Testimony 

Before the Committee on Commerce, 

Science, and Transportation, 

U.S. Senate

United States Government Accountability Office

GAO

For Release on Delivery 

Expected at 2:00 p.m. EDT 

Monday, April 11, 2005 TELECOMMUNICATIONS

Application of the 

Antideficiency Act and 

Other Fiscal Controls to 

FCC’s E-Rate Program 

Statement of Patricia A. Dalton, Managing Director 

Physical Infrastructure Issues 

GAO-05-546T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-546T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Patricia A. 

Dalton at (202) 512-2834 or 

daltonp@gao.gov. 

Highlights of GAO-05-546T, a testimony 

before the Committee on Commerce, 

Science, and Transportation, U.S. Senate 

April 11, 2005

TELECOMMUNICATIONS 

Application of the Antideficiency Act and 

Other Fiscal Controls to FCC’s E-Rate 

Program 

FCC established E-rate as a multibillion-dollar program operating under an 

organizational structure unusual to the federal government, but never 

conducted a comprehensive assessment to determine which federal 

requirements, policies, and practices apply to the program, to the Universal 

Service Administrative Company, and to the Universal Service Fund itself. 

FCC has addressed these issues on a case-by-case basis, but this has put 

FCC and the E-rate program in the position of reacting to problems as they 

occur rather than setting up an organization and internal controls designed 

to ensure compliance with applicable laws. 

With regard to the Antideficiency Act, we agree with FCC’s conclusions that 

the Universal Service Fund is a permanent indefinite appropriation, is 

subject to that act, and that the issuance of E-rate funding commitment 

letters constitutes obligations for purposes of the act. We believe that 

Congress should consider either granting the Universal Service Fund a twoor three-year exemption from the Antideficiency Act or crafting a limited 

exemption that would provide management flexibility. For example, 

Congress could specify that FCC could use certain receivables or assets as 

budgetary resources. These more limited solutions would allow time for the 

National Academy of Public Administration to complete its study of the 

Universal Service Fund program and report its findings to FCC. Congress 

and FCC could then comprehensively assess, based on decisions concerning 

the structure of the program, which federal requirements, policies, and 

practices should apply to the fund and to any entities administering the 

program. It could then be determined whether a permanent and complete 

exemption from the Antideficiency Act is warranted. 

FCC has not developed useful performance goals and measures for assessing 

and managing the E-rate program. The goals established for fiscal years 

2000 through 2002 focused on the percentage of public schools connected to 

the Internet, but the data used to measure performance did not isolate the 

impact of E-rate funding from other sources of funding, such as state and 

local government. In its 2003 assessment of the program, OMB concluded 

that there was no way to tell whether the program has resulted in the costeffective deployment and use of advanced telecommunications services. In 

response, FCC is working with OMB on developing new E-rate measures. 

According to FCC officials, oversight of the program is primarily handled 

through agency rulemaking procedures, beneficiary audits, and appeals 

decisions. FCC’s rulemakings, however, have often lacked specificity, which 

has affected the recovery of funds for program violations. FCC has also 

been slow to respond to beneficiary audit findings and make full use of them 

to strengthen the program. In addition, the small number of these audits 

completed to date do not provide a basis for accurately assessing the level of 

fraud, waste, and abuse occurring in the program. According to FCC 

officials, there is also a substantial backlog of E-rate appeals. 

Since 1998, the Federal 

Communications Commission’s 

(FCC) E-rate program has 

committed more than $13 billion to 

help schools and libraries acquire 

Internet and telecommunications 

services. As steward of the 

program, FCC must ensure that 

participants use E-rate funds 

appropriately and that there is 

managerial and financial 

accountability surrounding the 

funds. This testimony is based on 

GAO’s February 2005 report GAO05-151, which reviewed (1) the 

effect of the current structure of 

the E-rate program on FCC’s 

management of the program, 

including the applicability of the 

Antideficiency Act, (2) FCC’s 

development and use of E-rate 

performance goals and measures, 

and (3) the effectiveness of FCC’s 

program oversight mechanisms. 

What GAO Recommends

In its report, GAO recommends 

that FCC (1) comprehensively 

determine which federal 

accountability requirements apply 

to E-rate; (2) establish meaningful 

E-rate performance goals and 

measures; and (3) take steps to 

reduce its backlog of appeals. In 

response, FCC stated that it does 

not concur with (1) because it 

maintains it has done this on a 

case-by-case basis. GAO continues 

to believe that major issues remain 

unresolved. FCC concurs with (2) 

and (3), noting that it is already 

taking steps on these issues. 
Page 1 GAO-05-546T 

Mr. Chairman, Mr. Co-Chairman, and Members of the Committee: 

We are pleased to be here to discuss the results of our recently completed 

review of the Federal Communications Commission’s (FCC) universal 

service program for schools and libraries and to discuss specifically the 

applicability of the Antideficiency Act to the program. As you know, the 

Telecommunications Act of 1996 expanded the concept of universal 

service to include assistance to schools and libraries in acquiring 

telecommunications and Internet services; the act charged FCC with 

establishing the universal service discount mechanism for eligible schools 

and libraries. The commission, in turn, created a large and ambitious 

program that became commonly known as the “E-rate” program, and set 

the annual funding cap for the program at $2.25 billion. FCC designated 

the Universal Service Administrative Company (USAC), a private, not-forprofit corporation established under FCC’s rules, to carry out the day-today operations of the E-rate program. FCC retains responsibility for 

overseeing the program’s operations and ensuring compliance with the 

commission’s rules. 

Since 1998, the E-rate program has committed more than $13 billion in 

funding to help schools and libraries across the nation acquire 

telecommunications and Internet services. Eligible schools and libraries 

can apply annually to receive support, which can be used for specific 

eligible services and equipment such as telephone services, Internet access 

services, and the installation of internal wiring and other related items. 

Recently, however, allegations have been made that some E-rate 

beneficiaries (schools and libraries) and service providers (e.g., 

telecommunications and network equipment companies) have 

fraudulently obtained, wasted, or abused E-rate funding. In May 2004, for 

example, one service provider involved in E-rate projects in several states 

pleaded guilty to bid rigging and wire fraud and agreed to pay more than 

$20 million in criminal fines, civil payments, and restitution. 

In February 2005, we issued a report on various aspects of the program. 

Specifically, we evaluated (1) the effect of the current structure of the Erate program on FCC’s management of the program, (2) FCC’s 

development and use of performance goals and measures in managing the 

program, and (3) the effectiveness of FCC’s oversight mechanisms—

rulemaking proceedings, beneficiary audits, and reviews of USAC 

decisions (appeals)—in managing the program. 

Our testimony today is based on this report, which contains a fuller 

discussion of the results of our review and recommendations for 
Page 2 GAO-05-546T 

improving FCC’s management and oversight of the E-rate program.1 In 

summary, we found the following: 

• FCC established E-rate as a multibillion-dollar program operating under an 

organizational structure unusual to the federal government, but never 

conducted a comprehensive assessment to determine which federal 

requirements, policies, and practices apply to the program, to the 

Universal Service Administrative Company, and to the Universal Service 

Fund itself. FCC has addressed these issues on a case-by-case basis, but 

this has put FCC and the E-rate program in the position of reacting to 

problems as they occur rather than setting up an organization and internal 

controls designed to ensure compliance with applicable laws. 

• With regard to the Antideficiency Act, we agree with FCC’s conclusions 

that the Universal Service Fund is a permanent indefinite appropriation, is 

subject to that act, and that the issuance of E-rate funding commitment 

letters constitutes obligations for purposes of the act. We believe that 

Congress should consider either granting the Universal Service Fund a 

two- or three-year exemption from the Antideficiency Act or crafting a 

limited exemption that would provide management flexibility. For 

example, Congress could specify that FCC could use certain receivables or 

assets as budgetary resources. These more limited solutions would allow 

time for the National Academy of Public Administration to complete its 

study of the Universal Service Fund program and report its findings to 

FCC. Congress and FCC could then comprehensively assess, based on 

decisions concerning the structure of the program, which federal 

requirements, policies, and practices should apply to the fund and to any 

entities administering the program. It could then be determined whether a 

permanent and complete exemption from the Antideficiency Act is 

warranted. 

• FCC has not developed meaningful performance goals and measures for 

assessing and managing the program. As a result, there is no way to tell 

whether the program has resulted in the cost-effective deployment and use 

of advanced telecommunications services for schools and libraries. 

• FCC’s program oversight mechanisms contain weaknesses that limit FCC’s 

management of the program and its ability to understand the scope of 

waste, fraud, and abuse within the program. For example, FCC’s 

 1

Telecommunications: Greater Involvement Needed by FCC in the Management and 

Oversight of the E-Rate Program, GAO-05-151 (Washington, D.C.: Feb. 9, 2005). The report 

is available on GAO’s Web site at www.gao.gov. 
Page 3 GAO-05-546T 

rulemakings have often lacked specificity and have led to situations where 

important USAC administrative procedures have been deemed 

unenforceable by FCC. There is also a significant backlog of E-rate 

appeals that adds uncertainty to the program and impacts beneficiaries. 

FCC has taken some important steps, particularly in recent months, to 

address some of the areas of concern discussed in our report. 

