PROBLEMS WITH THE E-RATE PROGRAM: WASTE,

FRAUD, AND ABUSE CONCERNS IN THE WIRING

OF OUR NATION’S SCHOOLS TO THE INTERNET

Part 3

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

SEPTEMBER 22, 2004

Serial No. 108–124

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

PROBLEMS WITH THE E-RATE PROGRAM: WASTE, FRAUD, AND ABUSE CONCERNS IN

THE WIRING OF OUR NATION’S SCHOOLS TO THE INTERNET—Part 3

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PROBLEMS WITH THE E-RATE PROGRAM: WASTE,

FRAUD, AND ABUSE CONCERNS IN THE WIRING

OF OUR NATION’S SCHOOLS TO THE INTERNET

Part 3

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

SEPTEMBER 22, 2004

Serial No. 108–124

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

2

COMMITTEE ON ENERGY AND COMMERCE

JOE BARTON, Texas, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

RALPH M. HALL, Texas

MICHAEL BILIRAKIS, Florida

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi, Vice Chairman

VITO FOSSELLA, New York

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

DARRELL E. ISSA, California

C.L. ‘‘BUTCH’’ OTTER, Idaho

JOHN SULLIVAN, Oklahoma

JOHN D. DINGELL, Michigan

Ranking Member

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

TOM ALLEN, Maine

JIM DAVIS, Florida

JANICE D. SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

BUD ALBRIGHT, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

RICHARD BURR, North Carolina

CHARLES F. BASS, New Hampshire

GREG WALDEN, Oregon

Vice Chairman

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

JOE BARTON, Texas,

(Ex Officio)

PETER DEUTSCH, Florida

Ranking Member

DIANA DEGETTE, Colorado

TOM ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Bohuchot, Ruben, Chief Technology Officer, Associate Superintendent,

Dallas Independent School District ............................................................. 141

Caine, Christopher G., Vice President, Government Programs, IBM, accompanied by Mike Pratt ............................................................................. 245

Carlisle, Jeffrey, Chief, Wireline Competition Bureau, Federal Communications Commission ................................................................................... 20

Feaster, Walker, III, Inspector General, Federal Communications Commission; accompanied by Thomas Cline, Assistant Inspector General,

Audits, Federal Communications Commission; .......................................... 8

Foster, Sharon, Technology Information Systems Director, Ysleta

Independant School District ......................................................................... 148

Glogovac, Paula, former E-Rate Consultant to Sun Microsystems .............. 155

Green, Judy, former E-Rate Consultant, Video Network Communications;

accompanied by Quentin Lawson, Executive Director, National Alliance

for Black Educators; Carl Muscari, former President and CEO, Video

Network Communications; Robert McCain, Program Manager, NEC

BNS; Emma Epps, Superintendent, Ecorse Public School District;

Douglas Benit, former Facilities Director, Ecorse Public School District;

and William Singleton, Superintendent, Jasper County Schools,

Ridgeland, South Carolina ........................................................................... 51

Hawthorne, Nathaniel, General Counsel, Alpha Telecommunications, Incorporated ...................................................................................................... 196

McDonald, George, Vice President, Schools and Libraries Division, Universal Service Administration Company ..................................................... 15

Tafoya, Charles, Superintendent, El Paso Independent School District ..... 123

(III)

(1)

PROBLEMS WITH THE E-RATE PROGRAM:

WASTE, FRAUD, AND ABUSE CONCERNS IN

THE WIRING OF OUR NATION’S SCHOOLS

TO THE INTERNET—Part 3

WEDNESDAY, SEPTEMBER 22, 2004

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2123, Rayburn House Office Building, Hon. Joe Barton, (acting

chairman of the subcommittee) presiding.

Members present: Representatives Stearns, Bass, Walden, Rogers, Barton (ex officio), Deutsch, and DeGette.

Also present: Representative Bono.

Staff present: Mark Paoletta, majority counsel; Tom Feddo, majority counsel; Peter Spencer, majority professional staff; Jaylyn

Jensen, majority professional staff; Michael Abraham, legislative

clerk; David Nelson, minority counsel; and Jessica McNiece, minority clerk.

Chairman BARTON. The subcommittee will come to order. Today,

we are continuing a series of hearings by the Oversight and Investigations Subcommittee of the Energy and Commerce Committee

on problems with the E-Rate program, waste, fraud, abuse concerns in the wiring of our Nation’s schools to the Internet.

We are going to have three panels. The first panel is a panel of

Federal officials responsible for overseeing the program, approving

the program, and monitoring compliance with the regulations for

the program. Our next two panels consist of officials of local school

districts and various private vendors and consultants who have assisted those districts in applying for and using funds within the

program.

This hearing is going to resume our focus on problems with the

front end of the E-Rate process, the critical area of the program

where applicants must take certain required steps to plan and

choose the products and services that they wish E-Rate to support.

Failure to take the right steps at the beginning of the process can

result in wasteful spending, if not fraud and abuse, when the Erate funds begin to flow.

This hearing will also resume the subcommittee’s examination of

a bid-rigging conspiracy involving a large vendor, NEC BNS, which

affected E-rate applications in a number of school districts around

the country. In late May of this year, the NEC pled guilty to conVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 96098.TXT HCOM1 PsN: HCOM1
2

spiring to eliminate competition in E-rate projects and also to wire

fraud.

This past July, we examined this conspiracy largely in connection

with the San Francisco Unified School District. We heard about a

fraudulent $50 million application that passed the normal approval

process and was thankfully eventually stopped because one key individual, that district’s superintendent, took responsibility and

turned down the questionable funding and launched an internal investigation. In that case, because of that superintendent’s responsible actions, E-rate funds did not flow into the conspirator’s hands.

In contrast, we are going to look at a couple of districts where

the superintendents did not stop the questionable funding, where

E-rate funds were expended, and we will examine how the school

districts abdicated their duty to responsibly manage the people’s

money.

Four of the witnesses in connection with the topic today declined

to appear voluntarily. Therefore, this committee had to issue subpoenas last week to command their presence and testimony. Among

those that we had to subpoena that are here today are the superintendent of the Ecorse Michigan Public School District, Dr. Emma

Epps, and the former facilities director for Ecorse, Dr. Douglas

Benit. Both of these school officials can help us, if they will, understand how Ecourse became involved with NEC BNS and how they

developed plans to spend E-rate funds, including spending on goods

and services that were ineligible for E-rate discounts.

We also have Mr. Quentin Lawson, the executive director of the

National Alliance of Black School Educators, NABSE. He can explain how NABSE assisted school districts with their E-rate plans

and how NEC BNS became involved with these plans.

We have also issued a subpoena to Mrs. Judith Green, an E-rate

consultant and former employee of VNCI, a now defunct company

that supplied E-rate gear to school districts through NEC BNS. Although U.S. marshals were not able to serve Mrs. Green to command her appearance at our July hearing, she has been successfully served this time, and we have provided her another opportunity to explain what she knows about the NEC BNS conspiracy.

A well-run E-Rate program requires a high degree of accountability on the part of applicants, vendor participants and the managers of the program, both at the Universal Service Administrative

Company, or USAC, and the Federal Communications Commission,

the FCC. There are many key questions we must address on this

front. For example, how do we ensure that school districts have

done their homework, as the program requires, and have planned

and decided what they need from E-rate before they choose vendors? How do we ensure that the competitive bidding for goods and

services has been conducted properly and truly is competitive? How

do we ensure that vendors and consultants do not insinuate their

advice inappropriately in this process?

To help us answer these questions, another aspect of this hearing

involves a case where about 20 school districts applied for a total

of $500 million in E-rate support but were rejected for the funding

by USAC, the E-rate administrator, because they did not select Erate goods and services competitively. The year before this massive

rejection, the El Paso Independent School District, which is the

3

seventh largest district in Texas, applied for and received E-rate

discounts using the very same methods later identified by the FCC

as undermining the competitive process. It is notable that El Paso E-rate support increased by some $64 million in a single year. In other words, it went from around $4

million 1 year to around $67 million, I believe, the next year when

it deployed this strategy to use a single vendor as a so-called strategic technology integrator for the purposes of E-rate work. El

Paso’s public request for this integrator made clear that the district

had not yet determined what goods and services it would seek on

E-rate applications, thus suggesting that the winning vendor would

become closely involved in the subsequent E-rate planning process.

The success of El Paso’s funding request appears to have influenced school district decisions around the region the very next

year. In other words, the word got out that there was easy money

to be had. Those districts that decided to implement a strategy

similar to El Paso’s fortunately, for the taxpayers, were later rejected because the strategy did undermine competition.

We will hear from the vendor that served El Paso as the integrator, IBM, about its role in the process today. We will also hear

from several of the school districts and from other witnesses who

can shed light on how the process unfolded. I am hopeful they can

explain how the public came to be so poorly served.

What happened in El Paso and in the other districts will provide

for this subcommittee a window into the program setup, the quality

of planning by school districts and the impacts on price and eligibility of services when competition is not able to flourish. Throughout this review, I have remained very troubled by the performance

of the FCC and USAC at actually rooting out waste, fraud, and

abuse. They are supposed to be guardians of the public trust. In

many cases, in my opinion, they have failed to adequately discharge their oversight responsibility. These case studies today will

further illuminate problems that we found within their oversight of

the program. The pace and scope of program reforms have been, in

many cases, too little and too late.

Finally, and more fundamentally, I have serious concerns about

why the FCC set up the program this way in the first place. From

the evidence emerging from the series of hearings, this program

needs wholesale restructuring.

With that said, I look forward to hearing from the USAC and the

FCC as well as the numerous other witnesses at this hearing

today. I look forward to getting clear answers so that we can do

our job as the oversight committee to reform the program, so that

the public trust is not squandered. I want to welcome all of our

panelists and, with that, I would recognize the distinguished ranking member of the subcommittee, Mr. Deutsch of Florida, for any

opening statement which he wishes to make.

Mr. DEUTSCH. Thank you, Mr. Chairman, for recognizing me for

the purpose of making an opening statement. As you are aware,

the opportunity to make opening statements, which has long been

recognized in the Committee on Energy and Commerce on a bipartisan basis as a member’s right, was denied members on Wednesday, September 15. Before proceeding with my initial remarks, let

me note that next Congress, regardless of who is in the majority,

4

members will have an opportunity to debate and vote on the serious break with committee precedent and tradition. In the interim,

I strongly urge that committee precedent and tradition be respected. Again, I want to thank you for recognizing me for this

opening statement this morning.

Mr. Chairman, I commend you for holding this hearing and the

investigation that has led up to today’s inquiry. The E-Rate program has far-reaching consequences and is among those that determine the economic health and security of this Nation for years to

come. Congress enacted the E-Rate program to assure that all of

our children have schools and libraries that connect to the Internet.

Seven years and over $15 billion later, the program has not yet

achieved that goal.

In fairness, there has been some marvelous success stories. In

those instances where competent administrators have combined Erate funds with other funding sources and good planning, they

have produced classrooms where first graders do Powerpoint presentations and third graders forecast weather. Unfortunately, this is

clearly not the norm.

Mr. Chairman, this subcommittee has a history of exposing

waste, fraud and abuse in Federal programs. We have usually been

able to proceed on a bipartisan basis because it is in the interest

of everyone to expose and halt such practices. In this investigation,

the subcommittee has unfortunately hit the trifecta. Our first hearing focused on waste—$100 million spent in Puerto Rico for highspeed Internet, yet the two computers per school were connected to

the Internet via dial-up modems provided from local funds. All Erate funds were wasted. Our second hearing focused on fraud. NEC

Corporation paid $20 million in fines and pled guilty to criminal

charges involving bid-rigging of an E-rate contract in San Francisco

and elsewhere. Local officials stopped the fraud from coming to fruition in San Francisco. Two of the school districts where NEC and

its co-conspirators fraudulently obtained funds will be part of today’s hearings.

This hearing really focuses on abuse of the program. One of the

premier technology corporations, IBM, devised schemes to appropriate virtually all of the funds available for wiring 30,000 schools

and school districts in the country to a handful of school districts

that agreed to become strategic partners with that company in use

of E-rate funds. In 2002, school districts listing IBM as a primary

vendor submitted applications totaling about $1 billion in costs to

wire the internal connections in a handful of school districts.

The applications were modeled on its, ‘‘success,’’ in El Paso,

Texas where IBM managed to spend $69 million the year before to

supply those schools with equipment and services that far exceeded

the ability of the district to effectively utilize them. This gold-plate

equipment was installed without the necessary discussions and

teacher trainings. Much of it has gone unused. A prime example is

the $27 million spent on a help desk that the extent that such

funds might have been eligible for E-rate funds largely duplicated

the warranties that should have come with the installed equipment. That desk operated for only a couple of months and provided

no present-day benefit for the school children of El Paso.

5

Mr. Chairman, you and your staff have indeed documented how

a program that was enacted to serve such an important goal has

been derailed by incompetent administration, greedy vendors and

in some cases ill-prepared local school officials. The IBM case study

demonstrates once again how this program that is supposed to benefit our children has been captured by vendors whose only interest

is fattening their own pockets. E-rate was designed to close the digital divide, to close the gap between those children whose parents

could afford to provide them with a computer connected to the

Internet at home, whose community schools taught them how to

utilize the unlimited information available on the World Wide Web,

to make a place for themselves in this increasingly technologically

dependent economy and those Americans who are not so advantaged.

It is these children, the children of America’s hardworking families whose jobs have been lost to competition from cheap foreign

labor who must access the new technology if they have any hope

of being part of the economic future of this country. And this country can ill-afford to be a Nation divided between the competitive

and the ill-equipped. Look forward to the testimony.

Chairman BARTON. I thank the distinguished ranking member of

Florida for that opening statement. Before he recognizes the vice

chairman, I’d just like to take a point of personal privilege to point

out that the Chair held the start of this hearing for 15 minutes so

that the distinguished ranking member could be here to give that

statement.

Mr. DEUTSCH. I thank you.

Chairman BARTON. And we have honored the tradition of opening statements on both sides in every hearing this committee has

done this year except one when it was the chairman’s judgment

that the political implications of that particular subject did not rise

to the requirement that the opening statements tradition should be

honored. So if we can keep the purpose of the hearings and the legislation under consideration to be constructive, there won’t be any

restrictions on opening statements.

And with that, the Chair would recognize the distinguished vice

chairman of the subcommittee, Mr. Walden of Oregon, for an opening statement.

Mr. WALDEN. Thank you, Mr. Chairman, and thank you for your

work on this and many other issues. Today, as you said, we will

continue to explore a critical issue with respect to our oversight of

the E-Rate program, and that is how well does the application

process ensure that applicants have taken the appropriate steps to

choose the most cost-effective E-rate goods and services? This is a

central issue with this program. Weaknesses upfront in the application process, be it the planning or the competitive process, to

choose the goods and services for E-rate support paves the way either to effective educational enhancements, as envisioned for the

program, or to the waste and abuse of limited resources.

Incentives really matter. When a program is designed to provide

recipients and applicants access to others’ money, there is a powerful incentive to buy more than is needed. And when tens of millions

of dollars are at issue, there is a very powerful incentive to spend

wastefully. To prevent such wasteful spending, the program must

6

deploy measures that enhance the incentives that ensure efficient

and effective spending for schools and libraries.

At today’s hearing, we will approach this from several perspectives. We will continue to look at the impact of the NEC BNS conspiracy we heard testimony about this past July and the involvement of certain schools in this mess. We will also focus on the planning and decisions by school districts that pursued a procurement

method advertised as useful for, ‘‘maximizing,’’ E-rate funding.

And we will hear today about school districts’ obligations to do

their homework so that what they ask for can be put to use. I am

interested to learn more from our witnesses about the burdens of

planning and also about the ways to plan properly so that districts

don’t bite off more than they can chew. I am interested to learn

how we can strengthen the incentives to plan properly. I would also

like to learn if efforts to improve certifications on the applications

are sufficient for this task. Planning is essential. Also essential is

to know the rules and understand what is necessary for a competitive process to flourish.

We will hear today about a case where competition did not flourish and where it appears that school districts really did not fully

plan out what they needed for the program. The result was tens

of millions of dollars of questionable spending in one poor school

district. In another school district, the result was an application

that asked for more than what the district really needed. Fortunately, the district took subsequent steps to scale back the request,

but I am not sure that is what normally happens.

What is the responsibility of the vendor in these situations? Despite a powerful incentive to sell and do business, vendors must

play by the E-rate rules as well. So today we will be able to learn

about the responsibilities of vendors in this process and whether

the requirements and rules are clear and sufficient to ensure that

vendors participate appropriately.

One of the foremost issues we must address is accountability.

Today, we will hear about accountability from all parties—the

school districts, the vendors, and the agency charged with overseeing the program—and I think this is critical for our oversight

of this very important program. So I look forward to welcoming the

witnesses, and I would especially like to thank the efforts made by

Charles Tafoya of El Paso Independent School District who will

join us by video conference link today. We appreciate his efforts, especially given the last minute complications in his plans to attend

the hearing.

Thank you, Mr. Chairman, and I will yield back whatever time

remains.

Chairman BARTON. We thank the gentleman of Oregon for that

opening statement and recognize the gentleman of Michigan, Mr.

Rogers, for any opening statement he wishes to make. The gentleman yields.

The Chair would ask unanimous consent that all members of the

subcommittee not present have the requisite number of days to put

their opening statements formally in the record. Without objection,

so ordered.

[Additional statement submitted for the record follows:]

7

PREPARED STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OREGON

Thank you, Mr. Chairman. Today we will continue to explore a critical issue with

respect to our oversight of the E-rate program. And that is: how well does the application process ensure that applicants have taken the appropriate steps to choose the

most cost-effective E-rate goods and services?

This is a central issue with this program. Weaknesses up front in the application

process—be it the planning or the competitive process to choose the goods and services for E-rate support—paves the way either to effective educational enhancements

envisioned for the program or to the waste and abuse of limited resources.

Incentives really matter. When a program is designed to provide recipients and

applicants access to other people’s money, there is a powerful incentive to buy more

than is needed. And when tens of millions of dollars are at issue, there is a powerful

incentive to spend wastefully.

To prevent such wasteful spending, the program must deploy measures that enhance the incentives that ensure efficient and effective spending for schools and libraries.

At today’s hearing we will approach this from several perspectives; we will continue to look at the impact of the NEC-BNS conspiracy we heard testimony about

this past July, and the involvement of certain schools in this mess; we will also

focus on the planning and decisions by school districts that pursued a procurement

method advertised as useful for ‘‘maximizing’’ E-rate funding.

We’ll hear today about school districts’ obligations to do their homework, so what

they ask for can be put to use. I’m interested to learn more from our witnesses

about the burdens of planning, and also about the ways to plan properly so districts

don’t ‘‘bite off more than they can chew.’’ I’m interested to learn how we can

strengthen the incentives to plan properly. I would like to learn if efforts to improve

certifications on the applications are sufficient for this task.

Planning is essential. Also essential is to know the rules and to understand what

is necessary for a competitive process to flourish.

We’ll hear today about a case where competition did not flourish and where it appears that school districts really did not fully plan out what they needed for the program. The result was tens of millions of dollars of questionable spending in one poor

school district. In another school district, the result was an application that asked

for more than what the district really needed. (Fortunately, the district took subsequent steps to scale the request back; but I’m not sure that’s what normally happens.)

What is the responsibility of the vendor in these situations? Despite a powerful

incentive to sell and do business, vendors must play by the E-rate rules as well.

Today we’ll be able to learn about the responsibilities of vendors in this process and

whether the requirements and rules are clear and sufficient to ensure vendors participate appropriately.

One of the foremost issues we must address is accountability. Today we’ll hear

about accountability from all parties—the school districts, the vendors, and the

agency charged with overseeing the program. I think this is a critical hearing for

our oversight of this program.

Let me welcome the witnesses. I’d like to thank, especially, the efforts made by

Charles Tafoya of El Paso Independent School District, who will join us via video

link today. We appreciate his efforts given the last minute complications in his

plans to attend the hearing.

Thank you, Mr. Chairman. I’ll yield back the remainder of my time.

Chairman BARTON. We would now like our first panel to come

forward. We have Mr. Walker Feaster, III, who is the Inspector

General of the Federal Communications Commission. He is accompanied by Mr. Thomas Cline, the Assistant Inspector General for

Audits. We have Mr. George McDonald, the vice president, Schools

and Libraries Division, the Universal Service Administrative Company. We also have Mr. Jeffrey Carlisle, the Chief of the Wireline

Competition Bureau of the FCC.

Gentlemen, I think each of you understand that it is the tradition of this subcommittee to take all testimony under oath. Do any

of you object to testifying under oath? Let the record show they all

shook their head that they don’t object.

8

It is also the tradition and your right under the United States

Constitution to be advised by counsel during your testimony. Do

any of you so wish to be advised by counsel? Let the record show

they all shook their head that said no.

Would each of you gentlemen please rise and raise your right

hand?

[Witnesses sworn.]

Chairman BARTON. Be seated. We are going to start with you,

Mr. Feaster. Your testimony formally is in the record in its entirety, and we will recognize you for 7 minutes to elaborate on that.

Welcome to the subcommittee.

TESTIMONY OF WALKER FEASTER, III, INSPECTOR GENERAL,

FEDERAL COMMUNICATIONS COMMISSION; ACCOMPANIED

BY THOMAS CLINE, ASSISTANT INSPECTOR GENERAL, AUDITS, FEDERAL COMMUNICATIONS COMMISSION; GEORGE

MCDONALD, VICE PRESIDENT, SCHOOLS AND LIBRARIES DIVISION, UNIVERSAL SERVICE ADMINISTRATION COMPANY;

AND JEFFREY CARLISLE, CHIEF, WIRELINE COMPETITION

BUREAU, FEDERAL COMMUNICATIONS COMMISSION

Mr. FEASTER. Thank you, sir. Good morning, Mr. Chairman and

members of the subcommittee. I appreciate the opportunity to appear before you today to discuss concerns regarding waste, fraud

and abuse in the E-Rate 9rogram. I would like to introduce Tom

Cline. He is my Assistant Inspector General for Audits and has

been heavily involved in our oversight of the E-Rate program.

This is the second opportunity that I have had to testify before

the subcommittee in these matters. In my comments and written

testimony, I will discuss my office’s involvement in the investigations of NEC Business Network Solutions and IBM Global Services

and describe in more general terms the programmatic concerns

raised by these investigations.

First, I will briefly discuss my office’s involvement in an ongoing

Federal investigation involving NEC BNS. I want to point out that

there are aspects of this case that I am not at liberty to discuss

because of an ongoing nature of this investigation. In fact, the two

audit staff in my office that are involved in this investigation are

prohibited by law from disclosing information that they have been

provided related to this case that was developed through the grand

jury process.

We first received allegations related to NEC BNS in August 2001

and referred the matter to the FBI. In July 2002, we established

a working relationship with the Antitrust Division of the Department of Justice to investigate E-rate fraud and we provided information related to this case. The Antitrust Division opened an investigation and my office have been involved in supporting this ongoing investigation since that time.

Now, I will briefly discuss my office’s involvement in an investigation involving participation in the E-Rate program by IBM. In

February 2002, my office was contacted by the general counsel of

USAC regarding an anonymous letter that they had received alleging wrongdoing by IBM related to their involvement in providing

E-rate support to the El Paso Independent School District. The letter was signed, ‘‘Concerned Taxpayer,’’ and outlined three areas of

9

concern involving El Paso’s applications: The need for the program

and IBM’s role and them driving that need, apparent violations of

Federal and State rules governing the procurement process and a

lack of project information for the El Paso School Board and public.

The letter provided a great deal of detail regarding the project and

IBM’s involvement and clearly raised legitimate questions about

whether or not program rules were followed.

As a result of the allegations raised in the concerned taxpayer

letter, USAC initiated a special investigation of IBM’s involvement

as a service provider with El Paso for funding years 2001 and 2002

and with the Ysleta Independent School District for funding year

2002. Based on the results of the analysis, USAC concluded that

Ysleta failed to comply with program requirements and that those

Ysleta funding requests associated with IBM should be denied.

USAC further recommended that they deny funding requests associated with IBM when the request fit the pattern of Ysleta and El

Paso.

We referred this matter to the Antitrust Division shortly after

they established an E-Rate Fraud Task Force in July 2002 and

began supporting their work. Antitrust initiated a preliminary inquiry in October 2002. Meanwhile, in September 2002, we received

additional allegations regarding IBM’s overinvolvement in the competitive bidding process in numerous E-rate submissions, and we

forwarded this additional information to the Antitrust attorney directing the investigation. In April 2004, we were advised that the

Department of Justice has closed a preliminary inquiry of the IBM

matter. We discussed this case with representatives from the Antitrust Division and were informed that they did not identify any evidence of criminal activity based on the material that they reviewed

as part of the preliminary inquiry. After receiving this information,

my office closed their case on this matter.

The NEC BNS and IBM investigations highlight two general concerns that my office has with the design of the E-Rate program:

One, weaknesses in the rules governing the competitive procurement of goods and services, and, two, overreliance on self-certifications received from beneficiaries and vendors on E-rate funding

applications. It has been frustrating to me and my staff that these

are concerns that were identified in 2002 and the Commission has

yet to fully address these matters. The Commission has only recently started to address recommendations by the Antitrust Division of DOJ for strengthening program certifications. These recommendations are on three tracks: One track, some recommendations have been incorporated into E-rate forms and are at OMB for

approval; two, some recommendations are out for public comment;

and, three, some recommendations are not being implemented at

this time.

For this third group of recommendations, my office, along with

DOJ and the Wireline Competition Bureau, will work together to

see how they can be implemented. We believe all the antitrust recommendations would resort in better management of this program

and in delays in implementing these recommendations or the lack

thereof in some cases represents an ongoing risk to the program.

In view of these and numerous other concerns about the E-Rate

10

program, I believe that it would be appropriate to conduct a broadbased review of the program.

We believe we have made significant progress toward our goal of

designing and implementing effective independent oversight of the

USF Program. However, primarily because of the lack of adequate

resources, we have been unable to fully implement an oversight

program. There has been progress made in making resources available to us for conducting E-rate audits, but we believe that direct

access to the USF is the best manner for obtaining the resources

needed or adequate oversight and, as I have stated in the past,

until resources and funding are available to provide adequate independent oversight for the USF Program, we are unable to give the

chairman, Congress and the public an appropriate level of assurance that the program is protected from fraud, waste and abuse.

Thank you, and I will be happy to try to answer any of your questions.

[The prepared statement of H. Walker Feaster III follows:]

PREPARED STATEMENT OF H. WALKER FEASTER III, INSPECTOR GENERAL, FEDERAL

COMMUNICATIONS COMMISSION

INTRODUCTION

Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity

to appear before the subcommittee today to discuss concerns regarding waste, fraud,

and abuse in the E-rate program. This is the second opportunity that I have had

to testify before the subcommittee on these matters. In my comments and written

testimony, I will discuss my office’s involvement in the investigations of NEC-BNS

and IBM and describe in more general terms the programmatic concerns raised by

these investigations.

NEC-BUSINESS NETWORK SOLUTIONS INC. (NEC-BNS)

In this section of my testimony, I will briefly discuss my office’s involvement in

an on-going federal investigation involving NEC-BNS. I want to point out that there

are aspects of this case that I am not at liberty to discuss because of the on-going

nature of this investigation. In fact, the two audit staff in my office that are involved in this investigation are prohibited by law from disclosing information that

they have been provided related to this case that was developed through the Grand

Jury process.

In August 2001, my office was contacted by an Associate General Counsel with

the Universal Service Administrative Company (USAC) regarding a request for information from an investigator from the Office of the City Attorney for the City and

County of San Francisco. We obtained a copy of the request for information that was

provided to USAC and a copy of the USAC response. In September 2001, we referred this matter to the Governmental Fraud Unit of the Federal Bureau of Investigation (FBI) in accordance with the process that we had established with the FBI

for centralized management of E-rate fraud cases.

In July 2002, my office established a working relationship with the Antitrust Division of the Department of Justice to investigate E-rate fraud. The Antitrust Division

was interested in E-rate fraud because of the large number of cases that included

allegations of bid rigging and other violations related to the Sherman Act. Information related to this case was provided to the E-rate fraud task force established by

the Antitrust Division and my office has been involved in supporting this on-going

investigation since that time. As part of our support for the investigation, my office

has performed in-depth analyses of E-rate documents, testified before a federal

grand jury, participated in the execution of a search warrant, evaluated seized electronic media, and participated in numerous witness interviews.

As part of the analysis that we performed for federal law enforcement, we examined NEC-BNS participation in the E-rate program with the purpose of identifying

suspect activity. For the universe of NEC-BNS participation in the program from

funding years 1998 through 2004, we identified fifty-three (53) E-rate applications

at twenty (20) schools that we concluded were suspect. These fifty-three (53) applications represented approximately $380 million in requested E-rate funding, over

$40 million in commitments, and $29.7 million in disbursed funding. Although these

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applications represented only 27% of the E-rate applications during this period that

included NEC-BNS, they represented 93% of requested funds and 96% of disbursed

funds. The results of our analysis was shared with federal law enforcement and

served as the basis for the NEC-BNS portion of the overall investigation.

To date, there have been numerous indictments and plea agreements related to

this case. In October 2002, Desmond McQuoid and US Machinery were indicted for

mail fraud in the United States District Court for the Northern District of California. In March 2003, Mr. McQuoid entered into a plea agreement in which he

agreed to plead guilty to mail fraud. In that plea agreement, Mr. McQuoid agreed

to numerous facts regarding the matter including the following facts concerning Erate fraud:

• Participating in a scheme to submit false and inflated funding requests to the

USAC and SLD a part of the E-Rate program beginning in 1999 and continuing

until 2000. • Allowing the competitive bid process to be compromised by the consultants he was

working with. • Despite being aware that the contractors had submitted inflated bid price information to the School District and the USAC and SLD, not taking steps to correct the information provided. • Attempting to obtain a 10 million dollar in-kind donation from the main contractor by having them purchase computer workstations from US Machinery

and then donate these servers to the School District. • Attempting to use the excess funds in the inflated bids to pay for these products

even though I knew that the USAC and SLD had disallowed using their funds

for these expenditures.

In March 2003, US Machinery entered into a plea agreement in which they

agreed to plead guilty to mail fraud. In that plea agreement, US Machinery agreed

to numerous facts regarding the matter including the following facts regarding Erate fraud:

• US Machinery bid to supply computer servers as part of an E-Rate application

submitted by and on behalf of the San Francisco Unified School District.

• US Machinery learned during the process that some of the contractors had submitted inflated bids to the School District and to the USAC and SLD.

• US Machinery brought this fact to Dennis McQuoid’s attention and failed correct

the misstatements in the bid documents.

• Dennis McQuoid arranged a meeting with the principal contractor—and tried to

obtain a concession from the contractor to purchase computers from US Machine.

• As a result, the contractor was then supposed to donate these computers to the

School District.

In May 2004, NEC-BNS entered into a plea agreement as a result of this investigation. In that agreement, NEC-BNS agreed to plead guilty to one count of wire

fraud in violation of 18 U.S.C. § 1343 and one count of conspiracy to suppress and

eliminate competition in violation of the Sherman Antitrust Act, 15 U.S.C. § 1. As

part of the settlement, NEC-BNS agreed to pay $20,685,263 in criminal fines, civil

settlement, and restitution.

IBM GLOBAL SERVICES

In this section of my testimony, I will briefly discuss my office’s involvement in

an investigation involving participation in the E-rate program by IBM Global Services (IBM).

In February 2002, my office was contacted by the General Counsel of the Universal Service Administrative Company (USAC) regarding a letter they had received

alleging wrongdoing by IBM related to their involvement in providing E-rate support to the El Paso Independent School District (EPISD). The letter, signed ‘‘Concerned Tax Payer’’, outlined three areas of concern: (1) the need for the program and

IBM’s role in driving that need; (2) apparent violations of Federal and state rules

governing the procurement process; and (3) the lack of project information for the

EPISD board and the public. The letter provided a great deal of detail regarding

the project and IBM’s involvement and clearly raised legitimate questions about

whether or not program rules were followed.

As a result of the allegations raised in the ‘‘Concerned Tax Payer’’ letter, USAC

initiated a special investigation of IBM’s involvement as a service provider with

EPISD for funding years 2001 and 2002 and with the Ysleta Independent School

District (Ysleta ISD) for funding year 2002. Based on the results of their analysis,

USAC concluded that Ysleta ISD failed to comply with program requirements and

that those Ysleta funding requests associated with IBM should be denied. USAC

12

further recommended that SLD deny funding requests associated with IBM when

those requests fit the pattern of Ysleta ISD and EPISD.

As I discussed earlier in my testimony, we established a working relationship

with the Antitrust Division of the Department of Justice in June 2002. We referred

this matter to the Antitrust Division shortly after they established an E-rate fraud

task force in July 2002. In September 2002, representatives from my office visited

with representatives on the Antitrust task force to review case material. In October

2002, the Antitrust attorney directing the investigation requested authority within

the Antitrust Division to conduct a preliminary inquiry ‘‘to pursue a possible bid rigging scheme in which competing telecommunication providers may have colluded

with each other, with school districts, or through representatives, on contracts for

communications equipment sold to El Paso ISD in El Paso, Texas, Ysleta ISD in

Ysleta, Texas, and potentially other districts nationwide.’’ Authority to conduct a

preliminary inquiry was granted.

In September 2002, we received additional allegations regarding IBM participation in the E-rate program. These allegations were provided following a Train-theTrainers workshop provided by the Schools and Libraries Division of USAC during

which SLD trainers encouraged participants to provide any information highlighting

serious violations of program rules. The allegations address IBM’s ‘‘over-involvement

in the competitive bidding process.’’ The allegations provided information detailing

a pattern of virtually identical ‘‘cookie-cutter’’ or ‘‘laundry list-type’’ form 470s posted by applicants around the country and provided detailed information on a number

of these schools issuing ‘‘strikingly similar’’ requests for proposals around the same

time as the form 470s were posted seeking essentially the same thing—‘‘a strategic

technology partner—to assist the district in securing E-rate funds.’’ We forwarded

this additional information to the Antitrust attorney directing the investigation.

In April 2004, we were advised that the Department of Justice had closed their

preliminary inquiry of the IBM matter. We discussed this case with representatives

from the Antitrust Division and were informed that they did not identify any evidence of criminal activity based on the material that they reviewed as part of the

preliminary inquiry. After receiving this information, my office closed their case file

on this matter.

PROGRAMMATIC CONCERNS HIGHLIGHTED BY NEC-BNS AND IBM INVESTIGATIONS

The NEC-BNS and IBM investigations highlight two general concerns that my office has with the design of the E-rate program: (1) weaknesses in the rules governing the competitive procurement of goods and service; and (2) over-reliance on

self certification.

Competitive Procurement

Program rules require that applicants use a competitive procurement process to

select service providers. In establishing this requirement, the Commission recognized that ‘‘(c)ompetitive bidding is the most efficient means for ensuring that eligible schools and libraries are informed about all of the choices available to them’’ and

that ‘‘(a)bsent competitive bidding, prices charged to schools and libraries may be

needlessly high, with the result that fewer eligible schools and libraries would be

able to participate in the program or the demand on universal service support mechanisms would be needlessly great.’’

Applicants are required to submit a form 470 identifying the products and services needed to implement the technology plan. The form 470 is posted to the USAC

web page to notify service providers that the applicant is seeking the products and

services identified. Applicants must wait at least 28 days after the form 470 is posted to the web site and consider all bids they receive before selecting the service provider to provide the services desired. In addition, applicants must comply with all

applicable state and local procurement rules and regulations and competitive bidding requirements. The form 470 cannot be completed by a service provider who will

participate in the competitive process as a bidder and the applicant is responsible

for ensuring an open, fair competitive process and selecting the most cost-effective

provider of the desired services. Further, although no program rule establishes this

requirement, applicants are encouraged by USAC to save all competing bids for

services to be able to demonstrate that the bid chosen is the most cost-effective, with

price being the primary consideration.

In the case of IBM, it seems clear that the practices followed by several of the

school districts that selected IBM as their service provider for participation in the

E-rate program for the funding years reviewed did not follow program requirements

for the competitive procurement of goods and services. Although the Department of

Justice did not find evidence of criminal activity, USAC denied numerous applications involving IBM as a result of their investigation and the Commission affirmed

13

USAC decisions regarding these applications in the order they adopted in December

2003.

On June 5, 2002, USAC prepared a preliminary special investigation report summarizing the results of that review. In that preliminary report, USAC concluded

that both EPISD and Ysleta ISD utilized a Request for Proposal (RFP) format that

did not make price the major factor in the selection of the service provider in violation of program rules. In October 2002, USAC prepared a preliminary draft analysis

of issues identified in the EPISD and Ysleta ISD funding requests, determined that

funding requests for the two school districts followed the same basic pattern, and

presented the results of their legal analysis focusing on the Ysleta ISD funding requests. In that document, USAC concluded that:

• Ysleta selected IBM as its service provider by a process other than the FCC Form

470 posting process and without defining the specific services that would be provided; • Ysleta selected IBM as its service provider without complying with the requirements that the applicant select the most cost-effective provider of service with

low cost being the primary factor; • Compliance with FCC Form 470 posting requirement is necessary in addition to

applicable state and local procurement requirements; • IBM’s proposal specifies a range of services that it will provide as the Strategic

Technology Partner. Many of these services are not eligible for funding. • IBM’s proposal emphasizes developing the technology plan and structuring funding requests in order to maximize funding requests; and • Requests for Proposal contain similar language and raise significant questions as

to whether IBM was improperly involved in the selection process.

In the case of NEC-BNS, wrongdoing rose to the level of criminal activity. In the

plea agreement that NEC-BNS accepted, NEC-BNS admitted to the following facts

regarding this case:

• NEC ‘‘participated in a conspiracy with one or more vendors of equipment and

services related to telecommunications, Internet access, and/or internal connections, a purpose of which was to suppress and eliminate competition for E-Rate

program projects’’. • In furtherance of the conspiracy, NEC ‘‘reached an agreement with its co-conspirators to frustrate the competitive process on the E-Rate projects by allocating contracts and submitting fraudulent and non-competitive bids’’ and, to

carry out this conspiracy, NEC ‘‘discussed with these co-conspirators prospective

bids for the E-Rate projects; agreed with these co-conspirators who would be the

lead contractor on the project and who would participate on the project as subcontractors to the designated lead contractors; submitted fraudulent and noncompetitive bids in accordance with the conspiratorial agreement.’’ Further,

NEC engaged two consultants who ‘‘took steps to ensure the success of the conspiracy by eliminating and disqualifying bids from non-conspirators and either

directly awarding the contracts or using their best efforts to persuade the school

district officials to award contracts to the designated lead contractors.

Reliance on Applicant Certifications

The E-rate program is heavily reliant on applicant and service provider certifications. For example, on the form 470, applicants certify that the support received

is conditional upon the ability of an applicant to secure access to all of the resources,

including computers, training, software, maintenance, and electrical connections,

necessary to use effectively the services that will be purchased under this mechanism. On the form 471, applicants make several important certifications. Applicants

certify that they have ‘‘complied with all applicable state and local laws regarding

procurement of services for which support is being sought’’ and that ‘‘the services

that the applicant purchases—will not be sold, resold, or transferred in consideration for money or any other thing of value.’’ Other certifications are required on

various program forms.

Reliance on applicant and service provider certifications has been an area of concern in my office for some time. We have two concerns regarding certifications. The

first concern deals with over-reliance on certifications in lieu of USAC verification

and validation of applicant and service provider assurances as part of USAC’s normal review processes. The significance of this concern has been diminished somewhat by steps that USAC has taken, and is proposing to take, to strengthen the

Program Integrity Assurance (PIA) process.

The second, and more serious, concern is related to the design of the certifications.

Concerns about the design of program certifications were first brought to our attention by federal law enforcement. Numerous concerns about certification design were

brought to our attention during our first meeting with the E-rate fraud task force

14

established by the Antitrust division of the Department of Justice in July 2002. A

representative from the Commission’s Wireline Competition Bureau (WCB) was

present during that discussion. At our request, task force members provided written

comments on program certifications in December 2002. Some of the concerns expressed by task force members dealt with applicant certification to future events

(i.e., on the form 470, applicants certify that they recognize that support is conditional upon the schools ‘‘securing access to all of the resources... necessary to use

the services purchased effectively’’).

In the case of IBM, the pattern that was observed at several applicants shows applicants reporting on the form 470 that they do not have Requests for Proposal for

the specific internal connections being sought and certifying that the request has

been examined and that ‘‘to the best of my knowledge, information, and belief, all

statements of fact contained herein are true.’’ Shortly after form 470s were posted,

applicants would issue a separate RFP (‘‘strikingly similar’’ in many cases) for a

‘‘Technology Implementation and Systems Integrator Partner.’’ The RFP for the

‘‘Technology Implementation and Systems Integrator Partner’’ states that the ‘‘selected vendor will serve as the prime contractor for any projects funded through Erate.’’ Effectively, applicants provided assurance to the program that they have not

sought proposals for E-rate projects at the same time that they clearly have.

In the case of NEC-BNS, there are numerous examples of fraudulent representations on program forms. In fact, it may be more challenging to identify certifications

that were not fraudulent representations. Desmond McQuoid certified that he was

authorized to submit requests on behalf of the San Francisco Unified School District

when he was not. He further certified that the state and local procurement regulations were followed and that program rules were followed when neither of these

statements was accurate.

CERTIFICATION WEAKNESSES HAVE NOT BEEN FULLY ADDRESSED

My office started to raise concerns about perceived weaknesses in the competitive

procurement process and over reliance on certifications shortly after we became involved in program oversight. We first became concerned about the competitive procurement process as a result of our involvement in the Metropolitan Regional Education Service Agency (MRESA) investigation. During that investigation we observed how weaknesses in competitive bidding requirements and reliance on self

certification were exploited resulting in, at a minimum, a significant amount of

wasteful spending. We continued to express our concerns as we designed our oversight program, developed a program for auditing beneficiaries, and supported E-rate

fraud investigations. In fact, we established a working relationship with the Antitrust Division of the Department of Justice in a large part because of the number

of investigations that we were supporting that involved allegations regarding the

competitive procurement process.

Our level of concern regarding both the competitive procurement process and reliance on self-certification was heightened as we started to work with the Antitrust

Division. During our discussions with Antitrust, they expressed a general concern

with the lack of information regarding the competitive process and specific concerns

regarding applicant and service provider certifications. Although we started to pursue these issues with Commission staff in the fall of 2002, the Commission has only

recently started to address some of the recommendations from Antitrust, and none

of these recommendations are fully implemented. We have been informed by WCB

that several of the Antitrust suggestions have been incorporated into the appropriate E-rate forms and that those forms are now at the Office of Management and

Budget for approval. Other recommended certifications, particularly regarding the

competitive process, are still in the process of public comment, and we are as yet

uncertain what the FCC may ultimately do with these recommendations. Numerous

of the suggestions from Antitrust involved USAC obtaining and reviewing critical

procurement documents during the application review process. The Commission’s response to these suggestions was to include in the 5th Report and Order the requirement that the applicant retain these documents, but providing these documents for

review along with an E-rate application was not required. And lastly, WCB has informed us that at this time they will not incorporate certain recommendations. I believe that the delay in implementing Antitrust’s recommendations, and the exclusion of some of the recommendations from implementation, continues to place the

program at risk.

CONCLUSION

The Office of Inspector General remains committed to meeting our responsibility

for providing effective independent oversight of the Universal Service Fund proVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 96098.TXT HCOM1 PsN: HCOM1
15

gram. As I have described in this testimony, we continue to have numerous concerns

about this program. The results of audits that have been performed and the allegations under investigation lead us to believe the program may be subject to an unacceptably high risk of fraud, waste and abuse through noncompliance and program

weaknesses. We are concerned with program rules governing the competitive procurement of goods and service and with the over reliance on certifications. In view

of these concerns, I believe that it would be appropriate to conduct a broad based

review of the program.

We believe we have made significant progress toward our goal of designing and

implementing an effective, independent oversight program. However, primarily because of a lack of adequate resources, we have been unable to implement our oversight program. But some progress has been made. We have partnered with USAC

to accomplish approximately 100 audits of E-rate beneficiaries using contracted resources available to them and the Commission has been actively furthering efforts

for us to use the USF to accomplish more audits. But we believe direct access to

the USF is the best manner with which to obtain the necessary resources and, as

I have stated previously, until resources and funding are available to provide adequate independent oversight for the USF program, we are unable to give the Chairman, Congress and the public an appropriate level of assurance that the program

is protected from fraud, waste and abuse.

Thank you and I will be happy to answer any of your questions.

Chairman BARTON. Thank you, Mr. Feaster. Does Mr. Cline wish

to make a statement?

Mr. CLINE. No. Thank you.

Chairman BARTON. Okay. We now recognize Mr. George McDonald, who is the Vice President of the Schools and Library Division

of USAC, for an opening statement. Your statement is in the record

in its entirety, and we would recognize you for 7 minutes to elaborate.

TESTIMONY OF GEORGE MCDONALD

Mr. MCDONALD. Thank you, Mr. Chairman. Good morning, members of the subcommittee. Thank you for inviting me here today to

discuss USAC’s administration of the E-Rate program. Previous

hearings have given me the opportunity to outline our procedures

to combat waste, fraud, and abuse. Today, I want to focus on requirements for conducting a fair and open competitive process and

ensuring cost-effective use of E-rate funds. While USAC has responsibility for ensuring applications are properly reviewed, applicants and service providers alike have responsibility for knowing

and following the spirit, intent, and letter of the law and rules of

the program. The FCC, in a series of recent rulemakings, has

stressed that accountability.

We have been concerned from the beginning of the program

about service providers offering and applicants accepting free, ineligible services. Since service providers must cover their costs, these

free services would be paid for through inflated prices on eligible

equipment. Two key program requirements designed to protect the

integrity of the program are that applicants must conduct fair and

open competitive processes to select service providers, and applicants must pay the non-discount share of the cost of eligible goods

and services. These requirements are intended to ensure that the

applicants and E-rate are getting fair value. The rules require competition over the price of eligible services, competitively neutral

RFPs, and that applicants select the cost-effective offer with price

the primary factor.

The rules also require that applicants pay their share of the cost

so that they have a stake in selecting the most cost-effective offer

16

and so that they do not request services in excess of their needs.

If service providers offer to waive the non-discount share of the

cost, they remove any incentive for the applicant, who is the one

making the decision, to select the most cost-effective alternative. If

service providers do waive the applicant’s share, they cover their

costs by inflating the pre-discount costs so that the discount share

to be paid by USAC more than covers their cost and E-rate is the

loser.

The E-Rate program is designed to give applicants discretion in

deciding which technology solutions best meet their educational objectives. USAC generally does not second guess the technology

choices applicants make, but the subcommittee and USAC have

seen instances of goldplating, purchases that are clearly excessive

for the use that will be made of them. The Commission recently directed that applicants certify that the bid selected was, ‘‘the most

cost-effective means of meeting educational needs and technology

plan goals.’’ If an applicant solely relies on service provider recommendations, this may lead to applications that run afoul of program rules. Therefore, applicants must take the necessary steps to

determine if the recommended solution is in fact what is needed.

As the E-Rate program has matured, E-rate consultants have

played an increasing role. However, applicants remain responsible

for their applications and for ensuring that there is a fair and open

competitive process. USAC has denied millions of dollars in funding requests when we have determined that the consultant who

provided free services to the applicants was associated with the

service provider selected.

Let me now turn to the participation of IBM in the E-Rate program. In January 2002, USAC received an anonymous letter alleging program abuses at the El Paso Independent School District in

Texas, as Mr. Feaster has said. Our Special Investigations Team

began an investigation which led to a concern that the procurement

approach may not have been consistent with program rules. We

identified a number of funding year 2002 applicants who were requesting large amounts of E-rate discounts and funding requests

associated with IBM and who may have used a similar procurement approach. Ultimately, we concluded that the procurement approach was not consistent with the rules, and we denied requests

for over $500 million.

The rules require applicants to identify the specific eligible services for which they will seek funding based on the applicant’s technology plan, to solicit bids from competing service providers and

then to choose the most cost-effective alternative with price the primary factor. These applicants and IBM participated in a two-step

approach which consisted first of choosing a strategic technology

partner and then, with the help of that partner, deciding which eligible services to seek funding for. At the first step, each applicant

used the Generic Form 470 and a similar RFP indicating that they

had not decided which specific services they needed and sought a

partner to help them make those decisions. Since the applicant’s

did not identify the specific services they were seeking, the proposals did not state the cost of the services. Consequently, the applicants did not make the selection of the service provider based on

which was the most cost-effective alternative.

17

After IBM was selected, the second step began. At this step, IBM

worked with the applicants to identify the specific services for

which funding would be sought. This meant that at the time the

decisions were made about what specific services to request E-rate

discounts for and how much to request, there was only one service

provider at the table. Consequently, the price competition for eligible services that the FCC rules envisioned never took place. IBM

and the applicants appealed USAC’s denials; the FCC affirmed

USAC’s decisions to deny funding in all but one instance.

We funded El Paso in funding year 2001 even though El Paso

used the two-step approach that we determined was inconsistent

with program rules in the next year. This occurred because our review procedures did not flag the El Paso application for a particular kind of heightened scrutiny. We review almost 40,000 applications for funding every year, and we use a staff of some 150 people to conduct those reviews. With a process of that magnitude, we

appropriately rely on written procedures to guide the reviews to ensure consistency and equity for all applicants. Our procedures did

not contemplate the two-step procurement approach in 2001 and

therefore we did not identify this application as one requiring

heightened scrutiny. We have learned much more about the services IBM was offering through our intense review of the 2002 applications and concluded based on that analysis and on review of

statements of work for El Paso for 2001 that our 2001 funding commitments for El Paso may have included a substantial amount of

ineligible services. We have asked IBM to respond to our tentative

conclusions. Depending on that response, we may seek recovery of

a substantial portion of the funds we dispersed to IBM for work in

El Paso in 2001.

Mr. Chairman, thank you for providing me with the opportunity

to address the subcommittee. I would be happy to respond to any

questions.

[The prepared statement of George McDonald follows:]

PREPARED STATEMENT OF GEORGE MCDONALD, UNIVERSAL SERVICE ADMINISTRATIVE

COMPANY VICE PRESIDENT, SCHOOLS AND LIBRARIES DIVISION

Good morning, Mr. Chairman and Members of the Subcommittee. I am George

McDonald, Vice President of the Universal Service Administrative Company

(‘‘USAC’’) with responsibility for the Schools and Libraries Division. Thank you for

inviting me here today to discuss USAC’s administration of the ‘‘E-rate’’ program.

Protecting Against Pre-Commitment Program Abuse

Previous hearings held by this Subcommittee about E-rate have given me the opportunity to outline our procedures to combat those who would try to circumvent

program rules, which can lead to waste, fraud or abuse. Today, I will focus on requirements for conducting a fair and open competitive process and ensuring costeffective use of E-rate funds. These are the responsibilities of the applicant and

areas that the applicant must take responsibility for prior to submitting an application. While USAC has responsibility for ensuring applications are properly reviewed,

applicants and service providers alike have responsibility for knowing and following

the spirit, intent, and letter of the law and rules of the program. The Federal Communications Commission (FCC), in a series of recent rulemakings, has stressed that

accountability.

Free, Ineligible Services—We have been concerned from the beginning of the

program about service providers offering and applicants accepting free, ineligible

services and have taken steps to address this potential for abuse. Since service providers must cover their costs, these ‘‘free’’ services would not be free to E-rate; they

would be paid for through inflated prices on eligible equipment. For example, NECBusiness Network Solutions Inc. (NEC) admitted in its recent plea agreement that

18

it planned to ‘‘donate’’ millions of dollars worth of ineligible computer workstations

to the San Francisco Unified School District (SFUSD) and that NEC actually

planned to use E-rate funds to cover the costs of these ‘‘donated’’ workstations. NEC

also admitted that the funding requests that were submitted to us for SFUSD contained inflated prices.

An applicant can, however, accept free, ineligible services, along with eligible services, request discounts, and satisfy the rules if the applicant complies with the following requirement. The applicant must reduce the prediscount cost of the eligible

services by the fair market value of the ineligible services it will be provided at no

cost. When we review applications, we look for free, ineligible services so that we

may take appropriate action.

USAC is authorized to provide funding for eligible services only. This prohibits

applicants and service providers from using discounts to subsidize the procurement

of ineligible or unrequested services. The value of all price reductions, promotional

offers, and ‘‘free’’ services must be deducted from the pre-discount cost of services.

In this manner, universal service funds are not used to subsidize ineligible services.

Similarly, since applicants are required to choose the most cost-effective bid with

the price of eligible services being the primary factor, applicants cannot base their

decisions on free, ineligible offerings by service providers.

Competitive Process to Select Service Provider and Payment of the NonDiscount Share of the Cost of Eligible Goods and Services—Two key program

requirements designed to prevent waste, fraud, and abuse, and to protect the integrity of the program are that applicants must conduct fair and open competitive processes to select service providers and applicants must pay the non-discount share of

the cost of eligible goods and services. If applicants do not comply with these requirements, their applications will be denied. These requirements are intended to

ensure that the applicants and E-rate are getting fair value. The rules require competition over the price of eligible services, competitively neutral RFPs, and that applicants select the most cost-effective offer with price the primary factor. Applicants

must remain in control of the procurement process and cannot abdicate their responsibilities to a service provider who is competing for their business, or to a consultant.

The rules also require that applicants pay their share of the cost so that they

have a stake in selecting the most cost-effective offer and so that they do not request

services in excess of their needs. If service providers offer to waive the non-discount

share of the cost, they remove any incentive for the applicant, who is the one making the decision, to select the most cost-effective alternative. This undermines the

goal of preventing waste, fraud, and abuse. If service providers waive the non-discount share of the cost, they must still cover their costs. They do this by inflating

the prediscount cost so that the discount share to be paid by USAC more than covers their costs, and E-rate is the loser.

Goldplating—The E-rate program is designed to give applicants discretion in deciding which technology solutions best meet their educational objectives. Some applicants seek discounts only for basic phone service and dial-up Internet access. Others

seek assistance in building sophisticated networks with broadband connections for

Internet access and distance learning. USAC generally does not ‘‘second guess’’ the

choices applicants make, but the Subcommittee and USAC have seen instances of

‘‘goldplating’’— purchases that are clearly excessive for the use that will be made

of them. Applicants are responsible for the reasonableness of their choices. To emphasize this responsibility, the Commission recently directed that applicants explicitly certify that ‘‘the selection of services and service providers is based on the most

cost effective means of meeting educational needs and technology plan goals.’’ We

can and do deny requests when the applicant did not select the most cost-effective

offering with price the primary factor, when applications include a substantial

amount of ineligible services, or when requested services clearly go well beyond the

requirements set out in the applicant’s technology plan. Applicants are responsible

for their requests—they must do the planning for technology solutions tied to their

educational objectives, they make the certifications on the forms, they are to share

the cost. If an applicant solely relies on service provider recommendations, this may

lead to applications that run afoul of program rules. Therefore, applicants must take

the necessary steps to be in a position to determine if the recommended solution

is in fact what is needed.

