely traveling around the country promoting the program itself?   

     The administrative expenses for the Schools and Libraries Corporation are considerably
more than the administrative expenses of any and all of the other universal service programs.  For
example, the High Cost/Low Income program demand is significantly greater ($583 million which
is almost twice the schools and libraries demand), but the corresponding administrative expenses
are considerably smaller (only $2.7 million, or almost $8 million less).  In fact, the administrative
expenses for the Schools and Libraries Corporation exceeds the administrative expenses for all of
the other universal service programs combined by seven million dollars.  Indeed, these
administrative expenses on an annualized basis would equal almost 50% of the total demand of
Internet Services requested by all of the 30,000 applications received for the first year of this
program.   

     With these questionable and excessive expenses, I find it ironic that the Commission
chooses to conclude that "we are concerned about the size of the projected administrative
expenses relative to the size of the support mechanism" for the Rural Health Care Program. 
While there expenses may need additional scrutiny as well, how can the Commission continue to
ignore the burgeoning  schools and libraries budget?  If the appropriate standard for additional
review is the "size of the administrative expenses" relative to the "size of the support mechanism,"
then why isn't the fact that the "size of the administrative expenses" of the High Cost/Low Income
program is significantly less than the schools and libraries program while the "size of the support
mechanism" for the High Cost/Low Income program is significantly greater than the schools and
libraries program not evidence that this program too needs further review.  At the very least, the
Commission should have required USAC to submit a revised and more detailed first quarter
budget for the schools and libraries program by March 1, 1999 as it does with the rural health
care program.

     On an annualized basis, the schools and libraries budget for "administrative expenses"
alone will exceed $40 million.  In just one year, this agency has created an adjunct bureaucracy
with an "administrative" budget that is almost 25% of this entire agency's Congressional
appropriation, and with virtually no oversight.  Unlike the justifications and scrutiny that all
agencies undergo in the appropriations process, what public official is making sure that this $40
million of taxpayer money is well spent?  What public official is making sure that salaries are
reasonable, that "travel" does not include First Class, or that contingency does not include
Holiday bonuses?  Such cursory descriptions as "SLC Labor Costs," "Travel, Supplies and
Other," "Contingency," and "Contract - Operations Component" along with lump sum allocations
do not provide the type of assurances that should be in place for the expenditure of essentially
public money? 

     I cannot  endorse the disparity -- and certainly not one of this magnitude -- between the
administrative expenses of the Schools and Libraries Corporation and those of the other universal
service corporations.  I believe there is a need for more adequate safeguards against excessive
administrative spending by this program.

     II.  The Commission's Justifications for this Increased Budget Are Insufficient and
     Factually Inaccurate.

     The Commission makes two points in support of the Schools and Libraries Corporation's
budget.  First, the Commission argues that: 

          [T]he SLC has explained that the increased expenses represent the anticipated
     costs of processing a high volume of applications that it expects to be submitted in
     the next year.  Thus, we have no reason to believe that this level of expenses will
     continue to be as high each quarter and we will continue to monitor closely these
     expenses.

In addition, the Commission argues that: 

          The SLC explained that these increases are due in part to the cost of complying
     with the GAO recommendations, which were intended to help ensure that
     discounts were provided in accordance with the statute and commission rules.

The Commission's final assurance is that it will "continue to monitor closely these expenses."
Not only are these explanation insufficient, but they are -- in some cases -- factually inaccurate. 
Thus, I feel compelled to respond directly.

               A.   There is a reason to believe that the Schools and Libraries Corporation's
          budget will be as high in each and every quarter next year -- because they
          have overspent their own proposed budget in every quarter that information
          is available.

     First, I believe that there is "a reason to believe that this level of expenses will continue." 
The fact that the SLC's budget has continued to increase dramatically along with the fact that it
has been unable to meet its own projected budget in any quarter is an indication -- at least to me -
- that this level of expenses will at least continue.  In the first quarter of 1998, the estimated
expenses for SLC were $1.9 million, with a budget of $7.8 million for the year.  The actual first
quarter administrative expenses -- with no offset for interest income earned -- was $4.4 million.  
This amount is well in excess of the what was actually budgeted, and does not even include the
additional $1.9 million which was paid to NECA during the first quarter for additional start-up
expenses.  Thus, the actual first quarter costs for this program were $6.3 million, or almost the
entire estimated budget for the year.  