Nevertheless, we believe that FCC has not done enough to proactively 

manage and provide a framework of government accountability for the 

multibillion-dollar E-rate program. To address the management and 

oversight problems we have identified, we recommended in our report 

that the Chairman of FCC: (1) conduct and document a comprehensive 

assessment to determine whether all necessary government accountability 

requirements, policies, and practices have been applied and are fully in 

place to protect the E-rate program and universal service funding; (2) 

establish meaningful performance goals and measures for the E-rate 

program; and (3) develop a strategy for reducing the E-rate program’s 

appeals backlog, including that adequate staffing resources are devoted to 

E-rate appeals. 

The concept of “universal service” has traditionally meant providing 

residential telephone subscribers with nationwide access to basic 

telephone services at reasonable rates. The Telecommunications Act of 

1996 broadened the scope of universal service to include, among other 

things, support for schools and libraries. The act instructed the 

commission to establish a universal service support mechanism to ensure 

that eligible schools and libraries have affordable access to and use of 

certain telecommunications services for educational purposes.2

 In 

addition, Congress authorized FCC to “establish competitively neutral 

rules to enhance, to the extent technically feasible and economically 

reasonable, access to advanced telecommunications and information 

services for all public and nonprofit elementary and secondary school 

classrooms . . . and libraries. . . .”3

 Based on this direction, and following 

the recommendations of a Federal-State Joint Board on Universal Service,4

 2

47 U.S.C. § 254(h)(1)(B). 

3

47 U.S.C. § 254(h)(2). 

4

The Federal-State Joint Board on Universal Service was established in March 1996 to make 

recommendations to implement the universal service provisions of the 

Telecommunications Act of 1996. The board is composed of FCC commissioners, state 

utility commissioners, and a consumer advocate representative. 

Background 
Page 4 GAO-05-546T 

FCC established the schools and libraries universal service mechanism 

that is commonly referred to as the E-rate program. The program is funded 

through statutorily mandated payments by companies that provide 

interstate telecommunications services.5

 Many of these companies, in turn, 

pass their contribution costs on to their subscribers through a line item on 

subscribers’ phone bills.6

 FCC capped funding for the E-rate program at 

$2.25 billion per year, although funding requests by schools and libraries 

can greatly exceed the cap. For example, schools and libraries requested 

more than $4.2 billion in E-rate funding for the 2004 funding year. 

In 1998, FCC appointed USAC as the program’s permanent administrator, 

although FCC retains responsibility for overseeing the program’s 

operations and ensuring compliance with the commission’s rules.7

 In 

response to congressional conference committee direction,8

 FCC has 

specified that USAC “may not make policy, interpret unclear provisions of 

the statute or rules, or interpret the intent of Congress.”9

 USAC is 

responsible for carrying out the program’s day-to-day operations, such as 

maintaining a Web site that contains program information and application 

procedures; answering inquiries from schools and libraries; processing 

and reviewing applications; making funding commitment decisions and 

 5

These companies include providers of local and long distance telephone services, wireless 

telephone services, paging services, and pay phone services. 47 C.F.R. § 54.706. Along with 

the E-rate program, other universal service programs under the Universal Service Fund are 

the High Cost program, the Low Income program, and the Rural Health Care program. The 

High Cost program assists customers living in high-cost, rural, or remote areas through 

financial support to telephone companies, thereby lowering rates for local and long 

distance service. The Low Income program assists qualifying low-income consumers 

through discounted installation and monthly telephone services and free toll limitation 

service. The Rural Health Care program assists health care providers located in rural areas 

through discounts for telecommunications services. These four programs are sometimes 

collectively referred to as the Universal Service Fund program. For more information on 

the various universal service programs, see GAO, Telecommunications: Federal and State 

Universal Service Programs and Challenges to Funding, GAO-02-187 (Washington, D.C.: 

Feb. 4, 2002). 

6

The line item is called various things by various companies, such as the “federal universal 

service fee” or the “universal connectivity fee.” Some companies do not separate out 

universal service costs as a line item, but instead just build it into their overall costs. Either 

way, consumers ultimately pay for the various universal service programs, including E-rate. 

7

USAC was established at the direction of FCC and operates under FCC’s rules and 

policies. 

8

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

9

47 C.F.R. § 54.702(c). 
Page 5 GAO-05-546T 

issuing funding commitment letters; and collecting, managing, investing, 

and disbursing E-rate funds. FCC permits—and in fact relies on—USAC to 

establish administrative procedures that program participants are required 

to follow as they work through the application and funding process. 

Under the E-rate program, eligible schools, libraries, and consortia that 

include eligible schools and libraries10 may receive discounts for eligible 

services. Eligible schools and libraries may apply annually to receive Erate support. The program places schools and libraries into various 

discount categories, based on indicators of need, so that the school or 

library pays a percentage of the cost for the service and the E-rate 

program funds the remainder. E-rate discounts range from 20 percent to 90 

percent. USAC reviews all of the applications and related forms and issues 

funding commitment decision letters. Generally, it is the service provider 

that seeks reimbursement from USAC for the discounted portion of the 

service rather than the school or library.11

FCC established an unusual structure for the E-rate program but has never 

conducted a comprehensive assessment of which federal requirements, 

policies, and practices apply to the program, to USAC, or to the Universal 

Service Fund itself. FCC only recently began to address a few of these 

issues. 

The Telecommunications Act of 1996 neither specified how FCC was to 

administer universal service to schools and libraries nor prescribed the 

structure and legal parameters of the universal service mechanisms to be 

created. The Telecommunications Act required FCC to consider the 

recommendations of the Federal-State Joint Board on Universal Service 

and then to develop specific, predictable, and equitable support 

mechanisms. Using the broad language of the act, FCC crafted an 

 10Eligibility of schools and libraries is defined at 47 U.S.C. § 254. Generally, educational 

institutions that meet the definition of “schools” in the Elementary and Secondary 

Education Act of 1965 are eligible to participate, as are libraries that are eligible to receive 

assistance from a state’s library administrative agency under the Library Services and 

Technology Act. Examples of entities not eligible for support are home school programs, 

private vocational programs, and institutions of higher education. In addition, neither 

private schools with endowments of more than $50 million nor libraries whose budgets are 

part of a school’s budget are eligible to participate. 20 U.S.C. § 9122. 

11The school or library could also pay the service provider in full and then seek 

reimbursement from USAC for the discount portion. 

FCC Established an 

Unusual Program 

Structure without 

Comprehensively 

Addressing the 

Applicability of 

Governmental 

Standards and Fiscal 

Controls 
Page 6 GAO-05-546T 

ambitious program for schools and libraries—roughly analogous to a grant 

program—and gave the program a $2.25 billion annual funding cap. To 

carry out the day-to-day activities of the E-rate program, FCC relied on a 

structure it had used for other universal service programs in the past—a 

not-for-profit corporation established at FCC’s direction that would 

operate under FCC oversight. However, the structure of the E-rate 

program is unusual in several respects compared with other federal 

programs: 

• FCC appointed USAC as the permanent administrator of the 

Universal Service Fund,12 and FCC’s Chairman has final approval 

over USAC’s Board of Directors. USAC is responsible for 

administering the program under FCC orders, rules, and directives. 

However, USAC is not part of FCC or any other government entity; 

it is not a government corporation established by Congress; and no 

contract or memorandum of understanding exists between FCC 

and USAC for the administration of the E-rate program. Thus, 

USAC operates and disburses funds under less explicit federal ties 

than many other federal programs. 

• Questions as to whether the monies in the Universal Service Fund 

should be treated as federal funds have troubled the program from 

the start. Even though the fund has been listed in the budget of the 

United States and, since fiscal year 2004, has been subject to an 

annual apportionment from OMB, the monies are maintained 

outside of Treasury accounts by USAC and some of the monies 

have been invested.13 The United States Treasury implements the 

statutory controls and restrictions involving the proper collection 

and deposit of appropriated funds, including the financial 

accounting and reporting of all receipts and disbursements, the 

 12USAC was appointed the permanent administrator subject to a review after one year by 

FCC to determine that the universal service programs were being administered in an 

efficient, effective, and competitively neutral manner. 47 C.F.R. § 54.701(a). This review 

was never conducted. 

13The Universal Service Fund is included in the federal budget as a special fund. OMB 

concluded that the Fund does not constitute public money subject to the Miscellaneous 

Receipts Statute, 31 U.S.C. § 3302, and therefore can be maintained outside the Treasury 

by a nongovernmental manager. Letter from Mr. Robert G. Damus, OMB General Counsel 

to Mr. Christopher Wright, FCC General Counsel, dated April 28, 2000. 
Page 7 GAO-05-546T 

security of appropriated funds, and agencies’ responsibilities for 

those funds.14 

As explained below, appropriated funds are subject, unless specifically 

exempted by law, to a variety of statutory controls and restrictions. These 

controls and restrictions, among other things, limit the purposes for which 

federal funds can be used and provide a scheme of accountability for 

federal monies. Key requirements are in Title 31 of the United States Code 

and the appropriate Treasury regulations,15 which govern fiscal activities 

relating to the management, collection, and distribution of public money. 