Consultants—As the E-rate program has matured, E-rate consultants have

played an increasing role. Consultants offer a variety of services to applicants, from

providing advice with respect to the available technologies, to submitting program

forms, to overseeing the competitive process underlying the application. As with deciding which technology solutions best meet their educational objectives, applicants

have discretion to choose a consultant. However, applicants remain responsible for

19

their applications and for ensuring that there is a fair and open competitive process.

USAC has denied millions of dollars in funding requests when we have determined

that the ‘‘consultant’’ who provided free services to the applicant was associated

with the service provider selected.

Participation of IBM in the E-rate Program

Let me now turn to the participation of IBM in the E-rate program. IBM has been

participating as a provider of internal connections since the inception of the program. It has been paid over $760 million from 1998 until today—more than any

other single E-rate service provider. In January 2002, USAC received an anonymous

letter alleging program abuses at the El Paso Independent School District in Texas

(El Paso). Our Special Investigations team began an investigation, which included

a site visit. As we came to understand the procurement approach that had been

used by El Paso to select IBM for Funding Year 2001, we became concerned that

it may not have been consistent with program rules. We identified a number of

Funding Year 2002 applicants who were requesting large amounts of E-rate discounts in funding requests associated with IBM and who may have used a similar

procurement approach. We extended the investigation to cover these Funding Year

2002 applicants, which included El Paso. Ultimately, we concluded that the procurement approach was not consistent with the rules and denied requests for over $500

million because of that approach. Several of the applicants associated with IBM in

Funding Year 2002 would have been selected for heightened scrutiny of their applications even if USAC had not received the whistleblower call. I believe that it’s likely that would have resulted in USAC identifying these program rule violations independently of the whistleblower letter, but certainly the letter was helpful in the

process.

As I have discussed, the FCC rules are designed to ensure prudent use of E-rate

funds by requiring applicants to conduct a fair and open competition for obtaining

the eligible services the applicant has decided it needs. The rules require applicants

to identify the specific eligible services for which they will seek funding based upon

the applicant’s technology plan, to solicit bids from competing service providers, and

then to choose the most cost-effective alternative with price being the primary factor.

These applicants and IBM participated in a two-step approach, involving a ‘‘Strategic Technology Partner.’’ Generally, the Strategic Technology Partner is a consultant to help customers determine what their technology needs are, and a general

contractor overseeing the implementation of the different projects. The two-step approach consisted of first choosing the Strategic Technology Partner, and then, with

the help of that partner, deciding which eligible services to seek funding for.

At the first step, each applicant used a generic Form 470 and a similar RFP indicating that they had not decided which specific services they needed and sought a

partner to help them make those decisions. Since the applicants did not identify the

specific services they were seeking, the bids that the service providers submitted did

not state the cost of the services. Consequently, when the applicants selected the

winning service provider, they did not make that selection based on which was the

most cost-effective alternative with price the primary factor.

After IBM was selected, the second step began. At this step, IBM worked with

the applicants to develop detailed statements of work that identified the specific

services for which funding would be sought on the applications submitted to USAC.

This meant that, at the time decisions were made about what specific services to

request E-rate discounts for and how much to request, there was only one service

provider at the table. Consequently, the price competition for eligible services that

the FCC rules envision never took place.

IBM and the applicants appealed USAC’s denials to the FCC, and in some cases

to USAC. The FCC affirmed USAC’s decisions to deny funding in all but one instance. USAC reversed one of its denials on appeal. The FCC decision affected two

other appeals pending with USAC.

We funded El Paso in Funding Year 2001 even though El Paso used the two-step

approach that we determined was inconsistent with program rules in the next year.

This occurred because our review procedures did not flag the El Paso application

for a particular kind of heightened scrutiny. We review almost 40,000 applications

for funding every year, and we use a staff of some 150 people to conduct those reviews. With a process of that magnitude, we appropriately rely on written procedures to guide the reviews to ensure consistency and equity for all applicants. Our

procedures did not contemplate the ‘‘strategic technology partner’’ procurement approach in 2001 and, therefore, we did not identify this application as one requiring

heightened scrutiny.

20

We have learned much more about the services IBM was offering through our intense review of the Funding Year 2002 applications and concluded based on that

analysis and review of Statements of Work for El Paso for Funding Year 2001 that

our Funding Year 2001 funding commitments for El Paso may have included a substantial amount of ineligible services. We have asked IBM to respond to our tentative conclusions. Depending on that response, we may seek recovery of a substantial portion of the funds we disbursed to IBM for work in El Paso for Funding Year

2001.

Conclusion

Mr. Chairman, thank you for providing me with the opportunity to address the

Subcommittee. I would be happy to respond to any questions you may have.

Chairman BARTON. We thank you. Now I want to welcome Mr.

Jeffrey Carlisle who is the Chief of the Wireline Competition Bureau of the FCC. Mr. Carlisle, your statement is in the record in

its entirety, and we welcome you to elaborate on it for 7 minutes.

Welcome to the subcommittee.

TESTIMONY OF JEFFREY CARLISLE

Mr. CARLISLE. Thank you. Good morning, Mr. Chairman and distinguished members of the subcommittee. I was named Chief of the

Wireline Competition Bureau on August 4, 2004. As such, many of

the incidents that are the subject of this hearing occurred before

my tenure, and I do not have firsthand knowledge of them. I am

here, however, to relate to you the facts as I have ascertained

them. I am also here to communicate to you that with respect to

the E-Rate program, I am working hard to achieve three main

goals: First, to acquaint myself with the program and learn about

its functioning in detail; second, to get up to speed with the current

status of proceedings and pending audits and enforcement actions,

including the IBM case which the Commission concluded at the end

of last year; and, third, to continue work already started to improve

functioning and oversight of the program.

With the 2002 launch of the schools and libraries rulemaking

proceeding, the Commission has sought to improve the effectiveness, fairness and efficiency of the E-Rate program and taken significant steps to prevent waste, fraud and abuse. In April 2003, the

Commission adopted debarment rules. In December 2003, the Commission established limits on the use of the internal connections,

restrictions on funding for duplicative services and clarified eligible

services.

We have adopted rules to revise our approach to recovery of

funds for violations, strengthened our audit and investigation processes and will make recommendations to adjust the discount matrix and also to require recipients of funding to conduct their own

independent audits.

Competitive bidding is a cornerstone of the E-Rate program because it limits waste, ensures program integrity and assist applicants in receiving the best value for their limited funds. The potential weaknesses in the competitive bidding system were highlighted

by the facts in the various 2002 IBM applications. Under the ERate program rules for competitive bidding, after developing a

technology plan, applicants are required to seek competitive bids

on goods and services eligible for E-rate discounts by completing

and posting an FCC Form 470 on the USAC web site.

21

In the IBM cases, the applicants submitted a broad generic

version of the Form 470 indicating they were seeking virtually

every product and service eligible for E-rate discounts rather than

developing a list of services actually desired based on their technology plans with sufficient specificity to enable bidders to submit

realistic bids with prices for specified services.

This was coupled with the applicants posting an RFP for a systems integrator, something they did not disclose on Form 470 even

though Form 470 asks for such disclosure. IBM, in responding to

these RFPs, did not provide specific prices for specific facilities and

services, nor were such responses requested. Rather, the RFPs

sought general information and prices for acting as a systems integrator, and IBM responded with hourly rates. Subsequently, the

school districts selected IBM and then negotiated a contract for Erate-eligible products and services.

After receiving a whistleblower’s anonymous letter in January

2002, USAC investigated and ultimately denied Ysleta’s request for

funding on December 3, 2002, then denied eight other applications

that selected IBM as a systems integrator. On December 8, 2003,

after de novo review of the facts in these multiple cases, the Commission upheld USAC’s denial of 8 of the 9 funding requests, totaling over $250 million. The Commission found in general that the

two-step bidding process, that is procurement of a systems integrator followed by private negotiation with that integrator for

goods and services eligible for E-rate support, violated the Commission’s competitive bidding requirements.

The Commission permitted the applicants denied funding to have

a second chance to receive funding for funding year 2002 and allowed them to seek further bona fide competitive bids. The eight

school districts denied funding resubmitted funding requests seeking a total of $40 million in services, an amount substantially less

than the prior requests. IBM was permitted to bid again but bid

on only one of these applications and was not successful.

The Commission acted unanimously in just over a year after

USAC initially denied funding in the IBM cases, even as it was addressing numerous other cases and was engaged in general

rulemakings to improve the E-Rate program. In the course of the

IBM cases, USAC denied a quarter of a billion dollars of support

and also denied an additional quarter billion dollars of support for

funding year 2002 to nine applicants in similar circumstances involving IBM. Thus, in the IBM cases, no funding was distributed

and no dollars had to be recovered.

I believe there is more that we can and should be doing. As I indicated at the beginning of my testimony, since the IBM case was

concluded, the Commission has implemented further oversight requirements, and the Bureau has recommended changes to certification requirements to the Office of Management and Budget for

approval. We believe these steps will continue to improve our oversight over the program, and we will continue to use adjudications,

rulemakings and audits to help us identify areas of E-rate program

administration that are vulnerable to fraud or to confusion that

leads to waste and abuse.

22

Thank you, Mr. Chairman, for the opportunity to participate in

your review of the E-Rate program. I look forward to your questions.

[The prepared statement of Jeffrey Carlisle follows:]

PREPARED STATEMENT OF JEFFREY CARLISLE, CHIEF, WIRELINE COMPETITION

BUREAU, FEDERAL COMMUNICATIONS COMMISSION

Good morning, Mr. Chairman and distinguished members of the Subcommittee.

I was named Chief of the Wireline Competition Bureau on August 4, 2004. As such,

many of the incidents that are the subject of this hearing occurred before my tenure

and I do not have first-hand knowledge of them. I am here, however, to relate the

facts to you as I have ascertained them. More importantly, I am here to communicate to the Subcommittee that, with respect to the E-rate Program, I am working

hard to achieve three main goals: first, to acquaint myself with the program and

learn about its functioning in detail; second, to get up to speed with the current status of pending audits and enforcement actions, including the IBM case which the

Commission concluded at the end of last year; and third to continue and advance

the work already started to improve functioning and oversight of the program, and

thereby eliminate waste, fraud and abuse.

I. THE COMMISSION IS IMPROVING PROGRAM OVERSIGHT

As a program that benefits the public, the E-rate program has matured to such

a level that it has attracted bad actors that bend and violate the public trust. We

began to detect these individuals and entities, in some cases schools or libraries, as

early as 2001, in reviewing audits completed in the year 2000. These individuals

and entities have either gamed the system and exploited loopholes in our rules, or

they have committed outright fraud, and engaged in deceptive practices in an effort

to thwart our system of internal checks and audits. Some turn out to be honest mistakes, but some have also resulted in civil and criminal prosecutions. The sheer gall

of some of these deceptions—bid rigging, failure to deliver services already paid for,

falsified forms and kickbacks—is disappointing, given that this is a program to benefit children and library patrons, but it is not surprising. We are dealing with elements in some instances that acknowledge no moral limits, regardless of the purposes of the program.

Understanding this, the Commission has redoubled its efforts to deter and detect

all forms of waste, fraud and abuse in the E-rate program, and we believe we can

demonstrate good progress toward this goal.

Since the program’s inception, and more recently with the 2002 launch of the

Schools and Libraries Universal Support Mechanism rulemaking, the Commission

has sought to improve the effectiveness, fairness, and efficiency of the E-rate program, while preventing waste, fraud and abuse.

In April 2003, the Commission adopted rules to bar participation in the program

of any individuals and companies that have been found criminally or civilly liable

for actions that violate our rules. We already have applied these procedures in three

instances, and we have sought comment on whether to expand the reach of our debarment rules.

In December 2003, the Commission emphasized that our rules have always prohibited funding of duplicative equipment and services. To prevent entities from exploiting discounts on internal connections, the Commission adopted rules to prevent

program applicants from making repeated, uneconomical upgrades or transferring

their purchases to other entities, except in special circumstances. The Commission

also endorsed an initiative to publicize specific lists of services and equipment that

are eligible for E-rate discounts, both to help applicants more easily avoid ineligible

ones and to clarify the scope of the program.

In July of this year, the Commission adopted rules to revise our recovery approach such that recovery actions are no longer limited to instances in which service

providers have violated our rules, but instead recovery is directed against any party

or parties (including service providers and E-rate applicants) that have committed

rule or statutory violations.

Last month, the Commission adopted the Schools and Libraries Fifth Report and

Order, in which it addressed a number of issues that have surfaced as a result of

audits conducted during the Commission’s oversight of the E-rate program. The

Schools and Libraries Fifth Report and Order strengthens the Commission’s current

process for conducting audits and investigations of the E-rate program in a timely

and efficient fashion. Specifically, the order establishes a framework for determining

the appropriate amount to be recovered when funds are disbursed in violation of the

23

statute and our rules. In addition, the order sets forth a framework for heightened

scrutiny for applicants and service providers that have violated our rules in the

past. The order also extends the ‘‘red light’’ rule of the FCC’s existing Debt Collection rules to bar fund recipients from receiving additional program benefits if they

have yet to repay the fund for past erroneous disbursements. Our ‘‘red light’’ rule

provides that the Commission shall withhold action on any application or request

for benefits made by an entity that is delinquent in its non-tax debts owed to the

Commission, and dismiss all such applications or requests if the delinquent debt is

not resolved. The Fifth Report and Order also responds to recommendations made

by the Commission’s Office of Inspector General (OIG), including codifying USAC

procedures into our rules and strengthening the program’s document retention requirements, so that any misdeeds can be more easily detected and prosecuted. Consistent with the OIG’s recommendations, the order also modifies technology plan requirements to require applicants to have an approved plan that follows the U.S. Department of Education technology plan guidelines, subject to an additional requirement that an applicant show that it has the necessary resources to achieve its technology aims.

In response to recommendations from the U.S. Department of Justice, the Fifth

Report and Order also requires applicants to make important new certifications as

a prerequisite to funding. For example, applicants must now certify that price will

be the primary factor in bid selection, and, as a guard against gold-plating, that

they will select the most cost-effective means to achieve goals of their technology

plans. Finally, the order establishes a process to codify USAC procedures and update those requirements as necessary to protect against waste, fraud and abuse.

This Fall, we will make recommendations to the Commission on revising the

schedule of discounts schools and libraries are accorded under the program, as they

purchase equipment and services. We believe that adjusting the discounts so that

applicants are required to increase their contribution to those purchases will encourage schools and libraries to make better economic choices, and further minimize the

opportunities for abuse. We also continue to tighten and monitor the competitive

bidding process to minimize opportunities for waste, fraud and abuse. The potential

weaknesses in a competitive bidding system were highlighted by the facts in the

various 2002 IBM applications.

II. THE IBM CASES ILLUSTRATE THE NEED FOR CONTINUING REFORM AND VIGILANCE

Under the E-rate program rules for competitive bidding, after developing a technology plan, applicants are required to seek competitive bids on goods and services

eligible for E-rate discounts by completing and posting an FCC Form 470 on the

USAC website. Applicants also must satisfy applicable state procurement rules, wait

at least 28 days after posting before committing to a contract, and in selecting their

service providers, make price the primary consideration. Competitive bidding is a

cornerstone of the E-rate program because it limits waste, ensures program integrity, and assists applicants in receiving the best value for their limited funds.

In the IBM cases, the applicants submitted a broad, generic version of the Form

470 indicating that they were seeking virtually every product and service eligible

for E-rate discounts, rather than developing a list of services actually desired, based

on their technology plans, with sufficient specificity to enable bidders to submit realistic bids with prices for specified services. While the Form 470 offered applicants

the chance to inform potential bidders if there was a more specific request for proposal (RFP) that they could consult, the applicants in the IBM cases generally indicated that one was not available, even though they posted such an RFP only five

days after filing their respective Form 470s with USAC.

In the principal IBM case, involving Ysleta Schools District (Ysleta), the applicant

indicated that it was seeking a ‘‘Technology Implementation and Systems Implementation Partner’’ to ‘‘assist the District in preparing applications on the District’s

behalf for E-rate funding . . .’’ Five firms responded to Ysleta’s RFP. IBM submitted

a 147-page response that addressed each category in the RFP. In that response, the

only prices that IBM quoted were hourly rates for Systems Integration, ranging

from $394 per hour for a Project Executive to $49 per hour for a Project Administrator. A ‘‘systems integrator’’ operates in the role of a prime contractor for coordinating services actually delivered by subcontractors. Our rules, however, contemplate a direct relationship between the applicants and the service providers, not

an indirect relationship through an intermediary subcontracting unit.

In its response to the RFP, IBM did not place bids on the specific products and

services that were eligible for E-rate discounts, as required by our rules. Ysleta selected IBM subject to the condition that a satisfactory contract could be negotiated

between IBM and Ysleta over the scope of work and the prices of E-rate-eligible

24

products and services. IBM and Ysleta engaged in those negotiations and completed

them on January 17, 2002. The final contract included five statements of work,

ranging from just under $1 million to more than $12 million, each with detailed

specifications, prices, and terms.

Triggered by a whistleblower’s anonymous letter in May 2002, USAC sent a special investigator to do a site visit and collect documentation from Ysleta concerning

whether it had the resources to effectively use the services it had purchased. After

reviewing Ysleta’s application and supporting documents, USAC denied Ysleta’s request for funding on December 3, 2002, based on violations of the Commission’s

competitive bidding rules, and provided Ysleta and IBM with a detailed explanation

for that denial. Soon thereafter, USAC also denied eight other applications that selected IBM as system integrator. On January 30, 2003, Ysleta and IBM sought Commission review of USAC’s decision, and the eight other applicants associated with

IBM filed similar appeals.

On December 8, 2003, after a de novo review of the facts of Ysleta and similar

cases, the Commission upheld USAC’s denial of eight of the nine funding requests

totaling over $250 million, for Ysleta, Donna, El Paso, and Galena Park in Texas;

the Navajo Education Technology Consortium and Albuquerque in New Mexico;

Oklahoma City, Oklahoma; and Memphis, Tennessee. The Commission found, in

general, that the so-called ‘‘two-step’’ bidding process (i.e., procurement of a system

integrator followed by private negotiation with that integrator for the goods and

services eligible for E-rate support) that IBM had participated in with Ysleta and

others had violated the Commission’s competitive bidding requirements.

Specifically, the Commission found in Ysleta that:

1. Ysleta did not attempt to select the products and services that represented the

most cost-effective offerings, with price as the primary consideration. The only

prices that IBM presented were hourly rates for systems integration. No bids

were for prices for any E-rate supported offerings. Ysleta did not request or obtain sufficient data about the prices of IBM’s competitors for E-rate services to

know if IBM’s prices represented the most cost-effective option. Ysleta’s internal

assessment of cost-effectiveness was not sufficient;

2. The manner in which Ysleta and other schools used Form 470 had the effect of

eliminating competitive bidding for the products and services eligible for discounts under the E-rate program, because Ysleta’s form failed to describe the

services that it sought to purchase in sufficient detail to enable potential providers to formulate bids. Specifically, the structure and content of the RFP

meant that potential vendors of specific services would be unlikely to respond

in a meaningful way to the all-inclusive FCC Form 470;

3. Because Ysleta’s two-step system integration approach was inconsistent with our

competitive bidding requirements and Ysleta failed to demonstrate that it selected IBM with price as the primary factor, it failed to submit a bona fide request for service, contrary to section 254(h)(1)(B) of the Communications Act;

and

4. Compliance with state and local procurement processes did not exempt Ysleta

from complying with the Commission’s competitive bidding rules.

The Commission found it in the public interest, however, to permit the applicants

that were denied funding to have a second chance to receive Funding Year 2002

support for services that they sought by seeking bona fide competitive bids. In particular, the Commission found that there was ‘‘substantial and widespread reliance’’

on USAC’s prior approval of applications that utilized two-step bidding. USAC could

reasonably have been construed as sanctioning the improper two-step bidding process by approving a 2001 application by El Paso, which involved IBM. The processing

window for these rebid applications closed on June 9, 2004.

The eight school districts denied funding by the IBM decision have resubmitted

funding requests seeking a total of $40 million in services, an amount that is substantially less than the prior requests. IBM was permitted to bid again because, as

stated in the order, the Commission believes that its rules were not as clear as we

would have liked, and that IBM may not have realized that its aggressive interpretation of the rules actually crossed the line. As it turns out, IBM bid on only one

of these applications, and it was not successful. As directed by the Commission,

USAC is carefully scrutinizing these requests to ensure that they are consistent

with the Commission rules as clarified in the Order. USAC is also investigating the

circumstances surrounding El Paso’s 2001 application.

25

III. THE LESSONS LEARNED FROM THIS CASE

The IBM case illustrates the importance of a robust competitive bidding mechanism in the E-rate program. It also shows the importance of having clear rules. We

continue to be vigilant in pursuing both goals.

The Commission acted unanimously in just over a year after USAC initially denied funding in the IBM cases. The Commission acted decisively and quickly, even

as it was addressing numerous other cases and was engaged in general rulemakings

to improve the E-rate program. In the course of the ‘‘IBM cases,’’ USAC denied a

quarter of a billion dollars in support, and also denied an additional quarter billion

dollars of support for Funding Year 2002 to nine applicants in similar circumstances

involving IBM. Thus, in the IBM cases, no funding was distributed, and no dollars

had to be recovered.

Competitive bidding is critical to the success of the E-rate program. As long as

vendors and suppliers are subject to competition from others who are also eager to

gain a customer, they have a strong incentive to offer a competitive, cost-based price

for E-rate eligible goods and services. Absent competitive pressures, service providers and applicants may inflate prices to maximize their gains.

Clear rules are also crucial. Private firms and E-rate applicants have incentives

to interpret unclear rules to their benefit, even at the expense of the nation’s students, library patrons, and all Americans—the true beneficiaries of the E-rate program. The Commission is committed to enforcing, explaining, and, when necessary,

changing its rules to minimize potential for their abuse. Through the ongoing rulemaking process, we are revising and adjusting the program rules to minimize abuse,

as we have done in the recent Fifth Schools Order, while we continue to grant support to those in need.

Finally, the IBM decisions are an example of the system working. The inquiry

into Ysleta began with an anonymous letter alleging rule violations by IBM. Pursuant to its normal practices, USAC sent a special investigator to do a site visit and

collect documentation, and USAC denied the funding request consistent with our

rules. The Commission followed its normal process by reviewing the record de novo,

and it largely affirmed USAC’s decision, seizing the opportunity to clarify its rules.

We at the Commission are proud of this result. But I believe there is more we

can and should be doing. As I indicated at the beginning of my testimony, since the

IBM case was concluded, the Commission has implemented further oversight requirements, and the Bureau has recommended changes to certification requirements

to the Office of Management and Budget for approval. We are considering further

steps. We believe these steps will continue to improve our oversight of the program,

and we will continue to use adjudications, rulemakings, and audits to help us identify areas of E-rate program administration that are vulnerable to fraud or to confusion that leads to waste or abuse.

The Commission and its staff remain absolutely committed to making necessary

improvements in the E-rate program. We are happy to provide any assistance to the

Subcommittee and stand ready to offer our technical and subject area expertise as

you move forward. Thank you, Mr. Chairman, for the opportunity to participate in

your review of the universal service fund’s schools and libraries support mechanism,

and I look forward to your questions on these issues.

Chairman BARTON. We thank you, Mr. Carlisle. The Chair would

recognize himself for the first round of questions, and the staff

would put the clock at 10 minutes.

Mr. McDonald, I am going to ask you just some general questions

to set the parameters. Do you know approximately how much

money is being spent each year on the E-Rate program nationally?

Mr. MCDONALD. We have a cap on dispursements and collections

of $2.25 billion annually. We commit up to about that level and we

disperse about 80 percent of that. We actually send checks out for

about 80 percent.

Chairman BARTON. So about $2.25 billion. And has that amount

changed since the program was implemented in the late 1990’s?

Has it been about $2 billion each year?

Mr. MCDONALD. That was the cap, as originally set, and then in

1998 the Commission changed the first fund year from a 12-month

to 18 months and lowered the cap to $1.925. Since then it has been

26

$2.25 billion a year, and the Commission has recently provided for

rollover of unused funds for prior year.

Chairman BARTON. Okay. So in the history of the program, we have expended somewhere around $12 billion; is that just a ball

park figure?

Mr. MCDONALD. I think it is about $8 billion in actual money out

the door.

Chairman BARTON. $8 billion out of the door. As we speak, how

many requests are pending for funding, either for this year or the

next year; do you know, in terms of dollars?

Mr. MCDONALD. We have committed $740 million for the funding year we are in now, and the cap for this year is $2.4 billion.

Chairman BARTON. So you have expended about a third of the

money that is allocated for this year.

Mr. MCDONALD. We have committed, sir. We send letters out to

commit funds, and then as applicants do the work, applicants or

service providers can bill us for that. Our actual expenditures are

much less than $740 million.

Chairman BARTON. Okay. Now, my first question—I just kind of

want to get that in the record so we know what we are talking

about—I believe this is our third hearing on this program, it may

be the fourth hearing, but every hearing it is one horror story after

another. Is this a program that we should suspend any funding

until we can get it right, just stop spending the money until we can

get the program rules right? Mr. Feaster, do you want to take a

shot at that?

Mr. FEASTER. We agree that there has been a series of horror

stories. I think the movement has been in the right direction. From

our perspective, it hasn’t been fast enough. I think it would be a

real major decision for somebody to make to suspend the program.

I think the schools are very dependent upon the money to maintain

connections to the Internet and get new connections. I think that

would be a very radical decision. I think tightening up the procedures, as happened in the past and will hopefully happen in the

future, you will see less horror stories. And we also are instigating

a broad-based audit program using USF funds to check up on more

applicants than we have been doing in the past where we are looking at a program of 250 audits over the next 18 months to identify

major problems.

Chairman BARTON. Mr. McDonald, do you have an opinion

whether we should suspend the program?

Mr. MCDONALD. Sir, I think you would have to weigh it against

disruption to schools and libraries across this country. We have focused on particular instances that are very troubling. One of the

ones we are here to talk about today, as Mr. Carlisle said, except

for the 2001 money in El Paso, the money did not go out the door;

we stopped it. As I have told the committee before, we are initiating a new program of 1,000 site visits to complement the application and invoice reviews we do and the audits we do.

The audits that we have done, and we have worked very closely

with Mr. Feaster and his team on these audits, they have identified

issues but they haven’t identified very many instances of fraud. I

think that the subcommittee staff has done a good job of focusing

on the worst cases. I don’t think that the public should come away

27

from these hearings thinking what they are hearing in these

hearings——

Chairman BARTON. By the testimony of one of you gentlemen,

there are 150 program reviewers and you admit that most of it is

self certification. You assume that what they are telling you is the

truth because you just don’t have the staff to really investigate it.

Was that your testimony, Mr. McDonald?

Mr. MCDONALD. I believe Mr. Feaster spoke about the self certification.

Chairman BARTON. So we are basically on an honor system here. We have spent $8 billion and there is a real question about how

much of that has been effectively utilized. Mr. Carlisle, do you have

a view on whether we should suspend the program?

Mr. CARLISLE. I would largely agree with Mr. Feaster on this. I

think it would be a radical decision. And if I could provide a little

specificity about why, my understanding is is that it is not as if in

every funding year you are funding schools and libraries from the

ground up to build new systems and establish new connections. A

good deal of the funding is sent out in order to maintain connections that are already there.

Chairman BARTON. Well, one of my questions is where are we in

wiring our schools? What percent of the eligible schools and libraries have been wired effectively? Do we have any statistics on that?

Are we 90 percent there or 80 percent there?

Mr. CARLISLE. In our recent 706 report, we identified—I can’t

speak to the percent that are eligible for funding, but in the 706

report, we stated that 94 percent of the schools in the country have

broadband access, and somewhere between 94 and 95 percent of libraries, I believe, do.

Chairman BARTON. So we are over the 90 percent level. That

would indicate that there is really not a need to continue to fund

at the $2 billion plus year level.

Mr. CARLISLE. Well, a review of that level may be in order, although I would say that, again, you have recurring costs for the

connections that are already there. There are monthly payments

that you have to make to keep a broadband line up or a telephone

line up.

Chairman BARTON. Well, I guarantee you, as long as money is

available, people are going to ask for it. We could double the program to $4 billion a year and there would be requests for $4 billion.

We could double that to $8 billion and there would be requests for

$8 billion. If we cut it to $1 billion, if it is really 100 percent—as

we get closer to 100 percent, change the rules a little bit, the user

community will adapt to that and do that effectively.

Well, one of my next questions, since nobody said we ought to

suspend the program, I was hoping somebody would say we should,

but I have to be honest and our expert witnesses here that are in

charge of the program say we shouldn’t, should we restructure the

program so that the local communities that are requesting the

funding have to put more of their local tax dollars upfront to participate? In other words, instead of requesting Federal dollars and

you go out and use them, should we set it up so that you go out

and we set out the program requirements. The local school district,

the local library goes out and puts in a system that meets those

28

requirements and then gets reimbursed for it. Obviously, if the

local taxpayers are on the hook, the school board members and the

administrators are going to make sure or I would think they would

make sure that those monies are actually effectively used because

it is coming out of their local tax base. Mr. Feaster, do you have

a comment on that?

Mr. FEASTER. I think that would be an excellent idea. From the

standpoint of oversight, the more local money that goes into a system, I think the better it is going to be. I would have to defer to

the program operators in terms of the impact on whether the

schools that don’t have that money how that would affect them in

the operation of the program.

Chairman BARTON. Mr. McDonald, do you have an opinion on

that? Just the general concept. I understand that we would have

to do a lot of work to work it out.

Mr. MCDONALD. I think you would see a much lower participation by the poorer schools who would have to come up with that

money upfront. The poorer schools frequently wait for our commitment letters to initiate service because they don’t have that money,

and when they are assured——

Chairman BARTON. Well, but now 94 percent have gotten some

connection established, if Mr. Carlisle’s statistics are relevant. So

we are not starting from ground zero. You could set up some sort

of a loan program that a low-income school district could apply for

a loan, and once they show that they are actually spending the

money for what it is supposed to be, they could be reimbursed. I

understand there is a difference between El Paso Independent

School District in far west Texas, it is low income, and in Highland

Park School District in urban Dallas that is one of the higher income districts in the country. I understand that.

So you could have some special provisions for low income participation based on some sort of a loan program. But unless we force

accountability or at least incentivize accountability at the local

level, if you have got a pile of Federal dollars that are just out

there, people are going to grab at it. It is free money, it is found

money, it is somebody else’s money. So you have got to figure—I

think we have to figure out a way to make sure that there is a real

incentive at the local level to use the money for which it is intended.

Mr. Carlisle, do you have a comment on some sort of a system

where the local dollars go upfront?

Mr. CARLISLE. Well, I think your proposal would certainly create

that incentive. I would have the same concern, although what you

point out about much of the facilities already being in place would

be a countervailing consideration. We are taking steps and will

make a recommendation to the Commission in the next month or

so to lower the discount rate that is currently applied, which would

have the effect of requiring school districts to have more skin in the

game, to put more of their money upfront in order to qualify for

funding. That coupled with a requirement that certain of those recipients would have to do independent audits would also be a control on the program, an alternative one to what you have suggested

but a control.

29

Chairman BARTON. Let the record show that ‘‘skin in the game’’

is a technical term used at the FCC for the local community to put

more of their dollars at risk in the beginning of the program.

Mr. McDonald, before my time—my time has expired. You wrote

a letter to Mr. Bob Richter who is with IBM Corporation, in charge

of their national E-Rate program. This letter was dated September

16. It is directed toward the El Paso Independent School District

funding for the year 2001, and the amount of money that was dispersed under that was a little over $55 million. The thrust of this

letter appears to be that a fair amount of that money may have to

be reimbursed. Do you care to comment of what percentage of that

$55 million this letter indicates might need to be reimbursed?

Mr. MCDONALD. Potentially a significant amount of that, and we

have invited IBM to come back to us and help clarify which of

these services that they delivered an invoice for are eligible and

which are not.

Chairman BARTON. But do you think it is going to be in the

neighborhood of $40 million or half of it?

Mr. MCDONALD. I don’t think it would be that high. The analysis

attached to the letter walked through the individual pieces of it,

and a portion of the issue is what schools got the services? Were

they schools that qualified for the 90 percent discount rate or was

it the entire school district? And the answer to that question could

be a significant piece, and we just don’t know.

Chairman BARTON. The Chair would ask unanimous consent that

the letter with the attachments be included in the record. I am told

that the minority staff has seen this letter? Is there any objection?

With hearing no objection, this letter is included in the record.

My final question before I turn it over to Ms. DeGette, in the El Paso case, they were being funded in the $2 million to $4 million

range and then the funding request jumped up to over $60 million.

Is there no protocol within USAC, when you have such a huge increase from a prior year, that that is not automatically red-flagged?

We had the same case in the Dallas Independent School District

where they were going along at an amount of money and then

there was a significant jump in a single year. Does that not raise

some internal flag that needs to be investigated?

Mr. MCDONALD. It does since these hearings have begun, sir. I

think after the last hearing we realized that that should have been

an additional flag for us, and we have made that an automatic step

now.

Chairman BARTON. Okay. The Chair would recognize Ms.

DeGette of Colorado for 10 minutes.

Ms. DEGETTE. Thank you, Mr. Chairman. I agree with the chairman that one of the reasons this money has been so grossly misused is because of lack of oversight and local accountability, but my

concern is one that Mr. McDonald articulated, which is that some

of these school districts are so poor, I mean after all the whole program is to target poor districts, that they may not have the financial wherewithal to even come up with an initial amount of money.

And what I would like to explore is I was just telling staff my

daughter in the Denver Public Schools, which does receive this

money, they quit watering the lawn at her high school because

they don’t have enough money to maintain the grass. So I was tryVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 96098.TXT HCOM1 PsN: HCOM1
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ing to think about how they would come up with enough money to

make a major investment in computer wiring, and I think that is

a concern we all share.

But my concern is how do we find alternative ways to ensure

that this money is well spent? And I wanted to ask you a couple

of questions, Mr. Feaster. You testified in your opening statement

that it would take additional enforcement resources to really do the

job that you need to do; is that correct?

Mr. FEASTER. That is correct; yes, ma’am.

Ms. DEGETTE. You have, I think, three folks investigating these

complaints right now; is that right?

Mr. FEASTER. Yes, ma’am.

Ms. DEGETTE. How many staff do you think you would need to

adequately investigate and do this oversight?

Mr. FEASTER. Approximately 16 additional staff. We are in the

process of developing a request for proposals to conduct approximately 250 audits of the program over the next 18 months. For us

to do that many reviews of the audits, we would need additional

resources.

Ms. DEGETTE. Do you have a ball park sense of the kind of resources you are talking about, a dollar amount?

Mr. FEASTER. For the 250 audits, about $10 million.

Ms. DEGETTE. Ten million? And do you have any estimate about

how much fraud and waste and abuse is going on out there, roughly?

Mr. FEASTER. Based on 135 audits that have been done over the

past couple of years, we found about 36 percent of those people

were not following the rules.

Ms. DEGETTE. Do you have any sense about how much money we

are talking about with that 36 percent, roughly?

Mr. FEASTER. No, I don’t.

Ms. DEGETTE. What do you think—do you have advocate independent audits of these applications?

Mr. FEASTER. Yes, I do.

Ms. DEGETTE. Tell me how that would work, and are there additional rules that can be put into place to beef up independent audits?

Mr. FEASTER. When you say independent audit, I think that the

audits done by my organization or by contractors under my authority is the way to go. USAC also does internal audit—using an internal audit staff, they also do audits. I think that adds to the number

of audits we do. The concept I think you are talking about is independent audits by the school district.

Ms. DEGETTE. That would be helpful too, I would think.

Mr. FEASTER. We would have to review that to ensure that they

are truly independent. If the school district is paying somebody to

do something, they tend to get the results they like. That is always

a possibility.

Ms. DEGETTE. But there is a mechanism that can be put into

place as part of the application process to ensure independent audits by school districts, I would assume.

Mr. FEASTER. We could develop something in coordination with

USAC and the Wireline Bureau.

31

Ms. DEGETTE. Now, can USAC funds be used for independent

audits?

Mr. FEASTER. We are going to try to do that with my office and

USAC partnering in some audits.

Ms. DEGETTE. Mr. Carlisle, in your testimony, you said that the

Wireline Competition Bureau is making a recommendation to the

Commission on revising the schedule of discounts that schools libraries are quoted under the program. And what this recommendation would do, as you testified, it would increase applicants to increase their contribution to purchases. And this is what I am concerned about: I am wondering if you are concerned whether these

disadvantaged school districts will have a difficult time paying for

the equipment as a result of the increased costs of the schools, and

has your agency done any research on this issue?

Mr. CARLISLE. My staff is looking into it as part of the process

of making a recommendation. Obviously, any recommendation that

we make to the Commission is going to take that into account.

Ms. DEGETTE. So you don’t have any firm proposal to increase

the cost to the schools of the equipment and services, correct?

Mr. CARLISLE. I have not read the recommendation yet, so I don’t

exactly know what——

Ms. DEGETTE. I am sorry, is there a recommendation already?

Mr. CARLISLE. Not before the Commission yet. My staff is in the

process of writing that, which would be a recommended order to

the Commission.

Ms. DEGETTE. And what kind of research is your staff doing to

take into account the financial ability of these poor school districts

to pay?

Mr. CARLISLE. Well, typically, what we do in any rulemaking proceeding is review the record that we have got on hand, the comments and replies filed, which will include comments and replies

filed by the school districts and advocates on their behalf, and also

have meetings with them to find out what the scope of that issue

is.

Ms. DEGETTE. And what is that—is that comment period open

now?

Mr. CARLISLE. I am not sure—I am sure it is——

Ms. DEGETTE. Someone is shaking her head no behind you.

Mr. CARLISLE. I am sure it is closed at this point, but I am not

sure exactly——

Ms. DEGETTE. I mean was there notice to these school districts?

Mr. CARLISLE. It would have been the same public notice that

anyone receives of any rulemaking that we have. So it is publication in the Federal Register. I don’t know that specific notice was

sent. We have had ex parte meetings with a number of schools already, schools and libraries already, that would be affected by

changing the discount rate. But in terms of when the initial notice

of proposed rulemaking went out, it would have been the same

publication that the rest of the public received about it.

Ms. DEGETTE. And do you know whether—since the comment period is closed, do you know how many comments that you have received and from what types of schools and so on?

Mr. CARLISLE. Off the top of my head, no, but I would be happy

to work with your staff to give you that information.

32

Ms. DEGETTE. That would be great. Mr. Chairman, I would ask

unanimous consent that Mr. Carlisle be allowed to submit in writing the kinds of responses to my questions.

Mr. WALDEN [presiding]. Absolutely. Without objection.

Ms. DEGETTE. Thank you. Now, I am wondering, Mr. McDonald,

I think you testified a minute ago in response to the chairman’s

question that you had some concerns about these schools, the

needy schools being able to pay a higher percentage. I am wondering if you can elaborate on that answer and tell me why you do

have that concern?

Mr. MCDONALD. At a 90 percent discount rate, the schools are

paying 10 percent. If the discount rate were lowered to 80 percent,

the schools would pay 20. That is a doubling of the share they have

to come up with, so from their perspective, that isn’t a trivial impact on them. I am not taking a position about should the rate be

changed or not, just that from that perspective, every 10 percent

decrease in the maximum discount rate is a doubling or tripling of

what the schools have to pay today.

Ms. DEGETTE. Do you know if anybody has done any research on

whether reducing the E-rate contribution from 90 percent to 80

percent would have any effect on the wrongdoers? I mean it still

seems to me that if you have a 20 percent match, there is going

to be an incentive on some people’s part because there is still 80

percent.

Mr. MCDONALD. You mean——

Ms. DEGETTE. Where is the tipping point where it would really

create more accountability?

Mr. MCDONALD. You may be aware that USAC formed a Task

Force on Prevention of Waste, Fraud and Abuse last year, and the

task force spent a lot of time on this question. And there were advocates—the composition of the task force included representatives

of schools, rural schools, urban schools, libraries, service providers,

and there was extensive discussion about this, some people pushing

for maximum 70 percent rate. The task force ended up at 80 percent, very much the kind of issues you were just going through

there. Is the non-discount share large enough to stop the wrongdoing?

Ms. DEGETTE. Right.

Mr. MCDONALD. Was it still possible for the service provider to

inflate the price and get that money back? That is where they came

out. I have learned more about what is really going on in some of

what the committee has seen, because documents that have come

to your attention have not come to ours. Obviously, they aren’t

sharing these documents with us.

Ms. DEGETTE. And this task force, as I understand it, was primarily composed of vendors, while there were others on the task

force; is that right?

Mr. MCDONALD. No, I think it is primarily applicants that

were—vendors and applicants. We tried to get a cross section of all

the stakeholders in the program. So there were a number of school

applicants, a number of library applicants, rural schools, Catholic

schools.

33

Ms. DEGETTE. It would be helpful to me, Mr. Cline, if you

could—I am sorry, Mr. McDonald, if you could—the name tags are

over—Mr. Cline says, ‘‘Oh, no.’’

If you could supplement your testimony with the list of who was

on that task force, that would be very helpful.

Mr. MCDONALD. Be happy to do that.

Ms. DEGETTE. Thank you.

[The information referred to follows:]

34

35

36

37

38

Mr. WALDEN. Mr. McDonald, I want to go to you. Could you turn

to tab 65 in our notebook of information? You will find there a

memo from Mr. Quentin R. Lawson of the National Alliance of

Black School Educators to Mr. Bob Emery, John Colvin and Don

Parker. And attached thereto is a November 2, 2000 letter from

NEC to Mr. Lawson in which you will see—are you on the same?

Okay. In which you will see right off the top he says, ‘‘Dear Mr.

Lawson, I am pleased to respond to your letter on behalf of the

VNCI, NEC and IBM,’’ quote, unquote, ‘‘the team.’’

And then later on page 2 of that letter he says, on sub 6, ‘‘The

teaming agreement related to the team members participation with

one another is in negotiation and will remain the confidential information of each member of the team. The team, while fully committed to supporting NABSE and NABSE’s membership, believes

that any contractual arrangement between NABSE and the team

could be construed inappropriately by third parties.’’

And on the third page, he writes—or these people write, Mr.

Colvin, Mr. Emery and Mr. Parker, ‘‘As an offset to the costs that

NABSE will incur in support of this partnership, NABSE will receive an annual payment of 1.5 percent of the cumulative business

generated by the team members in sales to NABSE member

schools.’’

Is this some sort of kickback we are dealing with here? How

would you describe this 1.5 percent payment back to NABSE and

this reference to how this might be misconstrued by third parties?

Mr. MCDONALD. My understanding is that NABSE was presenting itself as a disinterested consultant to these school districts,

helping them participate in E-rate. As I mentioned in my testimony, we have denied millions of dollars where that consultant

who is controlling the process of selection of vendor is associated

with those vendors.

Mr. WALDEN. Do you think that is the case here, that NABSE

was associated with the vendors?

Mr. MCDONALD. NABSE certainly has an interest in making sure

the work goes to these vendors, because they make money if it

does. Presumably, they don’t if it does not.

Mr. WALDEN. And what qualifications, from your experience, did

the NABSE people bring to the process as technical qualifications?

Mr. MCDONALD. I don’t know, sir.

Mr. WALDEN. Are you familiar with other such agreements where

there is a percentage that goes back based on sales to a third

party?

Mr. MCDONALD. I recall the incident of Total Com and there was

an FCC decision on this where we found Total Com was the consultant where whenever they were involved with an applicant, the

applicant chose an outfit called SiteLink to provide internal connections. We got hold, in that case, of a contract that the applicant

and Site Link would sign that named Total Com a beneficiary of

the contract. It didn’t specify the percentage, as I recall, but presumably there was some money going back to Total Com based on

getting business for SiteLink. We denied those applications; the

FCC upheld that decision.

Mr. WALDEN. But that is a similar sort of scheme to what we are

reading about here?

39

Mr. MCDONALD. I would think that is similar; yes, sir.

Mr. WALDEN. And so would this be in violation of your rules

then?

Mr. MCDONALD. If this document had come to our attention, we

would have denied these applications.

Mr. WALDEN. Now that this document has come to your attention, is there a mechanism for recovery if this is in violation of your

rules?

Mr. MCDONALD. Yes, sir.

Mr. WALDEN. And is that something you are pursuing?

Mr. MCDONALD. Yes, sir.

Mr. WALDEN. All right. Mr. Feaster, from your perspective as the

IG, what is your reaction to this?

Mr. FEASTER. It would be something we would look into. It may

be part of a wider investigation that is ongoing at the present time.

I don’t know that for a fact, though.

Mr. WALDEN. All right. Mr. McDonald, your testimony indicates

that your investigations of El Paso in funding year 2001 have

shown, as you said, there were substantial amounts of ineligible

services funded. Walk me through this process of going back and

recovering on those that you determine are ineligible. Is that happening? Will that happen in 2001?

Mr. MCDONALD. Let me just amend my answer to that last question. NEC reached a settlement agreement with the Justice Department and we won’t seek, as I understand it, additional money

from NEC. They settled all their issues with E-rate. So as we go

back to look at the NABSE stuff, as I understand it, we wouldn’t

be looking to take—to recover——

Mr. WALDEN. From NEC. But what about the other participants

in that?

Mr. MCDONALD. Yes. Yes. In 1999, we discovered that we had

made some errors in making commitments in the first year. We

were in the middle of an audit, disclosed that to the auditor. That

led to discussions with the Commission and led to issuance of an

order in 1999, the Commitment Adjustment Order, where the Commission directed how do we do this when we discover after the fact

that we have committed money and dispursed money in violation

of the rules? So the process was established back then, and they

have recently amended that process in the fifth report and order

so that previously we could only seek money from the service provider, now the guidance is to seek it from whoever the guilty party

is, whoever violated the rules. In the old days, there was an opportunity for the service provider to offset the money owed back to us

from additional invoices that would be otherwise properly paid.

They have eliminated the offset option, so——

Mr. WALDEN. They have to pay you back.

Mr. MCDONALD. [continuing] it has to be paid. And they have

moved it under the Debt Collection Improvement Act so that there

is much more teeth in getting the money back and applied the socalled red light rule to that, that we won’t make any other payments and we will deny other requests if they are delinquent in

making those payments. The Commission has moved strongly to

tighten up recovery for rule violations.

40

Mr. WALDEN. What is your take on the fact that IBM bundled

its consulting services, valued at 7 percent of the cost of each Erate project, under the fees charged to the district and El Paso?

Mr. MCDONALD. I would say they were bundling ineligible services and seeking recovery of payments for ineligible services.

Mr. WALDEN. You testified that your investigation of El Paso concluded that the procurement approach was not consistent with the

rules. Is this because of their strategic technology partnership with

IBM? And how else was the procurement approach in violation of

the rules?

Mr. MCDONALD. In my testimony, I talked about the two-step approach, and I think that is the fundamental issue, that they avoided the competition over prices of goods and services, but there were

a number of other flaws in the processes. As my colleagues have

pointed out, the Form 470 listed virtually every possible product

and services——

Mr. WALDEN. Right. That is sort of like saying here is the catalog. I want everything in it but I don’t know exactly when or what.

Mr. MCDONALD. Yes, sir.

Mr. WALDEN. But make it all available to me at the discount.

Mr. MCDONALD. So that doesn’t provide any guidance to wouldbe vendors about what do you really want, what should I bid on?

Mr. WALDEN. And have they thought through what they need.

Mr. MCDONALD. Correct.

Mr. WALDEN. Isn’t that the underlying issue here?

Mr. MCDONALD. Yes, sir. The 470 said there was no RFP. There

was an RFP, and it was very different from the Form 470, as Mr.

Carlisle, I believe, testified. So there were a number of issues in

addition to ineligible services in the statements of work.

Mr. WALDEN. I want to go back just briefly to a comment you

made about where USAC had made some errors in approving funds

and then you later told your auditor. What happens in that case

or in future cases if USAC makes the mistake? Does the district

still have to pay it back or how—I mean where does this equal out?

Mr. MCDONALD. In the commitment adjustment order, the commission addressed that and said in a number of instances the mistakes we made were rule violations, and for that first year they

waived those. The others were statutory violations that we were

paying for ineligible services or paying for telecommunications

services to be provided by an ineligible telecommunications provider. They concluded those were statutory violations, and they had

no authority to waive those, so we had to seek recovery. Folks

who——

Mr. WALDEN. How do you end up with rule and statutory violations when you are administering this program? How did that happen?

Mr. MCDONALD. Well, the statute is not very detailed, and

the——

Mr. WALDEN. I see.

Mr. MCDONALD. [continuing] Commission has obviously done a

lot to flesh this program out in rules.

Mr. WALDEN. All right. Mr. Feaster, you mentioned steps the

Commission has taken to address the programmatic weaknesses

and expressed frustration, though, with the pace of the CommisVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 96098.TXT HCOM1 PsN: HCOM1
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sion. We have a new gentleman who has just taken over with the

Commission. Can you elaborate on what bothers you with the process, what Mr. Carlisle can do or has done since taking over and

what remains?

Mr. FEASTER. I think the full implementation of the DOJ recommendations on certifications is one positive step. We have had

discussions about that and we have both agreed that our staffs

should work together with DOJ to see how far we can go with those

certification changes. Also, they have some items out for comment

which would tighten up the competitive process aspects of the program that we would—we would like to see the requirement for

three bids as a minimum requirement. We think that would help

the process be more competitive and lower the prices for the equipment. The Bureau has a—we know they have a lot to do but we

think that they need to expedite, and I think Mr. Carlisle has committed to that process.

Mr. WALDEN. Mr. Carlisle, would you like to comment on that?

Mr. CARLISLE. I have committed to that process. I think one of

the first public statements I made after I took the Office of Bureau

Chief was that I had four primary things that we had to get done,

and E-rate was right on there, improving oversight of them. We obviously have many, many things that we have to get done in the

Bureau, but in terms of the things we absolutely have to get done

as top priorities, that is right up there at the top.

My sense is that we are continuing the work that was started

with the 2002 notice of proposed rulemaking. We have already released three orders at this point, typing up aspects of the program

on our fifth report and order, and we are moving into our sixth report and order, which is the recommendations that we will be making in the next month or so. So we are doing the best we can with

what we have got, and we will continue to do so. And I am also

committed to working with Mr. Feaster and also Mr. Fishel at the

Office of the Managing Director and our general counsel.

Mr. WALDEN. We appreciate that. Obviously, you have got a

bucket with a lot of money in it, and a lot of people have been drilling holes in the bottom of it.

Mr. FEASTER. That is true.

Mr. WALDEN. And it is time to plug those holes. Thank you. The

Chair recognizes the gentleman from New Hampshire, Mr. Bass,

for questions.

Mr. BASS. I will pass, Mr. Chairman.

Mr. WALDEN. Chair recognizes the gentlewoman from Colorado,

Ms. DeGette, for further questions.

Ms. DEGETTE. Are we going to do two rounds?

Mr. WALDEN. If you have any further questions you want to ask.

Ms. DEGETTE. Thank you very much, Mr. Chairman. Thank you,

Mr. Chairman. I have actually never known Mr. Bass to pass on

questions, so I wasn’t quite prepared.

Mr. Feaster, I just wanted to ask you, your written testimony indicated that the FCC IG established a working relationship with

the Antitrust Division of the DOJ, in large part because of the

number of investigations that you were supporting involved allegations regarding the competitive procurement process. About how

42

many competitive procurement process investigations are you currently supporting the Antitrust Division with?

Mr. FEASTER. I believe there are about 35. I don’t know if they

are all antitrust related. We work with two groups, actually, the

FBI and the Antitrust people, and I am not sure how that 35

breaks down. Maybe Tom knows.

Mr. CLINE. I am not certain exactly of the active investigations

that are in process how many of them specifically relate to competitive procurement problems. Some of them relate to items such as

paying for goods and services that were not received. But we do

know that we have 35 that are active at the moment, and our office

is actively supporting 18 of those with audit support and work like

that. The others we are monitoring, we are aware of them, and we

respond to requests when we receive them.

Ms. DEGETTE. And that is in addition to the existing work that

you folks have.

Mr. FEASTER. Yes.

Ms. DEGETTE. And that is with the three agents that you have?

Mr. FEASTER. Yes, ma’am.

Mr. CLINE. They are auditors, though, ma’am.

Ms. DEGETTE. Oh, they are auditors. I have just got to say on

behalf of the committee, and I think we would all agree, you folks

have been doing a heck of a job with very limited resources, so

hopefully we can get you some more resources to continue your fine

work.

Mr. FEASTER. Thank you.

Ms. DEGETTE. Now, Mr. Carlisle, I want to come back to you for

a minute because you testified that USAC denied a quarter of a billion dollars in support to the IBM cases and that no dollars have

to be recovered because funding was never distributed. And Mr.

McDonald talked in his testimony about how USAC was concerned

about funding year 2001 and the ineligible services from IBM. So

I guess my question is if it turns out that El Paso was guilty of

receiving money for ineligible products and services, is the FCC

going to make every appropriate effort to recover those monies?

Mr. CARLISLE. Yes.

Ms. DEGETTE. Okay. My other question, and I don’t know if you

can answer this or someone else, do you all think that if there

hadn’t been this whistleblower letter, that the El Paso case would

have come to light? Would we have found that? Mr. McDonald?

Mr. MCDONALD. In my longer statement, I think it may have not

got into my oral statement, I do believe we would have uncovered

the 2002 pattern. There were so many applicants doing the same

thing, seeking so much money that I believe we would have conducted intensive reviews of those, sought the competitive bidding

documents and learned what the approach was. And I think that

would have led us to look back to El Paso 2001.

Ms. DEGETTE. Do you think it would have happened as quickly

as it did or would it have happened after monies were already dispersed?

Mr. MCDONALD. I am glad we got the letter.

Ms. DEGETTE. How many cases do you think are out there like

that that haven’t had whistleblower letters? Mr. McDonald?

43

Mr. MCDONALD. One, the whistleblower hotline is a very effective

tool for us. It does bring our attention to a lot of issues, and we

have a special investigations team that follows up on every complaint we get—telephone calls, letters, whatever. In addition to

that, we have our own pretty intensive review of applications. We

look for similarities across applications that would suggest service

provider involvement in those applications. So we have our own

means at this and we catch a lot of this ourselves without whistleblower complaints, but that is a very valuable tool.