     Similarly, the second quarter administrative expenses of the Schools and Libraries
Corporation were estimated to be $4.16 million.  The actual second quarter expenses for this
program were $6.9 million.  Thus, in the first six months the Schools and Libraries Corporation
spent almost twice what they had been budgeted for the entire year.  At this rate, I can only
conclude that the Commission is right that "there is no reason to believe that this level of expenses
will continue" because it will only increase to at least $15 million per quarter.  With that kind of a
track record and credibility with regard to their budget, I find "a reason to believe" that their
increased expenses might continue.

     Even if their past failure to meet their own budget is not convincing, I fail to understand
why the Commission will not set any limit -- either in absolute dollars or in percentage of their
projected budget -- on overspending.  Surely at some point the program's spending in excess of
their own budget indicates a need to reexamine the program.  Why won't the Commission indicate
such a level?.  

     Finally, even if their spending does drop back to $5 million per quarter, that would result
in an annual budget of $25 million, which is still excessive.  Moreover, why won't the Commission
now commit to concluding that if the second quarter budget estimates do not drop to $5 million,
then that would justify a reexamination of this bureaucracy and its "administrative" budgetary
needs?

               B.   This is the third time the Schools and Libraries Corporation has asked for --
          and been given by the FCC -- additional money to "process" a high volume
          of 1999 applications, but the filing of those applications was delayed in the
          previous quarters and the money was still spent.

     I object to allowing this Corporation to continue to ask for an increasing amount of money
to "process" the 1999 applications.  In the estimates for the Schools and Libraries Corporation's
third quarter expenses of $4.2 million, SLC indicated that it would "begin review of applications
for 1999 funding in the fall of 1998."  They indicated that there were "significant assumptions
underlying our expense estimates" including "a total of about 50,000 FCC Forms 470 for 1999
funding filed in the Third Quarter."   With that in mind, the SLC estimated that "35 percent of
the $4.2 million we project to need for expenses in the Third Quarter will be for 1998 Funding
Year-related activities and 65 percent [$2.73 million] for 1999 Funding Year.  That proportion
will be even more heavily weighted to Funding Year 1999 in the Fourth Quarter, . . ."   Again in
their fourth quarter estimates, the Schools and Libraries Corporation repeated that they "will
begin processing applications for the second program year" as part of their justification for their
expenses.  But now the Schools and Libraries Corporation estimates that it will need a "significant
increase in expenses compared to the Fourth Quarter of 1998."   And what is the main reason? 
"One major factor in this expected increase is Client Service Bureau operations to support
applications for the second program year."   I fail to understand why the Schools and Libraries
Corporation can continue to ask for more and more money to process the same applications.  

     Indeed, in their latest filing, the Schools and Libraries Corporation justifies its expenses by
saying that it estimates "that in the second program year, over 40,000 Forms 470 will be filed . . .
"  But I thought that 65% of the third quarter's expenses or $2.73 million had already been
allocated to that function?  Moreover, why does this processing cost only $2.7 million in the fall
of 1998, but now cost $5 million in the Winter of 1999?  Why has the cost of processing fewer
applications increased?  I realize that the 1999 application window has been delayed several times,
but then what has happened to the vast sums of money that we have already allocated to that
processing function for the third and fourth quarters?  Why is that money not available for
processing the applications now?  I can only conclude that the Commission is being derelict in its
oversight duties to continue to fund the exact same request, and at an increasing cost to taxpayers
each time, without asking even these basic questions.  I cannot support spending taxpayer money
twice -- none-the-less three times -- for the same thing. 

               C.   In almost every quarter, the Schools and Libraries Corporation has either
          asked for money or overspent its budget because of developing additional
          program integrity assurances for these cash grants.   

     In their latest filing, the Schools and Libraries Corporation indicates that its budget
increases in part because of the "expansion of SLC's Program Integrity Assurance (PIA)
operations, . . ."   In its second quarter filing, under the heading "Program Integrity Assurance,"
the Schools and Libraries Corporation indicated that its estimate now "includes  $4.9 million
needed for a comprehensive process review function  . . .  . "  At that time, SLC indicated that
the "growth in the budget estimate" was for work "to protect the program from waste, fraud, and
abuse."  But when explaining why the actual costs for the second quarter exceeded the estimates
by $1.2 million, SLC states that its costs have risen "for our program integrity assurance unit to
help protect against waste, fraud and abuse."  Again in the fourth quarter estimates, SLC
"further supplemented its program integrity operations to protect against waste fraud and abuse. 
These costs are reflected in the Fourth Quarter estimate."   I fully support the efforts to ensure
that this program is being administered in an efficient and consistent manner and believe that the
audits that occurred have been essential.  I believe, however, that after the program has been
running for more than a year, additional overexpenditures for "program integrity assurances"
should require more of an explanation than a word processing macro that says "to protect against
waste fraud and abuse."  