Since the inception of the E-rate program, FCC has struggled with 

identifying the nature of the Universal Service Fund and the managerial, 

fiscal, and accountability requirements that apply to the fund. FCC’s 

Office of Inspector General first looked at the Universal Service Fund in 

1999 as part of its audit of the commission’s fiscal year 1999 financial 

statement because FCC had determined that the Universal Service Fund 

was a component of FCC for financial reporting purposes. During that 

audit, the FCC IG questioned commission staff regarding the nature of the 

fund and, specifically, whether it was subject to the statutory and 

regulatory requirements for federal funds. In the next year’s audit, the 

FCC IG noted that the commission could not ensure that Universal Service 

Fund activities were in compliance with all laws and regulations because 

the issue of which laws and regulations were applicable to the fund was 

still unresolved at the end of the audit. 

FCC officials told us that the commission has substantially resolved the 

IG’s concerns through recent orders, including FCC’s 2003 order that 

USAC begin preparing Universal Service Fund financial statements 

consistent with generally accepted accounting principles for federal 

agencies (GovGAAP) and keep the fund in accordance with the United 

States Government Standard General Ledger. While it is true that these 

steps and other FCC determinations discussed below should provide 

greater protections for universal service funding, FCC has addressed only 

 14See 31 U.S.C. §§ 331, 3301-3305 and the Treasury Financial Manual, vol. I, which instructs 

federal agencies in areas of central accounting and reporting, disbursing, deposit 

regulations, and other fiscal matters necessary for the financial accounting and reporting of 

all receipts and disbursements of the federal government. 

15As set forth in part 31 of the Code of Federal Regulations or the Treasury Financial 

Manual. 
Page 8 GAO-05-546T 

a few of the issues that need to be resolved. In fact, staff from the FCC’s 

IG’s office told us that they do not believe the commission’s GovGAAP 

order adequately addressed their concerns because the order did not 

comprehensively detail which fiscal requirements apply to the Universal 

Service Fund and which do not. 

FCC has made some determinations concerning the status of the Universal 

Service Fund and the fiscal controls that apply. For example, FCC has 

concluded that the Universal Service Fund is a permanent indefinite 

appropriation subject to the Antideficiency Act and that its issuance of 

funding commitment letters constitutes recordable obligations for 

purposes of the act. We agree with FCC’s determinations on these issues, 

as explained in detail in appendix I. However, FCC’s conclusions 

concerning the status of the Universal Service Fund raise further issues 

relating to the collection, deposit, obligation, and disbursement of those 

funds—issues that FCC needs to explore and resolve comprehensively 

rather than in an ad hoc fashion as problems arise. 

Status of funds as appropriated funds. In assessing the financial 

statement reporting requirements for FCC components in 2000, FCC 

concluded that the Universal Service Fund constitutes a permanent 

indefinite appropriation (i.e., funding appropriated or authorized by law to 

be collected and available for specified purposes without further 

congressional action). We agree with FCC’s conclusion. Typically, 

Congress will use language of appropriation, such as that found in annual 

appropriations acts, to identify a fund or account as an appropriation and 

to authorize an agency to enter into obligations and make disbursements 

out of available funds. Congress, however, appropriates funds in a variety 

of ways other than in regular appropriations acts. Thus, a statute that 

contains a specific direction to pay and a designation of funds to be used 

constitutes an appropriation.16 In these statutes, Congress (1) authorizes 

the collection of fees and their deposit into a particular fund, and (2) 

makes the fund available for expenditure for a specified purpose without 

further action by Congress. This authority to obligate or expend 

collections without further congressional action constitutes a continuing 

appropriation or a permanent appropriation of the collections.17 Because 

 1663 Comp. Gen. 331 (1984); 13 Comp. Gen. 77 (1933). 

17E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (D.C. Cir. 1965), cert. denied, 384 U.S. 

971 (1966); 69 Comp. Gen. 260, 262 (1990); 73 Comp. Gen. 321 (1994). 

FCC’s Decision on the 

Antideficiency Act 

Should Be Addressed 

in a Broader Context 
Page 9 GAO-05-546T 

the Universal Service Fund’s current authority stems from a statutorily 

authorized collection of fees from telecommunications carriers and the 

expenditure of those fees for a specified purpose (that is, the various types 

of universal service), it meets both elements of the definition of a 

permanent appropriation. 

Decision regarding the Antideficiency Act. As noted above, in October 

2003, FCC ordered USAC to prepare financial statements for the Universal 

Service Fund, as a component of FCC, consistent with GovGAAP, which 

FCC and USAC had not previously applied to the fund. In February 2004, 

staff from USAC realized during contractor-provided training on GovGAAP 

procedures that the commitment letters sent to beneficiaries (notifying 

them whether or not their funding is approved and in what amount) might 

be viewed as “obligations” of appropriated funds.18 If so, and if FCC also 

found the Antideficiency Act—which does not allow an agency or program 

to make obligations in excess of available budgetary resources—to be 

applicable to the E-rate program, then USAC would need to dramatically 

increase the program’s cash-on-hand and lessen the program’s 

investments19 to provide budgetary authority sufficient to satisfy the 

Antideficiency Act. As a result, USAC suspended funding commitments in 

August 2004 while waiting for a commission decision on how to proceed. 

At the end of September 2004—facing the end of the fiscal year—FCC 

decided that commitment letters were obligations, that the Antideficiency 

Act did apply to the program, and that USAC would need to immediately 

liquidate some of its investments to come into compliance with the 

Antideficiency Act. According to USAC officials, the liquidations cost the 

fund approximately $4.6 million in immediate losses and could potentially 

result in millions in foregone annual interest income. 

FCC was slow to recognize and address the issue of the applicability of the 

Antideficiency Act, resulting in the abrupt decision to suspend funding 

commitment decision letters and liquidate investments. In response to 

these events, in December 2004, Congress passed a bill granting the 

Universal Service Fund a one-year exemption from the Antideficiency 

 18An “obligation” is an action that creates a legal liability or definite commitment on the 

part of the government to make a disbursement at some later date. 

19According to USAC, the Universal Service Fund was invested in a variety of securities, 

including cash and cash equivalents, government and government-backed securities, and 

high-grade commercial paper. USAC generally did not seek the approval of the 

commission on particular investments, although investments were made with FCC 

knowledge and oversight through formal audits and informal meetings and review. 
Page 10 GAO-05-546T 

Act.20 Nevertheless, FCC’s conclusion on this issue was correct: Absent a 

statutory exemption, the Universal Service Fund is subject to the 

Antideficiency Act, and its funding commitment decision letters constitute 

obligations for purposes of the act. 

The Antideficiency Act applies to “official[s] or employee[s] of the United 

States Government . . . mak[ing] or authorizing an expenditure or 

obligation . . . from an appropriation or fund.” 31 U.S.C. § 1341(a). As 

discussed above, the Universal Service Fund is an “appropriation or fund.” 

Even though USAC—a private entity whose employees are not federal 

officers or employees—is the administrator of the program and the entity 

that obligates and disburses money from the fund, application of the act is 

not negated. This is because, as recognized by FCC, it, and not USAC, is 

the entity that is legally responsible for the management and oversight of 

the E-rate program and because FCC’s employees are federal officers and 

employees of the United States subject to the Antideficiency Act. Thus, 

the Universal Service Fund will again be subject to the Antideficiency Act 

when the one-year statutory exemption expires, unless action is taken to 

extend or make permanent the exemption. 

An important issue that arises from the application of the Antideficiency 

Act to the Universal Service Fund is what actions constitute obligations 

chargeable against the fund. Under the Antideficiency Act, an agency may 

not incur an obligation in excess of the amount available to it in an 

appropriation or fund. Thus, proper recording of obligations with respect 

to the timing and amount of such obligations permits compliance with the 

Antideficiency Act by ensuring that agencies have adequate budget 

authority to cover all of their obligations. Our decisions have defined an 

“obligation” as a commitment creating a legal liability of the government, 

including a “legal duty . . . which could mature into a liability by virtue of 

actions on the part of the other party beyond the control of the United 

States. . . .”21 

With respect to the Universal Service Fund, the funding commitment 

decision letter provides the school or library with the authority to obtain 

services from a provider with the commitment that the school or library 

 20Universal Service Antideficiency Temporary Suspension Act, Pub. L. No. 108-494, § 302, 

118 Stat. 3986 (2004). The law exempts universal service monies from the Antideficiency 

Act until December 31, 2005. 

21See B-300480, April 9, 2003. 
Page 11 GAO-05-546T 

will receive a discount and the service provider will be paid for the 

discounted portion with E-rate funding. Although the school or library 

could decide not to seek the services or the discount, so long as the 

funding commitment decision letter remains valid and outstanding, USAC 

and FCC no longer control the Universal Service Fund’s liability; it is 

dependent on the actions taken by the school or library. Consequently, we 

agree with FCC that a recordable obligation is incurred at the time of 

issuance of the funding commitment decision letter indicating approval of 

the applicant’s discount. 

Additional issues that remain to be resolved by FCC include whether other 

actions taken in the Universal Service Fund program constitute obligations 

and the timing and amounts of obligations that must be recorded. For 

example, this includes the projections and data submissions by USAC to 

FCC and by participants in the High Cost and Low Income support 

mechanisms to USAC. FCC has indicated that it is considering this issue 

and consulting with the Office of Management and Budget. FCC should 

also identify any other actions that may constitute recordable obligations 

and ensure that those are properly recorded. 