Ms. DEGETTE. Well, I understand you have mechanisms in place,

but, as we heard in the last hearing and as we have seen ample

evidence, there are just these gross examples of fraud going on

throughout the country, and I am wondering if there are procedures other than the ones you have in place that can be put into

place so that we can catch these systems like El Paso early on.

Mr. MCDONALD. We are in funding year 2004, and the committee

is focused on Puerto Rico was 1998 and 1999; San Francisco I think

was 1999 or 2000. We have gotten a lot more sophisticated from

those early years as we have learned about the abuses of the program. After these hearings, we go back and think about the issues

that you have raised and what could we do to literally improve our

procedures to address them. We want to get this right, and we are

looking for every means we can to improve to make sure we get it.

Ms. DEGETTE. So it is your view that since 2000-2001 these gross

abuses are not occurring at the rates they were before then?

Mr. MCDONALD. I believe they are not occurring in the rates they

were before then. We have hired certified fraud examiners to look

at these applications, to look for patterns. One of the first things

we do when we get the applications data entered is look for patterns across, look for very large requests from smaller school districts, is there a pattern, and then we go look for those.

Ms. DEGETTE. Okay. So then here is my question: If we have

adequate enforcement in place now, why are we talking about lowering the E-rate contribution or the formula to 80 percent?

Mr. MCDONALD. Are you asking me that?

Ms. DEGETTE. Yes.

Mr. MCDONALD. Well, I am saying we are getting better. I think

that we are catching this much better than we used to. I don’t

want to represent that there is no fraudulent activity in E-rate

today.

Ms. DEGETTE. What do you think about that, Mr. Feaster?

Mr. FEASTER. It goes back to the fact that we haven’t done

enough work in the audit area to make that statement positively,

but we have indications that waste and fraud is widespread.

Ms. DEGETTE. Do you think it has decreased dramatically since

these new controls have been put into place?

Mr. FEASTER. I don’t know if it decreased dramatically. I think

it has taken a bite out of it. The review process has been strengthened. We are doing more audits. We are finding more problems.

The more audits we do, the more problems we find, so I don’t know

whether it is decreasing or we are just finding more or finding less.

Ms. DEGETTE. We don’t really have a way to know right now how

much fraud and abuse is out there, do we?

44

Mr. FEASTER. No, we don’t. Hopefully, once I get 250 audits

under our belt, we will be able to tell you.

Ms. DEGETTE. Mr. Carlisle, I want to ask you, many vendors and

school districts have been found guilty—and I recognize that you

are new, so the information you have will be based on what your

agency has been doing—but many of the vendors and school districts have been found guilty of violating E-Rate program rules, either accidentally or maliciously. Some of the repeat offenders like

IBM have been allowed to continue operating with the E-Rate program, and I am wondering why that is.

Mr. CARLISLE. Well, our debarment rules, which were adopted in

April 2003, debar participation in the program of anybody who has

been convicted of a criminal offense related to the program or of

civil fraud or like civil charges related to actions within the program.

Ms. DEGETTE. I am sorry, I am confused. Civil actions, you mean

a judgment, a court judgment? Okay. Because people don’t——

Mr. CARLISLE. If they are sued for fraud or there is a DOJ civil

action against them for fraud, yes, exactly.

Ms. DEGETTE. Which is—okay. I am confused, because I thought

that it required a criminal conviction.

Mr. CARLISLE. No.

Ms. DEGETTE. No?

Mr. CARLISLE. In April 2003, we made clear that if there are

civil—if they have been found liable for civil judgments related to

the program, things like fraud, et cetera, they can also be debarred

from the program.

Ms. DEGETTE. Okay. And can these vendors avoid that kind of

finding by entering into a settlement agreement which specifically

doesn’t have a finding of fraud and thereby be eligible for continued

participation in the E-Rate program?

Mr. CARLISLE. Theoretically, they would not have received a conviction and also not a civil judgment against them, so, theoretically,

yes. However, my understanding is is that applications submitted

for funding by such vendors would be subjected to a higher level

of scrutiny.

Ms. DEGETTE. Since April 2003, when you folks promulgated

these standards, has there been a civil judgment that would debar

somebody from eligibility under the E-Rate program?

Mr. CARLISLE. Not to my knowledge, although we have debarred

individuals on the basis of criminal convictions.

Ms. DEGETTE. Right. And how many have been debarred on that

basis?

Mr. CARLISLE. Three, and we have pending action on several others.

Ms. DEGETTE. And who was that?

Mr. CARLISLE. Oscar Alvarez, John Angelitis and Duane Maynard.

Ms. DEGETTE. So those were three individuals who were convicted. What about some of these big companies? Has any company,

has any corporation been debarred?

Mr. CARLISLE. I believe the Enforcement Bureau currently has

under consideration debarment of NEC, but they have not yet completed that proceeding.

45

Ms. DEGETTE. And that has been a criminal proceeding as well,

NEC, right?

Mr. CARLISLE. I believe so, yes.

Ms. DEGETTE. Thank you.

Mr. BASS [presiding]. The Chair recognizes himself for 10 minutes. Mr. Feaster, did you agree with the Commission’s order regarding the IBM matter?

Mr. FEASTER. Yes and no. First, we agreed with the Commission

agreeing with USAC in denying the applications. The no is that we

thought they were—that the schools played a role in the misdeeds,

that there should have been action taken against the schools and

also against IBM. Basically, the order let them redo it, and we

think that IBM shouldn’t have had the opportunity to rebid, and

the schools should have lost the money.

Mr. BASS. What are your specific concerns regarding the program’s competitive bidding requirements? What do you believe is

the effect of weakness in this area of program design?

Mr. FEASTER. The effect is basically to cost the Universal Service

Fund more money. The lack of competition means higher prices

paid for equipment. The long-range effect is that the schools that

are the neediest end up losing money because the fund is capped.

Mr. CLINE. Sir, if I could expand on that as well.

Mr. BASS. Sure.

Mr. CLINE. We believe that the current competitive process that

is utilized for E-rate funding decisions—or applications, excuse me,

is based upon some faulty assumptions. There is an assumption

that the posting by the applicant of the 470 on USAC’s web site

for 28 days is going to generate a cycle of competitive activities,

that there will be vendors looking at these 470’s and there will be

this activity of phone calls and discussions. And we could certainly

not say anything to the extent that that may or may not be true,

but our audits indicate that that frequently does not happen. The

posting of the 470—the 470 is too general for vendors to be able

to generate good and competitive and sort of point-on bids that

meet the schools needs, and frequently that just does not generate

the level of competition that was originally envisioned by this process.

Mr. BASS. Mr. Feaster, what are your specific concerns regarding

the program’s reliance on self certification? What do you believe is

the effect of weaknesses in this area on the program design?

Mr. FEASTER. Well, the conclusion we have reached regarding

certification is that the bad guys will certify anything, and we recommended that the Bureau take the DOJ recommendations and

implement them on their forms to strengthen the language on the

forms and let the antitrust people when they do find misconduct

to take the appropriate legal action. That has partly been done,

and we were working with the Bureau to implement the other

ones, other recommendations that hadn’t been fully implemented

yet.

Mr. BASS. What do you think it is—the weakness in this area,

what effect do you think it has on program design, in general? How

does it affect the rest of the process?

Mr. FEASTER. Well, the certification process is a major foundation

of the program, and if people are certifying to things that they

46

haven’t done, we allow funding to occur for when it shouldn’t occur.

So, again, it goes back to money being misused by the applicants

of the program. That means less money for the truly needy applicants.

Mr. CLINE. If I could expand——

Mr. BASS. Yes.

Mr. CLINE. [continuing] another thought on that matter. What

we frequently run into in discussions with the certifications, again

with the Antitrust Division, is the lack of strength that the certifications as they currently are is sort of ignoring the impact of some

of the actions the Commission has taken recently to improve the

certifications and forms. Discussions we have had with numerous

antitrust attorneys indicate that these certifications provide no

strength, they have no basis by which they can make charges.

An interesting fallout of some of the charges and some of the

charges that are being worked on in active investigations under the

E-Rate program is they, to our knowledge, never include a charge

of false statements. Now, in government contracting, in grants, in

numerous other activities involving the transfer of Federal funds,

false statements is kind of one of those bread and butter charges.

Typically, if you have committed a crime, you have made a false

statement. I think it is telling that we have no charges of false

statements in this program, and it goes back to the weakness with

the certifications.

Mr. BASS. Mr. Feaster, in testimony today, we hear that El Paso Independent School District’s $27 million maintenance operation

was, ‘‘consistent,’’ with its technology plan. Do you believe rules regarding technology plans are sufficient to prevent wasteful spending?

Mr. FEASTER. No, we don’t. One of the findings that we have

come up in our audits is the difference between program rules and

implementing procedures established by USAC, and we have been

recommending that those implementing procedures be codified by

the Commission in order to bring them up to the status of rules

where we could take money back for violation of those. One of

those areas is the tech plan, that there are a lot of implementing

procedures that we would like to see codified.

Mr. BASS. Mr. McDonald, if you would be good enough to turn

to tab 38 and 39.

Mr. MCDONALD. Yes, sir.

Mr. BASS. Mr. McDonald, tab 38 and 39. One issue with the strategic partnership approach is the vendor getting—an example of

the vendor getting too involved in the application process. These emails used the term, ‘‘verbal commit.’’ What do you make of that?

What does that imply to you about the integrity of the competitive

process?

Mr. MCDONALD. It appears that the verbal commit is occurring

before the Form 470 is even posted, which is a violation of the

rules. The Form 470 is to be posted, wait 28 days, consider all the

bids you got and choose the most cost effective. It appears that

wasn’t followed in this instance.

Mr. BASS. And, obviously, the—well I am not going to answer the

question for you—what does it imply about the integrity of the

competitive process? It is pretty self evident.

47

Mr. MCDONALD. Yes. The commitment was made before it was

even begun.

Mr. BASS. Right. You state that you would probably have caught

the El Paso-IBM patterns absent the anonymous letter; is that correct?

Mr. MCDONALD. Yes, sir.

Mr. BASS. Do you think your processes would have captured the

full pattern of activity?

Mr. MCDONALD. We didn’t see these documents. I think your

powers to get documents are better than ours.

Mr. BASS. Well, have you changed your procedures since then to

make sure you can catch such an activity?

Mr. MCDONALD. We have certainly broadened our scrutiny of the

competitive process and sought—much more than we used to—we

are seeking the RFPs, all bids that were received, evaluation worksheets to see how the winning vendor was selected. We are doing

much, much more of that than we used to.

Mr. BASS. Later we will hear from Charles Tafoya, the superintendent of the El Paso Independent District who alleges in his

written testimony that USAC unexpectedly denied their year 6

funding request. It might be a form of retaliation. What can you

tell us about this application and why it was denied?

Mr. MCDONALD. We did subject El Paso to heightened scrutiny

in funding year 2003 based on denying its application in 2002. Part

of the review was whether they had secured access to the necessary

resources to make effective use of the discounts, and we were not

able to get clear documentation that they had budgeted for the

non-discount share for all the services they were requesting. So we

denied on that basis. If they think that is incorrect, that they did

present that documentation to us, they can appeal to the FCC if

they do that timely.

Mr. BASS. One last question, Mr. McDonald. What is the appropriate role for a consultant in the E-Rate program, and what is

your understanding of Judy Green’s role in the NEC BNS case? In

your opinion, do you think it was appropriate?

Mr. MCDONALD. A consultant ought to not have any ties to service providers. If the consultant is going to control the process, have

any influence on the process to select the service provider, that consultant needs to be an arms length from everybody, just as the applicant needs to ensure a fair and open process, selection of the

most cost-effective provider. If I understand Ms. Green’s relationship, she had a relationship to the vendors that were selected to

do the work.

Mr. BASS. Which, obviously, was not appropriate.

Mr. MCDONALD. Not appropriate.

Mr. BASS. All right. Thank you, Mr. McDonald. My time has expired. The committee has completed questioning of this panel. We

have no further questions to submit at this time. We are about to

have votes called on the floor of the House, so what the Chair

would like to do is to call a recess of the subcommittee until such

time as the votes are complete, at which time we will swear in the

second panel. With that, the Chair will declare a recess.

[Brief recess.]

48

Chairman BARTON The subcommittee will come back to order.

We are now ready to call the second panel forward, but before we

do that, we are going to show a brief video regarding the E-Rate

program, which has been produced by committee staff during the

course of this investigation. So could we dim the lights and show

the video? Produced to the committee staff, not produced by the

committee staff. Do we have sound on this?

[Video plays.]

The MODERATOR. The expanded use of computers in schools is

leading to important transformations tied to the use of multimedia

applications, broadband width communication pipes and widely distributed connectivity to the Internet, exposing students and teachers to an exciting world of synchronous distance learning, streaming audio and video and a host of other digital advances.

For many schools, however, especially those in high poverty and

geographically isolated communities, a lack of access to this new

technology is a serious problem. They are caught in the digital divide. The National Alliance of Black School Educators, known as

NABSE, stands ready to help schools bridge that divide through

the federally funded E-Rate program. Recently, NABSE has put together a program designed to help schools achieve the funding they

deserve from the often complicated E-rate process. This program

utilizes NABSE’s considerable experience in the application process, combined with the technical expertise of NABSE’s world-class

technology partners, NEC, IBM and VNCI, among others.

Video SPEAKER 1. Certainly one of NABSE’s major goals is to

bring the latest state-of-the-art equipment, methodologies and best

practices to its members. And with the advent of the E-Rate program, NABSE is very pleased that we have entered a partnership

with our three or four hybrid organizations, and these are technology firms who are making it much easier for the NABSE schools

to apply for E-rate funds, providing technical assistance in completing the application, conducting the research. So we are appealing to NABSE superintendents, to the principals, that when you

hear about this program that you will call us right away and request, at no cost to you, assistance from the support group so we

can assure that, one, you are getting the maximum amount of the

E-rate funds that is allowable for your school district.

Video SPEAKER 2. Our children are video learners. We have a

multimedia generation of children in our public schools today, but

yet we have an educational system that is designed to teach them

in a black and white format. That is probably the easiest way to

say it. Chalk and erasers, that is not the way our children are

learning.

The MODERATOR. The E-Rate program was authorized by Congress as a part of the Telecommunications Act of 1996. The E-Rate

program provides all public and private schools and libraries access

to affordable telecommunications and advanced digital technologies.

Video SPEAKER 3. NABSE was able to partner with the Jasper

County School District, partner with VNCI and we began the process of developing our needs and desires for the Jasper County

School District. And so it was not—I can’t say that it was extremely easy because it wasn’t, but it wasn’t quite as difficult as

49

it could have been if we did not have the partnership, and that was

the key factor.

Video SPEAKER 4. NABSE has really in its mission, if you look

at our mission, one of our goals speaks to partnering with individuals, organizations, institutions and entities of all forms. We welcome the partnerships, and more importantly we welcome the spirit in which the partners have come forth.

Video SPEAKER 5. If a small school district thinks that they can

develop all of the technology that is needed by their students for

the future, if they think they can do that alone, then they are sadly

mistaken. And when we were able to get all of the help and the

assistance from NABSE, then the amount of money that we received went through the ceiling. Ten and a half million dollars for

a district this size is basically unheard of. A million dollars versus

$10 million, big difference. A million dollars, you can put in a few

wires; $10 million, you can do video conferencing, and that is even

better.

The MODERATOR. Most rural schools, due to their locations, do

not have access to the world-class technology that NABSE’s partners provide. These partnerships give both the rural and urban

schools the ability to do the accurate technology needs assessments

required for E-rate applications. To aid school districts in acquiring

the technology they need, NABSE has developed consulting services which partner with several world-class companies: NEC, IBM

and VNCI, among others. These partnerships, combined with

NABSE’s assistance throughout the application process, have made

the E-Rate program a success for districts large and small.

Video SPEAKER 6. In terms of a very small school district like I

have, yes, it was very important to have NABSE’s assistance. I do

not have the time nor the staff, and NABSE has been able to assist

our school district in obtaining over $88 million in funds. My school

districts received approximately $9.8 million apiece.

Video SPEAKER 7. NABSE, NEC Business Relations and VNCI for

Jasper County School District have proven to be perfect partners.

The technical people from VNCI and NEC, as a matter of fact, they

came in so quickly it almost scared me.

Video SPEAKER 8. Why this team is so important is that they do

this every day. They have people on their staff who are trained and

who will be able to answer the technical questions, who will be able

to research information. They know how other school districts have

done it, so they are able to bring that knowledge and information

to bear to be sure that the NABSE school district gets the maximum amount of funds available.

The MODERATOR. To bridge the digital divide, today’s schools

need technology solutions that span the entire range of products

and services required in the field of education. NABSE’s technology

partners offer a wide range of desktops, laptops and high-quality

monitors. With today’s trends toward optimal speeds, it is essential

to be on the cutting edge of PC processing. Video solutions are beginning to be developed in progressive districts and campuses. Distance learning has allowed the K through 12 and campus educators

to expand beyond the walls of their facilities. Classroom content is

boundless.

50

Video SPEAKER 9. Students will be able to see resources, they will

be able to see things around the world in real time that they have

never been able to see before.

Video SPEAKER 10. They love, they want it, and we must bring

that technology to the students. They deserve it, and we owe them

our very best.

The MODERATOR. NABSE and its partners are well versed in the

E-rate application process. NABSE personnel can help school districts fill out the application, while the technology partners can

help in the needs assessment criteria. For assistance in E-rate applications, technology planning and needs assessment, school districts should contact NABSE before the window of opportunity is

gone.

Video SPEAKER 11. We appeal to the superintendents, to principals, to the technology directors to pursue this project with vigor.

As we have stated before, it certainly isn’t going to last forever.

Some corporate member of the school district must come to us, let

us know that they are interested, because otherwise the funds will

go to other school districts. When their program ends, then we will

find that once again many of the older schools in central city that

will be operating for the next 30 or 40 years will not be wired. The

students will be deprived of this, and therefore the digital divide

will become broader and wider and wider as the years go.

[Video ends.]

Chairman BARTON. All right. At this time, the Chair is going to

use an unusual procedure. The second panel consists of seven individuals: Ms. Judy Green, a former E-rate consultant for Video Network Communications; Mr. Quentin Lawson, the executive director

of the National Alliance of Black School Educators; Mr. Carl

Muscari, former president and CEO of Video Network Communications; Mr. Robert McCain, program manager for NEC BNS; Dr.

Emma Epps who is superintendent of the Ecorse Public School District; Dr. Douglas Benit, former facilities director for the Ecorse

Public School District; and Dr. William Singleton who is the superintendent of the Jasper County Schools in Ridgeland, South Carolina.

Some of you have indicated that you are going to refuse to answer questions and use your constitutional guarantee to plead the

Fifth Amendment. So we are going to call the individuals who we

believe are going to exercise that right forward first. So at this

time, we are going to call forward the following witnesses: Ms.

Judy Green, Mr. Quentin Lawson and Mr. Carl Muscari. If you individuals would please come forward. And you can be seated at the

table.

We do need to indicate for the record that Ms. Green and Mr.

Lawson declined to come forward voluntarily and were subpoenaed

and they did answer their subpoena. Ms. Green was subpoenaed to

attend our July 22 hearing, but U.S. marshals were unable to find

her to serve the subpoena. Ironically, on the very day that we held

that hearing, Ms. Green’s attorney notified the committee staff that

he had actually been retained.

During the last hearing then, I explained how serious this committee takes its need to get testimony and how serious we are

about our subpoenas being honored. I indicated that we would

51

again subpoena Ms. Green. We have done that and to her credit

she has answered that subpoena. But we will take every action

under the law in doing our oversight responsibility for the people

of the United States to compel attendance when we deem that it

is necessary to get the facts of the issues that are under investigation.

I think each of you individuals know that it is the practice of this

subcommittee to take testimony under oath. Does anybody here oppose testifying under oath? Let the record show that two of the

three shook their head. Mr. Muscari, you haven’t indicated. Do you

have a problem with testifying under oath? Okay. You also know

that you have the right to be advised by counsel. Do you all have

counsel here? Could each of you bring your counsels forward and

speak into the microphone and let us know who those individuals

are. Ms. Green? You have got to push that button. There is a little

button you have to push to turn the microphone on.

Mr. LINCENBERG. My name is Gary Lincenberg, counsel for Ms.

Green.

Chairman BARTON. Okay. Mr. Lawson?

Mr. LAWSON. Pete Harrison.

Chairman BARTON. And he is your counsel?

Mr. LAWSON. He is my counsel.

Chairman BARTON. Okay. Mr. Muscari?

Mr. SAVAGE. It is Joseph F. Savage, Jr. for Mr. Muscari.

Chairman BARTON. Okay. Will each of you individuals please

rise, raise your right hand?

[Witnesses sworn.]

Chairman BARTON. Be seated.

The Chair will now recognize Ms. Green for the purposes of making an opening statement if you so desire. Do you wish to make an

opening statement?

TESTIMONY OF JUDY GREEN, FORMER E-RATE CONSULTANT,

VIDEO NETWORK COMMUNICATIONS; ACCOMPANIED BY

QUENTIN LAWSON, EXECUTIVE DIRECTOR, NATIONAL ALLIANCE FOR BLACK EDUCATORS; CARL MUSCARI, FORMER

PRESIDENT AND CEO, VIDEO NETWORK COMMUNICATIONS;

ROBERT MCCAIN, PROGRAM MANAGER, NEC BNS; EMMA

EPPS, SUPERINTENDENT, ECORSE PUBLIC SCHOOL DISTRICT; DOUGLAS BENIT, FORMER FACILITIES DIRECTOR,

ECORSE PUBLIC SCHOOL DISTRICT; AND WILLIAM SINGLETON, SUPERINTENDENT, JASPER COUNTY SCHOOLS,

RIDGELAND, SOUTH CAROLINA

Ms. GREEN. No.

Chairman BARTON. Okay. Let the record indicate that Ms. Green

declined to make an opening statement. The Chair would now recognize Mr. Lawson for purposes of making an opening statement

if you so desire.

Mr. LAWSON. No.

Chairman BARTON. Mr. Lawson declines to make an opening

statement. The Chair will now recognize Mr. Muscari to make an

opening statement if he wishes.

Mr. MUSCARI. I have no opening statement. Thank you.

52

Chairman BARTON. Mr. Muscari also declines to make an opening statement. The Chair will then recognize himself for 10 minutes for questions.

Ms. Green, on July 22, 2004, we heard from the San Francisco

City Attorney’s Office about an elaborate conspiracy between individuals at NEC BNS and VNCI, including you, George Marchelos

and others in which the co-conspirators eliminated competitive bidding and inflated prices on contracts related to the E-Rate program. As you know, NEC BNS ultimately pleaded guilty to conspiracy to suppress and eliminate competition for the E-Rate program projects and to wire fraud. As a former employee of VNCI,

were you part of the conspiracy by NEC BNS, VNCI and others to

defraud the E-Rate program by rigging bids, inflating contract

prices, forging the signatures of school district officials and lying to

USAC officials during their review of that process?

Ms. GREEN. On advice of counsel, I respectfully decline to answer

that question based on my Fifth Amendment constitutional right.

Chairman BARTON. Ms. Green, are you refusing to answer all of

this committee’s questions on the right against self-incrimination

which is afforded to you under the Fifth Amendment of the United

States Constitution?

Ms. GREEN. Yes, sir.

Chairman BARTON. And is it your intention to assert such right

in response to all further questions from the subcommittee today?

Ms. GREEN. Yes, sir.

Chairman BARTON. Given that, I will dismiss you at this time,

but I want to make it perfectly clear that you are still subject to

being recalled by this subcommittee if we deem it necessary. Do

you understand that?

Ms. GREEN. Yes.

Chairman BARTON. If you don’t, now is the time to——

Ms. GREEN. No. Can I just——

Chairman BARTON. If you say anything, you are going to have to

answer every question.

Ms. GREEN. All right.

Chairman BARTON. I am not going to play games with you. You

have got the right to take the Fifth Amendment, which you have

done, but once you answer one question, then you have waived that

right, and we could ask you many questions. So at this time, I am

going to excuse you subject to recall if necessary.

We are now going to go to you, Mr. Lawson. We have just seen

a video that NABSE, of which you are affiliated with, produced,

marketing their E-Rate program. You appear in that program. The

video refers to an E-rate-related partnership between NABSE,

VNCI, NEC BNS and others. As the executive director of NABSE,

were you aware of the conspiracy by NEC BNS, VNCI, Judy Green,

George Marchelos and others to defraud the E-Rate program by

rigging bids and inflating contract prices?

Mr. LAWSON. Mr. Chairman, as you know, there are ongoing Federal criminal investigations into the same events that are the subject of this hearing. I have fully cooperated with the officials conducting these criminal investigations; however, in view of the openended Federal criminal investigations that are currently ongoing, I

reluctantly, and contrary to my desire to testify, will follow the adVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 96098.TXT HCOM1 PsN: HCOM1
53

vice of my legal counsel and respectfully decline to testify based

upon my rights under the Fifth Amendment to the United States

Constitution. I hope that the subcommittee will not draw a negative inference from my assertion of this basic constitutional right

guaranteed by the Bill of Rights. I respectfully request that the letter prepared and submitted by my counsel, dated September 17,

2004, be considered part of the record of this hearing.

Chairman BARTON. Are you refusing to answer the question

based on your constitutional rights under the Fifth Amendment?

Mr. LAWSON. Yes.

Chairman BARTON. Then we cannot accept the letter that you

just asked that we put into the record. Ms. DeGette has already

indicated that she would object, I would object, Mr. Walden will object. You can’t have it both ways. You can’t honor your rights under

the Fifth Amendment and then, I won’t say sneak into the record,

but put into the record something that is to your benefit, so to

speak.

Mr. Lawson, are you refusing to answer all of the questions on

the rights against self-incrimination afforded to you under the

Fifth Amendment of the U.S. Constitution?

Mr. LAWSON. Yes.

Chairman BARTON. And is it your intention to assert such right

in response to all further questions from the subcommittee today?

Mr. LAWSON. Yes.

Chairman BARTON. Given that, with the understanding, as we

just explained to Ms. Green, that there may be further requests for

you to come before this subcommittee, I am going to dismiss you

at this time, subject to the right of recall if necessary. Do you understand that?

Mr. LAWSON. Yes.

Chairman BARTON. Okay. Then at this time, you are excused

also.

Mr. LAWSON. Thank you.

Chairman BARTON. Mr. Muscari, on July 22, 2004, we heard testimony about an elaborate conspiracy between individuals at NEC

BNS and VNCI, including Judy Green, George Marchelos and others, in which the co-conspirators eliminated competitive bidding

and inflated prices on contracts related to the E-Rate program. As

you know, NEC BNS later pleaded guilty to conspiracy to suppress

and eliminate competition for the E-Rate program projects and to

wire fraud. As a former president and CEO of NEC BNS, were you

aware of this conspiracy by your company, or your former company,

VNCI, Judy Green, George Marchelos and others to defraud the ERate program by rigging bids, inflating contract prices, forging signatures of school district officials and lying to USAC during its review process?

Mr. MUSCARI. Mr. Chairman, based upon the advice of my attorneys, I respectfully decline at this time to answer based upon my

rights under the Fifth Amendment of the U.S. Constitution.

Chairman BARTON. And, Mr. Muscari, are you refusing to answer

all of these questions based on your right against self-incrimination

afforded to you under the Fifth Amendment of the U.S. Constitution?

Mr. MUSCARI. I am.

54

Chairman BARTON. And is it your intention to assert such right

in response to all further questions from the subcommittee today?

Mr. MUSCARI. Yes.

Chairman BARTON. Given that, as long as you understand that

you are still subject to being recalled by the subcommittee at a date

future, I am going to dismiss you at this time, again, subject to the

right to be recalled. Do you understand that?

Mr. MUSCARI. I do understand, yes.

Chairman BARTON. Okay. Then you too are excused, sir.

At this time, the Chair will now call forward the remainder of

our panel from Panel 2: Dr. Emma Epps, superintendent of the

Ecorse School District in Ecorse, Michigan; Dr. Douglas Benit, the

former director of facilities at Ecorse School District; Dr. William

Singleton, the superintendent of the Jasper County School District

in Jasper County, South Carolina; and Mr. Robert McCain, the

former NEC BNS project manager at Ecorse School District who is

appearing before us by video link. If those of you that are in the

chamber will come forward and be seated at the table.

As each of you individuals know, this subcommittee conducts its

investigative hearings by taking all testimony under oath. Do any

of you object to testifying under oath? Let the record show that all

three individuals said that they are willing to testify under oath.

You also have the right to be advised by counsel under the Constitution of the United States of America. Do any of you have counsel that are with you today?

Ms. EPPS. Yes.

Chairman BARTON. Dr. Epps, would you read into the record

your counsel, please, ma’am? You just push the button.

Mr. ALLEN. Yes, Mr. Chairman. Floyd Allen, representing Dr.

Epps and Dr. Benit.

Chairman BARTON. Okay. Dr. Benit, do you have—oh, he is counsel for both of you. Dr. Singleton, do you have counsel with you?

Mr. SINGELTON. No.

Chairman BARTON. Okay. Will all of you please stand and raise

your right hand? Oh, Mr. McCain, do you object to testifying under

oath?

Mr. MCCAIN. No.

Chairman BARTON. You also have the right to be advised by

counsel. Do you have a counsel with you today?

Mr. MCCAIN. Yes, Mr. Sutra.

Chairman BARTON. Could you bring him into the video.

Mr. SUTRA. Good morning, Mr. Chairman. Steve Sutra.

Chairman BARTON. Okay. Mr. Sutra needs to stay in camera

range, because he is going to have to be sworn too. So would

all——

Mr. SUTRA. I am not getting sworn.

Chairman BARTON. Are the attorneys—I thought they did. Will

our witnesses please stand to be sworn and raise your right hand.

[Witnesses sworn.]

Chairman BARTON. Be seated.

Okay. Mr. McCain, we are going to recognize you for 7 minutes.

Your statement is in the record, and if you would like to elaborate

on that, we would like to have your elaboration.

Mr. MCCAIN. No statement, sir.

55

Chairman BARTON. No statement. Okay. Dr. Epps, would you

like to make an opening statement?

Ms. EPPS. No, sir, I have no statement.

Chairman BARTON. Okay. Dr. Benit, would you like to make an

opening statement?

Mr. BENIT. No, sir.

Chairman BARTON. Okay. Dr. Singleton, would you like to make

an opening——

Mr. SINGELTON. No, sir.

Chairman BARTON. So we have nobody that wishes to make an

opening statement. Okay. The Chair would suspend for just a second.

[Pause.]

Chairman BARTON. The Chair is going to recognize Mr. Walden

for 10 minutes.

Mr. WALDEN. Thank you, Mr. Chairman. Mr. McCain, when you

were NEC BNS’ project manager at Ecorse School District, what

were your job responsibilities?

Mr. MCCAIN. My responsibilities were to install the products that

were within the job package and get them operational and turn

them over to the school district.

Mr. WALDEN. And what year did NEC BNS conduct work for

Ecorse while you were the project manager?

Mr. MCCAIN. The work started in February 2001.

Mr. WALDEN. And who was your primary contact at Ecorse

School District, sir?

Mr. MCCAIN. Dr. Benit.

Mr. WALDEN. Dr. Benit. Okay. And did you interact or work

often with Dr. Epps?

Mr. MCCAIN. No.

Mr. WALDEN. Did you work at all with Judy Green from VNCI

while managing the Ecorse project?

Mr. MCCAIN. No.

Mr. WALDEN. Who built the TV production studio for Ecorse?

Mr. MCCAIN. NEC.

Mr. WALDEN. NEC. Okay.

Mr. MCCAIN. Yes, sir.

Mr. WALDEN. Whose idea was it to provide Ecorse School District

with a TV production studio?

Mr. MCCAIN. That was from information we received from Dr.

Benit.

Mr. WALDEN. So it was Dr. Benit’s idea to build the TV studio?

Mr. MCCAIN. Yes, sir.

Mr. WALDEN. Please turn to the NEC document numbered 6345.

That is 6345. How much money was awarded to Ecorse School District by the E-Rate program for funding year 2000?

Mr. MCCAIN. The document 6345 indicates $4,135,969.81.

Mr. WALDEN. That is what it shows. Mr. McCain, please describe

document 6347. What is Dr. Benit insisting on dollar values for,

‘‘in-kind items,’’ document 6347?

Mr. MCCAIN. His inquiry was to identify the in-kind dollars and

what that detailed reference to products that were being proposed

for installation.

Mr. WALDEN. And at document 6348, go to that one.

56

Mr. MCCAIN. Yes, sir.

Mr. WALDEN. Why does Dr. Benit describe the TV studio as being

at a ‘‘critical status?’’

Mr. MCCAIN. That was to interface with the current onsite construction contractors to make ready the rooms for the TV production studio.

Mr. WALDEN. All right. So you had contractors onsite doing wiring installation, and from your recollection, he felt it was important, it was a critical status for the TV studio.

Mr. MCCAIN. Yes, sir.

Mr. WALDEN. Mr. McCain, looking now at document 6350 and

6351, do you have those in front of you, sir?

Mr. MCCAIN. Yes, sir.

Mr. WALDEN. Could you briefly describe these e-mails and the

issue being discussed here?

Mr. MCCAIN. The first document, 6350, was initiated from Dr.

Benit to Gerard McNulty, who was the account exec from NEC assigned to the Ecorse project, and he wanted to request an overview

of the dollars allocated from the SLD funding to properly be evaluated as to how those funds were going to be identified within the

project scope.

Mr. WALDEN. Okay. And does that cover 6351 as well then?

Mr. MCCAIN. 6351 is a reference to a meeting I had with Dr.

Benit and updated my immediate supervisor, Randy Weekly. After

that meeting—sorry, during that meeting, Dr. Benit did express

from this document that he had requested detail regarding the production studio cost and that he would follow up the following week

with Mr. Weekly.

Mr. WALDEN. And we are talking about the TV production studio?

Mr. MCCAIN. Yes, sir.

Mr. WALDEN. Okay. And now turn to document 6352. What is

this lengthy document?

Mr. MCCAIN. This document was originated from Bill Barber who

was a systems engineer for NEC in reference to the video TV production studio. It outlines all the line items that had been within

the initial design, identifying those items and what the total dollar

amount was.

Mr. WALDEN. And what is that total dollar amount of the TV studio?

Mr. MCCAIN. The original design was $1,040,239.62, and that is

reflected on document 6363.

Mr. WALDEN. And let’s go to document 6364 and 6365. Do you

recognize this document, and can you please describe your understanding of this document and in particular the second page. Is

this a document you recognize, sir?

Mr. MCCAIN. Yes. This document was identifying the NEC proposed use of funds, which is in the left columns. The middle columns were the response of the funds as to what was being requested to be installed by Dr. Benit, and the right column shows

the balance of award funds from the original amount authorized by

the SLD funding.

Mr. WALDEN. All right. And who built this spreadsheet, do you

know?

57

Mr. MCCAIN. Dr. Benit.

Mr. WALDEN. And, again, the first column shows what?

Mr. MCCAIN. The first column shows the original dollars in reference to the design of the line items located on the left column

there.

Mr. WALDEN. Okay. And the second column again?

Mr. MCCAIN. Is what Dr. Benit had requested funding to be

spent for those particular line items in that dollar amount.

Mr. WALDEN. It is what Dr. Benit requested the line items be.

Mr. MCCAIN. Yes.

Mr. WALDEN. And is that what the okay next to the numbers in

the second column would mean?

Mr. MCCAIN. Yes.

Mr. WALDEN. And is that—so that is Dr. Benit’s okay?

Mr. MCCAIN. Yes, sir.

Mr. WALDEN. All right. This document then seems to indicate

that Dr. Benit knew that E-rate funds were covering all the costs

of the TV studio. Is that a correct assumption?

Mr. MCCAIN. Yes, sir.

Mr. WALDEN. All right. Then please turn to 6366.

Mr. MCCAIN. Okay.

Mr. WALDEN. Who drafted this memo to you, sir?

Mr. MCCAIN. That is from Bill Barber, the systems design engineer for NEC for the video.

Mr. WALDEN. And would you agree that this memo describes a

Dr. Benit who is intimately involved with the design, construction

and many minor details of the TV studio?

Mr. MCCAIN. Yes. This document was reviewed with Dr. Benit to

be extended to the contractors onsite to address some of the items

that needed to be completed to provide a functional TV production

studio.

Mr. WALDEN. And, finally, turn with me to 6377. Can you briefly

describe this e-mail?

Mr. MCCAIN. This e-mail was originated from Dr. Benit to myself, Bill Barber and John Colvin, who was the director of the public sector for NEC, requesting NEC to support an open house conducted at Ecorse School District May 17 through May 19. I, in

turn, from the middle of the document, 6367, had requested from

the contractor that was hired by NEC to install the TV production

studio to also be onsite to assist in the open house.

Mr. WALDEN. All right. Given all the hype over the ribbon-cutting ceremony, does it seem likely to you that Dr. Epps could be

unaware of the fact that NEC built this studio for Ecorse through

the E-Rate program?

Mr. MCCAIN. No, she couldn’t be unaware of it.

Mr. WALDEN. She could not be unaware.

Mr. MCCAIN. Right.

Mr. WALDEN. Mr. McCain, did you ever learn or hear whether

Ecorse paid NEC BNS its required E-rate copayment?

Mr. MCCAIN. No.

Mr. WALDEN. Does that mean, no, you never learned or heard or

they never made the copayment?

Mr. MCCAIN. I never learned or heard.

58

Mr. WALDEN. So you don’t know whether that copayment was

ever made?

Mr. MCCAIN. That is correct.

Mr. WALDEN. All right.

Chairman BARTON. Do you have further questions?

Mr. WALDEN. Mr. Chairman, I don’t have any further questions

at this time.

Chairman BARTON. Okay. The Chair would recognize Ms.

DeGette for 10 minutes if she wishes.

Ms. DEGETTE. I have no questions at this time.

Chairman BARTON. Okay. The Chair would then recognize himself for 10 minutes.

Dr. Epps, you have just heard Mr. McCain in his comments on

some of the contracts that were in your school district. What is

your understanding of your district’s financial obligation in participating in the E-Rate program?

Ms. EPPS. My understanding is that we followed the rules of the

E-Rate program. That is my understanding.

Chairman BARTON. Dr. Benit?

Mr. BENIT. My understanding—could you repeat the——

Chairman BARTON. After listening to Mr. McCain’s answers to

Congressman Walden’s questions and some of the contracts that

were let for your school district, including the way a television studio was built and paid for, what is your understanding of your

school district’s financial obligation to participate in the E-Rate

program?

Mr. BENIT. My understanding is that the district is supposed to

pay a 10 percent share because they are at a 90 percent rate. A

lot of the documents that we referred to, Mr. Colvin and I reverted

back, with our counsels, back to the original agreement. So my understanding is that all the equipment that was supposed to be

spent, all the E-rate dollars supposed to be spent on E-rate was

spent and the TV production was something that they provided

that was outside of E-rate.

Chairman BARTON. Had you seen the documents that Mr. Walden referred to with the various columns? Have you seen those documents?

Mr. BENIT. Yes.

Chairman BARTON. Okay. Have we asked unanimous consent to

put those documents in the record? Okay. The Chair would ask

unanimous consent that the binder that has been prepared for this

hearing be put in the record. Is there objection? And the Chair

would indicate that this particular document that is NEC E-rate

contract, district attachment, rider A, memorandum of understanding is one of the documents that has been put in the record.

So you have seen this document?

Mr. BENIT. I saw it just as we were waiting here.

Chairman BARTON. Oh. You had not seen it before today.

Mr. BENIT. No. The document that was on top?

Chairman BARTON. Well, the primary document that we are referring to is the——

Mr. BENIT. That was signed by myself and John Colvin?

Chairman BARTON. Yes. And on page 0635, which shows the

spreadsheet.

59

Mr. BENIT. Where do I find this?

Chairman BARTON. It is in your binder, and it is at tab—it is

called the Benit spreadsheet.

Mr. BENIT. Okay. What tab number is that?

Chairman BARTON. Well, that is a very good question. We need

to get that. You obviously have the right to take a look at that. Tab

85.

Mr. BENIT. I don’t have a tab 85 in this one, sir. Oh, here it is.

Hang on.

Chairman BARTON. It is a big binder, so we certainly——

Mr. BENIT. Okay. I see the spreadsheet.

Chairman BARTON. Okay. And do you see the middle column

where it says, ‘‘EPS response to proposed use of funds?’’ That is

that middle column.

Mr. BENIT. Yes, I do, sir. I see that column, but I——

Chairman BARTON. And do you see the blocks, like $700,000 has

been blocked and then next to it it says, ‘‘okay.’’ And then the next

one is $500,000 and it is okay. And then $1 million and it is okay.

And then $14,000 and it is okay. And then $800,000 total, which

is not blocked, but that says, ‘‘okay.’’

Mr. BENIT. I see all that, but I also want to go on record as after

we did this and we had a discussion with our attorneys, we went

back to the original agreement that was signed.

Chairman BARTON. I am not sure I understand that response. Do

you want to elaborate on that?

Mr. BENIT. All I want to say is that we signed a memorandum

of understanding to the contract. We did some of this spreadsheet,

we discussed it with our attorneys and went back to the original

memorandum of understanding that all the E-rate dollars are supposed to be spent for E-rate purposes.

Chairman BARTON. So even though these say, ‘‘okay,’’ you are

saying that that was invalid, that you retracted that.

Mr. BENIT. Absolutely. That was done through a telephone conversation with John Colvin of NEC, I believe it was his attorney,

our attorney and myself.

Chairman BARTON. Mr. McCain, can you hear me?

Mr. MCCAIN. Yes.

Chairman BARTON. Do you want to respond to Dr. Benit saying

that even though we have got these documents that they were later

disallowed?

Mr. MCCAIN. I was not part of those conversations that Dr. Benit

had with Mr. Colvin and his counsel.

Chairman BARTON. Okay. Dr. Epps, does your school district’s

high school have a television production studio?

Ms. EPPS. Yes.

Chairman BARTON. Do you know when that production studio

was built?

Ms. EPPS. I am thinking the 2001-2002 school year.

Chairman BARTON. Do you know who built the production studio?

Ms. EPPS. I was asked that question. I know that NEC donated

the radio-TV room to the school district.

Chairman BARTON. So it is your understanding that NEC BNS

built the studio?

60

Ms. EPPS. Yes.

Chairman BARTON. And, Dr. Benit, is that your understanding as

well?

Mr. BENIT. My understanding is they contributed the equipment.

We were completing the building of a new high school at that time.

We had I think about 40, 50 contractors onsite. We had to put air

conditioning in the room, we had to paint the room. We used those

contractors through our construction manager to come in there and

make the room ready for the TV production.

Chairman BARTON. Do you know whose idea it was to build the

TV studio?

Mr. BENIT. I don’t recall, but I know there was a lot of discussions with a lot of people, and that was one idea that came up.

Chairman BARTON. Dr. Epps, do you recall who thought of the

idea to build this studio?

Ms. EPPS. No, sir, I don’t recall.

Chairman BARTON. When somebody approached you with it, did

you question whether it should be built and who was going to pay

for it or did you just accept that television studios kind of fell out

of the sky?

Ms. EPPS. No, sir. When Dr. Benit brought it to my attention, it

was supposed to be a donation from NEC.

Chairman BARTON. So your impression was that it was a donation.

Ms. EPPS. Yes, sir.

Chairman BARTON. Dr. Benit, is that your impression also?

Mr. BENIT. Yes, it is.

Chairman BARTON. Okay. Mr. McCain, do you have any comment

you would like to make on who paid for the construction of this studio?

Mr. MCCAIN. From the direction we were given, the funding for

the Ecorse project was all funded reference to what was identified

on the spreadsheet, initiated by Dr. Benit. I am not aware of any

donations of the TV production at NEC’s cost.

Chairman BARTON. So, Mr. McCain, your testimony would be,

based on the record, that this television studio was built with Erate money, not with money donated.

Mr. MCCAIN. That is correct.

Chairman BARTON. All right. Dr. Benit and Dr. Epps, now that

you have heard that, do you still stand by the original answer that

this was somehow donated money?

Mr. BENIT. I do, because Mr. McCain was not—he was a project

manager. He was not involved in any of the discussions. He is not

even aware of the discussion that John Colvin and I had to go back

to the original agreement that was agreed to.

Chairman BARTON. Do you agree, Dr. Benit, and you also, Dr.

Epps, that this television studio cost over $750,000?

Ms. EPPS. Sir, I don’t know the financial value of that radio-TV

studio.

Chairman BARTON. Dr. Epps, as superintendent——

Ms. EPPS. Yes, sir.

Chairman BARTON. [continuing] are you expected to track the financial aspects of the school district that you are superintendent

of?

61

Ms. EPPS. Yes, sir.

Chairman BARTON. Is $750,000 something that you would normally be expected to have some awareness of? I mean is that a

small sum, a large sum that it would be expected that an individual in your position would have a knowledge of and where the

money came from and how it was spent?

Ms. EPPS. If it came from the school district, but my understanding is it was a donate item to the school district.

Chairman BARTON. Do you have anything in the record that

shows that it was a donation? Is there anywhere a document where

whoever you think donated it actually made that donation and submitted a letter, a check, a voucher at all——

Ms. EPPS. No, sir, I am not aware——

Chairman BARTON. [continuing] that you could provide to this

committee documentation?

Ms. EPPS. No, sir, I am not aware of a check or a letter. I only

know about the memorandum that was signed by Dr. Benit and I

think Mr. Colvin.

Chairman BARTON. Dr. Benit, do you want to comment on that?

Mr. BENIT. The document that was signed by Mr. Colvin of NEC,

the vice president of E-Rate Operations at the time, and myself,

with our attorneys present, stated that the non-E-rate items could

include a TV production studio that would be donated by NEC.

Chairman BARTON. But there is no documentation to that. I

mean we agree—I think we agree the television station cost

$750,000. Do either of you dispute that?

Mr. BENIT. I haven’t—it has been a long time, so I am not aware

of the value.

Chairman BARTON. Okay. Dr. Benit, do you recall that when you

were questioned about this by the committee staff during the interview process, you said that you didn’t know who paid for the studio?

Mr. BENIT. I don’t recall that either, because I do know that the

studio’s equipment was donated by NEC, but I also know that a

lot of the contractors that we had on staff through our construction

manager was doing work throughout that building and through

that area at all times while they were there.

Chairman BARTON. Well, are you all aware, Dr. Epps and Dr.

Benit, that this television studio, just the actual studio itself, was

ineligible at the time and would be ineligible today for E-rate funding?

Mr. BENIT. I am aware that it was donated. The agreement says

it was supposed to be outside. It wasn’t supposed to violate any Erate rules or SLD rules.

Chairman BARTON. Okay. But there is no documentation that the

committee staff is aware of that shows that such a donation was

ever made. The documentation that we have shows in fact that it

was paid for by E-rate funding. Now, I——

Mr. BENIT. I don’t have any of that information.

Chairman BARTON. Mr. Walden?

Mr. WALDEN. Mr. Chairman, a question for Dr. Epps and Dr.

Benit. Did anyone in your district bother to check with the USAC

to see if E-rate allowed a $750,000 gift from a vendor receiving government funds?

62

Mr. BENIT. No. I have asked our attorney to make sure that

whatever we do we are in compliance.

Mr. WALDEN. Who is your attorney?

Mr. BENIT. Jaffey Rait.

Mr. WALDEN. And do you know if he checked?

Mr. BENIT. I don’t know. They were supposed to let us know if

something was askew, but I never did hear from him back that we

weren’t doing something right.

Mr. WALDEN. Mr. McCain, would you have known of any of these

other financial memos that we are hearing about today?

Mr. MCCAIN. No.

Mr. WALDEN. You wouldn’t have known.

Mr. MCCAIN. No.

Mr. WALDEN. You were the onsite project manager. Who told you

how this was being funded?

Mr. MCCAIN. All the financials were done through Dallas.

Mr. WALDEN. Okay. So you just installed the TV studio.

Mr. MCCAIN. Yes, sir.

Mr. WALDEN. Is that right?

Mr. MCCAIN. Yes.

Mr. WALDEN. Then how did you know about this memo, the

spreadsheet that Mr. Benit had?

Mr. MCCAIN. That was extended to me from my immediate supervisor.

Mr. WALDEN. And who is that?

Mr. MCCAIN. Randy Weekly.

Mr. WALDEN. Okay. Then I want to go to a memo to Mr. Weekly

from Mr. Benit. This is 06347, dated February 15, 2001, 2:54 in the

afternoon, and it says, and I quote, ‘‘I am reviewing the two sides;

however, I have discussed my concerns with our superintendent,

Dr. Epps, regarding the services to be provided by NEC. We would

like to know in detail just what you were provided and a dollar

value assigned to each. I want to firm up what is going to be considered as in-kind and the dollar assigned to each. I am going to

review the in-kind amounts tomorrow, and I will e-mail you the

changes which I see. I would want this in place before we proceed

any further with this project along with the coordination between

existing contractors and your final scope of work. Call me on my

cell or e-mail me.’’ What do you mean by the in kind part of this?

Mr. BENIT. In kind would be any kind of donations that would

was beyond the E-rate dollars that were applied.

Mr. WALDEN. See, it is our understanding that USAC does not

allow for gifts like this.

Mr. BENIT. I am not aware of that.

Mr. WALDEN. And your attorney clearly wasn’t aware of that; is

that what you are——

Mr. BENIT. They have not informed me of that.

Mr. WALDEN. Mr. Chairman, I yield back.

Chairman BARTON. I want to go back then. This television studio that $750,000 was spent for and which our records show was spent

with E-rate funding, which each of you, Dr. Epps and Dr. Benit,

indicate was donated, although there is no documentation that you

received the donation or even a letter notifying you of the donation.

How has that TV studio been used or is it even being used?

63

Ms. EPPS. Yes, sir, it is being used by the students at the high

school every day.

Chairman BARTON. By the students at the high school every day.

Ms. EPPS. We have classes. We do TV classes for credit.

Chairman BARTON. Has it been used by local businesses to generate revenue?

Ms. EPPS. No, sir.

Chairman BARTON. Not at all?

Ms. EPPS. No, sir.

Chairman BARTON. Dr. Benit?

Mr. BENIT. No. It is only for students. It started out being used

by students and is still being used by students.

Chairman BARTON. Mr. McCain, do you have any information

that the television studio has been used for local business, by local

businesses to generate revenue?

Mr. MCCAIN. No.

Chairman BARTON. Dr. Epps, do you know how much money the

E-Rate program was granted to your school for the funding year

2000?

Ms. EPPS. I believe with the reduction, I believe it came to about

$7 million.

Chairman BARTON. $7 million.

Ms. EPPS. Like six point something million dollars.

Chairman BARTON. Okay. Our records show $4 million, but if you say $7 million, okay. Dr. Benit, what is your recollection?

Mr. BENIT. Well, I think the original award through NEC was about $7 million. I conducted a review and told Dr. Epps that I

thought that one portion of the award was redundance and I asked

to reduce it by $3.3 million. And so the final award came out to

$4.1 million. I wrote a letter back to Schools and Libraries and

asked them to——

Chairman BARTON. So originally the $7 million that Dr. Epps referred to was granted, and then when that was reviewed, you made

a decision, or somebody, you and Dr. Epps made a decision that

some of those funds were not eligible and you refunded some of the

money or didn’t accept it so that the final number is the $4.135

million?

Mr. BENIT. Well, those funds were eligible, but we reviewed what

our needs were within the district and didn’t feel that we needed

the redundancy that that award would give us, so I asked the

Schools and Libraries by a letter to cut that funding for that particular award.

Chairman BARTON. Dr. Epps, do you want to comment on that?

Ms. EPPS. Dr. Benit reviewed our needs and I remember he came

to my office and told me that he had reviewed our needs in terms

of the E-rate. He had reviewed our bond project. We were building

the high school, another school at that time and remodeling two

others, so we had a big project going. And he had reviewed all of

that, and he felt that there were some items that would be redundant to what we were doing over with the bond so that he wanted

to reduce the amount. And my comment was if that is what we

needed to do, we didn’t want anything that we didn’t need, so he

wrote a letter or e-mail reducing that amount. And the exact figures he knows exactly how much that was.

64

Chairman BARTON. Well, we have—I have got 12 more questions,

but I haven’t even asked Dr. Singleton a question yet, and I want

to ask him some. I just want the record to show that our documents indicate that the Ecorse School District E-rate funds paid for

any number of projects and equipment that was ineligible, including servers, security systems, video equipment, a message center

for the high school football field. And I would also like to indicate

that our records and documents that we have created during the

course of this investigation cast some question on the Ecorse copay

for E-rate-related work that NEC and BNS accomplished for your

school district in 2001. Would Dr. Epps or Dr. Benit, either one of

you, wish to document for the committee that you in fact did pay

the copay and not roll it into the E-rate that would be ineligible

because the local school district is supposed to pay a copay?

Mr. BENIT. Well, I think we can provide that information to you.

Also, there was no scoreboard paid for. That was paid for with bond

funds. We have checks that were paid out of the bank trust fund

for that. Most of the items that you read off were paid through the

bond funds of the district that was handled through a bank trust

account.

Chairman BARTON. So you dispute the records that indicate the

E-rate funds were used in a way they shouldn’t have been used to

provide and pay for that. And we can give a detailed list of that

equipment.

Mr. BENIT. If you could do that, then I would like to provide you

with documentation that shows that it was paid for out of the district bond funds.

Chairman BARTON. Okay. Mr. Walden?

Mr. WALDEN. Thank you, Mr. Chairman. I want to go back to

something because I am confused. The spreadsheet we talked

about, number 6365, that there is testimony that these were your

okays next to it and it lists the TV studio, the spreadsheet Mr.

McCain and I were talking about, tab 85.

Mr. BENIT. Yes.

Mr. WALDEN. And that is your spreadsheet, right, and those are

your okays.

Mr. BENIT. Yes, that is correct.

Mr. WALDEN. And it does list TV studio on there, correct?

Mr. BENIT. It does.

Mr. WALDEN. And then didn’t you testify earlier that that is basically an old document that was superseded then by the memorandum of understanding with Mr. Colvin that would be found

under——

Mr. BENIT. No. The memorandum of understanding was signed

first. What I did say was that after this was done, we talked—I

talked with Mr. Colvin and our attorneys and it was agreed we are

out of line as far as E-rate rules, so we had to go back to the original memorandum of understanding.

Mr. WALDEN. How were you out of line as regards to E-rate

rules?