               D.   The Commission inaccurately states that these increased expenses for
          program integrity were necessary for "discounts" when this level of scrutiny
          has only been necessary because the Commission required a system of "cash
          grants" directly to schools and libraries. 
     
     Most importantly, all of these program integrity assurances have only been necessary
because the FCC required that schools apply for cash grants not merely "discounts" on
telecommunications services.  If the Commission had merely required that telecommunications
carriers provide a certain level of discount for their telecommunications services when provided to
schools and libraries, these excessive administrative expenses would have been unnecessary.  A
complex cash grant system with thousands of applications from schools all over the country was
not what Congress envisioned nor what the statute required, and has necessitated a federal
bureaucracy to "process" these applications.  Auditing and oversight is only needed because of the
use of cash grants instead of a more limited discount program.  Moreover, if there has to be an
application process, at least a state-by-state block grant program would have provided for only 50
applications and a much smaller application review process.

               E.   I do not believe that the Commission can "continue" to monitor closely when
          it has not been doing so thus far.  

     In objecting to the second quarter contribution factors, I noted that SLC was allocated
almost four times as much money for administrative expenses as the high-cost/low income funds
and that the administrative budget increased from $2.7 million to $4.4 million or by 65% in just
that one quarter.  In objecting to the next quarter's contribution factors, I noted that these
increased administrative expenses continued in the third quarter, despite the fact that, at that time,
the Schools and Libraries Corporation could not even provide an accurate estimate of all its
administrative costs for the first quarter.  Despite raising these concerns for almost nine months,
the Commission continues ahead with the Schools and Libraries Corporation's budget, while
raising issues about the budget of other programs. Indeed, the Commission has not addressed
many of the questions I have raised above, such as what happened to the third and fourth quarter
money already allocated to processing the 1999 application forms?  And, why shouldn't the FCC
review the SLC's budget in a similar manner as Congress reviews this agency's request?  With that
background, I cannot support the word "continue" in the phrase "continue to monitor closely."  

     As an example of the Commission's arbitrary scrutiny, I look to the Commission's
reference in reviewing the RHCC's budget to making sure that it "serves the public interest." 
First, I note my continuing frustration with such an arbitrary standard.  As I have explained above
why is the RHCC's excessive budget not in the public interest but the SLC's greater budget in the
public interest, despite the fact that both are excessive when compared to the High Cost/Low
Income Program's budget?  I can only conclude that the Commission has an arbitrary bias in favor
of some universal service programs over others.  

     A better standard to evaluate or monitor the cost of the program is one advocated by the
Schools and Libraries Corporation itself  -- 1% of the total program ceiling.  In its second quarter
filing, SLC indicated that: 

          Even with the growth, SLC's current estimate of its program delivery budget is
     significantly less than 1.0 percent of the program ceiling for 1998 -- and this for a
     year when the SLC will incur substantial non-recurring start-up costs and will go
     through two complete cycles of processing applications.

Using this standard, the SLC's first quarter 1999 budget should only be $3.25 million.  The
Schools and Libraries budget now exceeds that by almost $7 million.  

     If that standard is too rigorous, however, then why not use the Commission's own
statement's from a year ago.  In the Public Notice setting the contribution factors for the first
quarter of 1998, the Commission stated that: 

          Administrative expenses appear to be high relative to projected quarterly demand,
     because start-up costs have been allocated to the first quarter.  We anticipate that
     administrative expenses will total less than two percent of annual program costs.

Even using this more generous standard, the Schools and Libraries Corporation's budget would
exceed a "reasonable" amount (2%) by almost $4 million.  I can only conclude that the
Commission does not really intend to "continue to monitor" the expenses of this program with any
standard that might be meaningful.  