While we agree with FCC’s determinations that the Universal Service Fund 

is a permanent appropriation subject to the Antideficiency Act and that its 

funding commitment decision letters constitute recordable obligations of 

the Universal Service Fund (see app. I), there are several significant fiscal 

law issues that remain unresolved. We believe that where FCC has 

determined that fiscal controls and policies do not apply, the commission 

should reconsider these determinations in light of the status of universal 

service monies as federal funds. For example, in view of its determination 

that the fund constitutes an appropriation, FCC needs to reconsider the 

applicability of the Miscellaneous Receipts Statue, 31 U.S.C. § 3302, which 

requires that money received for the use of the United States be deposited 

in the Treasury unless otherwise authorized by law.22 FCC also needs to 

assess the applicability of other fiscal control and accountability statutes 

(e.g., the Single Audit Act and the Cash Management Improvement Act).23

 22Because OMB and FCC had believed the funds were not public monies “for the use of the 

United States” under the Miscellaneous Receipts Statute, neither OMB nor FCC viewed the 

Universal Service Fund as subject to that statute. 

23For example, in October 2003, when the FCC ordered USAC to comply with GovGAAP, it 

noted that the Universal Service Fund was subject to the Debt Collection Improvement Act 

of 1996. In that same order, FCC stated that “the funds may be subject to a number of 
Page 12 GAO-05-546T 

Another major issue that remains to be resolved involves the extent to 

which FCC has delegated some functions for the E-rate program to USAC. 

For example, are the disbursement policies and practices for the E-rate 

program consistent with statutory and regulatory requirements for the 

disbursement of public funds?24 Are some of the functions carried out by 

USAC, even though they have been characterized as administrative or 

ministerial, arguably inherently governmental activities25 that must be 

performed by government personnel? Resolving these issues in a 

comprehensive fashion, rather than continuing to rely on reactive, case-bycase determinations, is key to ensuring that FCC establishes the proper 

foundation of government accountability standards and safeguards for the 

E-rate program and the Universal Service Fund. 

We are encouraged that FCC recently announced that it has contracted 

with the National Academy of Public Administration (NAPA) for NAPA to 

study the administration of the Universal Service Fund. NAPA will review 

the current status of the Universal Service Fund program as well as other 

similar governmental and quasi-governmental programs. Among other 

things, NAPA is to examine the pros and cons of continuing with the 

program’s current structure or switching to an alternative model. NAPA is 

also to identify specific ways to improve the oversight and operation of the 

program, as well as any legislative or rule changes that would be needed to 

implement its recommendations. In addition, the review will identify 

internal controls in typical federal grant or subsidy programs that are not 

present in the Universal Service Fund program and determine whether the 

manner in which other analogous programs handle the holding, 

 federal financial and reporting statutes” (emphasis added) and “relevant portions of the 

Federal Financial Management Improvement Act of 1996,” but did not specify which 

specific statutes or the relevant portions or further analyze their applicability. FCC 

officials also told us that it was uncertain whether procurement requirements such as the 

Federal Acquisition Regulation (FAR) applied to arrangements between FCC and USAC, 

but they recommended that those requirements be followed as a matter of policy. 

24See 31 U.S.C. §§ 3321, 3322, 3325, and the Treasury Financial Manual. 

25See OMB Circular A-76, May 29, 2003, which defines an inherently governmental activity 

as requiring “the exercise of substantial discretion in applying government authority and/or 

in making decisions for the government.” OMB Cir. A-76, Attachment A. Inherently 

governmental activities include the establishment of procedures and processes related to 

the oversight of monetary transactions or entitlements. OMB Circular A-76 further states 

that “[e]xerting ultimate control over the acquisition, use or disposition of United States 

government property . . . including establishing policies or procedures for the collection, 

control, or disbursement of appropriated and other federal funds” involves an inherently 

governmental activity. 
Page 13 GAO-05-546T 

investment, and monitoring of program funds offers models for improving 

the operation of the Universal Service Fund. 

We believe that NAPA’s study will go a long way toward addressing the 

concerns outlined in our report, and we look forward to seeing the results 

of NAPA’s efforts. Given this important ongoing study and the unresolved 

issues mentioned previously, Congress may wish to consider deferring a 

decision on permanently exempting the Universal Service Fund from the 

Antideficiency Act at this time and instead consider either granting the 

fund a two- or three-year exemption from the Antideficiency Act or 

crafting a limited exemption that would provide management flexibility. 

For example, Congress could specify that FCC could use certain 

receivables or assets as budgetary resources. These more limited solutions 

would allow time for the National Academy of Public Administration to 

complete its study of the Universal Service Fund program and report its 

findings to FCC. Congress and FCC could then comprehensively assess, 

based on decisions concerning the structure of the program, which federal 

requirements, policies, and practices should apply to the fund and to any 

entities administering the program. It could then be determined whether a 

permanent and complete exemption from the Antideficiency Act is 

warranted. 

Although $13 billion in E-rate funding has been committed to beneficiaries 

during the past 7 years, FCC did not develop useful performance goals and 

measures to assess the specific impact of these funds on schools’ and 

libraries’ Internet access and to improve the management of the program, 

despite a recommendation by us in 1998 to do so. At the time of our 

current review, FCC staff was considering, but had not yet finalized, new 

E-rate goals and measures in response to OMB’s concerns about this 

deficiency in a 2003 OMB assessment of the program. 

One of the management tasks facing FCC is to establish strategic goals for 

the E-rate program, as well as annual goals linked to them. The 

Telecommunications Act of 1996 did not include specific goals for 

supporting schools and libraries, but instead used general language 

directing FCC to establish competitively neutral rules for enhancing 

access to advanced telecommunications and information services for all 

public and nonprofit private elementary and secondary school classrooms 

FCC Did Not Develop 

Useful Performance 

Goals and Measures 

for Assessing and 

Managing the E-Rate 

Program 
Page 14 GAO-05-546T 

and libraries.26 As the agency accountable for the E-rate program, FCC is 

responsible under the Government Performance and Results Act of 1993 

(Results Act) for establishing the program’s long-term strategic goals and 

annual goals, measuring its own performance in meeting these goals, and 

reporting publicly on how well it is doing.27

For fiscal years 2000 through 2002, FCC’s goals focused on achieving 

certain percentage levels of Internet connectivity during a given fiscal year 

for schools, public school instructional classrooms, and libraries. 

However, the data that FCC used to report on its progress was limited to 

public schools (thereby excluding two other major groups of 

beneficiaries—private schools and libraries) and did not isolate the impact 

of E-rate funding from other sources of funding, such as state and local 

government. This is a significant measurement problem because, over the 

years, the demand for internal connections funding by applicants has 

exceeded the E-rate funds available for this purpose by billions of dollars. 

Unsuccessful applicants had to rely on other sources of support to meet 

their internal connection needs. Even with these E-rate funding 

limitations, there has been significant growth in Internet access for public 

schools since the program issued its first funding commitments in late 

1998. At the time, according to data from the Department of Education’s 

National Center for Educational Statistics (NCES), 89 percent of all public 

schools and 51 percent of public school instructional classrooms already 

had Internet access. By 2002, 99 percent of public schools and 92 percent 

of public school instructional classrooms had Internet access.28 Yet 

although billions of dollars in E-rate funds have been committed since 

1998, adequate program data was not developed to answer a fundamental 

performance question: How much of the increase since 1998 in public 

 2647 U.S.C. § 254(h)(2)(A). 

27For additional details on the Results Act and its requirements, see GAO, Executive Guide: 

Effectively Implementing the Government Performance and Results Act, 

GAO/GGD-96-118 (Washington, D.C.: June 1996). GAO first noted the lack of clear and 

specific E-rate performance goals and measures in its July 1998 testimony before the 

Senate Committee on Commerce, Science, and Transportation. See GAO, Schools and 

Libraries Corporation: Actions Needed to Strengthen Program Integrity Operations 

before Committing Funds, GAO/T-RCED-98-243 (Washington, D.C.: July 16, 1998), pp. 15-

16. 

28See NCES, Internet Access in U.S. Public Schools and Classrooms: 1994-2002, NCES2004-011 (Washington, D.C.; October 2003). This was the most recent update available at 

the time of our review. 
Page 15 GAO-05-546T 

schools’ Internet access has been a result of the E-rate program, as 

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

Performance goals and measures are used not only to assess a program’s 

impact but also to develop strategies for resolving mission-critical 

management problems. However, management-oriented goals have not 

been a feature of FCC’s performance plans, despite long-standing 

concerns about the program’s effectiveness in key areas. For example, two 

such goals—related to assessing how well the program’s competitive 

bidding process was working and increasing program participation by lowincome and rural school districts and rural libraries—were planned but 

not carried forward. 

FCC did not include any E-rate goals for fiscal years 2003 and 2004 in its 

recent annual performance reports. The failure to measure effectively the 

program’s impact on public and private schools and libraries over the past 

7 years undercuts one of the fundamental purposes of the Results Act: to 

have federal agencies adopt a fact-based, businesslike framework for 

program management and accountability. The problem is not just a lack of 

data for accurately characterizing program results in terms of increasing 

Internet access. Other basic questions about the E-rate program also 

become more difficult to address, such as the program’s efficiency and 

cost-effectiveness in supporting the telecommunications needs of schools 

and libraries. For example, a review of the program by OMB in 2003 

concluded that there was no way to tell whether the program has resulted 

in the cost-effective deployment and use of advanced telecommunications 

services for schools and libraries.29 OMB also noted that there was little 

oversight to ensure that the program beneficiaries were using the funding 

appropriately and effectively. In response to these concerns, FCC staff 

have been working on developing new performance goals and measures 

for the E-rate program and plan to finalize them and seek OMB approval in 

fiscal year 2005. 