Mr. BENIT. Well, we felt that we were—this doesn’t show the

money all being spent for what it did in the memorandum of understanding. So we are trying to get back to the memorandum of

understanding.

65

Mr. WALDEN. I am confused because you are talking about two

memoranda of understanding, correct?

Mr. BENIT. No, I am not; I am talking about one.

Mr. WALDEN. Okay. The one that came after this——

Mr. BENIT. No, the one that came before that.

Mr. WALDEN. Okay. Is that the one on tab 79?

Mr. BENIT. I don’t know.

Mr. WALDEN. Why don’t you take a look at tab 79. This is the

one that is dated January 18, 2000.

Mr. BENIT. Yes. This is the one I am referring to.

Mr. WALDEN. Okay. But your spreadsheet, if I am correct, is

dated after that.

Mr. BENIT. That is right. I am saying that after that we got into

more detail and I was trying to find out how much money was

being spent, but, like I said, there were some discussions on those

items. We met with our counsels, we had a conference call, we

talked, and we were advised to go back to the original memorandum of understanding, which we did.

Mr. WALDEN. And were you advised that you couldn’t have a TV

studio as part of that discussion?

Mr. BENIT. No, I was not.

Mr. WALDEN. But yet that shows up here on the spreadsheet as

being moved around, right?

Mr. BENIT. It does.

Mr. WALDEN. Why was it on the spreadsheet?

Mr. BENIT. Well, it was on the spreadsheet that I was playing

around with things. Then we went back to counsel and said, ‘‘What

can we do and what can’t we do,’’ and they said, ‘‘Go back to your

regular memorandum of understanding. That will guide you to stay

within the school and library rules.’’ Mr. WALDEN. So are you testifying that your counsel never saw this spreadsheet?

Mr. BENIT. Yes, I am.

Mr. WALDEN. They never saw it.

Mr. BENIT. I don’t believe they did. Maybe they did. I can’t recall.

Mr. WALDEN. You can’t recall. Okay. So you had no knowledge

anywhere along the way that E-rate couldn’t fund a TV studio?

Mr. BENIT. Well, it says in the memorandum a media production

room is non-qualified equipment and services, so that had to be donated. So my understanding it was donated.

Mr. WALDEN. It is your understanding that NEC then just

turned around and donated $1 million or $750,000 or whatever

worth of——

Mr. BENIT. That is my understanding.

Chairman BARTON. Would the gentleman yield?

Mr. WALDEN. Certainly.

Chairman BARTON. Well, then, Dr. Benit, if that is the case, this

original memo of understanding that you have referred to refers to

a number of items that total, if I am reading this right, a little over

$2 million. Were those installed also, the 24-port Cisco 3524 series

ethernet switch, the NEC 8550 ATM workgroup switch, the 6066

gigabyte backbone switches, the four Cisco 3508 gigabyte ATM

intermediary backbone switches and the four Cisco 3660 routers?

Were those actually installed?

66

Mr. BENIT. My understanding everything on the first sheet of

memorandum of understanding was installed.

Chairman BARTON. Now, our understanding is that some of those

items were not installed because the money was switched to pay

for the television studio. Mr. McCain, do you have a comment on

that?

Mr. MCCAIN. What NEC installed was in reference to the document 6365, and within line item 3 it indicates the data system. It

also references back to the MOU.

Chairman BARTON. So are you—that is kind of a confusing answer. Dr. Benit and Dr. Epps are saying that the television studio

was donated and that this other material that is listed on page 1

was also installed. Is that what you are saying too or are you saying that only some of the equipment on page 1 was installed and

the funds that weren’t used for that were used to pay for the TV

studio, which is our understanding?

Mr. MCCAIN. I am not aware of any donation that NEC made for

the TV production studio.

Chairman BARTON. I understand that, but my question is was

money that was supposed to be used for these switches, which

would be eligible for E-rate funding, was it reallocated to pay for

the television studio, which was ineligible for E-rate funding? That

is what the documents tend to indicate.

Mr. MCCAIN. The NEC installed what was on the spreadsheet in

reference to document 6365 and how those line items were implemented and the associated dollar amount.

Chairman BARTON. Okay. Well, I have one—Mr. Walden. And we

need to get to Mr. Singleton here pretty soon.

Mr. WALDEN. All right. I am sorry, sir. Mr. McCain, have you

done several of these installs like this?

Mr. MCCAIN. Yes, sir.

Mr. WALDEN. From your experience, are these figures that are on

spreadsheet, 06365, are those numbers, the costs there, are those

pretty standard? Are they below what you would see charged elsewhere or are they inflated?

Mr. MCCAIN. No, they are not inflated. I mean new technology

is very expensive these days.

Mr. WALDEN. Okay. So I guess my question is then did a full $4,135,900 and whatever that says, 81—I didn’t bring my glasses

today—is that what was spent?

Mr. MCCAIN. Yes.

Mr. WALDEN. On the project?

Mr. MCCAIN. Yes, sir.

Mr. WALDEN. And is the only way you could have spent that to

have spent the million for the TV studio—or $800,000, I am sorry?

Mr. MCCAIN. What we did—what NEC did is from this spreadsheet, an agreement by both parties, we installed the line items

that are on the spreadsheet to use the funds that were approved

by the SLD funding.

Mr. WALDEN. And would that include the $800,000 for the TV

studio?

Mr. MCCAIN. Yes.

Mr. WALDEN. Okay.

Chairman BARTON. All right.

67

Mr. WALDEN. And one final time, neither superintendent, you all

don’t know, Doctors, whether your school district ever came up

with the match amount.

Ms. EPPS. It is my understanding, sir, that we paid our matching, either through the bond money that we had or our general

fund.

Mr. WALDEN. But you don’t know which?

Ms. EPPS. I can’t say we paid $10 from this or that. I don’t have

that information.

Mr. WALDEN. Dr. Benit, you don’t know specifically either.

Mr. BENIT. Well, I do know. I present it to our business office

that they need to pay a match. I am not sure what happened. I believe that they did, but I would have to go back and review the

records to find out how it was paid.

Mr. WALDEN. And you haven’t done that prior to this hearing at

all?

Mr. BENIT. No, because I am working in another district, and I

just got the request to come here while I am trying to get another

district working.

Mr. WALDEN. All right.

[During the hearing, Members of the Oversight and Investigations Subcommittee and the Committee Chairman requested that either Dr. Emma

Epps, the Superintendent of Ecorse Public School District, or Dr. Douglas

Benit, the former facilities director at Ecorse Public School District, provide the Committee with documentation demonstrating that the school district in fact paid its E-rate copayment, and did not use E-rate funds to

cover the district’s obligation. Dr. Benit stated that the requested information could be provided to supplement the record. Following subsequent requests from Committee staff that Dr. Benit provide the documentation before the record closed, Dr. Benit, through his attorney, produced several

documents to the Committee that were irrelevant and failed to answer the

outstanding questions. At the close of the record, the Committee has no

documentation that in fact demonstrates that Ecorse Public School District

did not use E-rate funds to pay for ineligible products and services and to

pay for the school district’s required co-payment.]

Chairman BARTON. Well, before we get off of that issue, what

does a television studio have to do with connecting your students

to the Internet? Either one of you.

Mr. BENIT. Well, as a donated piece of equipment, it does teach

kids how to project themselves, how to do TV production and——

Chairman BARTON. That has nothing to do with the Internet.

That has nothing to do with wiring your school system so that your

students can receive material for educational purposes over the

Internet.

Mr. BENIT. I understand that. All kids can, all buildings have

total access to the Internet.

Chairman BARTON. So you all think that E-rate funds should be

spent to put television studios in every high school in this country,

even though none of it is used for Internet purposes. You want to

expand the intent of the E-Rate program.

Mr. BENIT. No, sir, that is not what we said.

Chairman BARTON. Well, we had another school superintendent

from the San Francisco School District here before us. She refused

to sign documents. She instigated an investigation that resulted in

tens of millions of dollars being refunded to her credit, and in this

case, the school district that you represent, you all have a very

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vague notion of what was spent and what it was spent for and

don’t appear, quite frankly, to be too concerned about it, which is

a disappointment to me.

Let me ask Dr. Singleton some questions for the record. Dr. Singleton, you are the superintendent of the Jasper County School

District in South Carolina; is that not correct?

Mr. SINGELTON. That is correct.

Chairman BARTON. What is your understanding of your school

district’s financial obligation to participate in the E-Rate program?

Mr. SINGELTON. We have written several—worked with NABSE

and also with the VNCI and NEC. That is how we became involved. When I became superintendent in 1999, we wrote the first

grant or filed the first forms for E-rate funding. And, as I mentioned in my written testimony, I was at a conference and E-rate

was being promoted by NABSE.

Chairman BARTON. Is that where you met Judy Green for the

first time?

Mr. SINGELTON. I believe she was there, but I remember George

Marchelos. I remember him specifically.

Chairman BARTON. Do you know to what extent, if any, Judy

Green was involved in assisting Mr. Duncan in your district preparing E-rate forms and paperwork for the grant application?

Mr. SINGELTON. When I returned I filed the first form, 470, in

Nashville, and when I came back I turned everything over to Mr.

Duncan. He was our director of technology at that time, and he

was working with, I believe it was, Kim Mars and Judy Green and

Gerard McNulty.

Chairman BARTON. Do you know if Judy Green helped Mr. Duncan to prepare the E-rate RFP?

Mr. SINGELTON. From what Mr. Duncan said, he had assistance

from the organization, NEC and VNCI.

Chairman BARTON. But do you know if the employee or the consultant of NEC BNS was Judy Green, the woman here today who

refused to testify under oath—who took her Fifth Amendment right

against self-incrimination—I want to be exact on that.

Mr. SINGELTON. I don’t know for a fact that she sat down and

wrote the application, but she was physically in the district on several occasions. I can say VNCI filed the first form out in Nashville,

and I know that for a fact because after the breakout session I

came back downstairs and did that application electronically and

sent it in.

Chairman BARTON. Okay. Do you have the big notebook with all

the tabs there at the desk before you?

Mr. SINGELTON. This?

Chairman BARTON. Yes, sir. Could you turn to tab 48, please, sir?

Tab 48 should be the Jasper County memorandum of understanding.

Mr. SINGELTON. Yes, sir.

Chairman BARTON. Do you see that?

Mr. SINGELTON. Yes.

Chairman BARTON. Could you tell us how much money was

awarded to the Jasper County School District by the E-Rate program for year 2000?

Mr. SINGELTON. Well, the amounts meant $10.4 million.

69

Chairman BARTON. What is the document before you indicate?

Mr. SINGELTON. This indicates that 9.5——

Chairman BARTON. Four-eight.

Mr. SINGELTON. [continuing] 48.

Chairman BARTON. On the page marked 6374, can you describe

the items listed under the caption, ‘‘Non-qualified equipment and

services?’’

Mr. SINGELTON. Electrical upgrade, university training for teachers, climate control system, alterations of internal existing structure.

Chairman BARTON. That is enough. The entire document is in

the record, but would you just summarize. Does it look like there

are dozens of items that were non-qualified on that page, including

personal computers? There are a lot of items on that.

Mr. SINGELTON. Yes, sir.

Chairman BARTON. You would agree with that? Do you know if

Jasper County received all of those items even though they were

non-qualified?

Mr. SINGELTON. I believe we received most of the items.

Chairman BARTON. You believe that you did receive.

Mr. SINGELTON. Yes.

Chairman BARTON. Okay. On the next page, 6375, what is the

total cost of the so-called bonus package?

Mr. SINGELTON. Three million fifty.

Chairman BARTON. Three million fifty. Now, do you acknowledge that that means your school district received $3 million in nonqualified items for which they should not have been paid for by the

E-Rate program?

Mr. SINGELTON. Well, we received it as a bonus package. It was

given to us as a bonus package.

Chairman BARTON. All right.

Mr. SINGELTON. That was promoted by VNCI, NEC and——

Chairman BARTON. Define in your own words what a bonus package means.

Mr. SINGELTON. In my words, and what was said to us, was that

a bonus package would pay for the matching—could be used as the

matching for our portion that the district should have been paying.

Chairman BARTON. That makes no sense at all.

Mr. SINGELTON. Well, that is what was told to us.

Chairman BARTON. All right.

Mr. SINGELTON. That the bonus package could be used as in

kind. They would give us that and we could, in turn, use that as

the matching for the district.

Chairman BARTON. All right. The E-Rate program is supposed to

be—funds for the E-Rate program are supposed to be used to actually create the Internet connection, the servers, the wiring, the

switches, the monitors, the computers so that students can participate and receive information over the Internet and help with their

education. None of the equipment that was listed in the bonus

package does that. It is not qualified, it is not part of it. Some of

it may be if there are some computers there. Those funds to the

tune of $3 million were non-eligible and should not have been funded by E-rate. If the school district wanted those, the school district

should have paid for them themselves. There is no free lunch, and

70

you want us to believe that $3 million worth of equipment could

be given to your school district and you really think that the vendor that provided it did it and didn’t charge the government for it.

On a $4 million contract, they could give you a $3 million bonus.

Mr. SINGELTON. A $9 million——

Chairman BARTON. Well, but $3 million of it was listed as bonus.

Mr. SINGELTON. That is correct. And I am just repeating what

was told to us, that we——

Chairman BARTON. But you didn’t question that.

Mr. SINGELTON. No, sir, I did not.

Ms. DEGETTE. Mr. Chairman, would you yield for 1 second?

Chairman BARTON. I would be happy to.

Ms. DEGETTE. Dr. Singleton, who told you that this list of nonqualified equipment could be applied toward the district’s match?

Mr. SINGELTON. Well, if you read through this document, it says

in-kind and——

Ms. DEGETTE. No. Who told you that?

Mr. SINGELTON. When we first started discussing this out in

Nashville, I know it was discussed there——

Ms. DEGETTE. Who——

Mr. SINGELTON. Morales, George Morales mentioned it when we

got back to our district. Gerard McNulty, Judy Green, that whole

group——

Ms. DEGETTE. All of them told you that?

Mr. SINGELTON. Yes, ma’am.

Ms. DEGETTE. Thank you, Mr. Chairman.

Chairman BARTON. Doctor, doesn’t it strike you as too good to be

true that you could receive all these bonus items and have your copayment waived by NEC BNS?

Mr. SINGELTON. We know now sir, that it is too good to be true.

There are no free lunches, I will agree with that. Understanding

that we are a very rural, poor school district, NABSE involvement

by——

Chairman BARTON. So it is just don’t look a gift horse in the

mouth.

Mr. SINGELTON. Yes. Yes.

Chairman BARTON. That is kind of the——

Mr. SINGELTON. Well, a reputable organization like NABSE we

just assumed that everything was okay.

Chairman BARTON. I can understand that. The Chair would ask

unanimous consent to recall Mr. McDonald of USAC if he is still

in the audience. He is still under oath.

Mr. McDonald, you have heard Superintendent Epps and Superintendent Benit and now Dr. Singleton all indicate that they were

getting equipment and bonus packages and donations. Would that

be allowed, including a television studio, under the existing E-Rate

program, even if it was donated?

Mr. MCDONALD. These would be the kind of free, ineligible services I was talking about this morning, that the cost of those services need to be covered somehow, and they are covered by inflating

the cost of eligible services so that E-rate ends up paying for them.

TV production studio, we do pay for connectivity. We pay for distance learning. If the TV production studio were being used for disVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6602 96098.TXT HCOM1 PsN: HCOM1
71

tance learning, switches and cables that were carrying that data

would be eligible but not the TV production studio itself.

Chairman BARTON. And if Dr. Singleton’s school district had contacted USAC and asked about this bonus package or the concept

of a bonus package, what would your reviewers’ response have

been?

Mr. MCDONALD. We have been pretty clear about free, ineligible

services from the inception of the program, that they are not eligible, that the applicants should not acquire free, ineligible services

from service providers.

Chairman BARTON. Do you do anything to be proactive to send

out materials to these small school districts and these rural school

districts and low-income school districts that would tend not to

have professional—or not as likely to have professional staff that

were up to date on these programs to inform them, to warn them,

so to speak, to be wary of these kind of proposals that in fact they

are illegal?

Mr. MCDONALD. We have a web site that we try to promote as

much as possible where we put information about the rules of the

program. We have a toll-free call center that participants can call

and get information. We do an annual train the trainer conference

and bring people in from all the States and train and hope that

they will go back and train, and we do a mass mailing at the start

of the window for each funding year to basically all applicants in

the program, trying to highlight significant features of the program, things that have been problems that we have found recently.

Chairman BARTON. Before I let—I think Mr. Walden may have

a question for you, but I sent a letter, and I think Mr. Dingell sent

a letter, we signed a letter asking that this particular vendor be

barred because of what they have done. Do you know the status of

that debarment proceeding? Would that be your agency or would

it go to the FCC directly?

Mr. MCDONALD. That would be the FCC, sir.

Chairman BARTON. And you are not aware of—Ms. DeGette, do

you wish to ask a question?

Ms. DEGETTE. Thank you. Dr. Singleton, I just wanted to clear

a couple of things up. And thank you for appearing today. You are

making some sense here. This in-kind donation agreement that we

have been talking about, now you were told by Judy Green and

others that these were going to be donated by NEC, correct?

Mr. SINGELTON. Donated.

Ms. DEGETTE. And were you aware of an application by NEC for

E-rate money to pay for these items?

Mr. SINGELTON. No. I was not aware of that, no.

Ms. DEGETTE. Okay. Did you know that E-rate money cannot be

used to pay for these items?

Mr. SINGELTON. I know now, but that never occurred to me in

the beginning because they were donated items.

Ms. DEGETTE. Right. You just thought they were donating it as

part of your agreement, right?

Mr. SINGELTON. Yes.

Ms. DEGETTE. Now, as you look at this list of items, is there anything on this list that—well, everything on this list you needed to

72

be able to hook up computers for kids to use them in the classroom,

didn’t you?

Mr. SINGELTON. That is correct.

Ms. DEGETTE. Did your school district have $3 million to pay for

all this equipment?

Mr. SINGELTON. No, we do not.

Ms. DEGETTE. What would have happened if you didn’t have a

way to get this equipment? Did you have——

Mr. SINGELTON. We would never put it in. We could never afford

this kind of equipment.

Ms. DEGETTE. Right. Now, let’s say that Congress said that you

had to pay 20 percent. Because now you know, right, that there is

a 10 percent amount? What would you say to Congress if we said,

‘‘Well, the way we are going to stop the kind of fraud by Judy

Green and others is to make you pay for 20 percent’’?

Mr. SINGELTON. I think that would be detrimental to districts

like ours. Rural, poor districts cannot afford to pay upfront or to

pay the percentage that is required. Small amount but the magnitude of this project we could never afford it, we could never pay

it.

Ms. DEGETTE. Do you have any ideas what kind of changes—because I know you would never support fraudulent transactions at

all for your district, right?

Mr. SINGELTON. No, ma’am. That will get you fired.

Ms. DEGETTE. Well, it will do worse than that. And so my question to you is what do you think Congress can do to make sure that

this E-rate money goes to school districts like yours, the poorest

school districts in the country to help the students, but at the same

time there are not people just skimming millions of dollars off of

it fraudulently.

Mr. SINGELTON. Really, I think the whole application process, I

believe, needs to be revamped. It seems to be a complicated process, and I don’t know all the ins and outs because my technology

persons have always done it, and I have sort of taken a back seat

and they just bring it to me and say, ‘‘Okay. We have got this approved,’’ and I have signed documents as they came in. But I believe that is—the process is complicated, and I think the bid process may need to be looked at, because when we got into this

project, and if you ask me how VNCI and NEC got into it, I could

not tell you today. I know that we started in Nashville, and from

then on they were partnering with us. So it is unclear exactly how

they started. And maybe by just signing on and having them transmit that 470, that first application, and they are off and running

with us.

Ms. DEGETTE. Thank you. Thank you for sharing those views. I

appreciate it.

Mr. WALDEN [presiding]. Dr. Epps, are you a member of NABSE?

Ms. EPPS. Yes, I am.

Mr. WALDEN. I am not sure, is that mic on?

Ms. EPPS. Yes, I am.

Mr. WALDEN. Thank you. Are you currently an officer of NABSE?

Ms. EPPS. Yes, sir.

Mr. WALDEN. And how long have you been an officer at NABSE?

Ms. EPPS. I think 1998.

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Mr. WALDEN. You were elected——

Ms. EPPS. Secretary.

Mr. WALDEN. [continuing] secretary. And you are now—what is

your title now?

Ms. EPPS. President-elect.

Mr. WALDEN. President-elect.

Ms. EPPS. Yes, sir.

Mr. WALDEN. You appear in the NABSE E-Rate marketing video

that we viewed a short time ago.

Ms. EPPS. Yes, sir.

Mr. WALDEN. What do you know about NABSE’s participation in

the E-Rate program?

Ms. EPPS. As a board member, I know that a presentation was

made to us about a partnership and I, as a board member, voted

at that meeting because——

Mr. WALDEN. You voted for the partnership?

Ms. EPPS. For the partnership to assist school districts that

didn’t have the persons to do the work.

Mr. WALDEN. Sure. And you are aware of the, what was it, 1.5

percent fee that NABSE got back off some of these contracts, if not

all?

Ms. EPPS. That was in the presentation.

Mr. WALDEN. Okay. And Mr. McDonald again, is that fee generally acceptable under USAC rules?

Mr. MCDONALD. Depending on the role that NABSE would be

playing. If it is playing a role as the consultant and steering work

to those companies in order to get the 1.5 percent, no, that is not

keeping a fair and open competitive process.

Mr. WALDEN. Did you see the video?

Mr. MCDONALD. I did.

Mr. WALDEN. Did it trouble you that they listed various companies in the video, NEC, UNCI?

Mr. MCDONALD. If I were seeing that for the first time, I

wouldn’t be sure exactly what was being said there. If NABSE had

money and these companies were volunteering to come out and

help people put technology plans together and not going to corrupt

the process of the selection of the service provider, that would be

okay.

Mr. WALDEN. Will USAC be looking at NABSE’s role?

Mr. MCDONALD. Yes.

Mr. WALDEN. Okay. And in terms of these school districts, are yo

pursuing recovery? I mean we are hearing a lot today about $4 million and a free TV studio.

Mr. MCDONALD. I am making notes here.

Mr. WALDEN. I bet you have. Dr. Epps, what role did Quentin

Lawson play on behalf of NABSE and NABSE’s participation in the

E-Rate program?

Ms. EPPS. Sir, I can’t tell you what his role was, other than as

a board member, as I said, at the meeting, the project was presented to the board, but I can’t——

Mr. WALDEN. Does the board have legal counsel that reviewed

this process, do you know?

Ms. EPPS. The policy, sir, is that when projects are brought before the board, the general process is that if it is an agreement or

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a contract, as a board member, I know that it is supposed to go to

the legal attorney.

Mr. WALDEN. Who is that?

Ms. EPPS. The legal attorney is Mr. McCutcheon.

Mr. WALDEN. Mr. McCutcheon. Okay. What do you know about

NABSE’s E-rate partnership with NEC, VNCI and IBM?

Ms. EPPS. What I know has to do with there was a presentation

that there would be a partnership. I don’t know the intricate details of what that was and how it all came together. I don’t have

that detailed information, as I was one member.

Mr. WALDEN. That wasn’t presented in your board meeting?

There would be documents, minutes perhaps.

Ms. EPPS. The information was presented to the board. I can’t recall, tell you all of the details of the presentation, but just like all

the other initiatives, it was presented to the board.

Mr. WALDEN. All right. If you would take a look at tab 66 in our

big binder there.

Ms. EPPS. Okay.

Mr. WALDEN. I was just wondering if you were aware that

NABSE had entered this memorandum of understanding with NEC

BNS and VNCI? This was in January 2001. It references there the

1.5 percent of the gross revenue of said contract.

Ms. EPPS. And what is the question, sir?

Mr. WALDEN. Were you aware that NABSE had entered this

memorandum of understanding with NEC BNS and VNCI?

Ms. EPPS. I wasn’t aware of this particular memorandum. I have

seen it recently, but I was not aware of it previously.

Mr. WALDEN. Okay. Were you aware that this MOU provided for

the compensation of NABSE by those vendors?

Ms. EPPS. One and a half percent.

Mr. WALDEN. Right. Were you aware of that?

Ms. EPPS. I think that was—if my memory serves me correctly,

that was presented in the——

Mr. WALDEN. As part of the presentation?

Ms. EPPS. [continuing] presentation.

Mr. WALDEN. Yes. I question the term, ‘‘donation’’ versus perhaps

‘‘commission’’ on sales. I mean it is 1.5 percent of the gross revenues is part of the agreement.

Why would NABSE get that funding, the 1.5 percent, as opposed

to just helping schools for free, because that is your mission, right?

Ms. EPPS. Well, our mission is to help schools and children, yes.

Mr. WALDEN. Right. Why take 1.5 percent? I mean that could be

quite a bit of money on what we have heard today in terms of the

size of some of these contracts.

Ms. EPPS. Yes. Well, I can answer as one board member. At the

time it was presented——

Mr. WALDEN. Do you know how much money they did make?

Ms. EPPS. No, sir.

Mr. WALDEN. That doesn’t show up in a budget item or—do you

get like monthly cash-flow statements or P&Ls?

Ms. EPPS. No, sir. I haven’t seen monthly cash-flow statements,

but it would eventually be in the audit, I am sure, at the end of

the year.

Mr. WALDEN. The audit? How often does your board meet?

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Ms. EPPS. I attend board meetings about three times a year.

Mr. WALDEN. And that is how often the board meets?

Ms. EPPS. Yes, sir, about three times a year.

Mr. WALDEN. And at those meetings, do they give you financial

statements? I mean do they give you sort of——

Ms. EPPS. Yes, sir.

Mr. WALDEN. [continuing] quarterly cash-flows or——

Ms. EPPS. Yes, sir, we get financial statements.

Mr. WALDEN. Okay. But this isn’t one you looked at as a new line

of business?

Ms. EPPS. I did not particularly pay attention to that.

Mr. WALDEN. Is that information——

Ms. EPPS. I can’t say that it was there or not.

Mr. WALDEN. Sure. I have been through various boards I have

been on and I understand how that happens. Is that information

you could provide for us, though? NABSE?

Ms. EPPS. I am sure that NABSE could provide that for you.

Mr. WALDEN. Well, you are the president-elect. I mean is that

something you would help us get?

Ms. EPPS. I think that you could request that from the office, and

I am sure they would give you that.

Mr. WALDEN. Okay. Because it would be interesting to know just

how much money was generated off the E-rate projects in the

NABSE.

So take a look at tab 66, for example—I am sorry, 68. VNCI,

Video Network Communications, Inc. provided NABSE on October

1999 it appears to be $37,000. How big is your annual budget?

Ms. EPPS. I am sorry?

Mr. WALDEN. How big is your annual budget at NABSE?

Ms. EPPS. I really don’t——

Mr. WALDEN. Would $37,000 in one payment be considered quite

a bit? I mean are we talking a $10 million budget or——

Ms. EPPS. As a board member, I would think that $37,000 is a

lot.

Mr. WALDEN. So if I were looking at your P&L for the prior 4

months, $37,000 would jump out as a line item, wouldn’t it, in

terms of revenue source? And that is just one check. Is that what

you are telling me, that that would tend to show up? I mean how

big an organization——

Ms. EPPS. In revenue, I am sure it would show up in the office,

but I don’t remember seeing this check.

Mr. WALDEN. No, I wouldn’t think you would see the check. But

I mean I am just thinking back to my own company and others.

I mean $37,000 is a pretty good chunk of dough, and that is just

one check. Were there others maybe? How about at tab 69, July

2001. That is a $10,000, looks like, check. Again, it looks like from

VNCI. It just seems like a lot of money coming in, I don’t know.

And I think tab 69 and 70 also have revenue coming in as well,

it looks like, $45,000 from VNCI. It just seems like a lot of money

coming out of this program. I mean do you know the kind of technical support that your folks at—how many people are in this division at NABSE that help schools? How big is the staff for the Erate side of things?

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Ms. EPPS. I don’t remember how many. I couldn’t give you a

number of the staff doing the E-rate, what I consider the E-rate

time. I can tell you just about the staff now.

Mr. WALDEN. How many are on staff now total?

Ms. EPPS. Hold on a second.

Mr. WALDEN. Sure.

Ms. EPPS. I believe, sir, it is maybe 6 or 7 regular people, and

then there are, like, interns.

Mr. WALDEN. So you are not a big organization here, 6 or 7. And

that is full-time staff when you say the word, ‘‘regular?’’

Ms. EPPS. I believe that it is about that many full-time.

Mr. WALDEN. Okay. So 6 or 7 full-time. And that would include

people working on E-rate or do you——

Ms. EPPS. Well, working on projects. I don’t know who would exactly in the office work on specific projects.

Mr. WALDEN. Right. No, but it would be within that group of 6

or 7 people.

Ms. EPPS. That is the NABSE staff.

Mr. WALDEN. Yes. So the current staff you have that would have

been the ones that would be getting the payments, in effect. I mean

the payment came to NABSE, right, that we have the checks under

the tabs that I referenced earlier?

Ms. EPPS. I see the checks, sir. I don’t know—I haven’t looked

at in terms of when they were. I don’t know—the staff has changed

and the staff changes, so I can’t say this exact 6 and 7 people were

the people——

Mr. WALDEN. No, I understand that. I am not saying that. I am

just saying that when NABSE was holding itself out as a technological consultant for school districts like the one Mr. Singleton is

superintendent of, in theory, you had 6 or 7 people or positions,

right?

Ms. EPPS. Yes, sir.

Mr. WALDEN. That is what you have testified to.

Ms. EPPS. That is how many we have now, sir, that I know of.

Mr. WALDEN. Was it more or less then?

Ms. EPPS. I said that I couldn’t tell you how many it was, if you

remember when I said, during what I am considering the E-rate

time. I said now I would say it was 6 or 7 and some interns.

Mr. WALDEN. Was it more during the E-rate time?

Ms. EPPS. I really don’t know the number of staff members at

that time.

Mr. WALDEN. Okay.

Ms. EPPS. And I am thinking 2001. That is what I call E-rate

time.

Mr. WALDEN. All right. Did you rely a lot on Judy Green?

Ms. EPPS. I don’t know if NABSE relied on Ms. Green.

Mr. WALDEN. Was the NABSE Board informed that Quentin

Lawson had joined the VNCI Board? See Tab 88 if you want to,

there is a reference.

Ms. EPPS. Sir, I, as a board member, was made aware of that

this year, 2004, this year.

Mr. WALDEN. Okay. So you just learned about it sometime in

2004.

Ms. EPPS. Yes, sir.

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Mr. WALDEN. Okay. All right. Now, does that present any conflict

of interest in your mind?

Ms. EPPS. I, as an individual—I would tend to think that it is—

as an individual, I would think that it wasn’t——

Mr. WALDEN. It was not?

Ms. EPPS. It could be a conflict.

Mr. WALDEN. It could be a conflict.

Ms. EPPS. I mean I would think, as an individual. I can’t——

Mr. WALDEN. Mr. McDonald, do you think that presents a conflict?

Mr. MCDONALD. It certainly deepens the issue of were these fair

and open competitive processes.

Mr. WALDEN. Are you aware of these payments to NABSE?

Mr. MCDONALD. No, sir.

Mr. WALDEN. Do they seem out of the ordinary, hard to tell?

Mr. MCDONALD. They would be out of the ordinary. As we discussed earlier today, if we had seen these, we would have misconstrued them as causing a problem, and we would have denied

the applications.

Mr. WALDEN. Are these payments the kind of payments that you

would go back and review and seek refunds on if they are not—

I mean——

Mr. MCDONALD. It sounds like E-rate funds were used to make

the payments to NABSE and those would not be eligible uses of Erate funds.

Mr. WALDEN. Unless they provided very specific technological

support to the districts, right?

Mr. MCDONALD. Unless they were installing or providing

connectivity services.

Mr. WALDEN. All right. Anything else? All right. Thank you all

for your patience and time. We have no other questions for this

panel. You are dismissed. We will take a brief 5-minute recess because we have to bring up another witness by video. While our

technicians work on that, we will be in recess for 5 minutes.

[Brief recess.]

[The prepared testimony of William Singleton follows:]

PREPARED STATEMENT OF WILLIAM SINGLETON, SUPERINTENDENT, JASPER COUNTY

SCHOOLS

SCHOOL YEAR 1999-2000

I was somewhat familiar with the E-Rate Program some time before 1999. However, after attending the National Alliance of Black School Educators (NABSE) Conference in Nashville, Tennessee, I became more familiar with the program. I began

to take notice after being approached by a representative from VNCI, who had on

display numerous pieces of telecommunication equipment in the hotel lobby. VNCI

representatives stood in the hotel lobby soliciting conference participants to attend

a breakout session on how to acquire E-Rate funds. Several announcements were

made by NABSE officials encouraging conference participants to attend the breakout session.

A representative of VNCI encouraged conference participants to attend the breakout session to hear testimonies from other school districts that were recipients of

their equipment (see Exhibit A). The breakout session was very interesting. School

district representatives and superintendents that had received E-Rate funds shared

how they enhanced their school district’s technology program. As I recall, a superintendent from a small school district in the state of California shared during the

breakout session that he had received somewhere in the neighborhood of three million dollars. The school district was approximately half the size of Jasper County

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School District’s three thousand student population. I became interested because the

California school district’s demographics for free and reduced lunch population was

very similar to Jasper County.

The second selling point was that VNCI was promoting a special NABSE bonus

package of free telecommunication equipment. The school district would receive as

‘‘in-kind’’ donations to be used as the school district’s 15% match (district had at this

time 85% free and reduced lunch program). The bonus package included a 33 inch

TV monitor for each classroom, pan-tilt-zoom cameras, 400 computers, 12 laptop

computers, 100 teacher workstations, etc. (see Exhibit B). During the presentation

at the NABSE Conference, VNCI agreed to assist any school district that needed

help with the application process. After the session, participants returned to the

lobby and completed the first phase of the application process, Form 470.

Upon my return from the NABSE Conference in Nashville, Tennessee, I turned

the project over to Michael Duncan, the school district’s Director of Technology. As

we continued throughout the school year, the Director of Technology, along with

VNCI and NEC staff, filed the other necessary paperwork.

SCHOOL YEAR 2000-2001

After notification of the E-Rate subsidy awarded to Jasper County, Judy Green,

VNCI representative, and Gerard McNulty made a presentation to the Jasper County Board of Education (see Exhibit C). At this meeting, the focus seemed to change

from VNCI to NEC. As a matter of fact, Gerard McNulty announced that Ken Morrison would be the onsite manager for NEC and Jonathan James for VNCI. These

individuals worked with Michael Duncan, Jasper County Director of Technology, in

completing the application process and designing the system.

Believing everything was legitimate, Michael Duncan informed me periodically on

the status of the project. Michael Duncan resigned from the school district on June

25, 2001 due to health reasons.

SCHOOL YEAR 2001-2002

Early in the 2001-2002 school year, I was contacted by George Marchelos, VNCI

representative, to recommend him to Eleanor Adams, Director of the Salkehatchie

Consortium, to present the E-Rate program to the other superintendents using Jasper as a model for acquiring E-Rate funds. As I recall, George Marchelos and Judy

Green presented the program to the consortium superintendents on November 27,

2001 (see Exhibit D).

Ed Sauls was brought in to replace Michael Duncan and found that most of the

VNCI video-conferencing equipment did not work properly or was not working at

all.

SCHOOL YEAR 2002-2003

Attorney Karen Jones, U. S. Department of Justice, came to Jasper County to investigate the E-Rate subsidy that was allocated to Jasper County. I shared with her

what I knew about the program, basically the information communicated in this

document.

SCHOOL YEAR 2003-2004

On July 30, 2003, I was subpoenaed to appear before the United States District

Court Eastern District of Michigan Grand Jury. I gave the same testimony as outlined in this document and what was shared with Attorney Jones.

After receiving notice that NEC pleaded guilty and agreed to pay restitution and

supply Jasper County School District with eighteen months of free maintenance

services, we are still trying to negotiate a workable contract.

SUMMARY

I believe it is vital that the E-Rate program continue although the application

process seems to be complicated and burdensome. After learning more about the ERate program over the past three years and our school district’s involvement in the

investigation of E-Rate, I feel the following problems were present:

1. VNCI offered Jasper County a Bonus Package with equipment that was ineligible

for E-Rate funds.

2. VNCI as a provider of video-conferencing equipment assisted with the application

process Form 470 in Nashville, Tennessee.

3. Excessive equipment, such as a server in every classroom, probably was not necessary.

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4. VNCI/NEC agreeing not to charge the school district the 15% match (85% free/

reduced lunch), the match would be the in-kind NABSE Bonus Package donation.

5. I believe VNCI/NEC may have been involved in the RFP and bid process, which

was handled by the Director of Technology.

It appears that large companies, such as VNCI/NEC, have been going around the

country offering solutions to school district technology problems and taking advantage of the E-Rate program.

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Mr. WALDEN. Let me call the Subcommittee on Oversight and Investigations back to order, and we now have our third panel ready

to go, including our witness by video. We have Mr. Charles Tafoya,

superintendent, El Paso Independent School District; Ms. Sharon

Foster, technology information systems director; Mr. Ruben

Bohuchot—did I say that right—chief technology officer, associate

superintendent, Dallas Independent School District; Ms. Paula

Glogovac, former E-rate consultant to Sun Microsystems; Mr. Nathaniel Hawthorne, general counsel, Alpha Telecommunications,

Incorporated; Mr. Christopher G. Caine, vice president, Government Programs for IBM, accompanied by Mr. Mike Pratt.

And you are aware the committee is holding an investigative

hearing and when doing so has had the practice of taking testimony under oath. Do you have any objection to testifying under

oath? Let the record show they all indicated no.

The Chair then advises you that under the rules of the House

and the rules of the committee you are entitled to be advised by

counsel. Do you desire to be advised by counsel during your testimony? Mr. Bohuchot, the answer is yes and could you identify your

counsel, please, or have your counsel come up to one of the microphones? Please make sure it is turned on. It is not——

MS. JALLOH. I am sorry, my name is Joni Jalloh. I am an attorney for Dallas ISD here with Mr. Bohuchot.

Mr. WALDEN. Okay. Thank you. Ms. Foster, do you wish to be

represented by counsel?

Ms. FOSTER. Yes.

Mr. WALDEN. And your counsel, please identify yourself, sir.

Mr. PINE. Clyde Pine on behalf of Ysleta Independent School District.

Mr. WALDEN. Okay. And let’s see, Ms. Glogovac?

Ms. GLOGOVAC. No.

Mr. WALDEN. Do not wish to be represented by counsel. Mr.

Hawthorne?

Mr. HAWTHORNE. No.

Mr. WALDEN. The answer is no. Mr. Caine?

Mr. CAINE. Yes.

Mr. WALDEN. And your counsel, sir?

Mr. CAINE. Biz van Gelder.

Mr. WALDEN. Sorry, could you say that again?

Mr. CAINE. Ms. Biz van Gelder.

Mr. WALDEN. Thank you. And Mr. Pratt?

Mr. PRATT. It would be the same.

Mr. WALDEN. Okay. And let’s see, witness in the video is Mr.

Tafoya. Mr. Tafoya, do you wish to be represented by counsel?

Mr. TAFOYA. Yes.

Mr. WALDEN. And your counsel’s name?

Mr. SOFFI. Anthony Soffi.

Mr. WALDEN. Thank you, sir. In that case, let’s see, in that case,

if you would, the witnesses, rise and raise your right hand, I will

then swear you in.

[Witnesses sworn.]

Mr. WALDEN. Let the record show they all indicate, yes, they do.

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So you are now under oath, and you may now give a 5-minute

summary of your written statement. Mr. Tafoya, we are going to

start with you this afternoon.

TESTIMONY OF CHARLES TAFOYA, SUPERINTENDENT, EL

PASO INDEPENDENT SCHOOL DISTRICT; RUBEN BOHUCHOT

CHIEF TECHNOLOGY OFFICER, ASSOCIATE SUPERINTENDENT, DALLAS INDEPENDENT SCHOOL DISTRICT;

SHARON FOSTER, TECHNOLOGY INFORMATION SYSTEMS DIRECTOR, YSLETA INDEPENDANT SCHOOL DISTRICT; PAULA

GLOGOVAC, FORMER E-RATE CONSULTANT TO SUN MICROSYSTEMS; NATHANIEL HAWTHORNE, GENERAL COUNSEL,

ALPHA TELECOMMUNICATIONS, INCORPORATED; AND

CHRISTOPHER G. CAINE, VICE PRESIDENT, GOVERNMENT

PROGRAMS, IBM, ACCOMPANIED BY MIKE PRATT

Mr. TAFOYA. Thank you. Mr. Chairman, thank you for the opportunity to speak with you today. As indicated earlier, my names is

Charles L. Tafoya. I am the superintendent of the El Paso Independent School District and in that capacity I have decided to

present a short statement on behalf of the district for the hearing.

We also have provided you a much more detailed statement, which

is available, again, at your convenience.

Although I was not superintendent during most of the relevant

period, I have some familiarity with the program. The district is

the largest school district within the El Paso, Texas County in far

west Texas, along the border of New Mexico and Mexico. El Paso

is primarily an Hispanic city with a population of over 600,000 students. The district is a poor school district—I am sorry, with over

600,000 residents, not students. The district is a poor school district with many poor students. About 70 percent of the district’s

students are eligible for free and reduced lunches under Federal

law, though many of its schools have a much higher proportion.

As one can readily see, the district students are extremely poor

and in great need of benefits from the projects to be completed

using E-rate funding. Relatively few students within the district

have access to computers at home, much less access to educational

resources through the Internet. For many district students, the

school computers are the only computers to which they have access.

The digital divide is a major problem within the district, and, unfortunately, many of its students are on the wrong side of that divide.

The district has been a beneficiary of the E-Rate program since

its inception. In year 4 of the program, the district received an

award of approximately $65 million. That was a major grant, and

the district was ecstatic about it. The award was made several

months into year 4 and the district had less time than expected to

complete the projects. Those year 4 projects were a major undertaking for the district. The district devoted significant financial and

manpower resources of its own to the projects. The projects were

timely completed and implemented by the district and the service

provider, IBM.

Principally, though, some special contract provisions with IBM—

I am sorry, principally through some special contract provisions

with IBM, the district was able to save money and was in fact able

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to return over $9.3 million from its funding while still completing

the projects.

The district sought E-rate funding again in year 5 of the program

but a significantly lower amount. That is the year in which problems with the program came to light in a major way. Unbeknownst

to the district, the Request for Proposal developed and used by the

district for year 4 was used as a model by school districts throughout the country. At almost all of those other districts, IBM was the

successful vendor.

An issue arose as to whether that Request for Proposal was in

full compliance with program rules. The FCC ultimately concluded

that the RFP model was improper but acknowledged the ambiguity

of the rules and good faith of the districts. The district was, and

remains, adamant that its E-rate projects should be performed for

a fair price and with the best value for the dollar.

The district is responsible for its pro rata contribution in the

event of program funding for a project. The district contribution,

though, does not reflect all of the true costs that the district E-rate

awarded. Specifically, if a particular E-rate project is awarded program funding, the district must not only contribute its pro rata

share but must also pay for the computers and other ineligible

hardware necessary to use the eligible services under the project,

for additional staff to handle installation and operation of the

project and for additional training in related areas to best utilize

the resources of the project.

In addition, the district feels strongly that technology and other

resources at its various schools is equitable. Consequently, the district must pay for similar ineligible projects similar to an approved

project at schools ineligible for E-rate funding. Accordingly, the district’s contribution in the event of program funding is actually

much greater than pro rata contribution.

The district is very thankful for E-rate funding that it has previously received. That funding has provided immeasurable benefits

to students of the district. The written statement addresses those

in more detail. By way of example, a major benefit of the program

funds for El Paso ISD teachers and students was acquisition of a

computer network and connectivity to and amongst campuses. Another residual benefit is exactly being realized as I speak to you

through the ability to have been connected to the El Paso Community College from where this broadcast is being projected. The network required cabling and wiring in schools and provision of specialized network electronics. Using program funds, in combination

with the district’s own resources, the network was installed and

implemented. One cannot over emphasize the point that, without

program funds, it would have taken many, many years for the district to create and complete such a network across the district. Indeed, due to the time delays that would have been involved, the attendant issues of obsolescence in the meantime, it is indeed questionable if the network would have ever been fully completed and

compatible.

The district believes that its experience in this regard has been

shared by many school districts across the country. The primary

benefit from the program was high-speed Internet access. The

funding not only allowed many more students to gain access to the

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Internet, it also committed our students to expand their educational experience. E-rating funding has permitted the district to

complete needed projects in the technology area in an effort to provide its students with an enhanced opportunity for success in the

future. To be clear, through program funds, the district did not

seek to achieve and did not achieve a technology advantage over

other school districts. Instead, the district sought to use such funding to catch up to other districts.

Although thankful for the funding from the program, the district

has experienced frustration with the program as more fully outlined in the written statement. These frustrations primarily involve

ambiguities in the rules and the length of delays in making

awards, which make it difficult for school districts to properly handle technology projects. The district has learned a number of lessons from the program participation. These lessons learned are

likely to apply to many other school districts. The written statement addresses those in greater detail.

I did want to briefly focus on a few of those related to the issues

of preparedness and commitment. A district seeking E-rate funds

needs to ensure that it has properly planned for the projects, is

ready to manage the installation and completion of the projects and

is prepared to manage the actual usage of the projects, after completion. Each of these steps takes a major commitment by the district. For instance, beyond the technology plan required under the

program, a school district needs to do a comprehensive review and

analysis of its education needs, various technology solutions to

meet those needs, compatibility and structure issues as well as sustainability issues. Merely getting the latest and the greatest system may not be appropriate if it is not compatible with existing

technology, it does not meet the actual and structural needs or cannot be sustained in the future.

Moreover, in order to ensure that E-rate projects actually have

a direct positive effect in the classroom, a school district should expect to spend substantial sums on teacher training, staff, and

again, preparedness; equipment and other ineligible items under Erate. In short, a program participant, in order to fully enjoy the

benefits of program projects, should make a greater commitment of

its own staff, money and other resources in determining its technology needs, preparing and designing projects, overseeing and supervising project installation and ensuring implementation of the

projects.

We believe that the district acted reasonably, in good faith, within legal guidelines. Although its efforts were good, the district believes there was room for improvement. It is working to address

those issues. The district believes that the E-Rate program is a

good program and should be retained. Some reforms, though, are

needed. The written statement discusses those in more detail as

well.

The district believes, in conclusion, that notwithstanding the

problems, the program has been very successful in bringing much

needed technology to school districts across the country. Such technology has brought great benefits to the students involved. Thank

you, Mr. Chairman.

[The prepared statement of Charles Tafoya follows:]

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PREPARED STATEMENT OF CHARLES TAFOYA, SUPERINTENDENT, EL PASO

INDEPENDENT SCHOOL DISTRICT

INTRODUCTION

Mr. Chairman, thank you for the opportunity to speak to you this morning. My

name is Charles Tafoya. I am the Superintendent of the El Paso Independent School

District (‘‘El Paso I.S.D.’’), I have been asked to provide this statement on behalf

of El Paso I.S.D. for this hearing of the House Energy and Commerce Committee’s

Subcommittee on Oversight and Investigations entitled ‘‘Problems with the E-Rate

Program: Waste, Fraud, and Abuse Concerns in the Wiring of Our Nation’s Schools

to Internet’’.

El Paso I.S.D. welcomes the Subcommittee’s interest in the E-Rate Program (the

‘‘Program’’ or ‘‘E-Rate’’) of the Federal Communications Commission (the ‘‘FCC’’),

and administered by its Schools & Libraries Division (the ‘‘SLD’’) and the Universal

Service Administrative Company (‘‘USAC’’), and believes that Congressional hearings reviewing the Program’s good points and bad points are overdue. Such a review

should generally be done with any federal program on a periodic basis. On the other

hand, we admittedly would have preferred that El Paso I.S.D.’s own participation

in the Program not be a focus of this Subcommittee’s review.

Although I was not Superintendent at El Paso I.S.D. during the most of the relevant periods discussed below [becoming interim Superintendent during 2002, and

Superintendent in January 2003], I am or have become familiar with El Paso

I.S.D.’s participation in the Program.

I have attached a statement from the El Paso I.S.D. website describing my background, as well as a copy of my curriculum vitae.

The final page of this written statement includes one-page summary of the major

points of this written statement.

I also intend to present an oral presentation of five minutes or less at the hearing.

Due to the time limitations for such presentation, as well as for my answers to questions from members of the Committee, and the consequent inability to provide detailed, properly nuanced and articulated presentations and responses, my oral testimony at the hearing is and will be subject to, and qualified, supplemented, and

clarified by, this written statement.

BACKGROUND OF THE EL PASO COMMUNITY

Before proceeding further, it is important for you to understand the circumstances

which El Paso I.S.D. faces in its daily efforts to educate and prepare its students

for the future.

El Paso I.S.D. is the largest school district within El Paso County, Texas. Its

school boundaries encompass much of the City of El Paso. El Paso is located at the

far western end of Texas, wedged between Mexico and New Mexico. In fact, El Paso

is so far west in Texas, that it is actually closer to Los Angeles than the eastern

border of Texas. It is also said that Texarkana is closer to Chicago than El Paso.

El Paso is located in the Chihuahuan desert, with the Franklin Mountains [being

the southern end of the Rocky Mountains in the United States] bisecting the city.

The Rio Grande river flows south through a portion of El Paso, and then becomes

the border with New Mexico, and ultimately becomes the border with Mexico [which

river border continues to the Gulf of Mexico].

The El Paso community enjoys a long history. Although the first Spanish arrived

in the area in the late 1500’s [including what is asserted to be the first Thanksgiving ceremony in North America in 1598 by Juan de Onate and his colonists], the

original Spanish settlements in El Paso were not established until the 1680’s.

The population of El Paso County is approximately 680,000. The city of Cuidad

Juarez, Mexico borders El Paso. Cuidad Juarez has a population believed to be from

1,000,000 to 1,500,000 persons. To be clear, unlike the San Diego-Tijuana border

area, El Paso and Juarez are actually physically next to each other, separated only

by the Rio Grande. The bridges across the Rio Grande handle northbound [i.e. into

El Paso] traffic of about 15,000,000 vehicles and 9,000,000 pedestrians per year.

Demographically, El Paso is a primarily Hispanic city. It is believed to have the

largest proportion of Hispanics in its population amongst cities over 500,000 in the

country. Approximately 78% of its population is described as Hispanic according to

census records. About 17% of its population is non-Hispanic whites, with AsianAmericans and African-Americans constituting only small portions of the population.

El Paso I.S.D. is a poor school district with many poor students, and each have

many needs, especially in the technology area. About 70% of El Paso I.S.D.’s students are eligible for ‘‘free and reduced lunches’’ under federal law, though many

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1The nomenclature for the funding years in the Program has changed from ‘‘Year 6’’, etc. to

‘‘Year 2003-2004’’, etc. This statement will generally use the former terminology, for convenience.

of its schools have a much higher proportion. Indeed, at close to two-third’s of El

Paso I.S.D.’s schools, more than 90% of the students are eligible for ‘‘free and reduced lunches’’. The 2000 Profile of Selected Economic Characteristics issued by the

United States Census Bureau estimates the per capita income for 1999 in the El

Paso, Texas area at $14,388 per year. For comparison, according to the same survey,

the annual per capita income for 1999 in the United States was $21,587, for the

State of Texas was $19,617, and for the Washington D.C. area was $28,659.

As one can readily see, El Paso I.S.D. students are extremely poor, and in great

need of the benefits from the projects to be completed using E-Rate funding. Relatively few students within El Paso I.S.D. have access to computers at home, much

less access to educational resources through the Internet. For many El Paso I.S.D.

students, the school computers are the only computers to which they have access.

The ‘‘digital divide’’ is a major problem within El Paso I.S.D., and unfortunately

many of its students are on the wrong side of the divide.

EL PASO I.S.D.’S HISTORY WITH E-RATE PROGRAM

The rules and objectives of the Program have changed over time. Initially, the

Program appeared to be used primarily for reimbursement of school districts for

telecommunication expenses. Later, cabling for computer networks became popular

under the Program. More recently, E-Rate funding for other sorts of so-called internal connections have been commonly sought. The problems with the Program that

prompted these Subcommittee’s hearings appear to have involved this final category.

El Paso I.S.D. has been a beneficiary of the Program since its inception. In Year

1 of the Program 11, El Paso I.S.D. sought funding for telecommunications and inter- nal connections, and received an award of $2,669,822 from the SLD. For Year 2 of

the Program, El Paso I.S.D. was granted funding of $6,463,713 for telecommunications, internal access, and internal connection. In Year 3 of the Program, El Paso

I.S.D. received $1,422,392 in funding for telecommunications, internal access, and

internal connection. El Paso I.S.D. was awarded $65,683,831 in E-Rate funding in

Year 4 of the Program, for a variety of telecommunications, internal access, and internal connections projects. El Paso I.S.D.’s request for Year 5 E-Rate funding of

$46,094,835 was denied by the SLD. Upon appeal, in light of confusion over Program rules, in December 2003, the FCC permitted El Paso I.S.D. and a few other

districts to re-submit funding applications for Year 5. That has been done, and such

new application is now pending for $1,433,932. El Paso I.S.D.’s funding request in

Year 6 of the Program for $10,352,203, for both telecommunications, internal access,

and some internal connections, was unexpectedly denied by the SLD on an alleged

technicality. El Paso I.S.D. strongly disputes that contention and has appealed the

SLD’s decision to the FCC. Looking closely at those circumstances, one cannot help

but wonder whether retaliation against El Paso I.S.D. played a part in that denial.

That appeal is still pending. El Paso I.S.D. has also recently filed for funding under

Year 7 of the Program. $2,598,600 has been sought, in connection with telecommunications, high speed fiber network, and internal connection projects in Year

7.

The eligible campuses at El Paso I.S.D. under the Program currently consists of

3 high schools, 3 auxiliary campuses, 7 middle school campuses and 39 elementary

school campuses, for a total of 52 campuses.

EL PASO I.S.D.’S PARTICIPATION IN YEAR 4 OF THE PROJECT

Since El Paso I.S.D.’s participation in Year 4 of the Program unexpectedly and

unintentionally appears to have been a catalyst to problems nationwide in the subsequent funding year, further review of such participation [as well as that of Year

5] is in order.