     III. The Costs of the Schools and Libraries Program Outweigh the Benefits, At Least for
     Many States

     In any event one thing that is clear is that, with such high administrative expenses, the
costs of this program outweigh the benefits of it, at least to many particularly rural states.  If the
total amount requested by every applicant to the schools and libraries program were fully funded,
the following rural or high-cost states would not receive as much money -- or just barely as much
money -- as the Schools and Libraries Corporation estimates that it will spend on administrative
expenses in the First Quarter of 1999 alone: Alaska ($10 million), Arkansas ($11 million), Idaho
($5 million), Kansas ($12 million), Maine ($3 million), Montana ($3 million), North Dakota ($4
million), Nebraska ($5 million) Nevada ($8 million), South Dakota ($4 million), Utah ($5 million),
Vermont ($3 million), West Virginia (8 million) and Wyoming ($2 million).  In contrast, large
states like California ($277 million), Georgia ($104 million), Illinois ($109 million), New York
($138 million), and Texas ($169 million) are the big winners as they would all receive in excess of
$100 million.  Similarly, even if this distribution is examined on a per capita basis, many rural
states would receive 60% or less than the national average: Arkansas, Idaho, Indiana, Kansas,
Maine, Missouri, Montana, Nebraska, Oregon, Utah, Vermont, West Virginia, and Wyoming.  I
do not believe that such a distribution is what Congress intended by the "preservation" and
"advancement" of universal service.  Rather, I believe Congress intended that rural areas should
receive the lion's share of any increase in the federal universal service fund; support for rural and
high-cost areas should not be viewed as the residual after enormous amounts for other federal
universal service obligations have been promised.

     Finally, I note that these figures do not even represent all of the costs of the program.  Ten
million dollars in the first quarter is only the tip of the iceberg.  What about the costs of the
schools across America that must take the time and expense to fill out these applications?  How
many teacher, administrative and parent hours have been spent filling out these applications and
how much state administrative time has been wasted reviewing them?  Moreover, what about the
cost of the tens of millions of parents and teachers who have had their expectations raised only to
have been crushed by a program that was ill-conceived from the start?  

     IV.  The Size and Scope of the Schools and Libraries Program is in Excess of
     Congressional  Intentions.

     In addition, as I have described on several occasions, the size and scope of the current
schools and libraries program is far in excess of what was envisioned by Congress and thus
beyond the Commission's authority to establish.   I believe that the universal service
contributions, at least to the extent  they are providing support for non-telecommunications
services to non-telecommunications carriers, may not be fairly characterized as mere "fees." 
Some have argued that there is only one section of the act that provides funding for universal
service and that any challenge to universal service  necessarily sweeps in all of the programs.  I
point out, however, that the contributions for the schools, libraries, and rural health care support
mechanisms are based not only on interstate but intrastate revenues, while the contributions for
the high cost program are based solely on interstate revenues.  Thus, there are separate rates to
fund separate programs.

     I have also described on several occasions my conclusion that the legality of the
Commission's approach to calculating contributions is highly questionable.   As  I read the
Communications Act, it does not permit the Commission to assess contributions for universal
service support mechanisms based on intrastate revenues.  Rather, the Act makes clear that the
power to collect charges based on such revenues rests within the exclusive province of the States.

     Finally, I question whether the Commission's current plan to differentiate among bona fide
applications -- as will be necessary with these contribution levels -- is legal.  The Commission's
rules already consider a schools' economic status in determining the level of support to which they
may qualify.  The Commission also takes economic status into account to determine whether the
schools are even eligible for participation in the inside wiring aspect of the school and libraries
program.  I do not see how the Commission has the discretion to prioritize among bona fide
applications.  The universal service provisions of  section 254(h)(1) mandate that "upon a bona
fide request" the "telecommunications carriers ...shall" provide a discount.  All of the
applications that met our previous rules are bona fide requests, and I question the propriety and
legality of differentiating among them.  In addition, I note that there is no such mandatory
language under section 254(h)(2).  Thus, I believe that the Commission must ensure that
applications  that have sought funding under 254(h)(1) are separated from those seeking funding
254(h)(2), and that the Commission ensure that the 254(h)(1) applications for legal services are
fully funded.  To the extent that an application seeks funding under section 254(h)(2), the
Commission must set those applications aside until it can ensure adequate funding for all of the
254(h)(1) applications.

     Conclusion

     I reiterate my desire that the Commission delay further implementations of this new
universal service program until we have addressed  all aspects of universal service -- including
rural and high cost issues.  Such a delay would provide us the opportunity to reconsider some of
our legal conclusions related to the implementation of this new program, as I believe we must do. 
At the very least, however, we must become more involved in the oversight of this program and
the growing burden its administrative expenses are placing on the telecommunications ratepayers.