 29OMB reviewed E-rate using its Program Assessment Rating Tool (PART), which is a 

diagnostic tool intended to provide a consistent approach to evaluating federal programs as 

part of the executive budget formulation process. 
Page 16 GAO-05-546T 

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

components in overseeing the E-rate program: rulemaking proceedings, 

beneficiary audits, and fact-specific adjudicatory decisions (i.e., appeals 

decisions). We found weaknesses with FCC’s implementation of each of 

these mechanisms, limiting the effectiveness of FCC’s oversight of the 

program and the enforcement of program procedures to guard against 

waste, fraud, and abuse of E-rate funding. 

As part of its oversight of the E-rate program, FCC is responsible for 

establishing new rules and policies for the program or making changes to 

existing rules, as well as providing the detailed guidance that USAC 

requires to effectively administer the program. FCC carries out this 

responsibility through its rulemaking process. FCC’s E-rate rulemakings, 

however, have often been broadly worded and lacking specificity. Thus, 

USAC has needed to craft the more detailed administrative procedures 

necessary to implement the rules. However, in crafting administrative 

procedures, USAC is strictly prohibited under FCC rules from making 

policy, interpreting unclear provisions of the statute or rules, or 

interpreting the intent of Congress. We were told by FCC and USAC 

officials that USAC does not put procedures in place without some level of 

FCC approval. We were also told that this approval is sometimes informal, 

such as e-mail exchanges or telephone conversations between FCC and 

USAC staff. This approval can come in more formal ways as well, such as 

when the commission expressly endorses USAC operating procedures in 

commission orders or codifies USAC procedures into FCC’s rules. 

However, two problems have arisen with USAC administrative 

procedures. 

First, although USAC is prohibited under FCC rules from making policy, 

some USAC procedures deal with more than just ministerial details and 

arguably rise to the level of policy decisions. For example, in June 2004, 

USAC was able to identify at least a dozen administrative procedures that, 

if violated by the applicant, would lead to complete or partial denial of the 

funding request even though there was no precisely corresponding FCC 

rule. The critical nature of USAC’s administrative procedures is further 

illustrated by FCC’s repeated codification of them throughout the history 

of the program. FCC’s codification of USAC procedures—after those 

procedures have been put in place and applied to program participants—

raises concerns about whether these procedures are more than ministerial 

and are, in fact, policy changes that should be coming from FCC in the 

first place. Moreover, in its August 2004 order (in a section dealing with 

the resolution of audit findings), the commission directs USAC to annually 

FCC’s Oversight 

Mechanisms Are Not 

Fully Effective in 

Managing the E-Rate 

Program 

FCC’s Rulemakings Have 

Led to Problems with 

USAC’s Procedures and 

Enforcement of Those 

Procedures 
Page 17 GAO-05-546T 

“identify any USAC administrative procedures that should be codified in 

our rules to facilitate program oversight.” This process begs the question 

of which entity is really establishing the rules of the E-rate program and 

raises concerns about the depth of involvement by FCC staff with the 

management of the program. 

Second, even though USAC procedures are issued with some degree of 

FCC approval, enforcement problems could arise when audits uncover 

violations of USAC procedures by beneficiaries or service providers. The 

FCC IG has expressed concern over situations where USAC administrative 

procedures have not been formally codified because commission staff 

have stated that, in such situations, there is generally no legal basis to 

recover funds from applicants that failed to comply with the USAC 

procedures. In its August 2004 order, the commission attempted to clarify 

the rules of the program with relation to recovery of funds. However, even 

under the August 2004 order, the commission did not clearly address the 

treatment of beneficiaries who violate a USAC administrative procedure 

that has not been codified. 

FCC’s use of beneficiary audits as an oversight mechanism has also had 

weaknesses, although FCC and USAC are now working to address some of 

these weaknesses. Since 2000, there have been 122 beneficiary audits 

conducted by outside firms, 57 by USAC staff, and 14 by the FCC IG (2 of 

which were performed under agreement with the Inspector General of the 

Department of the Interior). Beneficiary audits are the most robust 

mechanism available to the commission in the oversight of the E-rate 

program, yet FCC generally has been slow to respond to audit findings and 

has not made full use of the audit findings as a means to understand and 

resolve problems within the program. 

First, audit findings can indicate that a beneficiary or service provider has 

violated existing E-rate program rules. In these cases, USAC or FCC can 

seek recovery of E-rate funds, if justified.30 In the FCC IG’s May 2004 

Semiannual Report, however, the IG observes that audit findings are not 

 30USAC, through its duties as administrator of the fund, initially seeks recovery of 

erroneously disbursed funds. In addition, the commission adopted rules in April 2003 to 

provide for suspension and debarment from the program for persons convicted of criminal 

violations or held civilly liable for certain acts arising from their E-rate participation. 

Debarments would be for a period of three years unless circumstances warrant a longer 

debarment period in order to protect the public interest. 

FCC Has Been Slow to 

Address Problems Raised 

by Audit Findings 
Page 18 GAO-05-546T 

being addressed in a timely manner and that, as a result, timely action is 

not being taken to recover inappropriately disbursed funds.31 The IG notes 

that in some cases the delay is caused by USAC and, in other cases, the 

delay is caused because USAC is not receiving timely guidance from the 

commission (USAC must seek guidance from the commission when an 

audit finding is not a clear violation of an FCC rule or when policy 

questions are raised). Regardless, the recovery of inappropriately 

disbursed funds is important to the integrity of the program and needs to 

occur in a timely fashion. 

Second, under GAO’s Standards for Internal Controls in the Federal 

Government,32 agencies are responsible for promptly reviewing and 

evaluating findings from audits, including taking action to correct a 

deficiency or taking advantage of the opportunity for improvement. Thus, 

if an audit shows a problem but no actual rule violation, FCC should be 

examining why the problem arose and determining if a rule change is 

needed to address the problem (or perhaps simply addressing the problem 

through a clarification to applicant instructions or forms). FCC has been 

slow, however, to use audit findings to make programmatic changes. For 

example, several important audit findings from the 1998 program year 

were only recently resolved by an FCC rulemaking in August 2004. 

In its August 2004 order, the commission concluded that a standardized, 

uniform process for resolving audit findings was necessary, and directed 

USAC to submit to FCC a proposal for resolving audit findings. FCC also 

instructed USAC to specify deadlines in its proposal “to ensure audit 

findings are resolved in a timely manner.”33 USAC submitted its Proposed 

Audit Resolution Plan to FCC on October 28, 2004. The plan memorializes 

much of the current audit process and provides deadlines for the various 

stages of the audit process. FCC released the proposed audit plan for 

public comment in December 2004.34

 31See FCC, Office of the Inspector General Semiannual Report to Congress, October 1, 

2003—March 31, 2004 (Washington, D.C.; May 3, 2004). 

32GAO/AIMD-00-21.3.1. 

33FCC, Fifth Report and Order, In the Matter of Schools and Libraries Universal Service 

Support Mechanism, FCC-04-190 (Washington, D.C.; Aug. 13, 2004), para. 74. 

34Comments were due January 5, 2005; reply comments were due January 20, 2005. 
Page 19 GAO-05-546T 

In addition to the Proposed Audit Resolution Plan, the commission 

instructed USAC to submit a report to FCC on a semiannual basis 

summarizing the status of all outstanding audit findings. The commission 

also stated that it expects USAC to identify for commission consideration 

on at least an annual basis all audit findings raising management concerns 

that are not addressed by existing FCC rules. Lastly, the commission took 

the unusual step of providing a limited delegation to the Wireline 

Competition Bureau (the bureau within FCC with the greatest share of the 

responsibility for managing the E-rate program) to address audit findings 

and to act on requests for waiver of rules warranting recovery of funds.35

These actions could help ensure, on a prospective basis, that audit findings 

are more thoroughly and quickly addressed. However, much still depends 

on timely action being taken by FCC, particularly if audit findings suggest 

the need for a rulemaking. 

In addition to problems with responding to audit findings, the audits 

conducted to date have been of limited use because neither FCC nor 

USAC have conducted an audit effort using a statistical approach that 

would allow them to project the audit results to all E-rate beneficiaries. 

Thus, at present, no one involved with the E-rate program has a basis for 

making a definitive statement about the amount of waste, fraud, and abuse 

in the program.36 Of the various groups of beneficiary audits conducted to 

date, all were of insufficient size and design to analyze the amount of fraud 

or waste in the program or the number of times that any particular 

problem might be occurring programwide. At the time we concluded our 

review, FCC and USAC were in the process of soliciting and reviewing 

responses to a Request for Proposal for audit services to conduct 

additional beneficiary audits. 

 35FCC 04-190, para. 75. 