To better understand the E-Rate funding process, an applicant must comply with

the following steps in order to be considered to have a complete application about

which a funding decision may be made: (1) the applicant must develop a technology

plan; (2) the applicant must file with the SLD a Form 470, describing the goods and

services it wishes to procure in accordance with its technology plan; (3) the SLD

then posts the Form 470 on its website, so that vendors interested in providing such

goods or services can contact the applicant, make a bid, and seek to become the provider of the same; (4) to the extent that state or local procurement laws apply to

the applicant, the applicant must comply with those laws, such as by issuance of

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competitive bid requests or requests for proposal; (5) the applicant reviews bids and

responses from interested vendors, under the Form 470 process and/or state or local

procurement laws; (6) the applicant must wait at least 28 days after filing of the

Form 470 in order to contract with a particular vendor, so that sufficient time is

permitted for vendors to respond or make bids; (7) the applicant selects the successful vendor to provide the goods and/or services under the Form 470; (8) the applicant enters into a contract with the successful vendor; (9) the applicant files a Form

471 with the SLD, in which it names the successful vendor as the ‘‘service provider’’,

using the vendor’s unique ‘‘service provider identification number’’ or ‘‘SPIN’’, for the

goods and/or services under the Form 470; and (10) the applicant then awaits any

decision by the SLD as to whether or not funding will be granted, and in what

amount, under the Form 471. If the SLD awards a grant of Program funds to an

applicant, the applicant must then file a Form 486, accepting such grant. Each applicant also is required, under Program rules, to pay a proportion of the charges

[often 10% or so] from the service provider, as a condition of participation.

During each year of the Program, El Paso I.S.D. has had a longstanding technology plan, as modified from time to time (the ‘‘Technology Plan’’), upon which its

Program participation has been based. In other words, El Paso I.S.D. has sought

E-Rate funding for projects consistent with its Technology Plan. Importantly, El

Paso I.S.D. has not relied and does not rely solely on E-Rate funding to satisfy the

goals of the Technology Plan, instead using its own funds and other sources as

available. The E-Rate funding, however, has essentially permitted El Paso I.S.D. to

accelerate the timetables for completion of such projects, thereby providing the benefits of technology for more students.

In December 2000, El Paso I.S.D. posted a Form 470 for Year 4 of the Program

(the ‘‘Year 4 Form 470’’), in accordance with Program requirements. The Year 4

Form 470 was posted through the SLD web-site. A hard-copy of the Year 4 Form

470 was signed by El Paso I.S.D. and forwarded to the SLD.

In December 2000, El Paso I.S.D. also issued its Request for Proposal No. 101-

00 entitled ‘‘Strategic Technology Solution Provider’’ (the ‘‘Request for Proposal’’).

The first page of the Request for Proposal stated in relevant part as follows:

. . . This Strategic Technology Partnership agreement will include, but not be

limited to, E-rate funded projects. The selected vendor should be prepared to assist the District with all aspects of the E-rate process and should demonstrate

knowledge and experience in dealing with E-rate funded projects. All E-rate applications will be submitted using the successor bidder’s single SPIN number.

Vendors must provide their SPIN number as part of their response... The Request for Proposal sought a vendor to provide integrated provision of goods

and services for El Paso I.S.D.’s proposed E-Rate projects. This was somehow different than what El Paso I.S.D. had done in prior years. Due to part to the loss

of personnel experienced with the Program, more outside assistance from the vendor

appeared to be beneficial to El Paso I.S.D. Utilization of outside expertise is not inappropriate, especially in the area of technology.

It is unrealistic to expect school districts to have in-house expertise to understand,

plan, and identify the specific plans, specifications, and other details of projects of

seeking funding. Districts rarely have expertise to do so. The districts generally understand only what projects need to be done and the basic scope and outline of those

projects, but do not often know ahead of time the particular plans and specifications

for those projects [especially in the technology area where new technologies and

techniques come into play very quickly]. This is a very complicated field, and hard

for a district to keep track of state-of-the-art goods and services. If a district tried

to design a technology project completely on its own, including all plans and specifications, it would not necessarily design the most cost-effective project, and its design would likely include inefficiencies, waste, and obsolete items. Accordingly, it

makes sense for a district to seek systems integration expertise from a third party.

By way of example, one should keep in mind the analogy of an individual building

an addition to a house. In theory, a person could build the addition himself, but that

is very rare indeed since individuals almost never have the necessary expertise and

experience to do so. Instead, individuals generally do have in mind their basic needs

and desires for the addition [no. of bedrooms, no. of baths, approx. square footage,

one or two-story, exterior facing, style, etc.], but do not know all of the details [depth

of foundation slab, location of plumbing and electrical conduit, framing details and

techniques, etc.]. In addition, the homeowner generally does not know exactly how

the framing, plumbing, HVAC, electrical, and other systems of the addition can be

made compatible with those in the existing portion of the house. Of course, the

homeowner rarely creates the blueprints on his/her own. The homeowner instead

generally retains an architect and/or a homebuilder to prepare the blueprints, based

upon the homeowner’s basic needs and desires. Those blueprints are not completed,

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however, by the architect/contractor without significant input from the homeowner.

The homeowner usually reviews those plans and specifications with the architect/

contractor and suggests many changes. In that regard, price is an important consideration, and changes are made to the blueprints accordingly. The price of the project

is negotiated between the parties. The homeowner retains final control over the

plans and specifications, and the price, especially since the homeowner has the right

to end negotiations and seek a new builder, if necessary. As applied to the Program,

the homeowner is akin to a district seeking Program funding, the addition is akin

to the new projects desired to the existing technology at the district, the homeowner’s basic needs and desires of the homeowner are akin to the technology plan

adopted by district seeking Program funding, the plans and specifications as set

forth in the blueprints are akin to the details contained in the Form 471 filed by

such district, and the architect and contractor are akin to the service provider for

the district. Consequently, this ‘‘general contractor’’ approach seemed reasonable to

El Paso I.S.D. when adopted through the Request for Proposal.

The Request for Proposal was prepared by an El Paso I.S.D. employee, based upon

review of similar bid documents prepared by other school districts nationally as well

as substantial drafting on his own. Importantly, it was not prepared by any vendor,

and not based upon draft documents provided by any vendor.

The Request for Proposal was noticed by El Paso I.S.D. in newspaper notices, and

placed upon its web-site. El Paso I.S.D. provided copies of its Request for Proposal

to eleven different companies who requested a copy, not all ones who ultimately bid.

The deadline for submitting responses to the Request for Proposal was December

19, 2000, and responses were thereafter opened. Eight vendors [IBM, Amherst Computer, Diversified Technical Services, Kent Data Communications, ESEI, Southwestern Bell, Time Warner Cable, and Cervantes CC] responded to the Request for

Proposal in some form or fashion. The Year 4 470 did not generate any responses,

in and of itself.

An evaluation committee composed of El Paso I.S.D. Technology and Finance Department officials reviewed the responses and recommended IBM to the Board of

Trustees of El Paso I.S.D. At a Board meeting on January 9, 2001, the Board of

Trustees of El Paso I.S.D. selected IBM as the putative awardee under the Request

for Proposal, and thus, if a final contract [including pricing] was successfully negotiated and finalized, as the service provider for the El Paso I.S.D. projects for which

a Funding Year 2001 application was to be made.

Thereafter, IBM and El Paso I.S.D. entered into an IBM Customer Agreement

dated as of January 2001, with incorporated Statements of Work dated January

2001, as well as an Addendum to Customer Agreement for January 2001 SOWs (collectively, the ‘‘Year 4 Contract’’). The Year 4 Contract had a one-year term, with

an option by El Paso I.S.D. to renew for two additional one-year terms. The Statements of Work included with the Year 4 Contract outlined in detail the projects to

be completed under the Program.

Importantly, the Year 4 Contract contained special provisions whereby El Paso

I.S.D. retained the right to select the ultimate providers of many services and products, through use of procurement requirements of Texas state-law (the ‘‘Special Procurement Provisions’’). The Special Procurement Provisions are found within the Addendum to the Year 4 Contract. In this way, El Paso I.S.D. intended to minimize

the costs for such services and products, and thereby minimize the amounts of Program funding, and thus El Paso I.S.D.’s pro rata contribution, ultimately required

to perform the desired E-Rate projects. El Paso I.S.D. insisted upon such terms, and

after challenging negotiations, was able to obtain IBM’s consent to the same. It is

El Paso I.S.D.’s understanding that it was the only district nationwide during Year

4 of the Program to obtain such special protection provisions from IBM, and one of

only two [the other being a sister district in El Paso County aware of such contract

terms] nationwide obtaining such provisions from IBM during Year 5 of the Program.

El Paso I.S.D. then filed a Form 471 for Year 4 of the Program (the ‘‘Year 4 Form

471’’) with the SLD, as required.

El Paso I.S.D. later received a substantial award of funding from the SLD for

Year 4 of the Program for IC/IA Services and Telco Services. El Paso I.S.D. accepted

such funding, and the projects thereunder have been completed. This award was

dated September 28, 2001, for the Year 4 funding year beginning July 1, 2001. As

one can see, the award was not received until well after the beginning of the funding year in question.

Upon receipt of such award, El Paso I.S.D. recognized that, due to the SLD’s

delays in making the grant, it had less time than originally anticipated to complete

the desired E-Rate projects. El Paso I.S.D. took a variety of internal steps to manage the construction of those projects, including retention of a consultant to act as

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overall project manager, looking out for El Paso I.S.D.’s interests, as well as a commitment [often called upon] by its Board of Trustees to hold special meetings or take

additional efforts to take the necessary Board actions to complete the projects on

a timely basis. El Paso I.S.D.’s Board of Trustees also made a substantial financial

commitment from the limited reserves of the District, to pay for its required share

of Program costs.

Ultimately, El Paso I.S.D. was able to complete the Year 4 projects on a timely

basis. Through use of the Special Procurement Provisions, El Paso I.S.D. was also

able to achieve costs savings and was able to essentially return significant funding

to SLD that was not needed to complete the projects in question. Through the Special Procurement Provisions, the pricing was capped at those set in the Form 471s,

but El Paso I.S.D. had the opportunity to obtain any better pricing later by the selection of subcontractors and/or suppliers through separate, later competitive procurement. With that better pricing, El Paso I.S.D. hoped to achieve additional savings. In fact, due in large part to the special procurement provisions of the Year

4 Contract, and otherwise due to its intent to ensure that its projects were limited

to critical needs, El Paso I.S.D. ultimately did not need to spend, and returned, over

$9.3 million from its Year 4 Program funding. In essence, El Paso I.S.D. obtained

desired and requested goods and services for a much lower price, and thus achieve

‘‘more bang for the buck’’ as it intended. This conduct demonstrated El Paso I.S.D.’s

continued commitment to avoid fraud, waste, and abuse in pricing, both for its own

benefit and the Program itself.

El Paso I.S.D. was and remains adamant that its E-Rate projects should be performed for a fair price, and with the most ‘‘bang for the buck’’. El Paso I.S.D. is also

very concerned about sustainability of its technology projects for the long-term, and,

since Program funding from year to year cannot be guaranteed, El Paso I.S.D. needs

to ensure that any Project can be sustained without Program funding in the future.

Although El Paso I.S.D. sought to meet such goal with respect to all E-Rate projects,

in 20-20 hindsight, it feels that, due to ambiguities in and misunderstanding of Program rules, the so-called ‘‘Help Desk’’ portion of the maintenance statement of work

did not prove to be sustainable [contrary to El Paso I.S.D.’s original intent and belief].

It is important to remember that El Paso I.S.D. is responsible for its pro rata contribution in the event of Program funding for a project. In the case of Year 4 funding, it alone represented a major financial commitment from El Paso I.S.D. That direct contribution, though, does not reflect all of the true costs to El Paso I.S.D. of

Program funding. Specifically, if a particular E-Rate project is awarded Program

funding, El Paso I.S.D. must not only contribute its pro rata share, but must also

pay for the computers or other ineligible hardware necessary to use the eligible

services under the project, for additional staff to handle installation and operation

of the project, and for additional training [not otherwise eligible] in related areas

to best utilize the resources of the project. In addition, El Paso I.S.D. feels strongly

that technology and other resources at its various schools be equitable; consequently, El Paso I.S.D. must pay for similar, ineligible projects, similar to an approved project, at other schools who are not granted Program funding due to a lower

‘‘free and reduced lunch’’ level. In short, El Paso I.S.D. has to spend its own money

to ensure that each school, whether or not it received Program funding, has similar

resources. Accordingly, El Paso I.S.D.’s contribution in the event of Program funding

is actually much greater than pro rata contribution. That alone is significant incentive for El Paso I.S.D. to seek cost-effective acquisition of the projects, which El Paso

I.S.D. has sought to do in each case.

EL PASO I.S.D.’S PARTICIPATION UNDER YEAR 5 OF THE PROGRAM

Year 5 of the Program encountered many problems nationwide. In hindsight, it

appears that, based upon El Paso I.S.D.’s large award in Year 4, many districts

across the nation prepared requests for proposal for Year projects almost identical

to the Year 4 Request for Proposal of El Paso I.S.D. El Paso I.S.D. was unaware

of those circumstances. It did share a draft of the Request for Proposal with a sister

district in El Paso County, Texas, Ysleta Independent School District; staff of local

districts commonly share bid documents or similar materials in an effort to avoid

unnecessary duplication of efforts.

Frankly, El Paso I.S.D. is somewhat upset that, without its knowledge or consent,

the so-called ‘‘El Paso model’’ was presumably pitched to other districts nationwide,

who ultimately selected a single vendor, resulting in what are now viewed by some

as abuses in the Program. That was not the intent of El Paso I.S.D., and it is very

concerned about being indirectly and unknowingly tied to such conduct.

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The nationwide problems with Year 5 of the Program also directly affected El

Paso I.S.D. For such Program year, El Paso I.S.D. filed a Form 470 for internal connections and related services, as well as for telecommunications services.

With respect to those telecommunication services, El Paso I.S.D. acquired services

from AT&T for long-distance service and local telephone service. Section 44.031(b)(4)

of the Texas Education Code authorizes school districts to acquire goods or services

under the catalogue purchase system under Section 2157.001 et. seq. of the Texas

Government Code. Under this catalogue purchase program, the DIR [being a Texas

state agency] creates a list of approved statewide vendors for specified goods and

services, after a process involving review of different pricing factors, among others.

This process essentially forces interested vendors to offer specially discounted prices

on a statewide-basis, in order to be listed as an approved vendor, in order to be able

to make sales to local governments across the state. The DIR itself advises vendors

on its website:

DIR expects to receive the vendors’ best pricing, since all state agencies, cities, counties, and other local governments, public school districts, and public colleges and universities can buy through the DIR contracts. Based on the state’s

anticipated volume, vendors need to offer DIR deep discounts from their list

price. Those discounts must apply to all DIR customers, regardless of their size,

which means that a small agency would receive the same base discounts that

a large agency would receive, although entities buying large quantities should

be able to negotiate deeper discounts through the DIR contracts.

The catalogue purchasing program, under state law, supersedes any requirement for

a local district to perform a second competitive procurement [insofar as the DIR has

already done a competitive procurement previously]. AT&T was/is an approved vendor on the DIR catalogue. The telecommunication services of AT&T as offered in the

DIR catalogue were tariffed services. El Paso I.S.D. approved AT&T as the provider

of such services for Year 5 of the Program, based upon the procurement under the

DIR catalogue.

With respect to internal connections and related services for Year 5 of the Program, after review and analysis by staff and approval by the Board of Trustees at

a meeting on January 8, 2002, El Paso I.S.D. decided to renew its relationship with

IBM as service provider for Year 5. As noted above, El Paso I.S.D. posted a new

Form 470 for Year 5, though not required to do so under Program rules due to the

renewal. Nevertheless, El Paso I.S.D. wanted to inquire as to any interest from

other possible vendors, in an effort to determine whether or not renewal was costeffective and should take place. No responses or inquiries were received by El Paso

I.S.D. from vendors to the 2002 Form 470 for IC/IA Services sufficient to convince

El Paso I.S.D. not to renew its existing contract with IBM; El Paso I.S.D. invited

further responses from any such inquiring vendor, but substantive information or

materials were not received on a timely basis, if at all. During an internal process,

El Paso I.S.D. itself reduced the funding levels it would seek from the Program for

Year 5, due to El Paso I.S.D.’s desire to reduce the scope of the projects thereunder.

Thereafter, El Paso I.S.D., in consultation with IBM, finalized the specifications for

the specific goods and services necessary for completion of such internal connections

and related projects. The funding requested for such projects for Year 5 of the Program represented a significant reduction in amounts as requested by El Paso I.S.D.,

and as awarded by SLD, for Year 4.

After further negotiations with IBM, El Paso I.S.D. and IBM entered into Statements of Work dated January 2002, as well as an Addendum to Customer Agreement for January 2002 SOWs (collectively, the ‘‘Year 5 Contract’’). The Year 5 Contract also contained similar Special Procurement Provisions. The Year 5 Contract

effectively represented the renewal and extension of the IBM Customer Agreement,

to cover Year 5 projects and new statements of work.

As noted above, funding for El Paso I.S.D. under Year 5 of the Program was denied by the SLD. Such denial was dated March 10, 2003, although Year 5 of the

Program actually began on July 1, 2002. In other words, El Paso I.S.D. did not learn

of a decision on its Year 5 funding until about three months before Year 5 ended.

El Paso I.S.D. appealed the decision of the SLD to FCC. By FCC Order 03-313

dated December 8, 2003 in Matter of Request for Review of the Decision of the Universal Service Administrator by Ysleta Independent School District, et. al., CC Docket Nos. 96-45 and 97-21 (the ‘‘Ysleta Order’’), the FCC effectively upheld the denial

of Year 5 funding, but granted a waiver of Program rules to permit El Paso I.S.D.

and several other school districts to re-file its application for Year 5 funding under

certain conditions. El Paso I.S.D. believes that its Year 4 and Year 5 procurement

for a service provider under the Program complied with applicable state and federal

law. Nevertheless, the FCC effectively found that certain aspects of such procurement did not comply with Program rules. On the other hand, the FCC implicitly

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admitted that ambiguities and/or past course of dealing might have confused districts as to such legal issues, and therefore permitted re-filing of the applications.

El Paso I.S.D. has done so, though its requested figure is much less than before,

due to reductions in market prices, obsolescence of several projects, and completion

of all or part of some projects using other resources, among other things. El Paso

I.S.D. still believed that its conduct was appropriate and not in violation of Program

rules. Nevertheless, in the circumstances El Paso I.S.D. [as well as the other affected districts] decided not to appeal the Ysleta order to the courts and to instead

take advantage of the FCC’s allowance of re-filing of the application at issue. The

relief permitted by the FCC’s ruling was an acceptable compromise in the district’s

view, and the time and expense of protracted litigation was not justified.

BENEFITS TO EL PASO I.S.D. STUDENTS FROM E-RATE FUNDING

El Paso I.S.D. is very thankful for the E-Rate funding that it has previously received. That funding has provided immeasurable benefits to students of El Paso

I.S.D. We believe it is important for Congress to recognize the wonderful things that

have been accomplished at the front lines of education, due to its funding of the Program.

In Year 1 of the Program, the awarded Program funds allowed El Paso I.S.D. to

provide 1,263 local long-distance service connections for telephones in El Paso I.S.D.

and provided high-speed Internet access to 2,479 computers at El Paso I.S.D. In addition, such funding allowed eligible campuses to have connections to the Internet

and provided structural cabling to all such campuses. With Year 2 Program funding,

El Paso I.S.D. was able to continue to provide and supply high-speed Internet access

to all the EPISD campuses and to provide additional 1,800 local long-distance service connections for telephones. El Paso I.S.D. used Year 3 Program funding to continue to provide telecommunications services to EPISD’s telephones and high-speed

Internet access to computers. El Paso I.S.D. also was able to obtain new telephone

connections for campuses, upgrade networks at all eligible campuses for new telephone systems, and to install additional structural cabling to eligible campuses. El

Paso I.S.D. was also able to procure network interface cards and upgrade network

switches for all eligible campuses. With Year 3 funding, El Paso I.S.D. was in addition able to procure maintenance and hardware support services for network electronics. In Year 4 of the Program, El Paso I.S.D.’s award was used to continue to

provide telecommunications and Internet access with El Paso I.S.D.’s telephones

and computers. It also provided an entire redesigned of El Paso I.S.D.’s computer

network. The wide area network became a dedicated fiber network as part of this

redesign. Structural cabling was also added to eligible campuses and horizontal

cable to all campuses was upgraded with enhanced category 5 cable. Fiber optic

lines were added to telecommunications lines at eligible campuses and network electronics were upgraded with switches and related components. El Paso I.S.D. also received a new email system for its employees. It also procured new application service. The Year 4 funding also provided funding for virtual schooling, technology-instruction integration, and technology planning.

A major benefit of the Program funds for El Paso I.S.D’s teachers and students

was acquisition of a computer network and connectivity to and amongst campuses.

The network required cabling and wiring in schools and provision of specialized network electronics. Using Program funds, in combination with its own resources, the

network was installed and implemented. One cannot over-emphasize the point that,

without Program funds, it would have taken many, many years for El Paso I.S.D.

to create and complete such a network across the district. Indeed, due to the time

delays that would have been involved, and the attendant issues of obsolescence in

the meantime, it is indeed questionable that the network would have ever been fully

complete and compatible. El Paso I.S.D. believes that its experience in this regard

has been shared by many school districts across the country.

A related benefit from Program was high-speed Internet access. The prior Internet

access provided speed of 1.5 mps. Program funding permitted El Paso I.S.D. to provide such access both through installation of appropriate cabling and network electronics, as well as provision of Internet access services. There was a major problem

with campuses using the old system to do classroom work assignments through the

Internet or other network resources because it was too slow. Slow speed was due

to the saturation of T-1 line that had been providing service. Essentially, over time

classroom Internet usage rates increased significantly at El Paso I.S.D. and demand

on the system increased for that reason and due to increasing file sizes. The number

and size of files and presentations available for educational purposes also increased

significantly. In other words, more websites often had more large, video or multimedia presentations available for review, as opposed to previous times. Using the

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old Internet access, it was difficult, if not impracticable, for El Paso I.S.D. students

to fully utilize such educational resources. Importantly, due to the slowness of the

old system, it at times was difficult for students to even getting any access to the

Internet and many stopped trying to do so. The old system was causing a severe

detriment to the education of El Paso I.S.D. students. It was no longer working and

El Paso I.S.D. students were beginning to fall further behind other students in technology matters as a result. It is also important to realize that the Texas Essential

Knowledge in Skills requirements include technology as part of the required curriculum for students in Texas. In addition, teacher evaluations are based upon their

use of technology. State-wide demands were also placing additional pressure upon

El Paso I.S.D. to increase the use of technology. The old system was unable to meet

that challenge.

Fortunately, due to Program funding, this challenge was in fact met. In addition,

the funding not only allowed many more students to gain access to the Internet, it

also permitted such Internet experience to be reasonably practicable. Furthermore,

Program funding also included web and file service that permitted students to learn

high-tech skills involving developing websites and in sharing research. That was

something that could not have been done using the El Paso I.S.D. own resources.

El Paso I.S.D. has also been pleased with the result from its acquisition of video

carts with Program funding. Indeed, El Paso I.S.D. since then has purchased many

more video carts, using its own resources, and is in process of acquiring more. El

Paso I.S.D. is seeking to make sure that each campus has at least one such cart.

These specialized video carts allow up to eight interactive sessions to occur

simulteously. There are often used for video-conferencing whereby one teacher can

provide instruction to classes at multiple schools. It is also used to permit multiple

classrooms to have interactive sessions to hear and talk to distinguished visitors.

In essence, each cart allows broadcasting from a single site to other sites across the

district, as a form of distance learning. In addition, the El Paso I.S.D. broadcast studio can provide broadcasts through the video carts to particular classrooms districtwide. The video carts are very popular with both teachers and students and have

proven to be a great learning tool. They have allowed El Paso I.S.D. to share the

resources of better or specialized teachers with more students. It has had a dramatic

effect at the classroom level.

As you can see, E-Rate funding has permitted El Paso I.S.D. to complete needed

projects in the technology areas, in an effort to provide its students with a fair opportunity to succeed in the future. To be clear, through Program funds, El Paso

I.S.D. did not seek to achieve, and did not achieve, a technological advantage over

average school districts. Instead, the district sought to use such funding to catch up

to those other districts. Although El Paso I.S.D. has not been able to fully ‘‘bridge

the gap’’ in this regard, E-Rate funds have permitted it to at least come within

range of being able to do so. Without the Program funds, El Paso I.S.D. and similarly-situated participants would technologically now be so far behind a typical

school district so that it could never expect to catch up as a practical matter.

El Paso I.S.D. sought the Program funding to aid the eligible schools. Such funding, however, though has also provided incidental [and initially unintended] benefits

district-wide and throughout the El Paso community. By way of example, the network advances achieved with Program funding also make it possible for El Paso

I.S.D. to comply with certain of the Adequate Yearly Progress and No Child Left

Behind Act requirements. With the network, there also can be greater accountability at the campus level, better review of campus-level data and information, better communication between central office and campuses, and greater sharing of resources amongst campuses. In addition, due to the increased connectivity afforded

from E-Rate projects in combination with El Paso I.S.D.’s own resources, the district

was able to utilize distance-learning to reach students and parents for educational

programs. Using one such program, over 225 ‘‘virtual learning’’ students were able

to complete high school requirements and graduate from El Paso I.S.D. this year;

those young adults [principally from areas of eligible schools] would not otherwise

have received high school diplomas, with resultant detriment to their own lives and

those of their families, to the local economy, and to the local community. El Paso

I.S.D. has also developed the Orion project with the local university, community college, and others to provide dual enrollment as well as specialized training in No

Child Left Behind Act and other issues, for both students and teachers. The goal

is to create a county-wide educational network to provide educational growth, and

hopefully economic growth for the depressed local economy. Rather than simply

have a collection of disparate, independent centers of basic, secondary, or higher

education, El Paso I.S.D. and these other educational bodies are seeking to establish

El Paso County as an ‘‘educational community’’, through creative and cost-effective

sharing of technological information and resources. Again, these benefits were not

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sought from the funding, but El Paso I.S.D. has been able to leverage the Program

funds using other resources in order to work on this greater good for the community

as a whole. El Paso I.S.D. believes that a principal purpose of the Program was to

benefit local communities, through provision of funding to aid the technology programs of schools.

It is important to raise this issue of ‘‘leveraging’’ the Program funds. As discussed

in detail elsewhere, Program funds are limited in amount and also may be legally

expended only on certain sorts of technology goods and services; therefore, districts

must commit significant resources on their own in order to ensure proper implementation of the projects. Consequently, Program funds must be ‘‘leveraged’’ by a grantee-district with other sources of funds. In addition, a project constructed with Program funds also should be ‘‘leveraged’’ by a grantee-district with other non-Program

projects, in order to meet technology needs. El Paso I.S.D. recognizes that the Program was not created to fulfill all technological needs of school districts, but instead

provides a substantial ‘‘down payment’’ to be leveraged by the districts.

FRUSTRATIONS WITH THE PROGRAM

Although thankful for the funding from the Program, El Paso I.S.D. believes it

is also important for Congress to understand frustrations that El Paso I.S.D. has

had with the operation and administration of the Program. Those frustrations are

believed to be shared with many other school districts across the country.

Probably the primary concern of El Paso I.S.D. and other school districts revolves

around an inability to fully understand the ever-changing Program requirements,

based upon changes in the actual rules as well as changes in SLD’s interpretation

of such rules. As El Paso I.S.D. and many other districts have learned, doing something the same way as successfully done in the prior funding year, even in the absence of any formal Program rule changes, is no guarantee that the SLD will approve such approach in the current funding year. Indeed, that is the principal issue

with El Paso I.S.D.’s Year 6 appeal. Furthermore, many have complained about the

SLD’s previous apparent refusal to make its manual of eligibility requirements for

goods and services available to the public, leading many well-meaning districts to

inadvertently seek ineligible goods or services or misunderstand those requirements.

El Paso I.S.D., of course, recognizes that some annual changes in SLD policy are

probably warranted, but wishes that such changes are announced publically and in

sufficient time for districts to comply with the same. Furthermore, the Program

rules have proven to be vague and ambiguous on a large number of points, making

it difficult for districts to seek compliance. For example, in El Paso I.S.D.’s own experience, different persons with the SLD, different E-Rate consultants, different

service providers, different attorneys, and different staff persons will have differing

interpretations of particular Program rules. If nationally-recognized E-Rate experts

in Washington, D.C. in constant communication with SLD officials do not agree

upon rule interpretations, it is difficult, if not impossible, to expect a typical school

district elsewhere in the nation to fully and properly understand what is expected

of it under the rule.

Another major frustration with the Program arises from the SLD’s continued

delays in making funding decisions. This frustration is believed to be shared by

many, if not most, applicants. A funding year under the Program runs from July

1 of one year to June 30 of the following year. Generally, a recipient of Program

funding must complete the project in question by such June 30 date [although short

extensions in certain categories have been permitted by the SLD]. The SLD, however, has routinely issued decisions on Program funding requests long after the beginning of the funding year. For instance, in Year 4 of the Program, El Paso I.S.D.

was notified of the SLD’s decision almost three months into the funding year in

question. In Year 5, the decision of the SLD was received about nine months after

the commencement date of the funding year. For Year 6 of the Program, El Paso

I.S.D. received notice of the SLD decision about six months after the start of the

funding year. In short, the SLD has issued its decisions after the funding year begins, and not beforehand. As a result, the districts are hard-pressed to adequately

and properly complete the funded projects, with appropriate oversight.

Such delays in decision-making also wreak havoc on a school district’s ability to

plan technology projects, whether or not based upon E-Rate funding. A district’s

technology projects for a particular funding year are generally dependent upon what

Program funding was awarded in the prior funding year. If such funding was denied

in whole or part, the district might need to re-urge such request in the next funding

year. By way of example, using a ‘‘pipeline’’ analogy to reflect the linear nature of

many projects, a district cannot be expected to request funds to build mile 5 of a

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struction. Due to the SLD’s late announcement of funding decisions, districts have

little time to develop projects for the next funding year before Form 470s for that

year must be posted. In El Paso I.S.D.’s case, it has often learned of the SLD decision on a particular funding year after its Form 470 for the next funding year is

due. El Paso I.S.D.’s experience is not unique.

Similarly, many technology projects must be integrated in order to be usable. It

is not uncommon for a district to plan a particular project eligible for Program funding, along with a related ineligible project using its own funds. Oftentimes, the timing of such projects must be coordinated. For example, a district’s plans to acquire

computers for a classroom is necessarily linked to its request for eligible cabling to

classrooms. With the delays in decisions on Program funding, the district’s plans for

the other projects are delayed and disrupted.

In this regard, due to delayed decision-making, districts are often in the uncomfortable position of wondering whether to use precious resources of their own on

needed technology projects for which E-Rate funding requests have been long pending. If a district decides to do the project outside of E-Rate, only to later get an Program award, it can effectively lose the requested E-Rate funding, as well as the ability to otherwise use those funds of its own for other needed technology projects.

It is also important to remember that technology constantly changes. Under current Program rules, it is not unusual for a district to be required to issue specifications for particular goods in October of a year in its Form 470, with a decision by

the SLD on funding taking place perhaps 12-18 months later, and actual procurement much later. Oftentimes, and El Paso I.S.D. experienced this as well, requested

goods are obsolete, no longer compatible with other items, or no longer manufactured at the time actual acquisition thereof is to occur.

In this vein, it is important to point out that the SLD has reportedly suspended

awards for the 2003 and 2004 funding years while it resolves problems arising from

a change in its accounting system. It is not entirely clear when the SLD will again

issue funding commitments.

As a related matter, the appeals process with the SLD and FCC of funding decisions is slow. Not only are decisions delayed in the first place, but delays in appellate decisions aggravate the problems described above.

El Paso I.S.D. realizes that the Program was in its infancy when these problems

arose. It is a relatively new federal program, and ‘‘growing pains’’ should have been

expected. The structure of the Program was different from other federal programs,

and the roles of the SLD and USAC were somewhat unusual. The complaints about

ambiguous rules and requirements with the Program are in large part similar to

those made about any new federal program during its early years. It often takes

a number of years for the ‘‘gray areas’’ to be identified and addressed. It is also important to remember that the Program also experienced a dramatic increase in both

the number of applications and in the dollar amount of monies requested. The regulatory bodies were presumably, and not surprisingly, overwhelmed to some extent

as a result.

El Paso I.S.D., despite its frustration [and that of other districts], recognizes that

staff of the SLD and USAC were probably trying to do the best job they could with

limited resources, and were also acting in good faith with respect to handling of the

Program [except, perhaps with respect to somewhat-suspicious funding denials by

SLD after the Ysleta order was issued]. Moreover, El Paso I.S.D. does wish to acknowledge that the FCC has more recently issued a number of orders and new rules

addressing a wide variety of issues in the Program, and is expected to issue more

in the near future. Those orders are welcome, and provide much more guidance and

clarification to applicants and service provider as to Program requirements. It is

hoped that those orders will limit this sort of frustration commonly experienced by

applicants in seeking to understand the Program.

LESSONS LEARNED BY EL PASO I.S.D.

El Paso I.S.D. has learned a number of lessons from its Program participation.

In particular, due to the above-described problems that El Paso I.S.D. encountered

with the Program, El Paso I.S.D. has also reviewed and studied causes of such problems. Although El Paso I.S.D. would prefer to place full responsibility upon others

for those problems, it recognizes and concedes that it bears some of the practical,

if not legal, responsibility for the same.

For instance, El Paso I.S.D. in Year 4 of the Program [unlike prior or subsequent

Program years] appears to have relied too heavily upon its service provider, IBM,

in developing the specifics of the statements of work. As mentioned above, El Paso

I.S.D. lost a number of key employees with Program experience and expertise shortly before the Year 4 process began. El Paso I.S.D. also had a relatively new techVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00143 Fmt 6633 Sfmt 6621 96098.TXT HCOM1 PsN: HCOM1
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nology director with essentially no Program experience [though very experienced

generally in technology areas]. Consequently, El Paso I.S.D. sought to select a ‘‘strategic technology solution provider’’ to provide additional assistance with respect to

Program matters. In the circumstances, that was a reasonable approach. On the

other hand, IBM submitted statements of work for Year 4 to El Paso I.S.D. for review with limited opportunity for extensive study and analysis before the deadline

for submission of the Year 4 Form 471s. Accordingly, El Paso I.S.D. technology department did confirm that the projects represented by statements of work were consistent with its Technology Plan and were ones desired by the district. Unfortunately, there was insufficient time for a detailed review and analysis by various affected departments of El Paso I.S.D. to ensure that those projects were in fact initially configured to meet the specific goals of such department or that each such

project [although functionally sufficient] was the preferred solution of the particular

department compared to other approaches. El Paso I.S.D. feels that its review was

legally sufficient, but in hindsight believes that more review and analysis would

have been better. Of course, the Special Procurement Provisions and other provisions in the Year 4 Contract did provide El Paso I.S.D. with an opportunity to further review and modify projects even after an award of Program funds. El Paso

I.S.D. in fact exercised these special contractual rights and modified several projects

from the initial proposals, in accordance with Program rules, in order to better satisfy the needs of the district. Nevertheless, in retrospect, the preferred approach

would have been to internally develop project details with little or no assistance

from the service provider [recognizing, of course, that the service provider is still

a valuable source of expertise for which it would inappropriate to ignore or discount

entirely].

On a related topic, looking back at the situation with further knowledge and experience, El Paso I.S.D. now wishes it had had a better understanding in advance of

the benefits of one or more Year 4 projects in comparison to the costs thereof. This

concern is principally directed at the Year 4 ‘‘SOW maintenance’’ project, which cost

about $27 million. El Paso I.S.D. now questions whether the benefits of the project

justified such a cost, not only to the Program but also to El Paso I.S.D. for its 10%

share. El Paso I.S.D. expended a significant amount of its own funds on this project,

and has not been satisfied with it. The maintenance project involved a number of

different sub-parts [such as maintenance of certain existing technology, inventorying

of existing technology goods, etc.], though the ‘‘help desk’’ was a principal part thereof. The ‘‘help desk’’ was very effective in permitting El Paso I.S.D. to quickly identify

and address problems of users, with a great benefit to student, teacher, and administrative productivity. Importantly, the ‘‘help desk’’ immediately referred calls from

ineligible schools to the technology department, in order to ensure such assistance

services were provided exclusively to eligible locations.

From a purely functional perspective, the ‘‘help desk’’ worked. Unfortunately, El

Paso I.S.D. did not realize at the time of acquisition the legal effect under Program

rules of characterization of the ‘‘help desk’’, and thus that the ‘‘help desk’’ would not

survive the end of the Year 4 term. That was a definite surprise to the district. El

Paso I.S.D. was under impression that the ‘‘help desk’’ would survive and that the

district would continue to run it in the future, using its own staff. That did not

prove to be the case. El Paso I.S.D. reviewed different alternatives, but Program

rules prevented some from being utilized and cost considerations interfered with

others. In the process of that additional review, El Paso I.S.D. also discovered that

the ‘‘help desk’’ configuration used certain proprietary software of a third party, for

which an individual license for the district [as opposed to a presumed nationwide

IBM license] was cost-prohibitive. The design of the ‘‘help desk’’, in retrospect, did

not necessarily conform to the long-term needs of the district, and made it difficult

to sustain in that configuration. Ultimately, and in light of the denial of Year 5

funding by the SLD, El Paso I.S.D. could not afford bearing the entire cost of continuing the ‘‘help desk’’, and IBM ceased providing such services to the district. The

‘‘help desk’’ did not meet the expectations of El Paso I.S.D. for the project. In this

regard, the district expected the ‘‘help desk’’ to achieve a much greater reduction

in pending work orders than actually experienced. To be clear, though, El Paso

I.S.D. believes that it received substantial value from the maintenance project in

Year 4 of the Program, but, in 20/20 hindsight, feels that the overall costs thereof

may have outweighed the long-term value to the district. As a result of these concerns, El Paso I.S.D. significantly decreased its request for maintenance contract

funding for Year 5 of the Program, and deleted requests for similar sorts of funding

in future years.

In short, although El Paso I.S.D. in good faith sought to make cost-effective acquisitions, it now questions whether the purchases met its expectations and fully justified the costs. It is, of course, not unusual for anyone to ‘‘second-guess’’ a purchase

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of any good or service. ‘‘Buyer’s remorse’’ is a well-recognized phenomenon based in

large part on the fact that a purchase rarely, if ever, meets all initial expectations

or desires of the buyer. Even persons who spend extraordinary amounts of time and

effort in studying and analyzing proposed purchases often suffer from ‘‘buyer’s remorse’’ after actually making the selection and using the product or service in question. El Paso I.S.D. does not feel that its acquisitions violated any Program rules,

but nevertheless wishes that additional, extra effort had been made in analyzing

and understanding the projects in advance. Such effort might not had lead to a different result [due to outside variables], but should have at least offered a better opportunity to avoid the problems experienced by the district.

Another important ‘‘lesson learned’’ of El Paso I.S.D. involves readiness for the

projects. There are two main components of readiness: (a) readiness to manage installation and completion of the projects; and (b) readiness to manage the actual

usage of the projects after completion. As a condition to Program participation, a

district must essentially certify in the Form 471 that it is ready to and capable of

implementing the proposed project(s), specifically:

25. The eligible schools and libraries listed in Block 4 of this application have

secured access to all of the resources, including computers, training, software,

maintenance, and electrical connections necessary to make effective use of the

services purchased as well as to pay the discounted charges for eligible services.

El Paso I.S.D. believes that its readiness was sufficient to meet that minimum

standard. On the other hand, it also feels that even more resources should have

been committed by the district to ensure project success.

When it first received notice that a substantial award had been made to it in Year

4 of the Program, El Paso I.S.D. quickly reviewed whether or not it had sufficient

staffing to oversee and supervise the installation of the desired projects, wondering

whether ‘‘it had bit off more than it could chew’’ [especially since the late award

by the SLD left a significantly reduced time period for completion of all the requested projects]. Through re-assignment of staff and new hires [including retention

of a program manager designated to oversee day-to-day issues on the project installation], and the extra efforts of existing staff, El Paso I.S.D. was able to devote sufficient resources for that phase of the project. Nevertheless, the district probably initially under-estimated the amount and extent of effort that would be required to

monitor and supervise completion of the projects. Even though its commitment was

adequate, El Paso I.S.D. also now feels in hindsight that even further commitment

of staffing and other resources to the supervision of project installation would have

been preferable.

Additionally, as noted above, readiness also concerns the ability of a district to

implement the project at the end-user level, in order to gain the full expected benefits thereof. It is important to keep in mind that many eligible projects under the

Program [e.g.—new servers and cabling] provide benefits to teachers and students,

without necessarily necessitating additional training. On the other hand, other technology projects [whether or not acquired using Program funds] do require a district

to invest significant resources of its own in training and related usage issues. For

example, without training of teachers in use of a new software program for classroom use, the program may prove to have limited practical benefit. This investment

is not just on an administrative level. Indeed, the teachers themselves must invest

additional time on their own in developing new lesson plans or materials, or converting old materials to the new system, to take advantage of the new software program. Ideally, the training should be on-going, and incorporate ‘‘best practices’’

learned district-wide. El Paso I.S.D. formerly had technology coordinators at most,

if not all, campuses. These persons, among other things, aided and trained teachers

on a continuing basis on technology matters. El Paso I.S.D. was somewhat advanced, compared to other school districts, in having such campus-level technology

staff. Such training and assistance, though, is generally ineligible for funding under

the Program. Unfortunately, due to serious budget concerns, those positions were

eliminated before implementation of the Year 4 projects. In retrospect, El Paso

I.S.D. feels that, although not necessarily legally required or even the industrystandard, the district should have made budget cuts elsewhere and made provision

at the time to re-institute the technology-coordinator program at campuses, in order

to take better advantage of classroom-level projects. El Paso I.S.D. believes that

project implementation was successful, but feels that there was and is room for improvement which the technology coordinator program could support.

Upon further analysis of its technology acquisitions, whether or not using Program funds, El Paso I.S.D. also believes that additional planning, above and beyond

a technology plan, is appropriate for many projects for which Program funding is

sought. For instance, a particular network component may satisfy the technology

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fectly, but still be a poor purchase for a particular district. In isolation, the component may be ideal, but the acquisition needs to be considered in light of the total

technology universe at the district and in the community. Ideally, a district should

review and analyze, from an engineering perspective and otherwise, whether a proposed project is in fact compatible with all of its existing systems, whether the design of the project actually satisfies discrete technological goals, whether the technological goals fulfill particular educational goals, and whether there is a capacity in

the community to support and sustain the project in questions over the long run.

This sort of review should permit a district to make more intelligent purchasing decisions. For instance, a new server may be ‘‘faster’’, but is not necessarily better

than the existing one if ‘‘large capacity’’ is what the district really requires. A particular software program may meet educational goals, but may be unacceptable if

it is not fully compatible with existing hardware systems. Community support is

critical; if the locale has no persons capable of operating or supporting a particular

project in the future, the sustainability, and thus value, of the project may be called

into question.

That sort of study and evaluation would ordinarily require experienced, highlyskilled persons familiar with ‘‘cutting-edge’’ technology issues, with the requisite

training and certification in the field of computer or electrical engineering. Ideally,

such a review and analysis could be performed in-house by El Paso I.S.D. and other

school districts. Unfortunately, that is generally not realistic. In the first place,

many locales outside of ‘‘hi-tech’’ communities do not have a sufficient population

of such experienced and skilled persons so as to permit a school district to find and

retain an adequate number of such persons on its staff. In any event, to the extent

a community has such persons available for hire by a school district, a district generally would be unable to pay a market-rate salaries sufficient to attract and retain

such persons. Although, like other districts, El Paso I.S.D. has many experienced

and skilled employees in its technology department, those persons do not necessarily

have the top-flight credentials and experience to handle this sort of additional analysis. Consequently, such services have to be retained from third parties, hopefully

third parties who are also vendors of products which may be at issue in the evaluation. Such services can be very expensive. El Paso I.S.D. doubts that many, if any,

districts have engaged in such an exhaustive review and analysis before seeking

Program funding. Nevertheless, the district feels that such an approach [even if not

required by Program rules] would provide substantial benefits to it, and better ensure the right projects for the district are implemented. El Paso I.S.D. is in the process of putting in place a comprehensive engineering and design review of its technology systems, which it would hope to be able to supplement on a periodic basis,

in order to better guide its acquisitions of technology in the future [whether or not

under the Program].

In a somewhat related vein, El Paso I.S.D. also recognizes that it is important

for technology acquisitions, whether or not using Program funds, to be coordinated

amongst many departments of the district. For instance, if even a particular product

meets the requirements of teachers and other educators, and also is deemed to be

a good, compatible product by the technology department, a problem may still exist

if the particular schools do not have facilities sufficient to locate and maintain the

product. El Paso I.S.D. has encountered such a problem with certain campus-level

servers. Specifically, at a few school sites with severe space limitations, servers were

placed in janitor closets to reduce noise in classroom areas. Unfortunately, some of

those closets did not necessarily have sufficient cooling for ideal server usage. In

other cases, they did have sufficient cooling, but the evaporative cooling systems

[whereby the air is cooled by the addition of moisture, rather than its deletion as

in normal air conditioning; evaporative cooling is common in the desert Southwest

among houses, businesses, and schools] unfortunately generated too much moisture

for ideal server usage. El Paso I.S.D. incurred additional costs for server support

at these limited locations. After extensive review of various costly alternatives, the

district is planning to relocate those servers to a centralized location with adequate

space, cooling, and ventilation [from which they will continue to serve the same eligible campuses in the same way]. This sort of site-specific, detailed, operational

issue is not something that ordinarily would be considered by any school district

when making a technology purchase. Nevertheless, El Paso I.S.D. believes such a

review and coordination amongst various departments would yield significant benefits. Such a process is difficult to design, establish, and implement, but the district

is working towards doing so.

El Paso I.S.D. furthermore enjoys a much better understanding of the true, complete costs of Program participation. As discussed elsewhere in this statement, a district ordinarily must expend much more money than its 10% share in order to implement Program projects. There are many necessary costs that are ineligible for

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Program funding, but are vital for the project to succeed. El Paso I.S.D. made a substantial monetary commitment in Year 4 of the Program, above and beyond the

awarded Program monies. It believes that such commitment was in excess of many

other participating districts. In retrospect, though, El Paso I.S.D. realizes that an

even greater district commitment, both initially and continuing over time, is needed

to achieve the desired goals and expectations of technology projects.

By way a somewhat different ‘‘house’’ analogy, one may view an award under a

Program as a gift of a ‘‘shell’’ of a house, with simply the foundation and framing

in place. That is a great gift, but is not a cost-free one. The house only achieves

its full value if the recipient of the gift then expends its own resources to add the

plumbing, electrical, roofing, HVAC, walls, and other facilities and to furnish the

finished house with furniture, fixtures, and appliances. The cost of the work needed

to properly implement the gift of the ‘‘shell’’ house would typically be much greater

than the value of the gift. In the case at hand, the Program only funds certain

items, and to a certain extent. Beyond that, the participating district must make

a major commitment of financial, staffing, and other resources to the funded

projects, in order to ensure that they fulfill the intended goals.

To be absolutely clear, El Paso I.S.D. does not believe that it violated any laws

or Program rules. Nevertheless, using 20/20 hindsight, there are things that El Paso

I.S.D. would have like to have done differently with respect to Year 4 of the Program, and Year 5 of the Program to some extent as well. In short, although its efforts were ‘‘good enough’’, the district believes there was room for improvement. Importantly, El Paso I.S.D. has striven to avoid these sorts of problems with respect

to subsequent-years participation in the Program. It feels that it handled Year 5

better than Year 4, Year 6 better than Year 5, and Year 7 better than Year 6. El

Paso I.S.D. believes Year 8 participation will be even better than the prior years.

Honest mistakes can and will be made by any participant in the Program [indeed,

by any participant in any federal program of any kind]; on the other hand, El Paso

I.S.D. has sought to identify any errors, learn from those errors, correct those errors,

and avoid similar errors in the future. For example, El Paso I.S.D. now exclusively

or almost exclusively develops specifics for Program projects on its own. It also has

developed in-house expertise on Program matters, and has retained an independent

E-Rate consultant for assistance [who is not a vendor to El Paso I.S.D. of technology

items]. The district also has re-started its technology-coordinator program at campuses. Sustainability of projects without Program funding [which has turned out to

be doubtful] is also a primary consideration for El Paso I.S.D. The district also has

invested more of its own resources in training and campus assistance on technology

matters, to better ensure that monies spent on technology have the desired impact

on the education of students. El Paso I.S.D. has a more realistic view of what sort

and quantity of projects can be feasibly and efficiently implemented by it in any particular year, considering all of the other necessary ineligible costs, and has therefore

substantially revised its Program funding requests.

El Paso I.S.D. believes that many similarly-situated school districts seeking to

participate in the Program may experience some or all of such problems, amongst

others, and is sharing its ‘‘lessons learned’’ in order to provide guidance to those districts, as well as to aid Congress in its review of the Program as a whole. The primary theme running through these lessons is ‘‘additional district commitment’’. A

Program participant, in order to fully enjoy the benefits of Program projects, should

make a greater commitment of its own staff, money, and other resources in determining its technology needs, preparing and designing projects, overseeing and supervising project installation, and in ensuring effective implementation of the

projects. Though El Paso I.S.D. believes its commitment in these regards was at

least legally sufficient, it also now feels that even a greater commitment was and

is warranted to ensure project success.

REFORMS WITH THE PROGRAM

Within the last year or so, the FCC has adopted a number of rule changes to the

Program and has commenced proceedings to adopt additional rule changes. The

SLD in such time period also appears to be much better in making important policies and information available to the public, so that districts can better seek to comply with Program or SLD requirements. These changes are welcomed, and seem to

go a long ways towards addressing both the concerns of El Paso I.S.D. expressed

above, along with Program problems or abuses that have been reported in certain

locations elsewhere in the country.

Nevertheless, El Paso I.S.D. does have some recommendations on further reforms

in the Program. The district’s reforms focus primarily on issues arising to the experiences of it and similar school districts. Since El Paso I.S.D.’s experience did not

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involve fraud or similar conduct [contrary to what may be the situation in other

cases addressed by this Committee], the focus is on these other issues.

In the first place, particularly in light of the delays in awards under the Program,

it would be preferable for districts to be permitted a complete 12-month period after

receipt of the award notice, in which to complete the projects. Alternatively, the period for completion of projects could run for a period of 18 to 24 months after the

commencement of the funding year. This additional time would allow for better review and control of project completion.

El Paso I.S.D., not surprisingly, would request that overall funding of the Program be expanded. The Program is basically funded by fees imposed on telecommunication billings, rather than the general revenues of the federal government.

Even a slight increase in such fees would result in much greater educational benefits for students throughout this country.

It is also important for Congress to recognize that, under the Program, many technology items are not available for funding. For instance, there may be funding for

cabling to classrooms, but not for computers in the classroom. In addition, and very

importantly, Program funds generally cannot be used for training of teachers or

other district personnel to fully and adequately utilize the equipment funded under

the Program, or even to retain personnel specifically assigned to teach the faculty

on how to take advantage of the new equipment during instructional exercises. The

goal of the Program is to reach the students. Although El Paso I.S.D. strives to use

its own funds to bridge the gap between Program-acquired items and the actual instructional effect on students, apparently not all school districts can or will do so.

Due to problems that have arisen in the past with the Program, there would likely

need to be some limits and restrictions on use of such funding. Nevertheless, if certain training or retention costs for districts in connection with new Program goods

were made eligible for E-Rate funding, the benefits to the students from such goods

should increase.

Whether from the universal services fees or regular budgeting, El Paso I.S.D. also

believes that the FCC and SLD do need additional funding, in order to allow

prompter handling of applications, appeals, and even audits. The problems with

delays in decision-making are probably best served through additional personnel resources for these agencies.

Of course, the ‘‘Lessons Learned’’ section above also highlights issues that El Paso

I.S.D. believes are appropriate for consideration by other Program applicants. Some

of those issues perhaps might be the subject of changes in Program rules. By way

of example, if an applicant is seeking a major overhaul of its entire computer network, perhaps the Program rules should require, in addition to the technology plan,

some sort of engineering analysis to better ensure that the network design is appropriate for the applicant and compatible with its other components.

Incidentally, and as something not directly experienced by it, El Paso I.S.D. also

wishes to highlight an area of potential abuse under the Program in the future.

There are a number of companies who act as E-Rate consultants. With the complexity and confusion surrounding Program requirements, that sort of expertise is

very valuable to applicants and service providers. Some of these E-Rate consultants

are very accomplished, reputable, and experienced. Unfortunately, not all necessarily fall in that category. El Paso I.S.D. is concerned that abuses might arise

amongst some of these consultants. Although El Paso I.S.D. has not contracted with

this second category of consultant, it believes that other districts nationwide have

done so on occasion. It is El Paso I.S.D.’s understanding that one or more of such

‘‘lesser’’ consultants may charge fees to their clients on a contingency basis, based

upon the amount of the award received from the SLD by such clients. That sort of

compensation method could easily lead such consultants to over-estimate what technology requirements are needed for districts and to request much greater funding

than actually needed. In other words, one wonders whether some of the complaints

lodged against certain vendors under the Program may in the future be applicable

to some of such consultants.

El Paso I.S.D. again wishes to point out that the FCC and SLD have already

adopted a number of Program reforms and have issued clarifications on many of the

‘‘gray areas’’ of Program rules. Those reforms and clarifications are expected to continue in the future. Since, the regulatory agencies appear to have already addressed

or to be in the process of addressing many of the problems with the Program, it

is not entirely clear that direct Congressional legislation is needed at this time to

address those issues [except with respect to the issue of increased funding].

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OVERALL EVALUATION OF THE PROGRAM

El Paso I.S.D. believes that, notwithstanding the problems, the Program has been

very successful in bringing much-needed technology to school districts across the

country. Such technology has brought great benefits to the students involved. The

Program has certainly made allowed El Paso I.S.D. to make great strides in catching up to other, more affluent school districts and providing its students with a fair

opportunity to compete and succeed in the real world. To be clear, El Paso I.S.D.

has not sought, and has not acquired, technology projects far in advance of other

districts. Instead, the Program funding, combined with El Paso I.S.D’s own resources, has allowed it to get closer to catching up with a typical school district in

the nation.

CONCLUSION

In conclusion, El Paso I.S.D. has greatly appreciated the opportunity to participate in the E-Rate program over the years. Such participation has greatly benefited

the students at El Paso I.S.D., giving them a fair opportunity to compete with their

peers from other communities.

El Paso I.S.D., like other school districts, also supports efforts to reform problems

or abuses with the Program. It regrets any role that it may have unintentionally

and unwittingly had with respect to any such problems.