                           Attachment A

                                        November 23, 1998

                    PRESS STATEMENT REGARDING THE SCHOOLS AND LIBRARIES
         CORPORATION'S FIRST WAVE OF COMMITMENT LETTERS
             BY FEDERAL COMMUNICATIONS COMMISSIONER 
                     HAROLD FURCHTGOTT-ROTH

     Today, the Schools and Libraries Corporation announced that it has begun issuing
commitment letters to schools and libraries across the country.  As this program begins, it is an
appropriate time to reflect upon what Congress intended for universal service to mean and
compare that to how these programs are living up to those goals as envisioned by Congress.

     Under the 1996 Act, the Commission's primary universal service responsibility was to
establish explicit and sufficient universal service funding for rural America.   The clear emphasis of
Section 254 is to preserve and enhance universal service in rural, high-cost areas of the country. 
Rural, high-cost universal service is not just one of many objectives of Section 254; it should be
the highest priority.   There are other goals of Section 254, but it is difficult to read Section 254 in
its entirety and understand how a federal universal service fund program could have as its primary
emphasis anything other than rural support.  It is hard to dispute that the universal service section
of the Telecommunications Act of 1996 was primarily intended to aid rural America. 

     With that goal in mind, let us examine what has taken place.   Federal universal service
support has nearly doubled in size since passage of the Act.  But amazingly, most of that growth
has not benefited rural states.  Instead, growth of universal service has been for other programs
that largely flow to other areas of the country.  Indeed, in this first wave of commitment letters
from the Schools and Libraries Corporation, states like Alaska (only $206 thousand),  Maine
(only $230 thousand), Montana (only $335 thousand), North Dakota (only $241 thousand),
Nevada (only $145 thousand), Vermont (only $103 thousand) and Wyoming (only $138
thousand) are all rural states that should be the primary beneficiaries of universal service, but
instead they each receive less than 1/2 of one percent (.5%) of this initial distribution.   Similarly,
South Dakota (only $394 thousand), West Virginia (only $470 thousand), New Mexico (only
$578 thousand), Nebraska (only $692 thousand), Arkansas (only $621 thousand), Colorado (only
$641 thousand) and Idaho (only $462 thousand) receive less than 1%.  Such a distribution cannot
be what Congress envisioned.  

     Moreover, a close inspection of the total amounts requested by these states reveals a
similar bias for urban states in this program.  In their latest filing, the Schools and Libraries
Corporation estimates that its first quarter 1999 administrative costs will exceed $10 million.  If
the total amount requested by every applicant were accepted and fully funded, the following rural
or high-cost states would not receive as much money -- or just barely as much money -- as the
Schools and Libraries Corporation estimates that it will spend in administrative expenses in the
First Quarter of 1999 alone: Alaska ($10 million), Arkansas ($11 million), Idaho ($5 million),
Kansas ($12 million), Maine ($3 million), Montana ($3 million), North Dakota ($4 million),
Nebraska ($5 million) Nevada ($8 million), South Dakota ($4 million), Utah ($5 million),
Vermont ($3 million), West Virginia (8 million) and Wyoming ($2 million).  In contrast, large
states like California ($277 million), Georgia ($104 million), Illinois ($109 million), New York
($138 million), and Texas ($169 million) are the big winners as they would all receive in excess of
100 million.  Similarly, even if this distribution is examined on a per capita basis, many rural states
would receive 60% or less than the national average: Arkansas, Idaho, Indiana, Kansas, Maine,
Missouri, Montana, Nebraska, Oregon, Utah, Vermont, West Virginia, and Wyoming.  Again, I
do not believe that such a distribution is what Congress intended.  

     As of today, if one includes the Joint Board's recommended decision, the Commission will
have provided universal service support for the schools and libraries program, and the rural health
care program (although none of that money has been disbursed yet), provided additional support
for the lifeline and link-up programs, and provided for additional universal service support for
non-rural carriers.  In effect, these  potential universal service beneficiaries have been "promised"
enormous and unending benefits, long before other potential universal service beneficiaries
(specifically the rural, high-cost program) have been addressed.  I fear that for the small rural
carriers, there may not be any money left to help increase their support.  

     Congress intended -- and the 1996 Act required -- that the Commission focus its efforts on
rural, high cost areas first, as opposed to finding support for these new programs that primarily
benefit other areas of the country.  Rural, high-cost universal service should not be viewed as the
residual after enormous amounts for other federal universal service obligations have been
promised; rural areas should have received the lion's share of any increase in the federal universal
service fund.