36In testimony before the House Subcommittee on Oversight and Investigations of the 

Committee on Energy and Commerce in June 2004, FCC’s Inspector General submitted a 

prepared statement that said the “results of audits that have been performed and the 

allegations under investigation lead us to believe the program may be subject to 

unacceptably high risk of fraud, waste and abuse.” At the same hearing, the Chief of FCC’s 

Office of Strategic Planning and Policy Analysis and the Deputy Chief of FCC’s Wireline 

Competition Bureau submitted a prepared statement that said that FCC had “enabled 

implementation of the [E-rate] statutory goals with a minimum of fraud, waste, and abuse.” 
Page 20 GAO-05-546T 

Under FCC’s rules, program participants can seek review of USAC’s 

decisions,37 although FCC’s appeals process for the E-rate program has 

been slow in some cases. Because appeals decisions are used as 

precedent, this slowness adds uncertainty to the program and impacts 

beneficiaries. FCC rules state that FCC is to decide appeals within 90 days, 

although FCC can extend this period. At the time of our review there was a 

substantial appeals backlog at FCC (i.e., appeals pending for longer than 

90 days). Out of 1,865 appeals to FCC from 1998 through the end of 2004, 

approximately 527 appeals remain undecided, of which 458 (25 percent) 

are backlog appeals.38

We were told by FCC officials that some of the backlog is due to staffing 

issues. FCC officials said they do not have enough staff to handle appeals 

in a timely manner. FCC officials also noted that there has been frequent 

staff turnover within the E-rate program, which adds some delay to 

appeals decisions because new staff necessarily take time to learn about 

the program and the issues. Additionally, we were told that another factor 

contributing to the backlog is that the appeals have become more 

complicated as the program has matured. Lastly, some appeals may be tied 

up if the issue is currently in the rulemaking process. 

The appeals backlog is of particular concern given that the E-rate program 

is a technology program. An applicant who appeals a funding denial and 

works through the process to achieve a reversal and funding two years 

later might have ultimately won funding for outdated technology. FCC 

officials told us that they are working to resolve all backlogged E-rate 

appeals by the end of calendar year 2005. 

In summary, we remain concerned that FCC has not done enough to 

proactively manage and provide a framework of government 

accountability for the multibillion-dollar E-rate program. Lack of clarity 

about what accountability standards apply to the program causes 

confusion among program participants and can lead to situations where 

 37Virtually all of the decisions made by FCC and USAC in their management and 

administration of the E-rate program may be subject to petition for reconsideration or 

appeal by beneficiaries. Moreover, schools and libraries have the option of multiple appeal 

levels, including USAC, the Wireline Competition Bureau, and the commission. 

38The bulk of the appeals are to USAC, which received a total of 16,782 appeals from the 

beginning of the program through 2003. Of these, 646—roughly 4 percent—remained 

undecided as of September 20, 2004. 

FCC Has Been Slow to Act 

on Some E-Rate Appeals 

Summary 
Page 21 GAO-05-546T 

funding commitments are interrupted pending decisions about applicable 

law, such as happened with the Antideficiency Act in the fall of 2004. 

Ineffective performance goals and measures make it difficult to assess the 

program’s effectiveness and chart its future course. Weaknesses in 

oversight and enforcement can lead to misuse of E-rate funding by 

program participants that, in turn, deprives other schools and libraries 

whose requests for support were denied due to funding limitations. 

To address these management and oversight problems identified in our 

review of the E-rate program, our report recommends that the Chairman 

of FCC direct commission staff to (1) conduct and document a 

comprehensive assessment to determine whether all necessary 

government accountability requirements, policies, and practices have been 

applied and are fully in place to protect the E-rate program and universal 

service funding; (2) establish meaningful performance goals and measures 

for the E-rate program; and (3) develop a strategy for reducing the E-rate 

program’s appeals backlog, including ensuring that adequate staffing 

resources are devoted to E-rate appeals. 

We provided a draft of our report to FCC for comment. FCC said that it 

took a number of steps in 2004 to improve its management and oversight 

of the program, and anticipates taking additional steps during the coming 

year. FCC concurred with our recommendations on establishing 

performance goals and measures and developing a strategy for reducing 

the backlog of appeals. FCC did not concur with our recommendation that 

it conduct a comprehensive assessment concerning the applicability of 

government accountability requirements, policies, and practices. FCC 

maintains that it has already done so on a case-by-case basis. As noted in 

our report, however, we believe that major issues remain unresolved, such 

as the implications of FCC’s determination that the Universal Service Fund 

constitutes an appropriation under the current structure of the E-rate 

program and the extent to which FCC has delegated some program 

functions to USAC. 

We conducted our work from December 2003 through December 2004 in 

accordance with generally accepted government auditing standards. We 

interviewed officials from FCC’s Wireline Competition Bureau, 

Enforcement Bureau, Office of General Counsel, Office of Managing 

Director, Office of Strategic Planning and Policy Analysis, and Office of 

Inspector General. We also interviewed officials from USAC. In addition, 

we interviewed officials from OMB and the Department of Education 

regarding performance goals and measures. OMB had conducted its own 

Scope and 

Methodology 
Page 22 GAO-05-546T 

assessment of the E-rate program in 2003, which we also discussed with 

OMB officials. We reviewed and analyzed FCC, USAC, and OMB 

documents related to the management and oversight of the E-rate 

program. The information we gathered was sufficiently reliable for the 

purposes of our review. See our full report for a more detailed explanation 

of our scope and methodology. 

This concludes my prepared statement. I would be pleased to respond to 

any questions that you or other Members of the Committee may have. 

For further information about this testimony, please contact me at (202) 

512-2834. Edda Emmanuelli-Perez, John Finedore, Faye Morrison, and 

Mindi Weisenbloom also made key contributions to this statement. 

GAO Contact and 

Staff 

Acknowledgments 
Page 23 GAO-05-546T 

There have been questions from the start of the E-rate program regarding 

the nature of the Universal Service Fund (USF) and the applicability of 

managerial, fiscal, and financial accountability requirements to USF. FCC 

has never clearly determined the nature of USF, and the Office of 

Management and Budget (OMB), the Congressional Budget Office (CBO), 

and GAO have at various times noted that USF has not been recognized or 

treated as federal funds for several purposes.1

 However, FCC has never 

confronted or assessed these issues in a comprehensive fashion and has 

only recently begun to address a few of these issues. In particular, FCC 

has recently concluded that as a permanent indefinite appropriation, USF 

is subject to the Antideficiency Act and its funding commitment decision 

letters constitute obligations for purposes of the Antideficiency Act. As 

explained below, we agree with FCC’s determination. However, FCC’s 

conclusions concerning the status of USF raise further issues related to 

the collection, deposit, obligation, and disbursement of those funds—

issues that FCC needs to explore and resolve. 

Background 

Universal service has been a basic goal of telecommunications regulation 

since the 1950s, when FCC focused on increasing the availability of 

reasonably priced, basic telephone service. See Texas Office of Public 

Utility Counsel v. FCC, 183 F.3d 393, 405-406 (5th Cir., 1999), cert. denied 

sub nom; Celpage Inc. v. FCC, 530 U.S. 1210 (2000). FCC has not relied 

solely on market forces, but has used a combination of explicit and 

implicit subsidies to achieve this goal. Id. Prior to 1983, FCC used the 

regulation of AT&T’s internal rate structure to garner funds to support 

universal service. With the breakup of AT&T in 1983, FCC established a 

Universal Service Fund administered by the National Exchange Carrier 

 1

See GAO, Schools and Libraries Program: Application and Invoice Review Procedures 

Need Strengthening, GAO-01-105, 41. FCC’s IG has also raised questions regarding the 

nature of USF. FCC’s IG first looked at USF in 1999 as part of its audit of the commission’s 

fiscal year 1999 financial statement. During that audit, the FCC IG questioned commission 

staff regarding the nature of the fund and, specifically, whether USF was subject to the 

statutory and regulatory requirements for federal funds. In the next year’s audit, the FCC 

IG noted that the commission could not ensure that USF activities were in compliance with 

all laws and regulations because the issue of which laws and regulations were applicable to 

USF was still unresolved at the end of the audit. In the FCC IG’s reports on FCC’s financial 

statements from fiscal years 1999 to 2003, the IG consistently recommended that FCC 

management formally define in writing the financial management roles and responsibilities 

of FCC and USAC to avoid confusion and misunderstanding. 

Appendix I: Fiscal Law Issues Involving the 

Universal Service Fund 
Page 24 GAO-05-546T 

Association (NECA). NECA is an association of incumbent local 

telephone companies, also established at the direction of the FCC. Among 

other things, NECA was to administer universal service through interstate 

access tariffs and the revenue distribution process for the nation’s local 

telephone companies. At that time, NECA, a nongovernmental entity, 

privately maintained the Universal Service Fund outside the U.S. Treasury. 

Section 254 of the Telecommunications Act of 1996 codified the concept of 

universal service and expanded it to include support for acquisition by 

schools and libraries of telecommunications and Internet services. Pub. L. 

No. 104-104, § 254, 110 Stat. 56 (1996) (classified at 47 U.S.C. § 254). The 

act defines universal service, generally, as a level of telecommunications 

services that FCC establishes periodically after taking into account various 

considerations, including the extent to which telecommunications services 

are essential to education, public health, and public safety. 47 U.S.C. § 254 

(c)(1). The act also requires that “every telecommunications carrier that 

provides interstate telecommunications services shall contribute . . . to the 

specific, predictable, and sufficient mechanisms” established by FCC “to 

preserve and advance universal service.” Id., §254 (d). The act did not 

specify how FCC was to administer the E-rate program, but required FCC, 

acting on the recommendations of the Federal-State Joint Board, to define 

universal service and develop specific, predictable, and equitable support 

mechanisms. 