El Paso I.S.D. has acted in good faith, and in what it believed to be a reasonable

fashion in compliance with albeit-ambiguous Program rules. El Paso I.S.D. does not

believe it did anything illegal, and certainly does not believe there is any basis to

justify a recovery against the district. In 20/20 hindsight, of course, there are things

that El Paso I.S.D. would likely have done differently.

Mr. Chairman, thank you again for this opportunity to present EPISD’s positions

and views on the E-Rate Program.

Mr. WALDEN. We appreciate your testimony. Thank you for joining us by video conference today.

Mr. Bohuchot.

TESTIMONY OF RUBEN BOHUCHOT

Mr. BOHUCHOT. One quick statement. On page 3 of the document

that I turned in, toward the bottom there is a number $84 million

some odd hundred thousand dollars. It should be $86 million.

Thank you.

[The prepared statement of Ruben Bohuchot follows:]

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Mr. WALDEN. And that is your opening statement, sir? All right.

Thank you.

Ms. Foster, welcome. Do you have an opening statement?

TESTIMONY OF SHARON FOSTER

Ms. FOSTER. Yes, thank you.

Mr. Chairman, thank you for the opportunity to speak to you this

morning, well, this afternoon now. My name is Sharon Foster. I am

currently the Executive Director of Technology Information Systems for the Ysleta Independent School District in El Paso, Texas.

During my career as an educator, I have had experience in virtually every aspect of classroom and administrative work. I have

been a classroom teacher, campus administrator, technology trainer, director of instructional technology, and currently the Executive

Director of Technology Information Systems.

That position requires me to oversee instructional technology, administrative information systems, and telecommunication networks. All of my experience is with large urban districts with student populations of over 45,000 students.

I worked in the El Pas Independent School District, a neighboring district of YISD, for 15 years, the last eight of which where

I was the head of the Instructional Technology Department. Part

of my responsibility in that position was that of the E-Rate coordinator.

I served as E-Rate coordinator for the first 3 years of the E-Rate

program. As the E-Rate coordinator, I met with other technology

and telecommunications staff to identify projects for which EPISD

would seek E-Rate funding.

In addition to determining the appropriateness and scope of the

E-Rate projects, I would make sure that all application requirements were met in a timely manner and addressed in the request

for additional information from the schools and libraries division of

the Federal Communications Commission.

In August 2000, I left EPISD in order to join YISD as an employee. My departure was not related to the E-Rate program in

EPISD. I left EPISD prior to the bidding process for the year 4 submission.

At YISD, I assumed the position of Director of Instructional

Technology. As Director, I worked with YISD’s E-Rate coordinator,

Richard Duncan, and other staff members to determine future ERate projects for the District in years 4, 5, 6, and 7.

In other words, I was involved in YISD’s participation in the ERate program, but not principally responsible for such participation.

I recently was named the Executive Director for Technology and

Information Systems at Ysleta and now, once again, I am responsible for overseeing the E-Rate projects. The most significant improvement that E-Rate has enabled to be achieved in my experience as been the improvement to school district infrastructure with

both EPISD and Ysleta.

As done by most school districts across the nation, EPISD and

YISD use the initial E-Rate projects to improve the speed and reliability of voice and data networks. E-Rate projects provide the basics for each district’s network which supports virtually any type

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of technology based instruction, including high speed Internet access to all classrooms, distance learning systems, video to classrooms, integrated phone networks, and other improved network

functionality.

E-Rate funding has allowed for acquisitions by school districts of

network electronics that insured high speed access and for the cabling and distributed networks across every instructional area.

Most school districts would never have been able to afford the cabling and network initiatives that E-Rate funded.

The E-Rate program has been the mechanism that many large

under-funded school districts have used to improve telecommunication infrastructure. School districts have discovered that virtually

all instructional initiatives require one essential element, namely a

high speed reliable telecommunications network. One of the great

successes of the E-Rate program is that it has been able to help

school districts enormously in developing those networks. With that

said there are several issues in the administration of the program

that have created obstacles to districts and planning projects, providing continuity and managing the projects from year to year.

Technology projects are linear, and in the case of most school districts, are planned in phased in implementations. Planning for

those projects can be done with estimated E-Rate funding from 1

year to the next. But, so far, the experience of most districts has

been that funding is nearly always delayed.

For example, currently, YISD is managing proposed projects for

years 5, 6, and 7 of the E-Rate program. Some of those funds have

been awarded. Some have not. In some cases decisions on initial

and/or continued funding have not always been clear.

In planning a multi-year project it is extremely difficult to provide assurances to campuses when it is unclear how fast implementation can proceed based on unknown levels of funding and/or indefinite schedules for release of funds. The delays have proven

frustrating to districts.

In the case of YISD, we have tried, and for the large part succeeded in applying for funds based on correct interpretation of ERate funding guidelines. There have been instances when we have

had to provide additional information, explanation to the SLD for

guidance and in virtually every case, our position has been determined to be correct.

In the very few instances when our interpretation of funding or

use guidelines have not been upheld, our interpretation of E-Rate

guidelines were made in good faith, reasonably based, and in a line

with how other school districts have interpreted those same guidelines.

It has been difficult and has taken a tremendous staff effort to

maintain our understanding of funding guidelines. In particular,

knowledge of eligible products, eligible locations, and how you determine in what instances campuses are not eligible for E-Rate

funding have been at best less than straightforward.

We understand the need for E-Rate’s guidelines to evolve and for

the guidelines to change in some instances, but that makes the district’s efforts, especially in multi-year project planning or long-term

network development, extremely difficult.

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One increasing common issue with E-Rate program among school

districts is the best use of funds to provide for the appropriate network design and development that both support instructional needs

of the particular district and that allow the district to take advantage of the support, the network, in the future.

The E-Rate funds have been used overwhelmingly for the upgrade of the networks, and though the funds cannot be used for

specific instructional purposes, the distinction between hardware

and software that is exclusively instructional is difficult to maintain.

Districts are using networks to support Web based projects, administrative information management systems, submission of state

mandated reports, and E-mail systems that are important to both

administrative and instructional functions, and it’s difficult if not

impossible to segregate.

In my view, what districts and E-Rate administrators have found

most difficult about the use of E-Rate funds is managing multi-year

projects, implementing large projects without adequate support resources, insuring that teachers’ skill sets match the upgrades in

the network capability and instructional potential, and dealing

with the changes in regulations and application of rules. I have

found with both EPISD and YISD that one of the essential elements in the use of E-Rate funds is insuring that the projects supported by each funding are successful.

However, without a support mechanism for the teachers who will

be using the technology, including training, staff development, and

campus-based technology support services it is virtually impossible

for districts to implement technology projects that would be successful and use the full potential of the networks that E-Rate has

funded.

That would be the task of all school districts, including YISD,

that use E-Rate funds. In many instances districts have been criticized for failing to capitalize fully on the improvements afforded

through E-Rate. In my experience some of that lost capacity has

been almost predictable.

In the first years of the E-Rate program, districts for the most

part applied for only what they could implement. It is my personal

opinion that in the following years of the E-Rate program, when

the vendors began to have more of a role in the application process

and when further ambiguities arose regarding the scope and extent

of the E-Rate program, many school districts across the country

may have asked for too much too quickly and were not in the best

position to fully support the technology projects for which funding

was awarded.

Such districts likely had the needs for that technology and justifiably requested E-Rate funding for those projects, but in hindsight perhaps should have been less ambitious in order to better

assure fully effective implementation.

As school districts have more skillfully used E-Rate funds and

have developed support staff for the technology infrastructure

made possible by the E-Rate program, I believe it is more critical

for districts to insure that technology infrastructure and capability

is driven by instructional need; that teacher technology skill sets

are established through staff development and training; and that

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campus based technology support is provided. In my opinion, technology projects fail when there is no identified instructional need

for the technology; when teachers are asked to use technology that

does not support their teaching outcomes; when teachers are asked

to use technology without sufficient training; or when campuses are

required to support technology without adequate resources.

Although the E-Rate program has enabled vastly improved networks for school districts, the use of those networks has been limited by the lack of funding for the training in campus-based support that would help better insure full success. In some instances

school districts have had to abandon technology projects or have

implemented projects that did not provide the results that were

hoped for due to training, staff development, and support issues.

For school districts like El Paso in Ysleta, the E-Rate program

has been a successful program. It does, however, require some adjustments on the part of both the school district, in general, and

the E-Rate program.

However, without the funding provided by E-Rate program, there

is no question that many of the instructional initiatives and some

of the instructional programs in progress in these school districts

would not have been possible. Such funding has significantly benefited the instructional process at each of these districts.

YISD is not a wealthy district. Its free and reduced lunch average is 86 percent. In general, YISD has a low economic profile. The

2000 profile selected economic characteristics issued by the United

States Census Bureau estimates the per capital income for 1999 in

El Paso, Texas was $14,388 per year.

It should be noted that YISD’s boundaries do not include the

areas generally recognized as being the most affluent in El Paso.

So the figures for the census tracks within YISD boundaries would

be probably lower.

For comparison, according to the same survey, the annual per

capita income for 1999 in the United States was $21,587 and for

the State of Texas it was $19,000, and for the Washington, D.C.

area it was $28,659. As one can readily see, YISD students are in

poor financial circumstances and in great need of the benefits from

the projects that can be completed using E-Rate funding.

The primary impact on YISD of E-Rate funding that is no longer

available is that instructional advantages available through a typical telecommunications network would in all likelihood no longer

be available.

Mr. WALDEN. Ms. Foster, how much longer do you have in your

testimony?

Ms. FOSTER. Thirty seconds.

Mr. WALDEN. You are about 11 minutes into. Okay.

Ms. FOSTER. I am sorry.

Well, I will just tell you, to close it up, if the E-Rate program

should go away, it would significantly damage our instructional

program and as access for our students.

Thank you.

[The prepared statement of Sharon Foster follows:

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PREPARED STATEMENT OF SHARON FOSTER, EXECUTIVE DIRECTOR, TECHNOLOGY

INFORMATION SYSTEMS, YSLETA INDEPENDENT SCHOOL DISTRICT

BACKGROUND

Mr. Chairman, thank you for the opportunity to speak to you this morning. My

name is Sharon Foster. I am currently the Executive Director of Technology Information Systems of the Ysleta Independent School District (‘‘YISD’’) in El Paso,

Texas. I have been asked to provide this statement for this hearing of the House

Energy and Commerce Committee’s Subcommittee on Oversight and Investigations

entitled ‘‘Problems with the E-Rate Program: Waste, Fraud, and Abuse Concerns in

the Wiring of Our Nation’s Schools to Internet’’. A copy of my curriculum vitae is

attached to this statement.

During my career as an educator, I have had experience in virtually every aspect

of classroom and administrative work. I have been a classroom teacher, campus administrator, technology trainer, Director of Instructional Technology and acting Executive Director for Technology Information Systems. I am currently the Executive

Director of Technology Information Systems for YISD in El Paso, Texas, a position

that requires me to oversee instructional technology, administrative information

systems, and telecommunication networks.

All of my experience is with large urban districts with student populations over

45,000. I worked in El Paso Independent School District (‘‘EPISD’’), a neighboring

district of YISD, for 15 years, the last eight of which were as head of the Instructional Technology Department. Part of my responsibility in that position was that

of E-Rate Coordinator. I served as E-Rate Coordinator for years 1 through 3 of the

E-Rate Program. As E-rate Coordinator, I met with other technology and telecommunication staff to identify projects for which EPISD would seek E-Rate funding. In addition to determining the appropriateness and scope of the E-Rate projects,

I would make sure that all application requirements were met in a timely manner

and addressed any requests for additional information from the Schools and Libraries Division of the Federal Communications Commission (the ‘‘SLD’’).

In August of 2000, I left EPISD in order to join YISD an as employee. My departure was not related to the E-Rate program at EPISD. I left EPISD prior to the bidding process for year 4 of the E-Rate Program. At YISD, I assumed the position of

Director of Instructional Technology. As Director, I worked with YISD’s E-Rate coordinator, Richard Duncan, and other staff members to determine future E-Rate

projects for the District (years 4, 5, 6, and 7). In other words, I was involved in

YISD’s participation in the E-Rate program, but am not principally responsible for

such participation.

I recently was named Executive Director for Technology and Information Systems

at Ysleta and now, am once in again responsible for over-seeing E-Rate projects.

WHAT E-RATE HAS DONE FOR DISTRICTS

The most significant improvement that E-Rate has enabled to be achieved in my

experience has been the improvement to school district infrastructure, with both

EPISD and YISD. As done by most school districts across the nation, EPISD and

YISD used the initial E-Rate projects to improve the speed and reliability of voice

and data networks. E-Rate projects provided the basics for each district’s network,

which supports virtually any type of technology-based instruction, including highspeed internet access to all classrooms, distance learning systems, video to classrooms, integrated phone networks [such as phone service to every classroom], and

other improved network functions. Very early on in the E-Rate program, dial-up or

other non-broadband Internet access was identified as inadequate for technologybased instruction in the classroom. E-Rate funding has allowed for acquisitions by

school districts of network electronics that ensured high-speed access, and for the

cabling that distributed network access to every instructional area.

Most school districts would never have been able to afford the cabling and network initiatives that E-Rate funded. Moreover, without the E-Rate funds and the

flexibility in their use, most school districts would never have been able to develop

the in-house expertise for such extensive cabling projects. YISD explored the feasibility of training and using district-employees as cablers for the network cabling,

and its turnover costs in employees alone would have been prohibitive. Skilled network technicians were able to seek employment in virtually locale, and YISD would

have lost employees as to whom it had spent a great deal of money to train. E-Rate

funding allowed poor school districts to cable schools on an aggressive schedule,

using vendors specializing in that work, and thereby allowing them to try to catch

up to more affluent districts in terms of computer networking.

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An example of the way that the E-Rate program allowed fully functioning networks was in the implementation of the YISD telephone network. While YISD could

not use E-Rate funds for some of the network costs [for example, the purchase of

the individual phone sets], E-Rate funds did allow YISD to purchase the PBX and

switching equipment, and funded the cabling to the classroom. YISD could never

have afforded the integrated phone system it now has without the use of E-Rate

funds. That telephone system has benefited teachers and students at the district.

Similarly, the E-Rate program has allowed school districts to upgrade network

electronics on reasonable schedules. Indeed, for districts like YISD, they have been

able to manage the upgrades and use the network routers, servers and other electronics in very effective ways. Cabling upgrades, for example from 10-Base T cabling

to cabling with more capability and reliability, have been possible via E-Rate funding. These upgrades have provided benefits to faculty and students, and aided the

instructional process.

CONCERNS AND PROBLEMS WITH E-RATE PROGRAM

The E-Rate program has been the mechanism that many large, under-funded

school districts have used to improve telecommunication infrastructure. School districts have discovered that virtually all instructional initiatives require one essential

element: namely, a high-speed, reliable telecommunications network. One of the

great successes of the E-Rate program is that it has been able to help school districts enormously in developing those networks.

There are several issues in the administration of the program that have created

obstacles to districts in planning projects, providing continuity, and managing the

projects from year to year.

Technology projects are linear, and in the case of most school districts, are

planned in phased implementations. Planning for those projects can be done with

estimated E-Rate funding from one year to the next, but so far the experience of

most districts has been that funding is nearly always delayed. For example, currently, YISD is managing proposed projects for years 5, 6, and 7 of the E-Rate program. Some of those funds have been awarded, some have not, and in some cases

the decisions on initial and/or continued funding have not always been clear. In

planning a multi-year project, it is extremely difficult to provide assurances to campuses when it is unclear how fast implementation can proceed, based on unknown

levels of funding and/or indefinite schedules for release of funds. The delays have

proven frustrating to districts.

In the case of YISD, we have tried and for the largest part succeeded in applying

for funds based on correct interpretation of E-Rate funding guidelines. There have

been instances when we have had to provide additional information and explanation

to the SLD for guidance, and in virtually every case our position has been determined to be correct. In the very few instances when our interpretation of funding

or use guidelines have not been upheld, our interpretation of E-Rate guidelines were

made in good faith, reasonably-based, and in line with how other school districts

have interpreted the guidelines.

It has been difficult, and has taken a tremendous staff effort, to maintain our understanding of funding guidelines. In particular, knowledge of eligible products, eligible locations, and how to determine in what instances campuses are not eligible

for E-Rate funding have been, at best, less than straightforward. We understand the

need for E-Rate’s guidelines to evolve, and for guidelines to change in some instances, but that makes the district’s efforts, especially in multi-year project planning or long-term network development, extremely difficult. School districts are generally also faced with equity issues; in other words, ensuring that all campuses, including those that are not E-Rate eligible, receive fair and equitable treatment by

the district in terms of technology acquisition and funding.

One increasing-common issue with the E-Rate program amongst school districts

is the best use of funds to provide for the appropriate network design and development that both supports instructional needs of the particular district and that allows the district to take advantage of and support the network in the future. The

E-Rate funds have been used overwhelmingly for the upgrade of networks, and

though the funds cannot be used for specific instructional purposes, the distinction

between hardware and software that is exclusively instructional is difficult to maintain. Districts are using networks to support web-based projects, administrative information management systems, submission of state-mandated reports, and e-mail

systems that are important to both administrative and instructional functions, and

difficult if not impossible to segregate.

In my view, what districts and E-Rate administrators have found most difficult

about the use of E-Rate funds is managing multi-year projects, implementing large

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projects without adequate support resources, ensuring that teacher skill-sets match

the upgrades in network capabilities and instructional potential, and dealing with

the changes in regulations and application of rules. I have found, with both EPISD

and YISD, that one of the essential elements in the use of E-Rate funds is ensuring

that the projects supported by such funding are successful. However, without a support mechanism for the teachers who will be using the technology, including training and staff development, and campus-based technology support services, it is virtually impossible for districts to implement technology projects that will be successful and use to full potential the networks that E-Rate funds have enabled. That will

be the task of all school districts, including YISD, that use E-Rate funds.

In many instances, districts have been criticized for failing to capitalize fully on

the improvements afforded through E-Rate. In my experience, some of that lost capacity has been almost predictable. In the first years of the E-Rate program, districts for the most part, applied for only what they could implement. It is my personal opinion that, in the following years of E-Rate program, when vendors began

to have more of a role in the application process and when further ambiguities arose

regarding the scope and extent of the E-Rate program, many school districts across

the country may have asked for too much too quickly, and were not in the best position to fully support the technology projects for which funding was awarded. Such

districts likely had the needs for that technology, and justifiably requested E-Rate

funding for those projects, but in hindsight perhaps should have been less ambitious

in order to better assure fully effective implementation.

As school districts have more skillfully used E-Rate funds, and have developed

support staff for the technology infrastructure made possible by the E-Rate program, I believe it is more critical for districts to ensure that technology infrastructure and capability is driven by instructional need, that teacher technology skill-sets

are established through staff development and training, and that campus-based

technology support is provided. In my opinion, technology projects fail when there

is no identified instructional need for the technology, when teachers are asked to

use technology that does that support their teaching outcomes, when teachers are

asked to use technology without sufficient training, or when campuses are required

to support technology without adequate resources.

Although the E-Rate program has enabled vastly improved networks for school

districts, the use of those networks has been limited by the lack of funding for the

training and campus-based support that would help better ensure full success. In

some instances, school districts have had to abandon technology projects, or have

implemented projects that did not provide the results that were hoped for, due to

training, staff development, and support issues. One specific example was the initial

success in EPISD technology projects when when Campus Technology Coordinators

(CTC) were part of all technology planning and implementations. When funding for

CTC’s was no longer available, several projects decreased in usefulness because of

the difficulty individual campuses had in making sure teachers were adequately

supported and that equipment was always working and available for use. In short,

staff development for technology use must meet instructional needs, and funding for

staff development, like the funding for network and technology projects, must be on

a consistent, realistic, multi-year basis.

For school districts like EPISD and YISD, the E-Rate program has been a successful program. It does, however, require some adjustments, on the part of both school

districts in general and the E-Rate program. However, without the funding from

provided by the E-Rate program, there is no question that many of the instructional

initiatives and some of the instructional progress in these schools districts would not

have been possible. Such funding has significantly benefited the instructional process at such districts.

CLOSING REMARKS

YISD is not a wealthy district; its ‘‘free and reduced lunch’’ average is 86%. In

general, YISD has a low economic profile. The 2000 Profile of Selected Economic

Characteristics, issued by the United States Census Bureau, estimates the per capita income for 1999 in the El Paso, Texas at $14,388 per year. It should be noted

that YISD’s boundaries do not include the areas generally recognized as being the

most affluent of El Paso, so the figures for census tracts within YISD’s boundaries

would probably be lower. For comparison, according to the same survey, the annual

per capita income for 1999 in the United States was $21,587, for the State of Texas

was $19,617, and for the Washington D.C. was $28,659. As one can readily see,

YISD students are in poor financial circumstances, and in great need of the benefits

from the projects that can be completed using E-Rate funding.

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The primary impact to YISD if E-Rate funding is no longer available is that instructional advantages available through a typical telecommunications network

would, in all likelihood, no longer be available. It would be virtually impossible for

YISD to fund the maintenance of the network, and within several years we would

have a much smaller access to Internet resources, limited student e-mail availability, and virtually no services for teachers in the way of voice or data network

capability. In such a case, our goal would be to continue to offer the best services

we could to teachers and students, but, realistically, that level of network service

would be very small in comparison to the current levels. Ultimately, the instructional variety and opportunity would be decreased for the students of YISD. I think

that would be true for other poor districts throughout the country.

Thank you again for providing me with this opportunity to present testimony.

Mr. WALDEN. Thank you. We appreciate your comments. They

were very much on point.

Ms. Glogovac, welcome.

TESTIMONY OF PAULA GLOGOVAC

Ms. GLOGOVAC. Thank you, Mr. Chairman, and subcommittee

members. I appreciate the opportunity to speak with you today.

My name is Paula Glogovac. I was a contractor for Sun Microsystems, where I provided E-Rate program management resources

to the company.

My role as a program manager was to review the E-Rate program rules for applications and service providers and to make sure

those rules were communicated to the Sun sales and marketing

team. I was the knowledge base for any questions regarding the ERate program to the Sun sales and marketing team, and starting

in year 6 of the E-Rate program, I reviewed 470’s that were actually posted on USAC’s Website, looking for internal connection

needs, and would try to make initial contact with the applicant or

their suggested contacts to qualify them for Sun opportunities.

I did this throughout the entire United States. I supported Sun’s

internal accounts receivables, payables, and order entry groups in

processing all the paper work. I was the single point of contact for

Sun with USAC and the SLD for paper work process and any

issues Sun might have had.

My experience with E-Rate programs started at the end of year

1 when I was a full-time Sun employee covering the K-12 educational market in support of the Sun sales team across the United

States. I consistently ran the program while at Sun for the next 2

years as a full-time employee.

I managed Sun’s involvement in the E-Rate program as a contractor for the last 5 years. I attended the E-Rate service provider

training in San Diego that was provided by USAC and the SLD,

and I might add it was very beneficial. I also participated in the

bi-weekly service provider conference calls on a regular basis to

stay current with the program, which also allowed me to ask questions that were relevant at the time.

What I have seen with this program is that in many cases it does

work for schools and libraries that have effectively learned how to

adhere to the rules, understand the process and value the much

needed support. In several cases, service providers are not following the program rules, as I have experienced myself.

For example, some have been developing the 470’s for small

schools and capturing the sales along with it, without the knowledge of this being against the program rules by the applicant. They

156

prey upon applicants that have no knowledge of the program but

are told that this service provider can get them money for computers. I saw it a lot.

This happened in year 6 across the United States with small

charter schools, religious schools, and special schools. Some consultants actually blocked service providers from responding to the

470’s that are posted by not allowing them to get appropriate technical information to size products and services for what the account

needs or by stating that the applicant is going to use a State contract to purchase from.

Even if you are on the State contract, they are choosing what

they want versus having a service provider provide them with information on what is available to them. Some service providers are

providing ineligible products and services knowing that they are

not eligible under the program rules, as I will get into in just a few

moments. This makes the applicant feel like they are getting a better solution and leaves those of us who are adhering to the rules

not an option.

I also see applicants making several program rule violations.

Some applicants will prerelease their RFPs prior to the posting of

the 470’s and then will close the RFP response prior to the 28-day

waiting window.

Some will require a mandatory prebid conference attendance

prior to or very shortly after the 470 being posted. This makes it

almost impossible for a service provider to respond to these applications unless they have had prior notification of the RFP from the

applicant.

Some applicants will release an RFP with ineligible products or

services or with clear violations of the program rules. In one case

just this year, a consortium applicant required a 3-percent kickback on all sales. In another case, an applicant’s RFP was for global positioning products and services.

In other cases, I have seen on the 470 forms and in RFPs applicants specifying specific brand names of products and not allowing

anyone else to respond. In making contact with some of these applicants, I have heard that they are already working with a vendor,

that they are only buying off their State contract, that they are

using the same vendor as last year, that they already have enough

responses or they do not even return my fax, phone calls, or Emails even though that is the suggested method of contacting these

vendors or applicants.

But not much is publicly stated about what the investigations

have found through all of these contacts that I have made and publicized to the whistleblower hotline. I am still seeing some of the

same activities happening today as I did in year 6.

Today when I see a possible violation, I actually try to tell the

applicant what the violation is and recommend that they call the

800 number at USAC to get their take on it and ask what they can

do about it. I do not know how successful that is. It is anyone’s

guess.

In one case I was brought in by the Sun sales team to work with

them on the E-Rate Project that they had been selected for. It was

an E-mail solution. In this case, as I started to get more involved

in it, I had serious questions about the integrity of what was going

157

on with this applicant and the originally awarded service provider.

The applicant was El Paso Independent School District, and the selected service provider on the original 471 form was IBM.

I had been given a Statement of Work that was provided to Sun

by IBM and had El Paso ISD’s name on it. I reviewed the Statement of Work, and it had several issues. They included ineligible

products and services and had products that did not pertain to just

an E-mail solution.

I sent an E-mail off to the service provider E-mail Alias, asking

if these products and services were eligible, and the response back

in most cases was no.

We had a conference call with El Paso ISD and IBM representatives discussing these issues, and IBM’s response was that we

should take this off line to discuss it, that they had FCC lawyers

that handled this kind of stuff. In my opinion, saying that in front

of the applicant gives them the belief that IBM is behind this 100

percent and I would buy into that as an applicant, as well.

I did take this off line with Don Riddick from IBM. Don told me

not to worry about that, that they would take care of it. I was to

fill out the service substitution form, and that would take care of

everything. He did not appear to be concerned about the products

and services that were being offered in the Statement of Work that

were not eligible.

In trying to fill out the service substitution form, I realized that

IBM did not include their E-mail software solution on any line

item. I informed the Sun sales team, and I was instructed to call

Woodrow Lee from IBM.

When I spoke with Mr. Lee, he informed me that they did not

include it because their E-Rate consultant had advised them not to.

In the Statement of Work it was listed as Lotus Notes, and in my

E-mail to the service provider Alias, I specifically asked if Lotus

Notes was eligible, and they said no.

I responded back to Mr. Lee that they must have known it was

not eligible and did not include it on their itemized list on the 471.

Again, he said no, but their E-Rate consultant had advised them

not to.

If that was the case, I did not know how I could substitute out

E-mail software solution for one that did not exist on their original

471. IBM agreed that Sun should also leave off their software solution.

I believe that it would not be acceptable since the original 470

products and services must match the 471, and in turn, the service

substitution form also needed to match the products and services

selected.

This was confirmed to me by SLD in another E-mail. Sun has

substantial discounts that they provide to educational institutions.

In this case, since we were asked by the applicant to work through

IBM on this project, we were not able to pass along those educational discounts.

We did offer to go direct with El Paso ISD, and the price would

be substantially lower for El Paso ISD. El Paso ISD again directed

Sun to work through IBM. IBM also stated to Sun that we needed

to work through them.

158

We did, however, provide our best possible pricing to IBM, considering that we were providing all of the products and installation

services, but IBM did not like our price. It was unclear to Sun why

IBM required us to provide them with a price that allowed them

to take approximately 51 percent of the overall cost for the project,

as they specified on the original 471 form, with Sun doing most of

the work, not to mention that Sun was providing an E-mail solution that could cover the entire school district versus the 5,000 accounts that were mentioned in IBM’s Statement of Work.

When Sun would not come down in our price to IBM, IBM told

Sun they were going to rebid the project and release an RFP that

would be due in approximately 1 day. It was clear to the Sun sales

team that even though they had been selected amongst three vendors, one of which was IBM, that Sun would not get the business

unless IBM had made a significant amount of money off the E-mail

solution.

In closing today, I would like to say that the intent of the E-Rate

program is very good one. Service providers and applicants that do

not feel ownership in working within the program rules and guidelines should not jeopardize those applicants and service providers

that do adhere to the program rules and value what the program

does for them.

There needs to be more extreme measures taken against the

waste, fraud, and abuse, and there are tools out there that can

help. There are some proficient sets of tools for service providers

and applicants to help them with the E-Rate process. These tools

could be modified to assist USAC and the SLD in providing a traceable method for service providers and applicants to work together.

Without the traceable contact between service providers and applicants, it will be very difficult to monitor the waste, fraud, and

abuse.

These tools could also help in identifying patterns of consultants

and service providers that might be working together, as well as

service providers and applicants. Exposing the program violations

and the offenders in a public forum is key to fixing some of these

problems. It is also important for those that report waste, fraud,

and abuse to get some sort of notification of what happened with

the reporting. This would encourage more reporting of these issues

when they see results from it versus nothing for years.

By eliminating the waste, fraud, and abuse, all of our schools

and libraries will have an opportunity to take full advantage of

what this program has to offer.

Thank you.

[The prepared statement of Paula Glogovac follows:]

PREPARED STATEMENT OF PAULA GLOGOVAC

My name is Paula Glogovac. I was a contractor for Sun Microsystems, Inc., where

I provided E-rate Program Management Resources to the Company. My role as a

Program Manager was to review the E-Rate Program Rules for Applicants and Services Providers and to make sure those Rules were communicated to the Sun Sales

and Marketing Team. I was the knowledge base for any questions regarding the ERate Program to the Sun Sales and Marketing Team. Starting in Year 6 of the ERate Program, I reviewed 470’s as they were posted, looking for Internal Connections needs and would try to make initial contact with the applicant or their suggested contact(s) to qualify them for Sun opportunities. I did this throughout the

entire United States. I supported Sun’s internal accounts receivables, payables, and

159

order entry groups in processing paperwork. I was the single point of contact for

Sun with USAC and the SLD for paperwork processing and issues.

My experience with the E-Rate Program started at the end of Year 1, when I was

a full-time Sun Employee covering the K-12 Educational Market in support of the

Sun Sales Team in the United States. I consistently ran the program while at Sun

for the next 2 years. I managed Sun’s involvement in the E-rate Program as a contractor for the last 5 years. I attended the E-rate Service Provider Training in San

Diego that was provided by USAC & SLD. I also participated in the Bi-Weekly Service Provider Conference Calls on a regular basis to stay current with the program.

What I have seen with this program is that in many cases it does work for

Schools and Libraries that have effectively learned how to adhere to the rules, understand the process and value the much needed support. In several cases, service

providers are not following the program rules. For example; some have been developing the 470’s for small schools and capturing the sales along with it, without the

knowledge of this being against the program rules, by the applicant. They prey upon

applicants that have no knowledge of the program, but are told that this service provider can get them money for computers. This happened in Year 6, across the

United States with small charter schools, religious schools and special schools. Some

consultants actually block service providers from responding to the 470’s that are

posted by not allowing them to get appropriate technical information to size products and services for what the account needs, or by stating that the applicant is

going to use a State Contract to purchase from. Even if you are on the state contract, they are choosing what they want vs. having a service provider provide them

with information on what’s available to them. Some service providers are providing

ineligible products and services, knowing that they are not eligible under the program rules, as I will get into in just a few moments. This makes the applicant feel

like they are getting a better solution.

I also see Applicants making several program rule violations. Some applicants will

pre-release their RFP’s prior to the posting of the 470’s and will then close the RFP

response prior to the 28-day waiting window. Some will require a mandatory prebid conference attendance prior to or very shortly after the 470 being posted. This

makes it almost impossible for a Service Provider to respond to these applications,

unless they had notification of the RFP from the applicant. Some applicants will release an RFP with ineligible products or services or with clear violations of the program rules. In one case, just this year a consortia applicant required a 3% kickback

on all sales. In another case, an applicants RFP was for Global Positioning products

and services. In other cases, I have seen on the 470 forms and in RFP’s applicants

specifying specific brand names of products and not allowing anyone else to respond.

In making contact with some applicants, I have heard that they are already working

with a vendor, that they are only buying off their state contract, that they are using

their same vendor as last year, that they already have enough responses or they

don’t return my faxes, phone calls or e-mails even though that is their specified

method of contacting them. Very little has been highly publicized about these issues,

until just recently. But not much is publicly stated about what the investigations

have found once you do report these violations. I’m still seeing some of the same

activities happening today as I did in Year 6. Today when I see a possible violation,

I actually try to tell the applicant what the violation is and recommend to them to

call the 800 number with USAC to get USAC’s take on whether it’s a violation or

not and what can be done about it. I don’t know how successful that is.

In one case, I was brought in by the Sun Sales Team to work with them on an

E-rate Project that they had been selected for. It was an E-mail solution. In this

case as I started to get more involved in it, I had serious questions about the integrity of what was going on with this applicant and the originally awarded service

provider. The applicant was El Paso Independent School District and the selected

Service Provider on the original 471 forms was I.B.M. (International Business Machines). I had been given a Statement of Work that was provided to Sun by IBM

and had El Paso ISD’s name on it. (See Reference #1) I reviewed the Statement of

Work and it had several issues. They included ineligible products and services and

had products that didn’t pertain to just an E-mail Solution. I sent an e-mail off to

the Service Provider E-mail Alias asking if these products and services were eligible

and the response back was NO. (See Reference #2) We had a conference call with

El Paso ISD and I.B.M. representatives discussing these issues and I.B.M.’s response was that we should take this offline to discuss, but they had FCC lawyers

that handled this kind of stuff. I did take this offline with Don Riddick from IBM.

Don told me not to worry about it that they would take care of it. I was to fill out

the service substitution form and that would take care of everything. He didn’t appear to be concerned about the products and services that were being offered in the

Statement of Work that were not eligible. In trying to fill out the service substiVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00167 Fmt 6633 Sfmt 6621 96098.TXT HCOM1 PsN: HCOM1
160

tution form, I realized that IBM didn’t include their e-mail software solution on any

line item. (See Reference #3) I informed the Sun Sales Team and I was instructed

to call Woodrow Lee from I.B.M. When I spoke with Mr. Lee, he informed me that

they didn’t include it on there because their E-rate Consultant had advised them

not to. In the Statement of Work it was listed as Lotus Notes and in my e-mail to

the Service Provider Alias, I specifically asked if Lotus Notes was eligible and they

said NO. I responded back to Mr. Lee that they must have known it wasn’t eligible

and didn’t include it on their itemized list on the 471. Again, he said no, but their

E-rate Consultant had advised them not to. If that was the case, I didn’t know how

I could substitute our e-mail software solution for one that didn’t exist on their

original 471. IBM agreed that Sun should also leave off their software solution. I

believed that it would not be acceptable, since the original 470 products and services

must match the 471 and in turn the service substitution form also needed to match

the products and services selected. This was confirmed to me by the SLD in another

e-mail. Sun has substantial discounts that they provided to Educational Institutions. In this case, since we were asked by the applicant to work through I.B.M.

on this project, we were not able to pass along those Educational discounts. We did

offer to go direct with El Paso ISD and the price would be substantially lower for

El Paso ISD. El Paso ISD again directed Sun to work through IBM. IBM also stated

to Sun that we needed to work through them. (See Reference # 4) We did however,

provide our best possible pricing to IBM considering that we were providing all the

products and installation services, but IBM didn’t like our price. It was unclear to

Sun why IBM required us to provide them with a price that allowed them to take

approximately 51% of the overall cost for the project, as they specified on the original 471 form, with Sun doing most of the work. (See Reference #5) Not to mention,

that Sun was providing an e-mail solution that could cover the entire school district

vs. the 5,000 accounts that were mentioned in IBM’s Statement of Work. When Sun

wouldn’t come down in our price to IBM, IBM told Sun they were going to rebid

the project and release an RFP that would be due in approximately 1 day. (See Reference #6) It was clear to the Sun Sales Team that even though they had been selected amongst three vendors, one of which was IBM, that Sun would not get the

business unless IBM had made a significant amount of money off of the E-mail Solution.

In closing, I would like to say that the intent of the E-Rate Program is a very

good one. Service Providers and Applicants that don’t feel ownership in working

within the program rules and guidelines, should not jeopardize those Applicants and

Service Providers that do adhere to the programs rules and value what the program

does for them. There needs to be more extreme measures taken against the waste,

fraud and abuse and there are tools out there that can help. There are some proficient sets of tools for Service Providers and Applicants to help them with the Erate Process. These tools could be modified to assist USAC & the SLD in providing

a traceable method for service providers and applicants to work together. Without

that traceable contact between service providers and applicants, it will be very difficult to monitor the waste, fraud and abuse. These tools could also help in identifying patterns of consultants and services providers that might be working together,

as well as service providers and applicants. Exposing the program violations and the

offenders in a public forum is key to fixing some of these problems. It’s also important for those that report waste, fraud and abuse to get some sort of notification

of what happened with their reporting. This would encourage more reporting of

these issues when they see results from it. By eliminating the waste, fraud, and

abuse, all of our schools and libraries will have an opportunity to take full advantage of what this program has to offer.

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Mr. WALDEN. Thank you. Thank you for your testimony.

Mr. Hawthorne, welcome.

TESTIMONY OF NATHANIEL HAWTHORNE

Mr. HAWTHORNE. I think I will stand.

Mr. WALDEN. I think your microphone is not on, sir.

Mr. HAWTHORNE. Thank you.

I think I will pass on an opening statement, and I will stand

ready to respond to any questions.

Mr. WALDEN. All right. Thank you very much.

[The prepared statement of Nathaniel Hawthorne follows:]

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Mr. WALDEN. All right. Thank you very much.

Mr. Caine, welcome.

Mr. CAINE. Thank you.

Mr. WALDEN. Do you have an opening statement for us today?

TESTIMONY OF CHRISTOPHER G. CAINE

Mr. CAINE. I do.

Mr. Chairman and Ms. DeGette, thank you very much.

I am Chris Caine, Vice President of Governmental Programs for

IBM.

I appreciate this opportunity to provide IBM’s perspective regarding the E-Rate program. We have a long history of commitment to public education and working to help our Nation’s leaders

improve K through 12 schools. Therefore, we responded willingly in

1997 when FCC Chairman Reed Hunt requested our help in educating school districts about the newly created E-Rate program.

We recognize that you and other members of this committee have

raised important questions about a number of issues surrounding

the program, including incompatible technologies that do not work

together, equipment delivered but not installed, billing for equipment or services not provided, and procurement irregularities. And

these are important issues and they should be addressed.

But we believe in IBM that overall the E-Rate program has been

a success in helping millions of disadvantaged students bridge the

digital divide. IBM is here today voluntarily because we care about

the program and we want to help you and others make it the best

it can be.

IBM has participated in the program as a service provider since

its inception. Our extensive experience in E-Rate and in K through

12 education has given us an insight into the E-Rate program and

how its goals can be fully realized.

Some have suggested that IBM has been too involved in the procurement process because school officials listened to advice from

IBM prior to issuing a request for proposal. We strongly disagree.

The SLD guidance encourages vendors to share their experience

with schools and specifically authorizes vendors to provide assistance in the development of an RFP as long as the resulting procurement is neutral. IBM has confidence in school districts to objectively consider technical options from various sources and apply

their good judgment to make sound and proper procurement decisions.

Deploying a modern network infrastructure is not a simple task,

especially under the often tight schedules imposed by the E-Rate

program. So it is important that the schools get the right technical

and project management help, and I think we heard that from

some of our earlier speakers.

As this committee has learned from prior hearings, students,

teachers, and communities will suffer if much needed equipment is

left stacked in a warehouse for lack of coordination or technical

skills. This is why IBM supported the choice by the El Paso Independent School District, among others, to use a systems integration

approach for selected E-Rate projects.

As a systems integrator, IBM can provide a single point of accountability to insure that all components of the network will be

246

installed as planned and will work properly together. In El Paso

IBM delivered good, tangible value on time and on budget.

Deploying complex network systems is not a plug and play activity. A collection of the lowest priced piece parts is often not the

most cost effective decision. That approach may not optimize the

cost of the overall solution, and the parts may not work together

effectively.

Implementing such projects under the strict rules of the E-Rate

program and dealing with the old physical infrastructure that is

frequently found in many school districts carries substantial risk

and requires considerable program management experience. For

these reasons, we believe systems integration is a valuable approach.

El Paso selected IBM as its E-Rate systems integrator in January 2001, following an open, two-step procurement process permitted under Texas law. In the first step, El Paso ranked bidders

based on technical qualifications, experience, and pricing information. As a result of this step, El Paso selected IBM as the most

qualified bidder.

In the second step, the district entered into detailed negotiations

with us and satisfied itself that we were the most cost effective

vendor for meeting its comprehensive network requirements.

As part of our E-Rate engagement in El Paso, IBM provided

maintenance support, including a centralized help desk to keep the

network up and running. We believe that quality maintenance is

critical for a school district to get the full value out of its technology investments, another thing we just heard recently from

other speakers on the panel here.

The Consortium for School Networking agrees. The consortium,

which is made up of education leaders in technology from school

districts across the country, notes the importance of a formalized

support infrastructure. In addition, the group reports that over 95

percent of school districts with more than 20,000 students, such as

El Paso, use help desks to provide technical support.

This industry standard practice is a good way to provide fast resolution for network problems and insure high network availability.

It is important to remember that the E-Rate program is relatively

new and that the rules are still evolving. Since the beginning of the

program, we have complied with the rules as we understood them

at the time. It is very unfortunate that El Paso and other school

districts were denied funding, despite the fact that they had followed application approaches that the SLD has previously approved.

However, we believe the FCC ultimately reached a fair and balanced decision in its Ysleta order. Significantly, the Commission

acknowledged that some E-Rate program rules were unclear and

applied inconsistently. Consequently, the Commission took the unusual step of waiving its rules to allow these applicants to conduct

rebids and to reapply for the denied funding.

The Commission also expressly noted that IBM could participate

in these rebid applications. IBM has always taken compliance with

E-Rate rules very seriously. Now that the Commission has provided additional clarification, we are working even harder to insure

our compliance. We have hired two highly regarded E-Rate experts

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from the applicant community and consolidated expertise into an

E-Rate Center of Competence as a resource for IBM staff.

Our Center of Competence is actively engaged with the SLD. For

example, we are proactively seeking to resolve questions about the

rules, working to improve clarity of our statements of work and

participating in the on-line product data base pilot program.

Members of the committee, IBM is committed to the ongoing success of E-Rate, and we will continue to work with the SLD, the

Commission and you to improve the program. As you can see in our

written statement, we have offered some recommendations for the

program, the most important of which is to make the rules as simple and as clear as possible.

Thank you for the opportunity to be here, and I will look forward

to answering your questions.

[The prepared statement of Christopher G. Caine follows:]

PREPARED STATEMENT OF CHRISTOPHER G. CAINE, VICE PRESIDENT, GOVERNMENTAL

PROGRAMS,, INTERNATIONAL BUSINESS MACHINES CORPORATION

INTRODUCTION

Mr. Chairman, Members of the Subcommittee, I am Christopher G. Caine, Vice

President, Governmental Programs for IBM. I appreciate the opportunity to appear

before this Subcommittee to provide IBM’s perspective regarding the E-rate program.

IBM has had a long history working with our nation’s educators. For example, in

1986 IBM pioneered the use of technology in classrooms with the introduction of

Teaching and Learning with Computers, a pioneering use of technology in the classroom. Since 1994, through our Reinventing Education program, IBM has given almost $75 million in philanthropic technology grants and worked with school partners to improve student achievement. As a result of this grant program, the Center

for Children and Technology, which has researched technology and learning for over

two decades, estimates that over 90,000 teachers and millions of students are using

the educational technology tools created by IBM and our school partners. Last year

alone, we provided over $35M in grants to elementary and secondary schools, making IBM the largest corporate contributor to K-12 education. And to advance the

cause of public school reform, IBM organized and hosted National Education Summits in 1996, 1999 and 2001, bringing together the nation’s governors and business

and education leaders to collaborate on this important goal.

Clearly, IBM was committed to improving schools through the application of information technology long before the E-rate program was created.

IBM AND E-RATE

Because of IBM’s strong commitment to improving K-12 education and bringing

the opportunities created by information technology to all students in our nation,

we were pleased when Congress created the E-rate program as part of the Telecommunications Act of 1996. We believed then as we believe today that the program

was structured properly to provide greater assistance to those schools that have the

greatest need, helping to provide opportunities for economically disadvantaged students to participate in the ‘‘information age.’’

Shortly after the FCC established the initial rules to govern the E-rate program

in 1997, I participated in a small meeting of high-tech leaders where then-FCCChairman Reed Hundt asked us directly to help educate schools across the country

about the opportunities of E-rate. IBM willingly responded by creating a booklet

that described the new program, and we mailed a copy to over 12,000 school districts in the nation. We followed up by providing seminars about E-rate for school

officials and meeting with individual districts to talk about how E-rate could help

them meet their communities’ educational needs and objectives.

IBM has participated in the E-rate program as a service provider since its inception, and we believe that the program has been an enormous success in bringing

the vast resources and opportunities of the Internet to deserving students. E-rate

funding has allowed many of our country’s poorest school districts to bridge the ‘‘digital divide’’.

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The E-rate program has provided the opportunity to many poorer school districts

to explore new ways to use technology to enhance teaching and learning. Many districts have found that the universal access to the Internet that E-rate funding provides has exposed their students to a depth and breadth of material that their local

teachers could not possibly have developed and delivered on their own. The program

has the added benefit of helping to prepare our nation’s students for the career requirements of a highly competitive, technology-based economy.

Since the beginning of the Erate program, IBM has served well over 200 E-rate

customers in over 30 states. As the largest computer company and IT services company in the world with a history of applying our world-class research capabilities

to educational challenges, IBM has provided a broad range of eligible networking

products and services under the E-rate program. IBM has the resources to support

many of the largest school districts across the country.

We believe that IBM has an excellent record of helping schools achieve their educational objectives under the E-rate program, delivering complex networking solutions—on time and on budget—to meet the increasingly sophisticated demands of

districts with tens of thousands of students, teachers and staff.

E-RATE INVESTMENTS TO IMPROVE EDUCATION

Our experience has shown that with clear goals and proper planning, school districts can leverage information and communication technology to transform the

learning environment, providing effective tools for teachers and leading to measurable improvements in student achievement. Therefore, IBM fully endorses the Erate program requirement that schools base their technology investments on a comprehensive Technology Plan that is aligned with their educational goals.

As the El Paso Independent School District stated in its 2000-2001 Technology

Plan:

‘‘In addition to a sound background in traditional academics, today’s students

must be competent and confident in using a wide range of technology in a variety of settings. Today, and in the future, most career paths require the use of

computers and a wide-range of other technology. In short, students must be as

comfortable using a computer or other technology as they are in using a pencil

and paper.’’

In our work over the last decade with school partners in our Reinventing Education program, IBM has encouraged schools to take a systemic approach to education reform, consistent with the goals of the E-rate program. For technology to be

used effectively in the classroom, it must be fully integrated in the curriculum, and

professional development opportunities must be provided for teachers so that they

can learn how to use it. If these principles are followed, the resulting improvements

can be dramatic. Indeed, as research has shown, students in Reinventing Education

classrooms have outperformed their peers on standardized achievement tests. Fortunately, the E-rate program created by Congress is making it possible for more students to enjoy the educational benefits of technology in the classroom.

IBM also believes that network infrastructure that schools install today should be

designed to avoid rapid obsolescence by supporting evolving technical requirements

and by accommodating reasonably projected future growth in demand for network

capacity. The network infrastructure should support not only basic Web usage and

e-mail, but should also be designed to support sensible, proven technologies that can

greatly improve the productivity and effectiveness of the educational environment,

such as online dissemination of lesson plans, classroom administration, and stored

broadcasts or real-time, interactive video instruction to enable distance learning and

sharing of the best-available teaching resources. Based on their educational goals

and available resources, school districts must make the ultimate decision about

what technology they should deploy.

TECHNOLOGY CHALLENGES FACING SCHOOLS

Many school districts have required substantial investments in recent years to upgrade their network infrastructures so that they could meet their educational objectives and prepare their students for the networked world. But deploying a modern

enterprise network is not a simple task. For example, a district with 50,000 students plus thousands of teachers and administrators has networking requirements

that are at least as complex as those of a small city. Many districts do not have

sufficient technical staff and knowledge to handle these projects on their own. They

require considerable assistance with the deployment, configuration, project management, technical support and maintenance for their large, complex network infrastructure projects. The Erate program has made it possible for many economically

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disadvantaged school districts to obtain the technology products and services that

they need to offer their students the same opportunities as more fortunate districts.

Certain constraints imposed by the E-rate program structure and the school environment, generally, create additional challenges in deploying advanced network infrastructure. For example, the annual E-rate funding cycle requires that major

projects be performed on an artificially accelerated basis, compressed to fit into a

narrow time window between receipt of E-Rate funding approval (often after long

delays) and the funding year deadline. Meeting this tight schedule is further complicated by having to work around classroom schedules, after hours and during

school holidays. And the simple fact that many school buildings were built decades

ago, long before the Internet and the need for wiring classrooms were contemplated,

can present difficult deployment problems, such as asbestos removal and inadequate

electrical supply.

Given the complexity of the task of installing, integrating and maintaining a sophisticated network environment, especially under the often-tight schedules imposed

by the E-rate annual funding cycle, it is important that school districts get the right

technical and project management help. And if a school district hires multiple vendors separately to perform portions of the work, they may also find it difficult to

coordinate among them.

Congress, the FCC and the SLD are well aware of the potential for waste if expensive equipment is left stacked in a warehouse for lack of planning, coordination,

or technical skills. IBM has also seen cases where computers sit unused, gathering

dust in classrooms, because schools had not invested sufficiently in technical support, maintenance or teacher training. In each case, expensive investments are

idled, the school’s instructional objectives and technology vision are frustrated, and

E-rate goals of bridging the digital divide go unfulfilled.

IBM HELPS SCHOOLS MEET THESE CHALLENGES

One way that IBM has responded to these challenges has been by proposing a systems integration approach for selected E-rate projects. Systems integration is recognized as the most effective procurement model for governments and businesses undertaking complex IT projects. In fact, the Federal Government’s use of systems integrators is longstanding and extensive. Since each school district’s requirements

are unique and districts often have varying levels of technology resources, schools

have seen great value in working with a technology partner like IBM.

As a systems integrator, IBM can provide a single point of accountability so that

school administrators are assured that all components of their network will be installed on time, within budget, and will work properly together. IBM can take responsibility for all of the work performed by multiple vendors and subcontractors,

and for keeping school officials and boards of education informed. And by overseeing

the entire project, IBM is able to provide a fixed-price commitment to a school district, enabling it to plan its budget and funding needs more precisely and avoid costly overruns. Once installed, IBM can provide ongoing technical support and maintenance to ensure that the network stays up and running so the school district can

obtain the full benefit of its E-rate-funded investment.

IBM does not consider systems integration to be a ‘‘one size fits all’’ approach.

Some school districts choose to hire a systems integrator to manage their project,

while other districts prefer to act as their own general contractor. IBM offers its

products, services, and experience either way. IBM strives to be a true partner to

many of our nation’s poorest school districts, helping them through the labyrinth of

technological solutions for their needs, as well as through the E-rate process itself,

while providing proven solutions. At the heart of each partnership is a firm understanding of the connection between infrastructure and educational results, and a

commitment by IBM to assist the school district with its technology goals.

2001 E-RATE FUNDING FOR EL PASO INDEPENDENT SCHOOL DISTRICT

Among the school districts that IBM has served as part of the E-rate program is

the El Paso Independent School District (EPISD or El Paso), which at the time

served over 63,000 students in 52 elementary schools, 16 middle schools and 16 high

schools, with over 8,000 employees. EPISD is an economically disadvantaged district, with a large portion of its students eligible for the National School Lunch Program. The mission of EPISD is to meet the diverse needs of all students and empower them to become successful members of a global community. EPISD developed

a thorough and forward-looking Technology Plan designed to achieve its educational

goals.

The selection by EPISD of IBM as its strategic technology partner provides an example of IBM’s role as a systems integrator in the E-rate program. El Paso had parVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00257 Fmt 6633 Sfmt 6621 96098.TXT HCOM1 PsN: HCOM1
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ticipated in the E-rate program from Funding Years 1 through 3 with service providers other than IBM. In December 2000, El Paso posted a Form 470 for Year 2001

on the Universal Service Administrative Company, Schools and Libraries Division

(‘‘SLD’’) Web site in accordance with E-rate program rules. El Paso also issued a

Request for Proposal (RFP) in December 2000 detailing El Paso’s requirements and

describing the form of the prospective contract.

EPISD selected IBM as its systems integration partner in January 2001 after

evaluating competitive bids from IBM and seven other vendors, following a negotiated solicitation process in accordance with Texas State procurement regulations,

FCC rules and SLD requirements in effect at the time. El Paso recognized that the

complex network solution they sought to procure to support their educational objectives was not a simple, commodity purchase in which the cheapest initial proposal

would necessarily be the most cost-effective solution over time. So EPISD issued an

RFP and followed an open, transparent, ‘‘two-step’’ procurement process permitted

under Texas law. In the first step, EPISD ranked systems integration partner bidders based on technical qualifications, experience and pricing of skilled labor. As the

result of this step, EPISD selected IBM as the most qualified bidder to implement

the network environment as envisioned in its Technology Plan.

In the second step, the District entered into detailed negotiations with IBM to

agree to contractual terms, with price as a primary factor in the final selection.

EPISD satisfied itself that it was receiving the right combination of cabling, equipment, software and services at a fair and reasonable price that, considering all of

the factors, made IBM the most cost-effective vendor for meeting its comprehensive

network requirements. At the end of the second step, EPISD staff presented its decision and rationale for consideration by the Board of Trustees in open, public meetings. The Board then voted in favor of the recommendation and issued formal authorization for the contracts. The SLD subsequently reviewed EPISD’s E-rate funding request in thorough detail and awarded E-rate funding to EPISD in October

2001.