FCC designated the Universal Services Administrative Company (USAC), a 

nonprofit corporation that is a wholly owned subsidiary of NECA, as the 

administrator of the universal service mechanisms.2

 USAC administers the 

program pursuant to FCC orders, rules, and directives. As part of its 

duties, USAC collects the carriers’ universal service contributions, which 

constitute the Universal Service Fund, and deposits them to a private bank 

account under USAC’s control and in USAC’s name. FCC has directed the 

use of USF to, among other things, subsidize advanced 

telecommunications services for schools and libraries in a program 

 2

In 1998, we issued a legal opinion on the then-current structure of the E-rate program 

where FCC directed the creation of the Schools and Libraries Corporation to administer 

the universal service program. Under the Government Corporation Control Act, an agency 

must have specific statutory authority to establish a corporation. 31 U.S.C. § 9102. We 

concluded that FCC did not have authority to create a separate independent corporation to 

administer the E-rate program. B-278820, Feb. 10, 1998. Subsequently, FCC eliminated the 

Schools and Libraries Corporation as a separate entity, and restructured the universal 

service program to its present form. 
Page 25 GAO-05-546T 

commonly referred to as the E-rate program.3 Pursuant to the E-rate 

program, eligible schools and libraries can apply annually to receive 

support and can spend the funding on specific eligible services and 

equipment, including telephone services, Internet access services, and the 

installation of internal wiring and other related items. Generally, FCC 

orders, rules, and directives, as well as procedures developed by USAC, 

establish the program’s criteria. USAC carries out the program’s day-today operations, such as answering inquiries from schools and libraries; 

processing and reviewing applications; making funding commitment 

decisions and issuing funding commitment decision letters; and collecting, 

managing, investing, and disbursing E-rate funds. 

Eligible schools and libraries may apply annually to receive E-rate support. 

The program places schools and libraries into various discount categories, 

based on indicators of need. As a result of the application of the discount 

rate to the cost of the service, the school or library pays a percentage of 

the cost for the service and the E-rate program covers the remainder. Erate discounts range from 20 percent to 90 percent. 

Once the school or library has complied with the program’s requirements 

and entered into agreements with vendors for eligible services, the school 

or library must file a form with USAC noting the types and costs of the 

services being contracted for, the vendors providing the services, and the 

amount of discount being requested. USAC reviews the forms and issues 

funding commitment decision letters.4

 The funding commitment decision 

letters notify the applicants of the decisions regarding their E-rate 

discounts. These funding commitment decision letters also notify the 

applicants that USAC will send the information on the approved E-rate 

discounts to the providers so that “preparations can be made to begin 

implementing . . . E-rate discount(s) upon the filing [by the applicant] of . . 

. Form 486.” The applicant files FCC Form 486 to notify USAC that 

services have started and USAC can pay service provider invoices. 

Generally, the service provider seeks reimbursement from USAC for the 

discounted portion of the service, although the school or library also could 

pay the service provider in full and then seek reimbursement from USAC 

for the discount portion. 

 3

The term “E-rate” evolved from some individuals referring to the program as the 

“Education” rate. 

4

USAC could reduce the amount requested if the school or library has included ineligible 

services in its application or has calculated its discount category incorrectly. 
Page 26 GAO-05-546T 

What Is the Universal Service Fund? 

The precise phrasing of the questions regarding the nature of USF has 

varied over the years, including asking whether they are federal funds, 

appropriated funds, or public funds and, if so, for what purposes? While 

the various fiscal statutes may use these different terms to describe the 

status of funds, we think the fundamental issue is what statutory controls 

involving the collection, deposit, obligation, and disbursement of funds 

apply to USF. As explained below, funds that are appropriated funds are 

subject, unless specifically exempted by law, to a variety of statutory 

provisions providing a scheme of funds controls. See B-257525, Nov. 30, 

1994; 63 Comp. Gen. 31 (1983); 35 Comp. Gen. 436 (1956); B-204078.2, May 

6, 1988. On the other hand, funds that are not appropriated funds are not 

subject to such controls unless the law specifically applies such controls. 

Thus, we believe the initial question is whether USF funds are 

appropriated funds. 

FCC has concluded that USF constitutes a permanent indefinite 

appropriation. We agree with FCC’s conclusion. Typical language of 

appropriation identifies a fund or account as an appropriation and 

authorizes an agency to enter into obligations and make disbursements 

out of available funds. For example, Congress utilizes such language in 

the annual appropriations acts. See 1 U.S.C. § 105 (requiring regular 

annual appropriations acts to bear the title “An Act making 

appropriations. . .”). Congress, however, appropriates funds in a variety of 

ways other than in regular annual appropriation acts.5

 Indeed, our 

decisions and those of the courts so recognize. 

Thus, a statute that contains a specific direction to pay, and a designation 

of funds to be used, constitutes an appropriation. 63 Comp. Gen. 331 

(1984); 13 Comp. Gen. 77 (1933). In these statutes, Congress (1) 

authorizes the collection of fees and their deposit into a particular fund, 

and (2) makes the fund available for expenditure for a specified purpose 

without further action by Congress. This authority to obligate or expend 

 5

Congress has recognized that an appropriation is a form of budget authority that makes 

funds available to an agency to incur obligations and make expenditures in a number of 

different statutes. For example, see 2 U.S.C. § 622(2)(A)(i) (budget authority includes 

“provisions of law that make funds available for obligation and expenditure . . . including 

the authority to obligate and expend the proceeds of offsetting receipts and collections”) 

and 31 U.S.C. § 701(2)(C) (appropriations include “other authority making amounts 

available for obligation or expenditure”). 
Page 27 GAO-05-546T 

collections without further congressional action constitutes a continuing 

appropriation or a permanent appropriation of the collections. E.g., 

United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (D.C. Cir. 1965), cert. 

denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 262 (1990); 73 Comp. Gen. 

321 (1994). Our decisions are replete with examples of permanent 

appropriations, such as revolving funds and various special deposit funds, 

including mobile home inspection fees collected by the Secretary of 

Housing and Urban Development,6

 licensing revenues received by the 

Commission on the Bicentennial,7

 tolls and other receipts deposited in the 

Panama Canal Revolving Fund,8

 user fees collected by the Saint Lawrence 

Seaway Development Corporation,9

 user fees collected from tobacco 

producers to provide tobacco inspection, certification and other services,10

and user fees collected from firms using the Department of Agriculture’s 

meat grading services.11 It is not essential for Congress to expressly 

designate a fund as an appropriation or to use literal language of 

“appropriation,” so long as Congress authorizes the expenditure of fees or 

receipts collected and deposited to a specific account or fund.12 In cases 

where Congress does not intend these types of collections or funds to be 

considered “appropriated funds,” it explicitly states that in law. See e.g., 

12 U.S.C. § 244 (the Federal Reserve Board levies assessments on its 

member banks to pay for its expenses and “funds derived from such 

assessments shall not be construed to be government funds or 

appropriated moneys”); 12 U.S.C. § 1422b(c) (the Office of Federal 

Housing Enterprise Oversight levies assessments upon the Federal Home 

Loan Banks and from other sources to pay its expenses, but such funds 

“shall not be construed to be government funds or appropriated monies, or 

subject to apportionment for the purposes of chapter 15 of title 31, or any 

other authority”). 

Like the above examples, USF’s current authority stems from a statutorily 

authorized collection of fees from telecommunication carriers, and 

 6

59 Comp. Gen. 215 (1980). 

7

B-228777, Aug. 26, 1988. 

8

B-204078.2, May 6, 1988 and B-257525, Nov. 30, 1994. 

9

B-193573, Jan. 8, 1979; B-193573, Dec. 19, 1979; B-217578, Oct. 16, 1986. 

1063 Comp. Gen. 285 (1984). 

11B-191761, Sept. 22, 1978. 

12B-193573, Dec. 19, 1979. 
Page 28 GAO-05-546T 

expenditures for a specified purpose—that is, the various types of 

universal service.13 Thus, USF meets both elements of the definition of a 

permanent appropriation. 

We recognize that prior to the passage of the Telecommunications Act of 

1996, there existed an administratively sanctioned universal service fund. 

With the Telecommunications Act of 1996, Congress specifically expanded 

the contribution base of the fund, statutorily mandated contributions into 

the fund, and designated the purposes for which the monies could be 

expended. These congressional actions established USF in a manner that 

meets the elements for a permanent appropriation and Congress did not 

specify that USF should be considered anything other than an 

appropriation.14 

Does the Antideficiency Act Apply to USF? 

Appropriated funds are subject to a variety of statutory controls and 

restrictions. These controls and restrictions, among other things, limit the 

purposes for which they may be used and provide a scheme of funds 

control. See e.g., 63 Comp. Gen. 110 (1983); B-257525, Nov. 30, 1994; B228777, Aug. 26, 1988; B-223857, Feb. 27, 1987; 35 Comp. Gen. 436 (1956). 

A key component of this scheme of funds control is the Antideficiency Act. 

B-223857, Feb. 27, 1987. The Antideficiency Act15 has been termed “the 

cornerstone of congressional efforts to bind the executive branch of 

 13The United States Court of Appeals for the Fifth Circuit has recognized the governmental 

character of the funds. Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393, 426-

428 (5th Cir., 1999), cert. denied sub nom; Celpage Inc. v. FCC, 530 U.S. 1210 2212 (2000). 

The Fifth Circuit held that USF funds are statutorily mandated special assessments 

supporting a federal program mandated by Congress. FCC has also requested that the 

Department of Justice recognize that USF are federal funds for purposes of representing 

FCC and the United States in litigation involving USF, such as the False Claims Act. 

14The Senate passed a “sense of the Senate” provision that stated, “Federal and State 

universal service contributions are administered by an independent nonfederal entity and 

are not deposited into the federal Treasury and therefore are not available for federal 

appropriations.” See section 614, H.R. 2267, as passed by the Senate (Oct. 1, 1997). 

However, the purpose of that resolution was to respond to an attempt to withhold USF 

payments as a means to balance the federal budget or achieve budget savings. We 

understand section 614, H.R. 2267 intended to insulate USF from budgetary pressures and 

not to express a view on the proper fiscal treatment of USF. Our interpretation of USF as a 

permanent appropriation is consistent with the intent that USF is only available for 

universal service and could only be changed if Congress amended the law to permit USF to 

be used for other purposes. 

1531 U.S.C. §§ 1341, 1342 and 1517. 
Page 29 GAO-05-546T 

government to the limits on expenditure of appropriated funds.”16 

Primarily, the purpose of the Antideficiency Act is to prevent the 

obligation and expenditure of funds in excess of the amounts available in 

an appropriation or in advance of the appropriation of funds. 31 U.S.C. § 

1341(a)(1). FCC has determined that the Antideficiency Act applies to 

USF, and as explained below, we agree with FCC’s conclusion. 

The Antideficiency Act applies to “officer[s] or employee[s] of the United 

States Government . . . mak[ing] or authoriz[ing] an expenditure or 

obligation . . . from an appropriation or fund.” 31 U.S.C. § 1341(a). As 

established above, USF is an “appropriation or fund.” The fact that USAC, 

a private entity whose employees are not federal officers or employees, is 

the administrator of the E-rate program and obligates and disburses funds 

from USF is not dispositive of the application of the Antideficiency Act. 

This is because, as the FCC recognizes, it, not USAC, is the entity that is 

legally responsible for the management and oversight of the E-rate 

program and FCC’s employees are federal officers and employees of the 

United States subject to the Antideficiency Act.17 

Where entities operate with funds that are regarded as appropriated funds, 

such as some government corporations, they, too, are subject to the 

Antideficiency Act. See e.g., B-223857, Feb. 27, 1987 (funds available to 

Commodity Credit Corporation pursuant to borrowing authority are 

subject to Antideficiency Act); B-135075-O.M., Feb. 14, 1975 (InterAmerican Foundation). The Antideficiency Act applies to permanent 

appropriations such as revolving funds18 and special funds. 72 Comp. Gen. 

59 (1992) (Corps of Engineers Civil Works Revolving Fund subject to 

Antideficiency Act); B-120480, Sep. 6, 1967, B-247348, June 22, 1992, and B260606, July 25, 1997 (GPO revolving funds subject to Antideficiency Act); 

 16Hopkins & Nutt, The Anti-Deficiency Act (Revised Statutes 3679) and Funding Federal 

Contracts: An Analysis, 80 Mil. L. Rev. 51, 56 (1978). 

17Under FCC’s rules, USAC is prohibited from making policy, interpreting unclear 

provisions of the statute or rules, or interpreting the intent of Congress. 47 C.F.R. § 

54.702(c). As addressed below, one of the issues that remains to be resolved is whether 

USAC is authorized to take the actions that obligate and disburse USF funds pursuant to 

FCC orders, rules, and directives or whether FCC must implement additional steps to 

ensure that obligations and disbursements are specifically authorized by FCC officials and 

employees. 

18Revolving funds are funds authorized by law to be credited with collections and receipts 

from various sources that generally remain available for continuing operations of the 

revolving fund without further congressional action. See 72 Comp. Gen. 59 (1992). 
Page 30 GAO-05-546T 

71 Comp. Gen. 224 (1992) (special fund that receives fees, 

reimbursements, and advances for services available to finance its 

operations is subject to Antideficiency Act). 

Where Congress intends for appropriated funds to be exempt from the 

application of statutory controls on the use of appropriations, including 

the Antideficiency Act, it does so expressly. See e.g., B-193573, Jan. 8, 

1979; B-193573, Dec. 19, 1979; B-217578, Oct. 16, 1986 (Saint Lawrence 

Seaway Development Corporation has express statutory authority to 

determine the character and necessity of its obligations and is therefore 

exempt from many of the restrictions on the use of appropriated funds 

that would otherwise apply); B-197742, Aug. 1, 1986 (Price-Anderson Act 

expressly exempts the Nuclear Regulatory Commission from 

Antideficiency Act prohibition against obligations or expenditures in 

advance or in excess of appropriations). There is no such exemption for 

FCC or USF from the prohibitions of the Antideficiency Act. Thus, USF is 

subject to the Antideficiency Act. 

Do the Funding Commitment Decision Letters Issued to Schools 

and Libraries Constitute Obligations? 

An important issue that arises from the application of the Antideficiency 

Act to USF is what actions constitute obligations chargeable against the 

fund. Understanding the concept of an obligation and properly recording 

obligations are important because an obligation serves as the basis for the 

scheme of funds control that Congress envisioned when it enacted fiscal 

laws such as the Antideficiency Act. B-300480, Apr. 9, 2003. For USF’s 

schools and libraries program, one of the main questions is whether the 

funding commitment decision letters issued to schools and libraries are 

properly regarded as obligations. FCC has determined that funding 

commitment decision letters constitute obligations. And again, as 

explained below, we agree with FCC’s determination. 

Under the Antideficiency Act, an agency may not incur an obligation in 

excess of the amount available to it in an appropriation or fund. 31 U.S.C. 

§ 1341(a). Thus, proper recording of obligations with respect to the timing 

and amount of such obligations permits compliance with the 

Antideficiency Act by ensuring that agencies have adequate budget 
Page 31 GAO-05-546T 

authority to cover all of their obligations.19 B-300480, Apr. 9, 2003. We 

have defined an “obligation” as a “definite commitment that creates a legal 

liability of the government for the payment of goods and services ordered 

or received.” Id. A legal liability is generally any duty, obligation or 

responsibility established by a statute, regulation, or court decision, or 

where the agency has agreed to assume responsibility in an interagency 

agreement, settlement agreement or similar legally binding document. Id. 

citing to Black’s Law Dictionary 925 (7th ed. 1999). The definition of 

“obligation” also extends to “[a] legal duty on the part of the United States 

which constitutes a legal liability or which could mature into a legal 

liability by virtue of actions on the part of the other party beyond the 

control of the United States. . . .” Id. citing to 42 Comp. Gen. 733 (1963); see 

also McDonnell Douglas Corp. v. United States, 37 Fed. Cl. 295, 301 

(1997). 

The funding commitment decision letters provided to applicant schools 

and libraries notify them of the decisions regarding their E-rate discounts. 

In other words, it notifies them whether their funding is approved and in 

what amounts. The funding commitment decision letters also notify 

schools and libraries that the information on the approved E-rate 

discounts is sent to the providers so that “preparations can be made to 

begin implementing . . . E-rate discount(s) upon the filing [by applicants] 

of . . . Form 486.” The applicant files FCC Form 486 to notify USAC that 

services have started and USAC can pay service provider invoices. At the 

time a school or library receives a funding commitment decision letter, the 

FCC has taken an action that accepts a “legal duty . . . which could mature 

into a legal liability by virtue of actions on the part of the grantee beyond 

the control of the United States.” Id. citing 42 Comp. Gen. 733, 734 (1963). 

In this instance, the funding commitment decision letter provides the 

school or library with the authority to obtain services from a provider with 

the commitment that it will receive a discount and the provider will be 

reimbursed for the discount provided. While the school or library could 

decide not to seek the services or the discount, so long as the funding 

commitment decision letter remains valid and outstanding, USAC and FCC 

no longer control USF’s liability; it is dependent on the actions taken by 

 19Legal liability for obligational accounting and to comply with the Antideficiency Act and 

the Recording Statute, 31 U.S.C. § 1501 is distinct from accounting liabilities and 

projections booked in its proprietary accounting systems for financial statement purposes. 

For proprietary accounting purposes, a liability is probable and measurable future outflow 

or other sacrifice of resources as a result of past transactions or events. See B-300480, Apr. 

9, 2003, and FASAB Statement of Federal Financial Accounting Standards Number 1. 
Page 32 GAO-05-546T 

the other party—that is, the school or library. In our view, a recordable 

USF obligation is incurred at the time of issuance of the funding 

commitment decision letter indicating approval of the applicant’s 

discount. Thus, these obligations should be recorded in the amounts 

approved by the funding commitment decision letters. If at a later date, a 

particular applicant uses an amount less than the maximum or rejects 

funding, then the obligation amount can be adjusted or deobligated, 

respectively. 

Additional issues that remain to be resolved by FCC include whether other 

actions taken in the universal service program constitute obligations and 

the timing of and amounts of obligations that must be recorded. For 

example, this includes the projections and data submissions by USAC to 

FCC and by participants in the High Cost and Low Income Support 

Mechanisms to USAC. FCC has indicated that it is considering this issue 

and consulting with the Office of Management and Budget. FCC should 

also identify any other actions that may constitute recordable obligations 

and ensure those are properly recorded. 

(543127) 
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