EPISD’s contracts with IBM allowed the District to bid out portions of the purchases to ensure competitive prices and provided for termination if the District became dissatisfied with IBM’s performance. IBM believes that the EPISD technical

staff and Board had sufficient procurement expertise and experience to make sound

decisions to ensure they received the best value for the money.

The lowest priced initial solution is often not, over time, the most cost-effective

use of taxpayer dollars. IBM believes that selection of a systems integrator is an

effective approach for procuring complex information technology systems. Where

school districts seek a comprehensive networking solution, as in El Paso, the proven

ability of the integrator to manage such a difficult project to completion on time and

on budget is particularly relevant.

Federal and state procurement laws provide for government procurements of complex IT systems, like the one in El Paso, through the use of a procurement model

that weighs vendor qualifications, technical expertise and management experience,

along with price, to choose the most cost-effective provider. The FCC recognized this

point in two key decisions governing the E-rate program. The Commission’s 1997

Universal Service Order gave schools ‘‘maximum flexibility to take service quality

into account and to choose the offering—that meets their needs most effectively and

efficiently.’’ (emphasis added) And in its 1999 Tennessee Order, the Commission

upheld a bid selection process in which price was an important factor, but was explicitly given a lower weighting than technological approach. In other words, price

was not required to be the most important selection criterion.

The work that EPISD procured in 2001 under the E-rate program was particularly complex. IBM acted as a systems integrator, or general contractor, providing

a single point of contact and accountability so that EPISD could be assured that the

network and all of its components would be installed as planned and work properly.

IBM worked closely with EPISD’s senior management and technical staff to ensure

that the network solution and product selection met the requirements as specified

by the District in line with their approved Technology Plan and that the solution

complied with E-rate eligibility rules as EPISD and IBM understood them. We also

made regular presentations to the Board of Trustees to keep them apprised of

progress and to seek their direction and approval.

IBM implemented a network solution, providing internal connections necessary

for high-speed Internet access to enable distance learning and to take advantage of

the educational resources available on the Internet. We accomplished this challenging task to connect and integrate these schools into an advanced communication

network in a very compressed time frame, as required by E-rate program rules. We

delivered everything that we committed to deliver, on time and on budget—and it

worked.

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1 Consortium for School Networking study available at http://classroomtco.cosn.org/surveyltechlpress.html 2http://classroomtco.cosn.org/gartnerlintro.html

Providing a modern technology infrastructure to support education is important

and will create long-term benefits for our students. Such infrastructure may require

significant investment, but it is an investment we must be willing to make. Implementing network projects of this size, scope and complexity for a fixed price under

the strict rules and time constraints of the E-rate program carries substantial risk

and requires considerable program management experience. A collection of the lowest priced piece parts is often not the most cost-effective decision. That approach

may not optimize the cost of the overall solution, and the parts may not work together effectively. It may be tempting to go with such a ‘‘cheaper’’ solution, only to

find out later that the District’s educational goals are not met when the network

cannot be deployed as planned or is frequently down.

IBM has the resources and capability to meet the challenges of implementing

complex network systems under the E-rate program. Based on customer satisfaction

surveys and comments from key EPSID staff, IBM believes that we met or exceeded

the District’s expectations. IBM is proud of the job that we did. We believe that we

built the right solutions and delivered the value that we promised to the District.

For Funding Year 2001, IBM implemented and integrated a total of nine projects,

including cabling, network electronics, server upgrade, Web and file servers, Fiber

Internet Access, video, e-mail, Web access and technical support. The following section provides further detail on the technical support IBM provided to EPISD.

IBM TECHNICAL SUPPORT SERVICES FOR EPISD

Prior to the projects IBM undertook at EPISD, the District had only begun to introduce a modern technology infrastructure, and they lacked sufficient technical

staff to properly support their new network infrastructure. To meet their needs,

EPISD sought a service provider to assist with technical support under the E-rate

program. The use of vendor resources in such cases is common, as illustrated by a

study by the Consortium for School Networking (CoSN)., made up of education leaders in technology from school districts across the country and others CoSN found

that over half of the school districts surveyed outsourced at least some of their technical support.1

IBM provided technical support and maintenance to EPISD using a methodology

IBM had honed through many years of support for customers with similar reliability

requirements and with environments of similar complexity. The goal was to enable

the network infrastructure to operate reliably and with little downtime, so that it

would be available to students and teachers to support learning in the classroom.

IBM first set up a Technical Services Office (TSO), which designed, developed and

implemented the support services. The TSO provided project coordination, site and

connectivity networking services support, network infrastructure support, Web

maintenance support, Local Area Network (LAN) and network hardware maintenance support, and help desk support. The IBM services achieved the following improvements for EPISD:

• Higher network availability.

• The ability to resolve network problems quickly, shortening downtime.

• Routine maintenance and technical change management methods to reduce unplanned connectivity outages.

• Network performance metrics to track quality of service and improvements.

• A single-point-of-contact help desk to screen calls and route them either to the

IBM network support for eligible services, or to EPISD’s own desktop PC support function for services not covered by E-rate.

• Trouble report status accessible by Web or phone.

IBM believed then, as it does now, that an effective technical support and maintenance program is an essential element of any school district’s technology investment. We believe that quality maintenance support is critical for a school district

to get the full value out of its technology investments. School districts are also coming to the realization that technical support is a critical element of their IT budget

that can no longer be treated as an afterthought to be handled by technologically

savvy teachers and students in their spare time. As CoSN has observed:

‘‘Ever-broadening use of personal workstations and the Internet in schools

has increased the awareness of support costs and the need for a more formalized support infrastructure. The increasingly complex technology infrastructure

makes the historically informal support approaches less adequate or practical.’’ 2

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3http://classroomtco.cosn.org/surveyltechlsupport.html 4Since IBM had been providing technical support to the District as a service, E-rate rules did

not permit us at the end of the contract to donate the tools that we were using to EPISD.

CoSN reports that over 95 percent of school districts with more than 20,000 students use help desks to provide technical support, so this is a very common practice

among large districts such as El Paso. 3 Help desks are a good way to provide fast

resolution of network problems and ensure high network availability.

2002 EPISD E-RATE FUNDING DENIAL

In November 2001, a month after receiving its funding award for E-rate Year

2001, EPISD posted a Form 470 on the SLD website for Funding Year 2002. According to EPISD, the District wanted to inquire into any additional vendor interest in

providing internal connection or Internet access services, and to ensure that renewing the IBM contract would be cost-effective and advisable. It did not issue an RFP

for Funding Year 2002, and received no response to the Form 470 posting that it

considered sufficient to prompt non-renewal. Consequently, El Paso conducted an internal review of its projects for 2002 and discussed pricing in detail with IBM prior

to its decision to renew the contract. El Paso’s Board of Trustees voted to renew

IBM’s contract on January 8, 2002. Through the first half of calendar year 2002,

IBM continued implementation of its Year 2001 E-rate contract, successfully installing the new network and support infrastructure for EPISD.

The 2001 funding year ended on June 30, 2002, without El Paso receiving a funding decision for Year 2002. In anticipation of eventually receiving 2002 funding,

IBM, at its own risk and expense, continued to provide technical support for EPISD

beyond the end of our Year 2001 service contract. This support continued for six

months until the end of calendar year 2002, when IBM reached the point at which

it was unwilling to continue service without being paid. IBM did not subsequently

seek payment from EPISD after E-rate funding was denied, despite the fact that

IBM incurred millions of dollars in expenses in providing technical support services

for those extra six months.

El Paso did not receive the SLD decision denying its Year 2002 application until

March 10, 2003. Among the reasons for the denial, SLD criticized EPISD’s use of

the ‘‘two-step’’ procurement process for EPISD’s Year 2001 application (which the

SLD had approved the prior year), and therefore questioned whether EPISD had

adequately established that IBM was the most cost effective vendor for Year 2002.

IBM supported El Paso in its appeal of the SLD funding denial to the FCC, and

IBM also filed its own appeal at the FCC. IBM urged the Commission to expedite

the appeals of EPISD and other similarly situated school districts. The Commission’s Ysleta Order subsequently upheld the SLD’s denial of Year 2002 funding for

EPISD, Ysleta and six other school districts. The Order was released on December

8, 2003, eighteen months after the end of the 2001 funding year.

While waiting for the delayed Year 2002 funding decision, IBM and EPISD discussed various options for continuing technical support services in the event that

funding was ultimately denied. EPISD originally had intended to transition technical support services over to its internal staff over time, but this plan was dependent upon renewal of E-Rate funding. EPISD and IBM had not planned the project

to address the eventuality that E-Rate funding for the technical support service

would be approved for one year and then abruptly cancelled for subsequent years.

As of December 2002, it was still too early in the implementation of the services

for the EPISD staff to have gained enough experience with the system to effectively

take over operation of it themselves. EPISD considered purchasing the system from

IBM 4, but it did not believe that alternative was viable given the short timing and

lack of funding.

This was a frustrating time for both EPISD and IBM. Substantial start-up effort

and cost were expended on establishing the Technical Support Office, the help desk,

the maintenance procedures, the tools and the supporting computer systems. It is

very unfortunate that a change in the interpretation or application of the Erate

rules caused much of the return on this investment to be unnaturally truncated.

IBM also regrets that El Paso, Ysleta and other schools were delayed by a year or

more in the implementation of their Technology Plans due to denial of their Year

2002 funding applications, which were submitted to the SLD in good-faith reliance

upon the SLD’s previous approval of similar applications. However, EPISD did receive full value from the other important E-Rate projects IBM implemented for Year

2001.

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5 [W]e acknowledge that SLD has approved other funding requests in the past that utilized

all-inclusive FCC Forms 470 similar to that submitted by Ysleta. (Ysleta Order, ¶ 35)

THE COMMISSION’S YSLETA ORDER

IBM believed that we had complied with all applicable rules relating to the El

Paso projects and Year 2002 proposals, including Erate program rules, state procurement rules and communities’ local procurement requirements, as we understood

them at the time. In addition to complying with the rules, IBM met its commitments in delivering products and services to our funded Erate customers—some of

the largest school districts in the country with the most challenging network requirements.

Significantly, the Commission, in ruling on the funding appeals by IBM and our

school district partners in El Paso, Ysleta and elsewhere, acknowledged that some

E-rate program rules were unclear and applied inconsistently. The Commission’s

Ysleta Order said: ‘‘SLD could reasonably have been construed as sanctioning the

two-step Systems Integration process by approving the El Paso Independent School

District’s application’’ for Year 2001. (¶ 69) Further, the Ysleta Order ‘‘acknowledge[d] that the Commission’s use of varying phraseology in the same decision [concerning whether price must be ‘‘the primary factor’’ or only ‘‘a primary factor’’] created some ambiguity on this issue.’’ (¶ 50) And as the Commission noted,

some applicants received funding despite circumstances similar to those of the denied applications associated with IBM. For example, while some of IBM’s E-rate

customers were criticized for including a broad list of internal connections services

on their Forms 470, other districts that were not working with IBM received funding despite using the same or similar lists of services.5

Because of applicants’ ‘‘substantial and widespread reliance on prior SLD’’ funding

decisions and to avoid imposing an ‘‘unfair hardship’’ on applicants, the Commission

took the unusual step of waiving its rules to allow these applicants to conduct

‘‘rebids’’ and reapply for denied funding under the new guidance issued as part of

the appeals order. The Commission expressly noted that IBM would be eligible to

participate in these rebids.

IBM believes that it is very unfortunate that El Paso, Ysleta and other school districts were denied funding for Year 2002, despite the fact that they followed application approaches that SLD had previously funded. However, given the circumstances,

we commend the Commission for reaching a fair and balanced decision on these districts’ funding appeals. What is most important is that the Commission provided additional guidance on E-rate rules to ensure that they are interpreted as intended

and gave these school districts the opportunity to conduct rebids under this guidance so that they would not lose out on Year 2002 funding opportunities.

IBM’S RELATIONSHIPS WITH SCHOOL DISTRICTS

Some have suggested that IBM may have exerted improper influence on the procurement process at certain school districts, because school officials listened to advice from IBM prior to issuing a Request for Proposal (RFP). We strongly disagree.

IBM has been successful in winning E-rate contracts from many districts across the

country, but this is not surprising, since IBM for many years has been a major information technology supplier to both commercial and governmental customers. IBM

has a reputation for being able to handle the most challenging systems integration

projects, and the company has a long history of providing innovative IT solutions

for K12 education.

In some cases, individual school districts interested in applying for E-Rate funding shared with each other, or IBM shared with a school district, sample RFP documents that other school districts had previously used successfully. School districts

could learn from these examples and tailor an RFP to meet their needs. SLD guidance encourages vendors to share their experience with schools and specifically authorizes vendors to provide assistance in the development of an RFP, as long as the

resulting procurement is neutral. IBM strives at all times to comply with applicable

state, local, and E-rate rules and regulations.

It is appropriate for vendors to get to know their school customers, understand

their needs, goals, and Technology Plans, and offer advice. In fact, school districts

should be encouraged to seek input from as many competing vendors as possible.

As a company that has worked closely with American public school systems for decades, it is natural for school administrators to seek our advice and for us to offer

thoughts on technology-related education matters. IBM believes that school districts

can objectively consider input from various sources and apply their own good judgment to make sound procurement decisions. School officials understand very well

that they must comply fully with all applicable procurement regulations and must

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obtain the approval of independent boards of education for their procurement decisions.

ELIGIBILITY OF PRODUCTS AND SERVICES

The SLD’s guidance on eligibility of products and services for E-rate discounts is

contained in the Eligible Services List. Since the beginning of the E-rate program,

applicants and service providers have frequently raised questions about interpretation of the ESL. In response, the SLD has periodically updated the ESL to elaborate

and provide clarification about what products and services are covered. However,

given the rapid advances in networking and information technology, it is very difficult to provide a clear, definitive statement on the eligibility of the broad range

of products and services that a school district might consider as part of its technology infrastructure. There is always room for improvement, and SLD should strive

to provide greater clarity and certainty about eligibility by continuing to update and

refine the ESL.

Given the evolving nature of the ESL, it is understandable that there would be

varying interpretations about whether a certain product or service is considered eligible. IBM has made a good-faith attempt to understand and comply with the ESL

as it existed at the time, and we have added and deleted products and services from

our E-rate portfolio as a result of the periodic changes in the ESL. However, we are

very concerned that new guidance in the ESL might be applied retroactively to declare a product or service that was previously approved for funding by SLD now ineligible and subject to recovery of funds from the applicant or service provider.

IBM is very willing to work with the Commission and SLD to identify areas of

the Eligible Services List that would benefit from further clarification, but we believe that new guidance should only apply prospectively.

ONGOING SUCCESS OF E-RATE

IBM is committed to the ongoing success of the Erate program, and we will continue to work with the SLD, the Commission and Congress to improve the program

so that it can continue to help bring the latest tools for learning to schoolchildren,

teachers and communities.

IBM has always taken compliance with the E-Rate rules very seriously, and we

have spent considerable time trying to understand and comply with the rules. Each

region in our Erate sales team was responsible for monitoring, understanding, and

complying with program rules. Employees who worked on E-rate projects participated in annual training sessions and periodic conference calls and e-mail updates.

Each year every IBM employee must certify that he or she will comply with IBM’s

Business Conduct Guidelines requiring compliance with all applicable laws and regulations. Employees who participate in sales to government entities, such as E-rate

school customers, must read and certify to a separate set of Public Sector Guidelines.

Now that the Commission has provided additional clarification, we are working

even harder to ensure our compliance. We have hired two highly regarded E-rate

experts from the applicant community and consolidated expertise into an E-rate

Center of Competence as a resource for IBM staff and our customers. Our Center

of Competence is actively engaged with the SLD. For example, we are proactively

seeking to resolve questions about the rules, working to improve the clarity of our

statements of work, and participating in the online product database pilot.

RECOMMENDATIONS TO IMPROVE E-RATE

IBM offers the following recommendations to improve the E-rate program and

help ensure its continuing success:

1. Make rules simple and clear. Ensure rules are simple, consistent, clear and

fully disclosed to the public. The entire rules structure must be open and public.

In particular, processing criteria used by the SLD to review applications and

invoices should be open and publicly available. Capturing all questions asked

by applicants and service providers and their answers in a wide ranging Frequently Asked Questions (FAQ) would help to improve program integrity, clarity and compliance.

2. Expedite application reviews and appeals. Provide SLD with adequate resources to process applications and appeals in a timely manner. Appeals and

prior year applications pending at SLD should have top priority for processing

over current year applications.

3. Provide adequate advance notice of rules changes. Advance notice of

changes in FCC rules and SLD guidance should be given so that applicants will

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have adequate time to plan budget changes. Changes that have significant impact on applicants should be made after longer advance notice.

4. Clarify the Eligible Services List. SLD should provide illustrative examples

of both eligible and ineligible products and services to help clarify the Eligible

Services List and create greater certainty for applicants and service providers.

SLD should create a Web-based Eligible Services List with links to SLD’s answers to questions posed by applicants and service providers over time.

5. Identify E-rate consultants and their business relationships. IBM agrees

with the recommendation of SLD’s waste, fraud and abuse task force that Erate consultants should disclose their business relationships with service providers for both applicants and other service providers to see. Alternatively, consultants who also sell eligible services on a third party basis should be prohibited from involvement in the procurement process on behalf of applicants.

Thank you for the opportunity to be here to offer IBM’s perspective on the E-rate

program and how it can be improved. I look forward to answering your questions.

Mr. WALDEN. Mr. Caine, thank you for being here, and thank

you all for your testimony this afternoon and for your patience

throughout the day. I know this has been a long hearing. It is an

important issue, and I want to assure all of you and everyone else

listening in that it is our goal as well to make sure that the—we

are picking up some audio somewhere. It is me. That is a frightening thought. I do not know if there is a way to—well, if you could

turn off your microphone for now because we are hearing all of that

back here.

Thank you.

I just want to assure people that it is our goal as well to figure

out how to make E-Rate work because we have seen how it does

not work and we have seen how vendors have misused it to their

advantage and how some school districts have been overtaken by,

frankly, greedy vendors who have gone out of their way to rip off

the system, and so we are committed to try and figure out how we

make it work, work right, work fairly because there are a lot of districts that need to be wired and operated.

Ms. Glogovac, in your comments, you made reference to awareness of a consortium that gets a 3-percent kickback, I believe was

your term.

Ms. GLOGOVAC. This year I was reviewing 470’s. I believe it was

in the May or June timeframe, and I saw that there was an RFP

for a consortium.

In reviewing the RFP, I believe it was on line. It read that they

were looking for a 3-percent kickback from the vendors that were

going to get the business.

Mr. WALDEN. Tell me what the consortium is.

Ms. GLOGOVAC. I do not know exactly. I cannot remember off the

top of my head, but I——

Mr. WALDEN. But these would have been school districts?

Ms. GLOGOVAC. I believe it was school districts that were allowed

to use this contract.

Mr. WALDEN. Who was putting together the contract?

Ms. GLOGOVAC. The consortia was.

Mr. WALDEN. Who is the——

Ms. GLOGOVAC. I do not know the exact name of the consortia.

I did not bring that information with me.

Mr. WALDEN. Okay.

Ms. GLOGOVAC. I did report it to the whistleblower hotline.

Mr. WALDEN. All right. Good. But in general terms, just so I understand, when you say ‘‘consortia,’’ is that a consortia of vendors?

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Ms. GLOGOVAC. No, it is a consortia of applicants. So it could be

a number of school districts, private schools lumped into one application.

Mr. WALDEN. Right, and they basically said, ‘‘You come provide

this to us, and we will give you‘‘?

Ms. GLOGOVAC. Basically it was an RFP that said they were looking for E-Rate products and services, and in order to go through

this RFP and win the business for the RFP, you had to provide

them back 3 percent of whatever you sold into those applicant

sites.

Mr. WALDEN. I wonder from your experience would that be a violation of the USAC rules?

Ms. GLOGOVAC. I think we heard today that, yes, it is.

Mr. WALDEN. I would think so as well.

You did report that to the hotline, you said?

Ms. GLOGOVAC. Yes, I did.

Mr. WALDEN. That is what I thought. Okay.

What I would like to do now is have you walk us through what

happened again with IBM and the E-mail solution. Sun Microsystems, as I understand it, was selected to provide the E-mail

services by the school district.

Ms. GLOGOVAC. According to what I was told by the Sun sales

team, there was what they called a bake-off. There were three vendors, one of which was IBM and I believe the other vendor was

Novell; were brought in, and they presented their E-mail solution

to the school district, and I do not know if the board was there or

who was there. I was not privy to that information, but Sun was

actually selected.

And then Sun was told that they needed to work back through

IBM for the project.

Mr. WALDEN. Okay, and yet when Sun submitted a proposal,

IBM wanted to add costs, 51 percent?

Ms. GLOGOVAC. What happened was Sun provided a cost to IBM.

IBM had a specific number associated with it based on the original

471 they submitted and, I guess, were awarded.

Mr. WALDEN. Okay. Let me see if I understand this. So is it accurate then to say Sun came in and said, ‘‘Here is an E-mail solution

that will work for your district’’?

Ms. GLOGOVAC. Yes.

Mr. WALDEN. ‘‘And here is what we think it costs to do that.’’

Ms. GLOGOVAC. Correct.

Mr. WALDEN. And then you were told by the district you had to

work back through IBM?

Ms. GLOGOVAC. No, we were told that we needed to work through

IBM.

Mr. WALDEN. By whom?

Ms. GLOGOVAC. By the district.

Mr. WALDEN. Yes, that is what I mean. The district told you that

you have got to work through IBM.

Ms. GLOGOVAC. Yes.

Mr. WALDEN. And it is your recollection then that IBM said, ‘‘We

have got to up this cost by 51 percent’’?

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Ms. GLOGOVAC. No, what IBM was telling Sun was, ‘‘You need

to lower your cost in order for us to get what we need out of the

amount that was designated for this project.’’

Mr. WALDEN. What were they going to do with that money? Do

you know?

Ms. GLOGOVAC. I do not know.

Mr. WALDEN. Mr. Caine, are you familiar with that situation?

Mr. CAINE. I would be happy to comment on it, Mr. Chairman.

We disagree with the characterization that Sun has presented.

We were selected as the systems integrator, as I mentioned in my

opening statement.

Mr. WALDEN. Okay.

Mr. CAINE. We pointed out certain risks to the school district,

that if they were to implement the Sun E-mail solution, they needed to consider as the systems integrator, the party responsible for

bringing it all together, all of the parts together.

Mr. WALDEN. Right.

Mr. CAINE. These risks included schedule delays, need to rework

designs, the need for SLD change approvals and possibly increased

costs, which is the dialog we were having with our applicant and

our partner, the school district.

IBM also pointed out the pros and cons of a non-Sun and nonIBM solution, as Ms. Glogovac said, Novell.

Mr. WALDEN. Okay.

Mr. CAINE. Ultimately the school district chose neither IBM’s solution nor Sun’s solution. They chose Novell. So we believe we

played the role as a systems integrator fairly, pointing out to the

school district the appropriate considerations they needed to keep

in mind on this particular topic.

So neither IBM nor Sun received the E-mail solution. An entirely

independent vendor, Novell, did.

Mr. WALDEN. And, Ms. Glogovac, do you have a comment on

that?

Ms. GLOGOVAC. I guess my comment would be that why would

IBM not consult with El Paso prior to selecting Sun during the

three-step process of selecting Sun amongst the three vendors if

they were playing that role.

Mr. WALDEN. All right. Now, Sun had already installed the system in EPSID, right?

Ms. GLOGOVAC. That I do not know.

Mr. WALDEN. All right. Okay. Mr. Tafoya, you state in your testimony that your school district lost a number of employees shortly

before the funding year 4 application process, and your technology

director had essentially no program experience.

Did the district rely on its strategic technology provider to fill the

gap in knowledge on E-Rate experience?

Mr. TAFOYA. It was my belief because, again, as I said, I was not

directly involved at that time with the E-Rate program; I was in

the district, and so I was watching the progress of the program. It

was my belief that they really did not, if I understood your question correctly, have the resources internally to provide that kind of

leadership to answer those technical questions.

Mr. WALDEN. You relied on a strategic technology provider?

Mr. TAFOYA. That is correct. That is what I saw.

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Mr. WALDEN. Okay, and to your knowledge, prior to issuing the

request for a strategic provider, did the district consult with USAC

or other E-Rate authority as to the propriety of this approach?

Mr. TAFOYA. Again, it was my understanding in the conversations that I heard at the board meetings that I attended that we

were compliant with all of the current rules.

Mr. WALDEN. Okay, and you state that IBM, after it was chosen

as a strategic technology provider, submitted statements of work to

your district for review with limited opportunity for extensive study

and analysis before the E-Rate application deadline. Could you

elaborate on that comment?

Mr. TAFOYA. I am sorry. Part of that broke up at the very end

there.

Mr. WALDEN. Yes. The question is this. You state that IBM, after

it was chosen as the strategic technology provider, submitted statements of work to your district for review with limited opportunity

for extensive study and analysis before the E-Rate application

deadline. In other words, you did not have much time to review

this; is that correct, or your district did not?

Mr. TAFOYA. No.

Mr. WALDEN. Could you elaborate on that? Why was that? What

happened?

Mr. TAFOYA. I believe there were a couple of reasons that that

took place. One was that after the award was made, you had a limited window of opportunity for the actual execution of the work

itself, and I think the other thing that happened is because of the

scope of the number of projects that were involved, there was a real

scramble to make sure that we got all of that addressed as quickly

as we could.

I think there was a big concern on the part of the district that,

with an award of this magnitude, which was highly publicized in

the community, that we did not want to have any appearance

whatsoever of having essentially misrepresented what we are capable of doing, and by that I mean that we wanted to make sure that

the money that was awarded was used, that it was, you know, the

intent of the board.

Mr. WALDEN. Right.

Mr. TAFOYA. And it was the intent of the administration to make

sure that based on the original design that we were able to deliver

within that timeframe what we said we could.

Mr. WALDEN. Okay. You state the work submitted by IBM was

consistent with the district’s technology plan.

Mr. TAFOYA. Yes, sir.

Mr. WALDEN. Does the technology plan provide guidelines as to

the specific scope and size of the projects?

Mr. TAFOYA. It was scalable. Yes, sir, it did, but again, as I said,

what happened was, which I saw as a problem for the district looking at it externally in this capacity, was that the award was made,

and there was approximately 90 days of lost time. And I believe

that that window of opportunity that was sunk really did affect the

overall technology implementation.

Mr. WALDEN. All right. You state in your testimony the help desk

operation did not necessarily conform to the long-term needs of

your district. Do you believe the district got its money’s worth?

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Mr. TAFOYA. Frankly, no.

Mr. WALDEN. Why?

Mr. TAFOYA. I think, again, there was a lot of confusion as to

who was going to own the equipment after the help desk was installed. There were a number of work orders that were left that

were unattended to simply because, again, we ran out of time and

ran out of opportunity to utilize the equipment that was available.

Mr. WALDEN. How much did you pay for that help desk operation?

Mr. TAFOYA. It is my recollection it was somewhere in the neigh- borhood of $27 million.

Mr. WALDEN. Twenty-seven million dollars for the help desk?

Over what period of time and for how many schools?

Mr. TAFOYA. That would have been over approximately I would

say a 6-month period of time, and it would have been for the 53

eligible schools.

Mr. WALDEN. So 6 months, 53 eligible schools, $27 million?

Mr. TAFOYA. Yes, sir.

Mr. WALDEN. Just for a help desk?

Mr. TAFOYA. That is correct.

Mr. WALDEN. What did the help desk do? Is this where you just

call and say, ‘‘I am having trouble with my server. What do I do?’’

Is this a support desk?

Mr. TAFOYA. Essentially that is what it was, and I believe that

was one of the reasons that there was concern and questions that

were being asked within the district as to what the value at that

point was of what we were receiving.

Mr. WALDEN. I hope there were questions. I mean, I do not know.

Some of you all do this, but I mean, I pay software support services

for software I have, but $27 million in 4 months seems like an

awful lot. I do not know.

Ms. Foster, do you have a reaction to that? Is that normal? Is

that what is going on out there with our E-Rate money?

Ms. FOSTER. I do not think that is normal. I think it is excessive.

Mr. WALDEN. By how much? What would I expect? I mean, I do

not know.

Ms. FOSTER. You know, really, there are all sorts of products and

they all have different bells and whistles. So it would be hard to

say, but my opinion would be that it is very excessive.

Mr. WALDEN. I mean, let’s go back a second here. Twenty-seven

million over 4 months, right? Fifty-three schools. Now, I am not a

mathematician, but you could hire people probably for a good share

of their life for that money and put them in the district, couldn’t

you? Pay them a million bucks a piece and you have got 27 people.

Mr. CAINE. Mr. Chairman.

Mr. WALDEN. Yes.

Mr. CAINE. I would be happy to comment.

Mr. WALDEN. Please do.

Mr. CAINE. I think there are a couple of things we have to remember. First of all, the 1 year timeframe that the E-Rate program

imposes upon school districts and their service providers to both

come up with the 470’s, the statements of work, and the plan, to

submit the application——

Mr. WALDEN. I am aware of that.

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Mr. CAINE. [continuing] to get the funding approval, okay, eats

up a fair amount of time.

Mr. WALDEN. That is why they operate on a 15-month budget

year.

Mr. CAINE. So when you get your approval, then you have a limited period of time on which to execute your plan.

Mr. WALDEN. Okay.

Mr. CAINE. Because the funding year stops. In this case, it

stopped at June 30.

Mr. WALDEN. Right.

Mr. CAINE. You do have some capacity to continue work until

September.

Mr. WALDEN. All right.

Mr. CAINE. So the program rules have a very compressed and a

very intensive timeframe for both application approval and execution.

Mr. WALDEN. Right.

Mr. CAINE. This is why we feel as a systems integrator that that

is a good approach, because if we are willing to sign up for that

as a school district’s partner in this process, we will have the accountability to make sure that it ends on time and on budget.

Now, let me go exactly to your point. The help desk was more

than just a help desk as you know it. Okay? There is a lot of risk

in the timeframe to execute. So, therefore, there is a lot of pressure

to get it done, and I talked in my opening statement about who suffers if you do not get it done.

So there were startup costs involved because in El Paso we were

going from no infrastructure and no maintenance to support this

infrastructure that we were building to something. This was a

large, complex system.

Mr. WALDEN. But in that startup cost phase you just

referenced——

Mr. CAINE. Yes.

Mr. WALDEN. [continuing] is that part of the $27 million?

Mr. CAINE. Yes.

Mr. WALDEN. Okay.

Mr. CAINE. Okay. So there are startup costs that, as I can discuss later, were not evident; were not evident in the following years

or would not have been evident in the following years. We never

got to the following years. Okay?

So within two and a half months of beginning the operation, IBM

helped reduce the outstanding trouble tickets that the school district had from the old El Paso help desk arrangement, all right,

from 600 down to 173. We thought that was good value.

Mr. WALDEN. How much did they pay for the old help desk?

Mr. CAINE. We were not their partner. So I cannot answer that

question, but my point, if I could just finish, my point here is to

say that there was a presentation made to the board. The board

reviewed the progress that had been made in that funding year

and seemed pleased with it.

Now, let me just say at the end of that funding year, El Paso did

not have funding approvals for the following year. We, the company, stayed with the school district and ran that maintenance and

help desk service for 6 months following the end of that year reVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00268 Fmt 6633 Sfmt 6602 96098.TXT HCOM1 PsN: HCOM1
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ceiving no funds. So we stayed on with the school district from

June until the end of the year on our cost because we knew that

we had built this; we thought there was good value to the school

district; and we did not want to leave the school district just hanging there.

Mr. WALDEN. I am sure they appreciated that.

Ms. Foster, do you know what your costs were for the help desk

prior to IBM?

Ms. FOSTER. No. I really was not responsible for the help desk.

So I could not tell you.

Mr. WALDEN. All right.

Mr. HAWTHORNE. May I make a comment on the help desk issue?

Mr. WALDEN. Yes. Somebody help me out here.

Mr. HAWTHORNE. I think one of the issues that got the attention

of IBM initially was that the help desk that was in place, and representing Alpha got our attention, was that they basically had no

network, and it would take up to 4 months for a teacher or students if there was a problem in the network to get it repaired.

And so what happened is that IBM came in. Let me back up. The

school district realized that they really needed some help in this

area, and that was the impetus for focusing on the help desk.

And I might suggest also that there is probably maintenance in

there. To just say that there was a help desk, that somebody is sitting there to answer phones——

Mr. WALDEN. How many people were involved in the help desk?

Mr. Caine?

Mr. CAINE. I do not know the exact number, Mr. Chairman.

Mr. WALDEN. And how long was the help desk in operation for that $27 million?

Mr. CAINE. Well, as I said, we started, and then we got it up.

We would have liked to have gotten it up earlier than we did within that year.

Mr. WALDEN. That is fine.

Mr. CAINE. It was up for 21⁄2 months.

Mr. WALDEN. 21⁄2 months?

Mr. CAINE. 21⁄2 months, until the funding year ended June 30.

Mr. WALDEN. And for that 21⁄2 month period, that is where the $27 million was allocated?

Mr. CAINE. No, Mr. Chairman. That portion of the award for that

maintenance support, which included the help desk, was a part of

a startup.

Mr. WALDEN. How much was the help desk then?

Mr. CAINE. I do not have the breakout number for you on that,

but for the maintenance for that network and for that infrastructure, which Mr. Hawthorne just referred to, that entire piece was

$27 million, and we believe that within the 21⁄2 months that it was

up—so we basically got it up in April——

Mr. WALDEN. So you got up a network. Let me see if I understand this because I do not do what you all do. You created, wired,

hard wired the 53 schools, got a network up and running among

all those schools, and then had a support system in place including

staff to keep it running. Does that kind of capture what you did?

Mr. CAINE. Yes, that is correct. Yes, you have described it correctly. I wanted to be care.

262

Mr. WALDEN. Yes, sure. No, that is all right. That is what we are

after here.

And for that you got paid $27 million, but is the $27 million just

for the support or is it for the technicians to go in and wire and

hook things up and crawl around in the buildings?

Mr. Pratt, do you know?

Mr. PRATT. Yes. There was the help desk. There was actually onsite support, maintenance if somebody had to go out onsite to do

that. So that was all included in that. The number of people between the onsite maintenance and the help desk were in the 40

range.

Mr. WALDEN. So 40 people?

Mr. PRATT. Yes. Also, it was a problem that the school district

at the time had no space on their facility to house the Operations

Center. So we had to go out within the city of El Paso and find a

location that was proximate to the district that we could then outfit

and build out, put all of the tools in place.

So all of those things were rolled into that $27 million startup

cost.

Mr. WALDEN. Is that all E-Rate eligible?

Mr. PRATT. It was part of the service. It was required to put that

in place as part of the service which is eligible under E-Rate based

on the rules at the time.

Mr. WALDEN. All right. All right. My time has long since expired.

My apologies to my ranking member.

Ms. DeGette.

Ms. DEGETTE. Thank you, Mr. Chairman.

Ms. Foster, I was very impressed by your testimony. You seem

to really know this business quite well and have been involved in

it for a long time, and you also seem to be very committed, as I

am sure everyone here is, to the goals of the E-Rate, which is to

help low income students learn to use computers and have a level

playing field.

So let me ask you something we have been struggling with today,

which is how do we eliminate the waste, fraud, and abuse that

seems to be rampant in the program. One of the suggestions has

been, as you probably heard, that we increase the local match to

20 percent. I am wondering from your perspective what that would

do for the E-Rate program in these low income school districts.

Ms. FOSTER. I think that if you increased it to 80 percent, it

would be very difficult for districts, such as Ysleta, your poorer districts, to continue to provide what we are currently and to go forward with projects because one thing that you have to consider is

that E-Rate does pay for certain eligible services, and mostly what

we have used it for in the past and what I always use it for was

connectivity issues and teleco issues.

But then there’s a whole other thing. You are building this infrastructure, but what you want to do with that is to educate kids.

Ms. DEGETTE. Right.

Ms. FOSTER. And so, therefore, you have to train the teachers,

which is not E-Ratable. You have to buy the computers, which is

not E-Ratable, and that is very expensive. Those types of services

are very expensive, and so, therefore, the district is already putting

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a huge chunk of money into trying to go forward with these technology initiatives.

E-Rate does a great job in giving us our connectivity and our

teleco services, but then districts make a huge commitment as well

so that you have the tools necessary so that if you raise that to 80

percent it would be very hard.

Ms. DEGETTE. And, in fact, we have seen some examples like in

our last hearing with Puerto Rico where they did all of the

connectivity, but then they did not actually put in the computers

or train the teachers, and that does not help the students one iota,

does it?

Ms. FOSTER. Not at all.

Ms. DEGETTE. For your school district, YISD, how much would

you estimate that you spend, and you probably know, for teacher

training and for hardware and other aspects that are not covered

by the E-Rate annually?

Ms. FOSTER. District-wide annually, we probably spend $8, $9

million annually.

Ms. DEGETTE. And how many students do you have in your district?

Ms. FOSTER. About 45,000.

Ms. DEGETTE. Ms. Glogovac, I am wondering if you can tell me

in your testimony you said you thought there were a lot of tools

out there for discovery of waste, fraud, and abuse that are being

under-utilized that perhaps we could look at. I am wondering if you

could explain some of those.

Ms. GLOGOVAC. Well, I am lucky enough to get access to some

tools from Funds for Learning. I do not know if you are familiar

with them. They are an organization here in the D.C. area. They

are E-Rate consultants. They provide consulting services to applicants and service providers, and Sun actually purchased one of

their packages that allows them to view the 470 forms line item

by line item and identify which applicants are looking for internal

connections’ needs.

You can also go in and view what the applicants have been

awarded for the last 5 years of E-Rate program, which kind of tells

you how they might be increasing in their requests, and it also will

allow you to pull up which service providers have been selected by

that applicant in those subsequent years, which can provide you

with information about a pattern of consistently the same service

provider or possibly consistently the same consultants and service

providers working together with an applicant. So that is possible.

Ms. DEGETTE. What you are saying is that the regulators could

just look at that data on line and begin to see patterns.

Ms. GLOGOVAC. Yes, you could.

Ms. DEGETTE. Which, in fact, is what they did, to deny some of

these IBM contracts and other contracts for El Paso and other

school districts. They saw patterns and said that is a problem.

Ms. GLOGOVAC. Right.

Ms. DEGETTE. I wanted to clarify something. You are not here

testifying today on behalf of Sun, correct?

Ms. GLOGOVAC. That is absolutely correct.

Ms. DEGETTE. You do not work for Sun anymore because you got

laid off, right?

264

Ms. GLOGOVAC. Correct.

Ms. DEGETTE. And you are just here testifying as to what you

saw in your years of employment with that company, right?

Ms. GLOGOVAC. That is correct, and I also have a passion for this

program, the E-Rate program, and that is why I am here today.

Ms. DEGETTE. And why is that?

Ms. GLOGOVAC. I have two children that go to school and I work

in the school, and I know how hard it is for schools to get funding

for projects, and technology is at the top of the list of most of the

schools. And I think this program really helps them out. I think it

is important.

Ms. DEGETTE. Thank you.

Mr. Caine, I wanted to follow up on a question that the chairman

asked because I was a little confused when Ms. Glogovac was testifying. She said Sun had a much lower rate that they were able to

offer educational institutions, but IBM, as the manager in the El

Paso situation, declined that.

I am wondering if you know why that was declined, that lower

rate.

Mr. CAINE. Ms. DeGette, I do not believe that we necessarily declined the lower rate. What we did is we looked at what the integration implications were of a Sun offering. Of course, the school

district has to make these determinations, which they ultimately

did, on selecting the Novell solution, but as you go to a fixed price

contract and as the systems integrator, we had to manage where

all of the different funds were going to ultimately come out for all

of the different parts of what the school district had asked for.

So when we presented, and we raised these issues with the

school district about the various options and implications of the

three vendor choices, the school district arrived at their decision.

Ms. DEGETTE. So the school district was the one in your recollection that decided not to use Sun. It was not IBM.

Mr. CAINE. The school district ultimately made the decision to

take Novell, correct.

Ms. DEGETTE. And I am going to have staff bring you a document. This was a document that was prepared by the USAC about

IBM’s application. It says Evaluation of IBM’s Statement of Work.

Do you see that on the top? I just want to make sure we have the

same.

Mr. CAINE. Yes, I do.

Ms. DEGETTE. Okay. This is USAC’s evaluation of the IBM

Statement of Work for the El Paso Independent School District Email system for the funding year 2001, and it talks about the various ineligibility issues that arise.

You can take a look on the second page of this document. At the

bottom it says, ‘‘Specific areas of the Statement of Work that raise

questions are as follows.’’ Do you see that there?

Mr. CAINE. I do.

Ms. DEGETTE. And it says, ‘‘Section 2.2 describes implementation

services that appear to include high level ineligible consulting, such

as updating the objectives and vision. Furthermore, the scope of

the work described raises a question whether the extent of work

that received funding approved in the previous year was completed

successfully.’’

265

I am wondering if you can comment on whether or not IBM was

aware that they were violating program rules with this item or

were just misadvised by your employees and consultants about

what was allowable under the E-Rate program rules.

Mr. CAINE. Well, Ms. DeGette, we have never seen this document

before. So——

Ms. DEGETTE. Well, are you aware of the issues raised there

about Section 2.2?

Mr. CAINE. No, I am not personally aware.

Ms. DEGETTE. Who would be aware of that?

Mr. CAINE. I am not sure I can tell you who specifically would

be aware of it. This is the first time we have seen the document.

I would say——

Ms. DEGETTE. Well, forget about the document. Do you know

about the issue that is raised right there?

Mr. CAINE. Not specifically, no.

Ms. DEGETTE. So the USAC never told you that there was high

level ineligible consulting?

Mr. CAINE. Well, I do not know the date of this document, and

so it is hard for me to answer your question precisely, Ms. DeGette,

because it does not have a date. I do not know whether——

Ms. DEGETTE. Well, it is March 2003, sir, if that helps you.

Mr. CAINE. Okay. That is helpful, but it does not help me answer

the question, but it certainly is, therefore, the case that that would

be after our engagement with El Paso.

Ms. DEGETTE. Okay. Section 2.2—so you have never seen this

evaluation, even though you are in charge of—what is your title?

It is Vice President for Government Programs?

Mr. CAINE. That is correct, but I am not——

Ms. DEGETTE. But you have never seen this evaluation of the

IBM Statement of Work?

Mr. CAINE. Ms. DeGette, I have never seen this evaluation, and

I am not in charge of the overall E-Rate activity for the company,

but I am involved with it.

Ms. DEGETTE. Okay. Who is in charge of the E-Rate activity for

the company?

Mr. CAINE. Let me explain my role if I could, as Vice President

of Governmental Programs, I have responsibility for public policy

issues for the company of which the E-Rate program, Edits and

Section, was one. So I have been involved with the E-Rate program

on behalf of the company, commenting on its development when it

was a legislative proposal and when it became a regulatory reality

and program.

Ms. DEGETTE. Okay. So you are a guy who can testify as to the

policy implications on behalf of IBM of the E-Rate, correct?

Mr. CAINE. That is correct.

Ms. DEGETTE. Who is in charge of the E-Rate applications and

the program within your company?

Mr. CAINE. We have a management system in IBM that is a distributed management system, a matrix management system. There

is no E-Rate division of IBM.

Ms. DEGETTE. So there is no equivalent within IBM of what Ms.

Glogovac did when she was at Sun?

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Mr. CAINE. I have to remember precisely the way she said it, but

I thought I heard her say that she was a subject matter expert; is

that correct?

Ms. GLOGOVAC. Single point of contact.

Mr. CAINE. Okay. So we have a management system within IBM

that allows different people to get close to the customer because we

have a very large company. So we have sales people and we have

execution people who will get to know what the requirements of a

school district are all across the country.

Obviously we have been working with school districts for a long

time. So we have a matrix management system that brings a team

of people together when working with a school district about what

their needs are, E-Rate or not. In the context of an E-Rate discussion, it would be a number of different people. We have regular discussions about the E-Rate rules. We have conference calls. We have

now, as I said in my statement, created a Center of Competence

within the company.

But at the end of the day the organizational structure within the

IBM company relative to the E-Rate program uses the fundamental

matrix management system we have as an enterprise.

Ms. DEGETTE. So what you are saying is for each team that goes

out there in the field to advise the El Paso school system or the

Denver public school system or any other school system, you are relying on the members of each of those individual teams to have the

familiarity with eligibility under the E-Rate program.

Ms. DEGETTE. That is correct, and they are backed up by people

who are not necessarily customer facing, but are knowledgeable

about the program and the rules as——

Ms. DEGETTE. Who are those people?

Mr. CAINE. Those people, they would be people within the company, again, broken up into different section that would be dealing

with the public sector and education.

Ms. DEGETTE. Are those people identified as resources for those

folks out in the field?

Mr. CAINE. Sure, and the staff. We have made these people available to the staff of the subcommittee for numerous interviews over

the last——

Ms. DEGETTE. And how many of those people are there?

Mr. CAINE. I cannot tell you exactly how many there are.

Ms. DEGETTE. Okay. Mr. Chairman, I would like it if Mr. Caine

could supplement his—I am sorry. Is Mr. Hawthorne helping out

there? Do you know Mr. Hawthorne?

Mr. CAINE. Yes.

Mr. HAWTHORNE. One of the resources sitting right here. This

matrix that he is talking about, they were authorized to contact

Alpha Telecommunications for E-Rate help.

Ms. DEGETTE. That is the folks out in the field that Mr. Caine

is describing. Was Alpha basically the consultant for IBM on eligibility issues under the E-Rate program?

Mr. HAWTHORNE. That is correct, as I pointed out in my testimony. That is correct.

Ms. DEGETTE. Okay, and are you the only consultant or is Alpha

the only consultant that they were using?

Mr. HAWTHORNE. That I do not know.

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Ms. DEGETTE. Okay. Do you know the answer to that, Mr. Pratt?

Mr. PRATT. Yes, ma’am. We have evolved over time as the program has grown, and in the early days we had retained Alpha as

part of our expertise on the E-Rate program, and that was nationally. They were available to us nationally. We have evolved now.

As Mr. Caine has said, we have brought in from the applicant community, we brought in additional experts. We have approximately

five folks. We have training that is conducted on a yearly basis as

the E-Rate cycle starts again, brings up to speed on the eligible

services, but we do have a central point that is responsible for

making sure that we are all applying and adhering to the——

Ms. DEGETTE. And the central point is Alpha?

Mr. PRATT. No, it was initially, and we have now expanded. In

addition to still using Alpha, we now have our own folks. As I said,

we have got five IBM folks that are actually providing that support.

Mr. CAINE. Ms. DeGette, we hired Alpha to help us deepen our

internal expertise about the program. We felt we had expertise, but

we wanted more. They were a very knowledgeable and respected

E-Rate enterprise. So we hired them as a consultant to help us internally.

Ms. DEGETTE. That is great. What I am wondering is when all

of your sales people are out in the field trying to work with these

school districts and other educational entities, is there someone or

a group, and I guess you are saying now there is.

Mr. Pratt, when was that group established within the company?

Mr. CAINE. When was it established?

Ms. DEGETTE. Yes, I was asking Mr. Pratt since he seems to

know.

Mr. PRATT. Yes, we started formulating it toward the end of last

year in terms of the current population that is in the group that

is supporting us today.

Ms. DEGETTE. The end of 2003?

Mr. PRATT. Yes, as we have evolved.

Ms. DEGETTE. Okay.

Mr. PRATT. That is where the group that is in place today began,

and then prior to that we were using folks like Alpha.

Ms. DEGETTE. Okay. So here is my question. There is some sales

team out in the field, and they are trying to do a big contract. Were

they required to vet that contract through Alpha so that the people

with the expertise could see whether there were ineligible items

there?

Mr. HAWTHORNE. That is correct, through Alpha.

Ms. DEGETTE. Was that a requirement that IBM put on its sales

folks? I know Alpha did it, but was it a requirement?

Mr. PRATT. Yes, ma’am.

Ms. DEGETTE. And the sales folks all knew that?

Mr. PRATT. Yes, ma’am.

Ms. DEGETTE. And now what happens, now that you have this

internal team?

Mr. PRATT. The same exact thing, but we have, as I said, we

have got an internal group now that has built up the expertise. We

brought them in with that same level. So the first point of contact

would be that team now.

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Ms. DEGETTE. Okay. So I guess I will ask you, Mr. Hawthorne,

then since Alpha was apparently the E-Rate expert hired by IBM

at the time that these applications were disallowed. Why from your

perspective were there so many ineligible items in these contracts,

in these proposals?

Mr. HAWTHORNE. I do not recall any ineligible items in the contracts.

Ms. DEGETTE. I mean, maybe you can take a look at that document that I gave Mr. Caine.

Actually, Mr. Chairman, shall I go on on that?

I am going to yield, and I will come back to you, Mr. Hawthorne.

Mr. WALDEN. All right. Mr. Bohuchot, let’s start with you.

In your testimony you said on page 3, ‘‘During the review of the

SOWs, I questioned the size and scope of the effort being proposed

by IBM. I was told that it was okay. ‘You never get everything you

ask for. The SLD always reduces the scope of the work.’ ’’ Who said

that?

Mr. BOHUCHOT. I do not recall the name of the individual. It was

one of the Alpha people.

Mr. WALDEN. One of the Alpha people. Okay. Then walk through

with me how all of this works because the district’s pre-discount

total you said went from $216,030,996 to $129,185,228, a difference

of nearly $85 million.

Mr. BOHUCHOT. Eighty-six.

Mr. WALDEN. All right. It is 84,845,768. Oh, that is right. Okay.

So that is the figure that we needed to correct.

Mr. BOHUCHOT. Right.

Mr. WALDEN. I stand corrected. So okay. Eighty-six million dollars.

How do you go from a $216 million project to a 100—now, do we

change the one? No, we do not. Okay. So how do you go down to

about a $129 million project? That is a fairly substantial change.

What happened?

Mr. BOHUCHOT. Well, once IBM had been selected as the strategic technology partner for the district, they had aggressively

started the work to go ahead and figure out what the filing with

the SLD was going to be, and when I was giving those documents

to sign, I was just blown away by $216 million.

Mr. WALDEN. It does tend to get your attention.

Mr. BOHUCHOT. Yes, and I asked some questions.

Mr. WALDEN. Of whom?

Mr. BOHUCHOT. Of the IBM and the Alpha people who were in

my office.

Mr. WALDEN. All right.

Mr. BOHUCHOT. And when that comment that you had quoted

was made, and I asked a few high level questions, and I had told

them at that time that I did not believe that that was a correct filing, that we are going to reduce it or that I needed to look at it

in greater detail. The problem was that it needed to be signed and

sent to the SLD to meet a time line.

I did——

Mr. WALDEN. Who came up with the $86 million reduction?

Mr. BOHUCHOT. What we did is we subsequently met. After I

signed the documents that went forward to the SLD, I had let the

269

SLD know that I was going to look at the projects in detail and

more than likely was going to reduce the filing.

I had spent some time with the documents, the statements of

work that were given to me by IBM, and set a meeting with IBM

and Alpha, and we sat down to talk about it, and I was not convinced that there was not some redundancy in cost. By the time we

had finished that meeting, we had reduced it by $86 million.

Mr. WALDEN. So there was redundancy in cost?

Mr. BOHUCHOT. In my opinion there was.

Mr. WALDEN. How so?

Mr. BOHUCHOT. There was for file service, for example, there was

the cost to set up the file servers, and you do the conditioning work

to get them ready to be installed, and then the actual installation,

and then when I looked at the technical support Statement of

Work, there was also—you seem quizzical.

Mr. WALDEN. No, go ahead.

Mr. BOHUCHOT. Okay. When I looked at the technical support,

which was another filing, it seemed to be redundant, some of that

activity, with the file server activity. So when we kind of agreed

that there was some redundancy there, we went ahead and reduced

the technical support.

Mr. WALDEN. Did you have technical people on your team evaluating this?

Mr. BOHUCHOT. Yes, sir.

Mr. WALDEN. So they took a look at this contractor. Was IBM

your technical person for the company?

Mr. BOHUCHOT. Well, yeah, they were.

Mr. WALDEN. The integrator. So you had your own tech people

looking at what IBM had put forward. Are they the ones who put

forward the $200 million recommendation?

Mr. BOHUCHOT. IBM did. I will say that, you know, when I sat

down with IBM, I had my wide area network director.

Mr. WALDEN. Sure.

Mr. BOHUCHOT. My No. 1 technician, in essence, with me, and

he was agreeing that, you know, everything was okay relative to

the file server filing and the technical support filing, and I did take

him outside the room, and I asked him not to say anything until

I finished the discussion.

Mr. WALDEN. Why? Why did you do that?

Mr. BOHUCHOT. Well, because he honestly believed that—he did

not understand the direction that I was taking relative to try and

see if there was redundancy.

Mr. WALDEN. I see.

Mr. BOHUCHOT. And he believed that the filings were absolutely

spot on. He had help to work on them and had a sense of ownership in those also.

Mr. WALDEN. I see. So he helped put all of that together.

Mr. BOHUCHOT. He participated with IBM. So I had asked him

not——

Mr. WALDEN. So you were coming back from a management

standpoint saying, ‘‘Justify what is in here.’’

Mr. BOHUCHOT. Well, the item that got him to kind of settle

down was when I said to him, ‘‘If you take the $49 million of techVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00277 Fmt 6633 Sfmt 6602 96098.TXT HCOM1 PsN: HCOM1
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nical support and you divide it by $250 an hour, that is 102 people.

Where are you going to put 102 people at?’’

Mr. WALDEN. So your tech support was $49 million?

Mr. BOHUCHOT. Right.

Mr. WALDEN. Over what period of time?

Mr. BOHUCHOT. It would have depended. I mean, if we had 10

months to do the project, it would have been 10 months. If we

had——

Mr. WALDEN. What did you whittle it down to in that sector?

Mr. BOHUCHOT. We went from $49 million down to $13 million,

and quite frankly, at $13 million I kind of acquiesced there because, you know, I really did not at that time know that it would

be $13 million. At that point I said okay.

Mr. WALDEN. Okay. So you got it down. How big is your project

compared to El Paso’s?

Mr. BOHUCHOT. We have 165,000 students. So we are what, four

times?

Mr. WALDEN. How many schools?

Mr. BOHUCHOT. Two hundred eighteen schools.

Mr. WALDEN. I want to compare apples to apples here. I represent an apple growing region. So I always like to do that. We

grow pears.

Mr. BOHUCHOT. As a percent, El Paso would have been larger

than DISD.

Mr. WALDEN. Yes, I guess that is my question.

Mr. BOHUCHOT. Right.

Mr. WALDEN. So you had a bigger project with more schools with

a smaller size help desk or help work?

Mr. BOHUCHOT. I thought it was going to be a huge help desk

for a while.

Mr. WALDEN. But you cut yours down to $13 million is my point.

Mr. BOHUCHOT. Right.

Mr. WALDEN. And El Paso still stayed at $27 million, right? For

next year, but still, what is the difference?

Mr. CAINE. I was going to clarify one of the comments about El

Paso, which was the following year, which was never funded. That

cost was cut in half basically in the proposal because the startup

costs——

Mr. WALDEN. So year 2. Was his year 1 or year 2?

Mr. BOHUCHOT. Year 5.

Mr. WALDEN. Year 5. Okay. What were your year 1 costs on the

help desk then?

Mr. BOHUCHOT. DISD has been very conservative relative to filing for E-Rate. Our year 1 was, I think—well, I can tell you exactly. Our year 1 filing was $12,272,000.

Mr. WALDEN. That is for your total project though, right?

Mr. BOHUCHOT. Internal connections was $12 million; telecom

was $105.

We have been very conservative for a number of reasons. One is

that we are cash strapped, revenue strapped district, and having

the commensurate matching funds has not been an easy thing.

Mr. WALDEN. What happens now? I understand you have been

rejected.

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Mr. BOHUCHOT. Well, we were rejected for E-Rate year 5. IBM

had asked us to appeal, and we had thought about that, but we decided not to appeal.

Understand that this whole process was about a year, 10, 11

months in making. So during that time we had the benefit of all

the work that we did with IBM and the numbers that we developed

with them.

Mr. WALDEN. But your tech support staff today, are they able to

keep the network up and running and do all of that?

Mr. BOHUCHOT. Well, it kind of is not a fair question because we

did not get the funding that year. So we are just now working on

the funding for E-Rate year 6. So, I mean, our tech support——

Mr. WALDEN. But don’t you have a network up and running

today?

Mr. BOHUCHOT. Yes. For what we have got up and running,

which is a fairly robust network, we keep everything running with

the staff that we have that is full time.

Mr. WALDEN. And what does that cost you?

Mr. BOHUCHOT. Probably $600,000, $650,000 a year.

Mr. WALDEN. Thank you.

Mr. Caine and Mr. Pratt, the CIO of Dallas Independent School

District testifies that he questioned the size and scope of the effort

being proposed by IBM, and he says IBM told him you never get

everything you ask for. You just heard me go through that, with

the implication that the district should ask for more than they plan

to receive. At least that is the way I would read it.

Is this how the system operates?

Mr. CAINE. Mr. Chairman, we have a different characterization

than Mr. Bohuchot about what happened on this particular point.

Mr. WALDEN. All right.

Mr. CAINE. We disagree with his characterization, and I will be

happy to explain.

Mr. WALDEN. Yes, please do. How did you get to over $200 million?

Mr. CAINE. Mr. Chairman, the initial proposal from IBM to Dal- las was $100 million, and it was not our proposal at $220 million.

Mr. WALDEN. Whose was it?

Mr. CAINE. It was the decision of the school district.

Mr. WALDEN. Okay. We are somewhere between $100 and $200

million off here. Who made the decision to take your proposal at

$200 million, Mr. Bohuchot? Was it your folks?

Mr. BOHUCHOT. I received documentation to sign to forward to

the SLD of $216 million.

Mr. WALDEN. Who gave you the documentation?

Mr. BOHUCHOT. I suppose it was IBM. I mean, IBM was the

partner that was supposed to help us bring those out.

Mr. WALDEN. Okay. Mr. Caine, you seem to know that you submitted $100 million, and Mr. Bohuchot says documentation is $200

million. Who but the other $100 in there?

Mr. CAINE. Mr. Chairman, our understanding is that Mr.

Bohuchot had a conversation with George McDonald, the SLD, and

after that conversation the $200 million was reduced, but we never

proposed originally the $200 million. We proposed a $100 million

scope.

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Mr. BOHUCHOT. If I can, maybe——

Mr. WALDEN. If you can enlighten us, yes, because I was left

with the impression from your comments, Mr. Bohuchot, that it

was IBM that brought you a $216 million contract or proposal.

Mr. BOHUCHOT. I have a document here and its proposed adjustments that was developed by IBM, and the numbers that we are

talking about, the $216 reduced, are in this document here.

Mr. WALDEN. Would it be possible for you to provide that?

Mr. BOHUCHOT. Sure.

Mr. WALDEN. For the record, without objection.

[The following was received for the record:]

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274

275

276

277

278

279

280

Mr. CAINE. And, Mr. Chairman, if I could just add that we have

provided all of our documents to the committee staff, as well.

Mr. WALDEN. Including this one?

Mr. CAINE. All of the documents that we have, yes.

Mr. WALDEN. All of the documents that you have?

Mr. CAINE. Yes, all the documents——

Mr. WALDEN. Is this a document you recognize? Can you show

this?

Mr. CAINE. I have to see it.

Mr. WALDEN. Oh, yes, that is always good in this process.

Mr. Caine needs to see that.

Yes, it has the IBM logo on it, Mr Caine. I will give you a minute

with that.

Mr. Hawthorne, do you have some knowledge of this?

Mr. HAWTHORNE. Your Honor, I do recall working with the Dallas School District, and I recall that it was one of the more sophisticated school districts that we worked with. And my recollection

is that the Dallas School District, the technology person, drove the

process, and that the member that originated $200 million or

thereabouts was a Dallas School District member, not an Alpha or

an IBM member, and that this number was reduced not voluntarily. It was only reduced after Mr. Bohuchot had a conversation

with the SLD, specifically Mr.—I forget his name.

Mr. WALDEN. McDonald?

Mr. HAWTHORNE. McDonald, yes.

So it was not reduced, in my opinion, as an independent review.

Mr. CAINE. And, Mr. Chairman, I do want to answer your question about this.

Mr. WALDEN. Yes, please.

Mr. CAINE. Yes, we did submit this document to the staff.

Mr. WALDEN. Okay. So we do have it. As you can tell, we have

a lot of them in the binder.

Ms. DeGette.

Ms. DEGETTE. Thank you, Mr. Chairman.

Okay. Mr. Hawthorne, if you could just take a look at that document that I had given to Mr. Caine, the one that says ‘‘evaluation

of IBM Statement of Work,’’ and maybe you are familiar with some

of these issues. I will simplify my questioning.

If you can look at Appendix A, it says Appendix A, ‘‘Eligibility

Issues Contained in Statement of Work,’’ and first of all, have you

ever seen this document from the USAC?

Mr. HAWTHORNE. No, I have not.

Ms. DEGETTE. What Appendix A appears to be, well, what it says

it is, the left column and the information that follows describes information contained in the Statement of Work. The right columns

provides conclusions about the E-Rate eligibility of the products or

service described by the statements.

Do you see that there?

Mr. HAWTHORNE. I see it, yes, ma’am.

Ms. DEGETTE. Okay. So here is my question to you. It says Section 2.2 is titled E-mail installation planning. Eligibility comment:

this may imply initial planning which is not eligible per the eligible

services list.

281

Were you aware of any problems with the title of Section 2.2, implying that there may be ineligible planning?

Mr. HAWTHORNE. What it says, ma’am, is ineligible initial planning, which is outside the scope of E-Rate.

Ms. DEGETTE. So that was not contemplated?

Mr. HAWTHORNE. No, it does not say that planning is ineligible

because it is.

Ms. DEGETTE. Right.

Mr. HAWTHORNE. It is eligible.

Ms. DEGETTE. But what you are saying is there was no ineligible

planning contained.

Mr. HAWTHORNE. I was not aware of any initial planning. To be

perfectly honest, it was very difficult to get IBM moving on the

project at all because they wanted to wait until the project was

funded. So to my knowledge, there was no initial planning.

Ms. DEGETTE. Okay. What about Item 2? Now, this clearly says

in the next category here Section 2.2, Item 2, is develop distributed

E-mail architecture. That was clearly in the Statement of Work,

but the eligibility comment says such an activity clearly falls within the ineligible initial planning category. Architecture must already be known for applicants to indicate the products and services

to be deployed, which is a requirement of Form 471.

Now, did IBM run this by you before they put this section in

their Statement of Work? That is clearly ineligible.

Mr. HAWTHORNE. Well, the SLD says it is clearly ineligible, but

they also say that it clearly falls within the ineligible initial planning category.

Ms. DEGETTE. Right. Develop distributed E-mail architecture is

within the ineligible initial planning category, right?

Mr. HAWTHORNE. Ineligible initial planning category. That is

what it says in the right-hand column, and again, I am not aware

of any initial planning done by IBM on this project.

Ms. DEGETTE. No, what the USAC is saying is this item, develop

distributed E-mail architecture, is ineligible because it is within

the initial planning category, but you disagree with that?

Mr. HAWTHORNE. I know of no initial planning involving this.

Ms. DEGETTE. Well, what they are saying the initial planning is

develop distributed E-mail architecture. You do not think

develop——

Mr. HAWTHORNE. During the initial planning stage?

Ms. DEGETTE. Yes.

Mr. HAWTHORNE. If it is in the initial planning stage, it would

be ineligible, but I do not recall that being done, during the initial

planning stage. There was no initial planning.

Ms. DEGETTE. Let’s talk about the fifth little section there, the

second one from the bottom, which says Section 2.2, Item 12, is ‘‘assist in developing standards for conductivity, security, and access

from outside the firewall,’’ and the comment is, ‘‘Security features

are not eligible under current program rules and, thus, consultation in security standards would not be eligible.’’

What is your response to that?

Mr. HAWTHORNE. I do not know what current program rules you

are talking about. Are you talking about current current program

282

rules or are they talking about current rules that were current at

the time El Paso made its application?

Program rules change each year.

Ms. DEGETTE. Did this program rule change, since you are an expert?

Mr. HAWTHORNE. My recollection is that connectivity dealing

with firewalls was eligible in 2001. I may be wrong.

Ms. DEGETTE. It was? Okay. Did IBM run this item past you as

the expert on the E-Rate eligibility?

Mr. HAWTHORNE. If it was in the Statement of Work, they ran

it, yes.

Ms. DEGETTE. So you saw the whole Statement of Work, right?

Mr. HAWTHORNE. Yes.

Ms. DEGETTE. Okay. Take a look at the next page of Appendix

A, and it says Section 2.5, ‘‘Web maintenance overview indicates

that Cyber Control content filtering software will be provided.’’ Do

you see that?

Mr. HAWTHORNE. Yes.

Ms. DEGETTE. Now, the comment is filtering software is not eligible. What is your opinion on that?

Mr. HAWTHORNE. I would saying filtering software is not eligible.

Ms. DEGETTE. But it was——

Mr. HAWTHORNE. I do not recall seeing this in the El Paso Statement of Work.

Ms. DEGETTE. Okay, but the USAC apparently did see it in the

El Paso Statement of Work.

Mr. HAWTHORNE. So they say, yes.

Ms. DEGETTE. But you do not recall, and you reviewed that.

Mr. HAWTHORNE. I did personally.

Ms. DEGETTE. Okay. So you made a mistake? Would that be——

Mr. HAWTHORNE. Well, I am not above making mistakes, but I

make very few of them.

Ms. DEGETTE. Well, as I recall, your company received what, about $2.4 million in fees as a result of the——

Mr. HAWTHORNE. From IBM, that is correct.

Ms. DEGETTE. For the El Paso project.

Mr. HAWTHORNE. That is correct.

Ms. DEGETTE. Were you the one that worked on this or were

there others that helped you review it?

Mr. HAWTHORNE. There were others, yes.

Ms. DEGETTE. How many others?

Mr. HAWTHORNE. There were three of us altogether.

Ms. DEGETTE. And did you review this and then did you provide

written comments to IBM about their proposal or did you draft the

Statement of Work?

Mr. HAWTHORNE. No, IBM provided the Statement of Work,

which we reviewed and we provided——

Ms. DEGETTE. And who was it you dealt with at IBM with respect to the El Paso proposal?

Mr. HAWTHORNE. I believe it was Don Riddick.

Ms. DEGETTE. Don Riddick?

Mr. HAWTHORNE. Yes, that’s my recollection.

Ms. DEGETTE. Okay. And did you provide any comments to Mr.

Riddick about ineligible items?

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Mr. HAWTHORNE. Continually.

Ms. DEGETTE. Do we have that documentation?

Mr. HAWTHORNE. I believe I provided everything that was in our

possession regarding that.

Ms. DEGETTE. Okay. Now, Mr. Caine, when this initial Statement of Work was developed by IBM for the El Paso district, were

you in your position at IBM at that time? I think that was 2001.

Mr. CAINE. Yes.

Ms. DEGETTE. Did anyone bring it to your attention, any issues

relating to ineligible items in the Statement of Work for El Paso?

Mr. CAINE. No.

Ms. DEGETTE. So that is why you told me earlier when I showed

you this document you did not have any idea, correct?

Mr. CAINE. We have never seen this document before. We have

never and the IBM company has not seen this document before.

Ms. DEGETTE. As far as you know. You have never seen it.

Mr. CAINE. No, but I am consulting with my colleagues, we

turned everything over to the subcommittee that we have, and we

have never seen this, and we do not know the date of it.

Ms. DEGETTE. Okay.

Mr. CAINE. Can I just amplify one thing that Mr. Hawthorne

said?

Ms. DEGETTE. Sure.

Mr. CAINE. The eligible services list has evolved dramatically

over the time, over the years of this program, and different interpretations have been made about what is eligible and what is not

eligible throughout that time period. So in defense of Mr. Hawthorne, it is very hard to make a definitive statement about a document we have never seen before that is making a decision about

an eligible service without a time context to know whether it aligns

with the El Paso application or not.

Ms. DEGETTE. Well, Mr. Caine, let me say this. We are concerned, and we are not just trying to pick on IBM. We are concerned because we are talking about millions and millions, in some

cases hundreds of millions of dollars from the E-Rate fund which

are just wildly going around and which could be used to wire up

these low income schools.

And I am going to ask Mr. McDonald to come back up in a

minute and talk about this, but it seems to me that when corporations and their consultants are making so much money from these

projects, the letter of the regulations should be followed, and I do

not think you would disagree with that.

Mr. CAINE. Not one bit.

Ms. DEGETTE. One bit.

Mr. CAINE. Not one bit, and that is exactly why we believe the

rules and the criteria should be clear, and quite honestly, they

have not been either clear or consistently applied over time.

Ms. DEGETTE. I would like to recall Mr. McDonald.

Mr. WALDEN. Mr. McDonald, could you rejoin us for this panel?

I think you have now been on all three panels, and as a reminder,

you remain under oath.

Ms. DEGETTE. Thank you, Mr. McDonald. I know you have had

a long day today.

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Are you familiar with the document that I have been talking

with these gentlemen about?

Mr. MCDONALD. I am.

Ms. DEGETTE. And did you prepare that document?

Mr. MCDONALD. A colleague of mine on my staff did.

Ms. DEGETTE. And when was that document prepared?

Mr. MCDONALD. We did not date this. There are a series of these

drafts that we provided to your staff. IBM did not see this analysis

until last week when we sent a letter to them asking them to comment on our tentative conclusions. So they would not have recognized this document.

Ms. DEGETTE. Okay. I think I have got a copy of that. That letter

that was sent last week was sent to Bob Richter?

Mr. MCDONALD. That is correct.

Ms. DEGETTE. And he is addressed in your letter as the National

E-Rate program Executive, correct?

Mr. MCDONALD. Yes, I believe he is in the new Center of Competence that Mr.——

Ms. DEGETTE. Is that right, Mr. Caine?

Mr. CAINE. That is correct.

Ms. DEGETTE. Okay. Now, some of the issues that were outlined

in the evaluation of the IBM Statement of Work, were those issues

also contained in your letter that was sent to IBM last week?

Mr. MCDONALD. Yes.

Ms. DEGETTE. So while they may not be familiar with this particular document, they are familiar with those issues, right?

Mr. MCDONALD. That letter just went out last Thursday.

Ms. DEGETTE. So were they apprised of the eligibility issues before last week?

Mr. MCDONALD. No, ma’am.

Ms. DEGETTE. So, for example, in Appendix A, when I am asking

Mr. Hawthorne and Mr. Caine about these ineligibility issues, they

were never informed of that before?

Mr. MCDONALD. They were not informed before the letter last

Thursday. That is correct.

Ms. DEGETTE. Okay.

Mr. MCDONALD. We were working with the FCC about getting

this document out.

Ms. DEGETTE. All right. Well, let me ask you this because we

were talking about some of these issues that were in Appendix A,

Section 2.2, develop distributed E-mail architecture, and the eligibility comment was such an activity clearly falls within the ineligible initial planning category.

Can you explain why that item would be ineligible?

Mr. MCDONALD. Applicants are supposed to do technology planning. They are supposed to develop their network concepts, the

planned architecture and so forth, and then put out a Form 470

that describes that actual services they need to fill that technology

plan. The planning developing architecture, that kind of information, that kind of work is supposed to be done ahead of time before

filing the Form 470, and certainly before filing the Form 471. That

is ineligible for discount.

What is eligible for discount is the actual work to put that technology plan in place.

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Ms. DEGETTE. And do the vendors know that?

Mr. MCDONALD. I believe they do.

Ms. DEGETTE. And was that the case in 2001?

Mr. MCDONALD. That has always been the case.

Ms. DEGETTE. Okay. So the rules did not change around that?

Mr. MCDONALD. Firewall has changed since 2001.

Ms. DEGETTE. Okay. Now, so when you say here Section 2.3,

Item 3 indicates that IBM servers will be installed and configured

with free firewall software, you say here or your colleague says

firewall software is not eligible. But that was not true in 2001? It

was eligible?

Mr. MCDONALD. No, it was not eligible in 2001, and in looking

at the eligible services list, they would have seen firewall is ineligible.

Ms. DEGETTE. Okay, and again, in 2001, were the vendors well

aware that firewall software was not eligible at that time?

Mr. MCDONALD. They should have been. It was on our eligible

services list.

Ms. DEGETTE. And certainly consultants who were experts in the

E-Rate program would know that I would think.

Mr. MCDONALD. I would hope so.

Mr. HAWTHORNE. Consult——

Ms. DEGETTE. Let me finish.

Just one more question, Mr. McDonald. Where it says Section

2.5, Web maintenance overview indicates that Cyber Patrol content

filtering software will be provided, and then the comment is filtering software is not eligible; was that the rule in 2001?

Mr. MCDONALD. That has been the clear rule from the beginning.

I believe Congress addressed that when they passed the Children’s

Internet Protection Act, I believe.

Ms. DEGETTE. Okay. What I would like you to do, just take just

a second and look over this Appendix A and tell me for all of the

items on Appendix A, were those rules in place in 2001 and should

the vendors have known about it in 2001.

Mr. MCDONALD. I believe so.

Ms. DEGETTE. All right. Mr. Chairman, I would ask unanimous

consent that both this document, ‘‘Evaluation of IBM Statement of

Work,’’ and also the September 16 letter from the USAC to IBM

be entered in the record.

Mr. WALDEN. The letter is already in the record, but the other

information will be added.

Without objection, so ordered.

Ms. DEGETTE. And I would also say, Mr. Chairman, that I would

hope that the USAC where it is seeing issues like this, where there

is widespread ineligibility in these applications would communicate

that to the vendors immediately. I would hope that would happen

because I can now understand some of Mr. Caine’s confusion at

least.

Mr. McDonald?

Mr. MCDONALD. At this point we were waiting for the FCC decision on the basic big picture with the IBM procurement approach,

which was true of El Paso as well. So we did not know what the

guidance was going to be about the procurement approach, and if

the decision was it was improper and was always improper, we

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would have sought to recover the money from El Paso for everything independent of the services. We were doing this analysis. Depending on what the FCC decided, then we would pursue recovery

based on the services. That was what was going through our mind.

Ms. DEGETTE. Thank you.

Thank you, Mr. Chairman.

Mr. WALDEN. I believe Mr. Hawthorne wanted a follow-up.

Mr. HAWTHORNE. I am not sure what the procedure here is, but

could we have additional time to respond to this document since we

have just seen it today?

Ms. DEGETTE. Mr. Hawthorne, we would give you——

Mr. WALDEN. The record remains open for 10 days.

Ms. DEGETTE. I would not object to allowing you to send a written response.

Mr. HAWTHORNE. When Mr. McDonald was speaking, and I am

not positive on this; I have to go back and review the rules, but

it says on Section 2.3, Appendix A, the second column, ‘‘firewall

software is not eligible,’’ but then it says, ‘‘Program rules require

cost allocation for such components.’’

I am not aware that the cost allocation process was even in place

when El Paso was funded. Again, I may be wrong. I would just like

an opportunity to review.

Ms. DEGETTE. Mr. Hawthorne, I have no objection whatsoever to

you being allowed extra time to respond.

Mr. HAWTHORNE. Thank you.

Mr. WALDEN. And our record does remain open.

Mr. McDonald.

Mr. MCDONALD. And our letter asks IBM to respond to us within

30 days. They have asked for an extension of that, which we will

grant, to get back to us with a detailed response to our analysis.

Mr. WALDEN. All right. I guess sort of fundamentally here, Mr. Caine or Mr. Pratt, did El Paso need a $67 million system? And

did Dallas need a $216 million system?

Mr. CAINE. Mr. Chairman, the E-Rate program asks school districts to develop a technology plan, as we talked about this afternoon.

Mr. WALDEN. Right.

Mr. CAINE. It is that plan that service providers or vendors like

IBM are asked to respond to. We do not tell the school district

what they need. They set up the requirements, and then we respond to their 470’s and their RFPs accordingly.

That process goes through obviously a judgment and a decisionmaking process by the schools and then boards. This was a fairly

open, very open process of the plan that the school districts prepare—what is in the community’s interest. Do they need it? Do

they have the appropriate funds to put up their share as you were

talking about earlier this afternoon?

And so we respond to what the community feels it needs.

Mr. WALDEN. Okay, but how does that gibe then with the sort

of cookie cutter approaches IBM came up with for various school

districts, the almost identical, if not identical, proposal? Twentyone of them?

Mr. CAINE. Well, we would not necessarily say they were cookie

cutters. We were saying that the school districts obviously are inVerDate 11-MAY-2000 11:57 Jan 04, 2005 Jkt 000000 PO 00000 Frm 00294 Fmt 6633 Sfmt 6602 96098.TXT HCOM1 PsN: HCOM1
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terested in understanding what other school districts are doing.

They can get that information from various sources: the SLD

Website. There are a number of Websites within the E-Rate community.

Now, each school district has to come up with its own technology

plan.

Mr. WALDEN. Okay. Mr. McDonald, weren’t these 470’s pretty

much identical?

Mr. MCDONALD. They were.

Mr. WALDEN. Do you think that represents individual plans from

each district of those you saw in those 470’s?

Mr. MCDONALD. I believe the committee staff has an E-mail from

Seattle from IBM to the Seattle Public Schools attaching the 470,

suggesting this is a good 470 that is very broad and it gives us lots

of flexibility.

So I think there is reason to believe that the 470’s were suggested by IBM.

Mr. WALDEN. Is this one of these where they basically ask for

every available service?

Mr. MCDONALD. The 470, I have used the word ‘‘encyclopedic.’’

It appears to try to cover every possible service and equipment that

is eligible under the program.

Mr. WALDEN. All right. I want to get back to my other question. Did Dallas need a $216 million system?

Mr. CAINE. Mr. Chairman, only they can answer that question.

We suggested to them that they did not at the beginning.

Mr. WALDEN. Then let me have you go to Tab 41, and I realize you say you told them $100 and some million dollar system, but

it is like two or three pages in here, and it is from one of your

folks, IBM H0026480, and it is from a James Whitmer, I believe,

who is with IBM.

Mr. CAINE. Mr. Chairman, could I just ask are you on Tab 41 did

you say?

Mr. WALDEN. I believe that is correct. Tab 41, and then about

three pages in, and you give your IBM number at the bottom.

Mr. CAINE. James Whitmer, yes, and you said the number was?

Mr. WALDEN. Zero, zero, two, six, four, eight, zero. Two, six, four,

eight, zero.

Mr. CAINE. Okay.

Mr. WALDEN. And I go back to this because here, this person,

Jim Whitmer, is your IBM Global Services Integrated Technology

Services Sales, and it is dated in March. And, Mr. Pratt, I believe

you were cc’ed on this E-mail, and it says, ‘‘We met with Dallas

ISD staff today and our approach to any changes will not require

a new QA or PCRs. Worst case, they will eliminate one of the

SOWs which will most likely be the video SOW. This would actually be a postponement until E-Rate 6. We will be meeting with

them again this Thursday and will encourage them to move ahead

with the SOWs as submitted totaling 216M. If there are any questions, please let me know. Thanks. Regards, Jim Whitmer.’’ So you are telling me you submit a $100 and some million dollar

proposal. It comes back at 200, but then your folks are saying, hey,

you know, we are going to try to get them to move ahead as

planned here for the full $216.

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Mr. Pratt, do you have a comment on that or Mr. Bohuchot? Mr.

Caine?

Mr. Pratt.

Mr. PRATT. Yes, sir. I wasn’t directly involved in the conversation. I got copied on a lot of notes for Western Region, but my understanding was that when DISD came back and said the requirements due based on the technology plan, this is what we need, we

felt the integrity of the program would be held up. If we started

reducing at that point, there was a question that the SLD would

come back and say why was this asked for in the first place.

And so it was better to continue with the original submission.

Mr. WALDEN. Well, what that says to me is we never believed in

the original submission of 216. That was them. Now they are coming back saying that is more than we need, and you are saying, no,

let’s keep the 216 in there. They might ask other questions? Is that

what you are saying?

Mr. PRATT. Not necessarily other questions, but once we——

Mr. WALDEN. Well, you said it might bring into question, I think

you said, the integrity of the submission.

Mr. PRATT. The integrity of the submission. It would raise questions as to why would you submit $216 million in the first place

if——

Mr. WALDEN. Well, isn’t that a realistic question somebody needed to ask? Why do you think it raises that question?

Mr. Hawthorne? Mr. Caine? We are talking a lot of—Mr.

Bohuchot, how do you respond to that?

It appears here—I will just read it again. ‘‘We will be meeting

with them again this Thursday.’’ I assume that means you all, the

school district, ‘‘and will encourage them to move ahead with the

SOWs as submitted totaling $216 million.’’

Mr. BOHUCHOT. I am supposing that we met on a Thursday, and

we jointly came to the conclusion that we should reduce the filing,

which generated the document that you have got.

Mr. WALDEN. Right, that then came out in May, right? That

says, ‘‘The following summary shows adjustments based on reduced

number of schools, recent due diligence, and the elimination of the

video SOW.’’

So, indeed, Mr. Whitmer was right. You are going to eliminate,

but I guess the question I have is: what happens in between here?

I mean, on the one hand, I am told—one second, Mr. Hawthorne.

I will give you time.

Mr. HAWTHORNE. Okay.

Mr. WALDEN. On the one hand, I was told it was not IBM’s plan.

Then it seems to be like it is your techies and the school district

pumped it up. It comes back to IBM. IBM said, ‘‘Hey, not our plan.

We did not pump it up to 216. They did.’’ But then when you start

to question it, their people are saying, ‘‘We are going to try and

keep them going at 216 because somebody may question why it was

pumped up.’’ Mr. Hawthorne?

Mr. HAWTHORNE. You know, IBM certainly does not need any

help from me, but my recollection on this particular item was that

there was talk of a reduction, but when you are talking reduction,

you just can’t start lopping stuff off. What you have to do is look

and see what is out there.

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Do you just reduce by a certain dollar amount or do you see how

much you want to cut back on your maintenance? Do you see how

much you want to cut back on your internal connections?

It has to be some type of proportionate adjustment. You do not

just——

Mr. WALDEN. Well, I do not dispute that. That is not the question here.

Mr. HAWTHORNE. Well, I think it is the question. From what I

have heard being bantered about here is that there was this great

reduction because someone looked at this and said, ‘‘We cannot afford this. We do not want to do this.’’

Mr. WALDEN. No, that is not what I heard. What I heard was

from Mr. Bohuchot, they figured out it was gold plated. It was far

more than they needed for their system. Isn’t that what you basically said, Mr. Bohuchot? Eighty-six million?

Mr. BOHUCHOT. Quite frankly, a lot of it was because I felt that

I would end up here eventually regardless of what was being filed.

Mr. WALDEN. Not everybody is that lucky, but we are glad you

are here.

Mr. BOHUCHOT. And here I am, and I would rather explain $17

million in technical support versus $43 million or whatever it was.

Mr. WALDEN. All right.

Mr. BOHUCHOT. So you were suspicious of this; is that right?

Most people do not wake up in the morning and say, ‘‘Gee, I think

I am going to get to go to the O&I Subcommittee some day.’’

IBM and the district has a long, good standing relationship. I

personally have worked with numerous IBM staffers. They were

our partner implementing a major ERP system, finance H.R. payroll, and quite frankly, without them, we would not have got it

done on time and under budget. So it is not an IBM personal thing.

Mr. WALDEN. No.

Mr. BOHUCHOT. We hit a wall, and the wall said there is $216

million there. Ruben, you have to sign the documents to let it go.

Are you comfortable signing it?

Quite frankly, I was not comfortable signing it.

Mr. WALDEN. Good for you.

Mr. BOHUCHOT. Well, I do not want to take credit for it.

Also I do not know if Mr. McDonald remembers, but I also called

George.

Mr. WALDEN. Right.

Mr. BOHUCHOT. And I said, ‘‘George, I have signed this thing, but

I want to let you know that I am going to adjust it.’’

Mr. WALDEN. Do you remember that, Mr. McDonald?

Mr. MCDONALD. I do, sir.

Mr. WALDEN. You do. Okay.

I want to go to Tab 17, and you all may want to take a look at

this. Mr. McDonald, I think this was the document that you recently referred to when you talked about Seattle. I will let you get

that in front of you, sir.

Mr. MCDONALD. Yes, sir.

Mr. WALDEN. In about the third paragraph down, it says Mitchell, and that is John Mitchell. Who is John Mitchell?

Mr. MCDONALD. He is a consultant to Seattle Public Schools for

overseas—their E-Rate.

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Mr. WALDEN. It says, ‘‘Mitchell stated that he called George

McDonald after the December 3, 2002 Website noticed was posted

because he was concerned that SPS would be targeted for scrutiny

because they had used the Form 470 boilerplate template that IBM

had provided to them during their preliminary discussions with

IBM when they posted their FCC Form 470. Mitchell forwarded me

the E-mail that he received from IBM with the FCC Form 470

boilerplate template attached.’’

This, by the way, is from Kristy Carroll to file, and then the next

graph says, ‘‘Mitchell stated the discussions with IBM began in October and that he was on a conference call with Steve Mueller and

Charles Gentry. He stated that one of IBM’s selling points was that

they represented to him that former SLD attorneys work for IBM,

and as a consequence IBM knows all of the loopholes in the program. Mitchell said that because SPS had started the E-Rate process a little late this year, that the plan with IBM was that SPS

would use the Western States consulting contract agreement rather

than go through local procurement regulations.’’

And it later says Mitchell said that he saw it as a way for IBM

to get around State procurement cycle and says Mitchell stated

that another one of IBM’s selling points was that IBM could get

SPS a lot more funding than they had gotten in the past.

The next page it says Mitchell stated that he was told by Alpha

or Gentry that they could increase the number of 90 percent sites

at the SPS from 13 to 40, and then says Mitchell stated that he

started feeling unpleasant about the discussions with IBM in November.

Can you address this for us?

Mr. MCDONALD. Kristy Carroll is our Associate General Counsel.

She is here with us today.

And when we posted the notice in December 2002, we posted a

prominent notice on our Website about the procurement pattern

that IBM had engaged in, and I contacted Mr. Bohuchot at that

point, and a lot of the applicants who had 2002 applications with

IBM to tell them I was not making any judgment about the 2002

applications, except this letter was the only one that we had completed, but that to alert them that our conclusion that this procurement pattern was not consistent with the rules. So as they approached, we were in the filing window for 2003. They would have

a heads up not to continue down this road or at least to do so at

risk since our conclusion was that it was not consistent.

So that Website notice prompted Mr. Mitchell to call me and said

we did not go through this process, but we did use the encyclopedic

470.

The allegation of that SLD attorney is working for IBM, I know

nothing about that. Certainly USAC attorney, I know all of the attorneys that have worked for USAC, and I am not aware that any

of them work for IBM.

And then he did provide the template 470.

Mr. WALDEN. All right.

Mr. MCDONALD. If I could go back to the question that Congresswoman DeGette asked.

Mr. WALDEN. Yes.

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Mr. MCDONALD. Giving IBM a heads up about the ineligible

services, in our December 2002 denial letter for this letter which

we copied IBM on, there is an entire discussion in there about ineligible services that we believe were not the basis of our denial.

It was the procurement pattern, but that we gave them a heads up

that we thought they were asking for ineligible in the initial planning.

Ms. DEGETTE. Thank you for clarifying your testimony, Mr.

McDonald, because that is what I was just saying. The staff has

before it sounded like there was no notice at all, and in fact, your

testimony right now shows there was notice several years ago.

Mr. MCDONALD. December 2002.

Ms. DEGETTE. Thank you.

Mr. WALDEN. Mr. Caine, do you want to comment?

Mr. CAINE. I was just going to say that that was relative to the

Ysleta denial, and therefore prompted the appeals to the Commission both by the Ysleta School District and other school districts,

about those denials of funding. So in that context, yes, Mr. McDonald is correct.

But the Commission ruled five-nothing on an opinion that we

think was very fair and balanced and pointed out a number of

things where there was inconsistency and ambiguity all the way

around.

Mr. WALDEN. Did they rule on this issue of the boilerplate proposals?

Mr. CAINE. No, I don’t believe that was part of the decision.

Mr. WALDEN. All right. Let’s go to Tab 33. Perhaps you can help

us clarify this one as well, Mr. Caine. This is an E-mail to Tracy

Diaz/Austin/IBM at IBM U.S. from Jack McKinney, Kansas City

IBM at IBM U.S., and it talks about E-Rate lessons learned, year

5 strategic partnership agreement, Oklahoma City schools, $49 million.

And if you drop down to the second from the bottom point, it

talks about communication and time lines are areas that need improvement, and then the second from the bottom point says, ‘‘The

customer knows that the pricing for the SOWs are significantly inflated but has not’’—I assume that should be ‘‘had.’’ It is just the

letter A—‘‘but has not a conversation on how this will be remedied.

Our pricing methodology would be undefendable in public forum.’’

Do you have any idea what this document that is supplied by

IBM would——

Mr. CAINE. No, I do not, but I will tell you that relative to Statements of Work——

Mr. WALDEN. I’m sorry. Relevant to?

Mr. CAINE. SOWs.

Mr. WALDEN. Okay.

Mr. CAINE. Statements of Work.

Mr. WALDEN. Yes.

Mr. CAINE. They were frequently expansive by many applicants

in the program. As a matter of fact, there was guidance given that

expansive Statements of Work enabled substitutions and revisions

later on to be made.

Mr. WALDEN. Sure.

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Mr. CAINE. So that the 470 process also were made to be expansive because they were basically public notices, and that there were

school districts that we had nothing to do with that were funded

using expansive 470’s and Statements of Work.

So I cannot refer to this specific E-mail as you have asked me

to do, Mr. Chairman, but on the topic of expansive Statements of

Work and the 470 process, we do have experience that says, yes,

vague, expansive Statements of Work are not the preferable approach, but they were the reality at the time.

Mr. WALDEN. Are they still the reality, Mr. McDonald?

Mr. MCDONALD. I hope since the Ysleta order that they are not,

and we are looking at those then.

Mr. WALDEN. Wouldn’t this be like hiring a contractor to do a remodel on your house and the contractor basically comes back and

says, ‘‘Here, Mr. Homeowner or Mrs. Homeowner. You know, everything at Home Depot. I am not sure what I am going to use, but

here is your Statement of Work’’? Isn’t that pretty close to what

was happening in some instances?

Mr. MCDONALD. The 470 was like that. The Statements of Work

were tied to specific functions, the E-mail, the servers, and that

kind of thing.

Mr. WALDEN. Because it looks to me like the missing piece here

is the homeowner, and that tends, I guess to be sort of us. I guess

you, if you have your auditors, but we wonder whether enough of

that, but who is saying, ‘‘Wait a minute. I do not need everything

in Home Depot. I just want to fix my kitchen’’?

Mr. CAINE. Mr. Chairman.

Mr. WALDEN. Yes.

Mr. CAINE. Could I just make a reference to the FCC’s Ysleta

order?

Mr. WALDEN. Sure.

Mr. CAINE. On this point?

Mr. WALDEN. Yes.

Mr. CAINE. The order was quoted as saying the SLD cautioned

applicants in the past to be expansive in listing services on FCC

Form 470 to provide applicants with greater flexibility to make

service substitutions post commitment.

So that is what the FCC rule determined in their order on the

Ysleta appeals.

Mr. WALDEN. Tell me the difference between the Statement of

Work and the 470.

Mr. HAWTHORNE. The 470 is a document, an FCC Form 470.

Mr. WALDEN. Right.

Mr. HAWTHORNE. Which the applicant is supposed to use to list

his required services or the services that he is looking for, and it

has to stay posted for 28 days and hopefully during that period of

time vendors will call and try and get more information. There is

a place on the 470 to indicate what the——

Mr. WALDEN. So how is the Statement of Work?

Mr. HAWTHORNE. The Statement of Work is the actual work, that

if the successful vendor gets and defines that it is supposed to provide.

Mr. WALDEN. Okay. So going back to this earlier E-mail——

Mr. HAWTHORNE. It is a contract.

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Mr. WALDEN. Okay. Going back to this earlier E-mail I had, the

one from Mr.—here it is right here—the one from Mr. Whitmer

then, Mr. Hawthorne, where he says, ‘‘We will be meeting with

them,’’ being Dallas, ‘‘again this Thursday and will encourage them

to move ahead with the SOWs as submitted totaling $216 million.’’

So this is not the wish list anymore, if I understand you right.

Mr. HAWTHORNE. No.

Mr. WALDEN. This is actual statements of work?

Mr. HAWTHORNE. That is correct. Those are contracts, which I

would assume were submitted to——

Mr. WALDEN. And they should have been the whittled down

version of I am only doing my bathroom and my kitchen, not the

whole house. I do not need everything in Home Depot.

Mr. HAWTHORNE. If Dallas was dissatisfied with the Statement

of Work before it was executed, I would think they would have an

opportunity to say, ‘‘I do not want this. I want that,’’ and you know,

because it is a negotiated document.

Mr. WALDEN. Right, but it is an IBM person who is saying, ‘‘We

are going to try and convince Dallas to stay with the 216, the

Statements of Work as submitted.’’

Mr. HAWTHORNE. Well, again, I get to the point that I raised earlier. In my opinion, you have to go back and reevaluate what you

have asked for from bottom up. You just cannot start lopping off

goods and services just based on the Statement of Work. What did

you ask for? I mean, I do not think that can be done.

Mr. CAINE. Mr. Chairman, this is one area that needs improvement. We would clearly acknowledge that in the program. Okay?

There is no process actually to coming backwards, and there should

be probably. Okay? In this particular context that you were just referring to.

Mr. WALDEN. But didn’t Dallas hire you at IBM to come help

give them guidance as to what they need to wire their schools?

Wasn’t that your role?

Mr. CAINE. Yes, to be their strategic partner.

Mr. WALDEN. So at what point in that partnership do you say to

Dallas, ‘‘We do not think you need all of this stuff’’?

Mr. Pratt, were you involved in that part of it?

Mr. PRATT. Not with the Dallas.

Mr. WALDEN. All right. Mr. Caine, you were not involved in that.

Mr. CAINE. I was not, but as I said in my statement, we believe

we said that at the front end. Our initial proposals were

significantly——

Mr. WALDEN. Yes, but later in this E-mail, your own people are

saying we are going to try and get them to hold to 216, and Mr.

Pratt said reducing it might call into question the integrity of the

overall proposal, right?

I mean, all right. Ms. Glogovac——

Mr. HAWTHORNE. May I comment on the 470 before you move

on?

Mr. WALDEN. Sure.

Mr. HAWTHORNE. I agree with the statements that E-Rate is very

important in the process of wiring schools. It is crucial.

Mr. WALDEN. Nobody is disputing that.

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Mr. HAWTHORNE. And I disagree with the statement that 94 percent of the schools have been wired. I mean, there are schools that

have not even been touched by E-Rate.

However, it appears that E-Rate has now become a game. School

districts want to get money, and people at the government level

will say to them, ‘‘Well, you know, gosh. You didn’t put this on your

470. We’re not going to allow it.’’ You might have made some vague

reference to it, but you know, it is not there. So we are going to

deny you.

There is that Catch-22. Do you put a lot of stuff on the 470 or

do you put what you think you might need and that evolves over

time?

Mr. WALDEN. But couldn’t you come back the next year and get

that which you——

Mr. HAWTHORNE. Time moves on.

Mr. WALDEN. Well, yes, but that is true in any project, right? I

mean, if I go get a loan in a bank——

Mr. HAWTHORNE. I thought the objective here was to put technology in place to educate kids.

Mr. WALDEN. Of course it is. Of course it is, but if I go get a loan

from a bank to do my home remodeling and I get a certain amount

of money, that is what I have got to operate under, right?

I do not know. Let me go on to Ms. Glogovac. Did Sun do work

for EPISD prior to funding year 4?

Ms. GLOGOVAC. That I do not know. What I do know is that Sun

was selected the year prior to that to provide servers, and for some

unknown reason that I was not privy to, El Paso did not follow

through on that funding commitment and never made the purchase.

Mr. WALDEN. My understanding was that Sun did provide an Email system of some sort.

Ms. GLOGOVAC. That I do not know.

Mr. WALDEN. All right. Do you recall what the budget was for

EPISD’s E-mail system?

Ms. GLOGOVAC. I do not know what that was.

Mr. WALDEN. Okay. Mr. Caine has testified that the budget they

were provided with was to be used in the best interest of the district. How many E-mail addresses did the system Sun was going

to provide? What was the capability?

Ms. GLOGOVAC. I believe Sun had an unlimited license, software,

E-mail software package.

Mr. WALDEN. What does that mean?

Ms. GLOGOVAC. Meaning it would scale with however many users

they need to use.

Mr. WALDEN. So they could have an unlimited number of E-mail

addresses?

Ms. GLOGOVAC. Correct.

Mr. WALDEN. And then what is the capacity of what EPISD and

IBM put in?

Ms. GLOGOVAC. I believe their Statement of Work said 3,000, but

on conversations on conference calls, I was told 5,000.

Mr. WALDEN. So is that correct, Mr. Caine or Mr. Pratt? Do you

know? Is the system in El Paso 5,000 E-mail addresses?

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Mr. CAINE. I cannot confirm the number for you, Mr. Chairman,

but I do know that the proposal from Sun included E-mail addresses for ineligible activities in schools. So there was always a distinction between eligible schools in the district and ineligible schools

in the district, and that was a factor.

Mr. WALDEN. So you advised them of that?

Mr. CAINE. That was part of the consideration that we brought

to the attention of the school district.

Mr. WALDEN. Paula, is that correct?

Ms. GLOGOVAC. I would have to say that El Paso was completely

open to selecting how many E-mail licenses they wanted to deploy

and where they wanted to deploy them. That was not dictated by

Sun.

Mr. WALDEN. But were they ineligible places?

Ms. GLOGOVAC. I have no idea. I do not know what school was

ineligible in El Paso, and that was not brought up to our attention

on any conference call that I know of.

Mr. WALDEN. Even by IBM?

Ms. GLOGOVAC. No, or El paso.

Mr. WALDEN. And who is the area coordinator? Are you, Ms. Foster? No. You were the area——

Ms. GLOGOVAC. I was a contractor that was brought in to assist

the Sun sales team.

Mr. WALDEN. So, Mr. Caine, you were involved in that discussion

then. Where is your information coming from?

Mr. CAINE. No, I was not involved in the conversation, but I do

think that it is probably a question about eligible schools versus ineligible schools within the El Paso School District that the district

could answer. But I do know that not all schools in the El Paso

School District were eligible, and so there has to be this distinction.

Mr. WALDEN. I wonder if our superintendent on video—can you

address this issue, sir? Thanks for keeping your mic off, too, so that

we do not get the feedback. But this issue of ineligible E-mail addresses in our schools.

Mr. TAFOYA. Yes, sir. I do recall there was conversation that took

place at that time, that we had to be careful that we did not cross

the line of the eligibility using E-Rate money, and so I do know

that just like I said, the piece of the conversation that I can recall

was that there was concern that the scope of work would not exceed what we were eligible to receive in E-Rate funding.

Mr. TAFOYA. And are you satisfied with the notion of like 5,000

E-mails versus unlimited?

Mr. TAFOYA. We were satisfied with what we received because it

was what we could afford within that E-Rate funding.

Mr. WALDEN. Thank you, sir.

Ms. DEGETTE. Just very quickly, Mr. Chairman, Mr. Caine, if

you could take a look at Tab 65 of your notebook. This is the agreement. We got this from NABSE. I do not know if you have seen

this, Mr. Caine.

Mr. CAINE. No, I have not.

Ms. DEGETTE. Okay. This is the agreement with NABSE, the one

that Mr. McDonald was testifying about earlier, and part of the

agreement talks about on page 3 the offset to the cost that NABSE

will incur in support of this partnership. NABSE shall receive an

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annual payment of 1.5 percent of the cumulative business. This is

the kickback we have been talking about all day. Do you see that

on page 3?

Mr. CAINE. I do.

Ms. DEGETTE. Now, this agreement was signed by Donald J.

Parker, the customer service executive for IBM Global Services on

behalf of IBM. Do you see that on the last page there?

Mr. CAINE. I do.

Ms. DEGETTE. Did Mr. Parker as far as you know have the authority to enter into this type of agreement?

Mr. CAINE. Actually the video was quite a surprise to us. We

were not aware of it. We had actually asked the staff when we

were told that it existed to see it. We were not given an opportunity to see it.

But he was not sanctioned to do this. This was not an official

IBM activity. Our company——

Ms. DEGETTE. Is he still with the company? Do you know?

Mr. CAINE. No, he is not.

Our company does have relationships, Ms. DeGette, with a number of educational organizations, but none specifically for E-Rate

performance. We have not done that. So it was not sanctioned by

the IBM company, and I think if I could just—I do not mean to propose where you are going, but if I could just point to the next tab,

which is also a document that talks about a memorandum of understanding on this point. It is conspicuously not signed by IBM.

Ms. DEGETTE. Okay. Well, but you would not dispute the fact

that by Mr. Parker’s signature on this document on behalf of IBM

he bound the company contractually to that, correct?

Mr. CAINE. Well, we would dispute that.

Ms. DEGETTE. You would?

Mr. CAINE. Yes, we would.

Ms. DEGETTE. Well——

Mr. CAINE. Yes, we would. He was not sanctioned to do this for

the company, and it is actually a proposal, not a contract.

Ms. DEGETTE. I will yield to the chairman.

Mr. WALDEN. I just wanted to note the committee staff had tried

repeatedly to interview Mr. Parker, and apparently IBM does not

know where he is anymore.

Mr. CAINE. He is no longer an employee of the IBM company.

Mr. WALDEN. So otherwise we would have shared that at that

time.

Ms. DEGETTE. I am studying this, and in fact, it is an agreement.

It is a letter agreement, and on page 2, it says the team, well, fully

committed to supporting NABSE, and NABSE’s membership believes that any contractual agreement could be construed inappropriately by third parties. The team is not going to request an exclusive or formal endorsement by NABSE. The individual members

are content that NABSE will recommend the team and each team

members with the same confidence and vigor.

So, in fact, what this is, it is a letter agreement that everybody

is agreeing to. Disagree?

Mr. CAINE. Ms. DeGette, yes, in this sense: that he was not sanctioned to do this. We are as surprised about this as you seem to

297

be disturbed by it, and we are as well, and we are referring it to

our attorneys as soon as we get a copy of this.

Ms. DEGETTE. Well, take it with you.

Mr. CAINE. I would be happy to.

Ms. DEGETTE. Are your customer service executives authorized

to sign letter agreements of this nature?

Mr. CAINE. No.

Ms. DEGETTE. And are they informed of that in some personnel

guideline or handbook?

Mr. CAINE. Each IBM employee is asked each year to sign a business conduct guideline, which is a code of conduct. All right? And

they know that contracts have to go through or proposals have to

go through a rigorous process.

Ms. DEGETTE. Is there a written guideline for that, that talks

about that in the code of conduct?

Mr. CAINE. I would have to go back and look at the——

Ms. DEGETTE. I would appreciate it if you would supplement

your response on this, and I will tell you, frankly, my concern, and

it is a concern for all of the companies that are doing these E-Rate

contracts. I mean, I always tell people in this committee, and the

chairman has heard me say it, in my law practice I am on inactive

status in Colorado, but I practiced for a number of years, and I will

tell you this looks like a letter agreement to me.

And the thing I was always worried about when I represented

corporations in my law practice was exactly this type of thing

where you have got sales representatives signing what end up to

be binding contracts.

And I will tell you probably your lawyers will tell you that even

though Donald J. Parker may not have had the legal authority to

sign this, if he is doing it and putting it out there to the world, you

would have been bound by this. So that is a concern.

Mr. CAINE. Well, we appreciate your comments, and we are going

to look into this very, very quickly and very forcefully.

Ms. DEGETTE. Good, and the other concern I have, first of all, to

your knowledge, I would assume, you are unaware of any other

contracts that IBM or any of its representatives have entered into

for kickback agreements to organizations, correct?

Mr. CAINE. Correct.

Ms. DEGETTE. And that would not be your policy, I would assume.

Mr. CAINE. Never.

Ms. DEGETTE. So, Mr. Hawthorne, as a consultant, did your company ever enter into agreements that involved kickbacks to the organization?

Mr. HAWTHORNE. Absolutely not.

Ms. DEGETTE. Okay. But here was my concern, Mr. Caine. Earlier when you were testifying, and I am glad you have put this little group together of E-Rate experts, but when you put so much authority on sales reps. out in the field, sometimes this kind of thing

in an aggressive market can result, and so I would hope IBM

would take this very seriously and adopt some clear rules.

Mr. CAINE. We do Ms. DEGETTE. Thank you very much.

Thank you, Mr. Chairman. I yield back.

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Mr. WALDEN. I appreciate the gentle woman’s comments and her

participation for this full day.

Mr. Tafoya, if I could just ask you a question, sir, because one

of the other issues that we are looking at, and we did certainly in

the North Carolina situation, are districts now in a position where

they have, frankly, bitten off more than they can chew? And is that

the case in your district, sir?

Because this is an enormous amount of equipment. It is not a

new technology. Do you have the information, staff up to speed to

really be able to run a system like this? Is this something other

districts need to take note of?

Mr. TAFOYA. Well, I would like to bring the answer two ways. I

do believe that an award of this magnitude really needs to be scrutinized very, very carefully simply because all of the residual expense and support that is required once the installation takes place

is very overwhelming. We feel fortunate that we do have the capacity with the structure now to manage the network that we have in

place. We are not exactly where we want to be, but we have made

great strides, and we will continue to devote because we have, in

fact, a commitment from our board to continue to devote resources

to make sure that this network does, in fact, work.

But I would say overall an award of this magnitude needs much

longer scrutiny than I think we took in El Paso.

Mr. WALDEN. So a good lesson learned for other districts that

may be going down this path?

Mr. TAFOYA. I believe so, yes sir.

Mr. WALDEN. I was reading through the PowerPoint presentation

that, Mr. Johnston, Jack Johnston, the Executive Director of Technology Information, had done, I think, for the board in which he

said, ‘‘We are no longer in the driver’s seat.’’

This was in 2002 as the whole system was rolling out, and he

said with the introduction of the first class technology came the

need for skill upgrade for many of the TIS staff. What IBM could

provide within the SLD guidelines for skill transfer, they did so.

Unfortunately my staff has a long way to go before we could ever

be expected to provide the same level of service as IBM in many

areas.

And so it looks to me like as this handoff occurs for other districts that may be observing this whole process, they need to learn

the lesson your district learned the hard way it sounds like.

Mr. TAFOYA. Mr. Chair, I believe one of the things that we always have to keep in mind in public education is that sometimes

it is hard to embrace a business model where you have recurring

revenue and an opportunity to grow that resource to support that

in a public setting where you have limited resources that are going

to be pressed a number of different directions.

Mr. WALDEN. I appreciate your comments.

I have no other questions for our panel. I know we have been rejoined by the distinguished Chairman of the full committee who

has put a lot of energy into oversight over the years and continues

to as our Chairman.

Mr. Chairman, I would yield.

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Chairman BARTON. Well, Mr. Chairman, and Ranking Member

DeGette, I do not want to delay this. This is another of our all day

hearings.

I do want to thank our witnesses for being here and participating, and I have actually been watching a lot of this on TV in

my office as I have had a series of meetings. So it is six o’clock.

I am not going to ask any direct questions.

I guess I do want to ask the gentleman that represents IBM.

Which one is that?

Mr. WALDEN. That is Mr. Caine and Mr. Pratt.

Chairman BARTON. How can a company as credible as IBM is

participate in the way that apparently you all have where we have

gone into these districts and just the amount of money that has

been requested, it has increased by orders of magnitude?

I mean, I cannot tell you how disappointed I am to find that out.

I mean, what is the real justification for that?

Mr. CAINE. Mr. Chairman, we believed we were responding to

the technology plans the school districts were putting together, that

we were complying with the rules as we understood them at the

time. There are a number of decisions that had been made

throughout the program that allowed these kinds of approaches to

be sanctioned in the Ysleta decision and denials. That question was

called, and we submitted our comments.

Quite honestly, we were happy that it was called, and the FCC

looked at a number of issues here, and they decided 5-0, in that

order, and we have learned from that, and we have actually made

adjustments since that time, since the FCC came out with its decision, but these are——

Chairman BARTON. But, you know, in the panel before you we

had some rural school districts or at least low income school districts where I do not believe your company was one of the vendors,

but you know, it is fairly credible to some extent if the school district says, well, we do not really know a whole lot about the program, but if a company like IBM says it is okay, it is okay.

And when you look at the amounts of money that are requested,

I think ultimately the accountability is at the local level, the school

board and the school superintendent. If it is a library, the city

council, the county or whatever, but companies like IBM have a lot

of credibility, and to use that in a way that just has the appearance

of abusing the public trust is just extremely disappointing, you

know.

I have not really read the hearing record directly on point in detail on what IBM’s relationship was and direct participation is, but

IBM is one of the icons of corporate America, I have to say I am

very disappointed, and I certainly hope that you will take back to

your management and to the board that we expect companies of

your stature to honor the public trust and not try to push these

things, you know, right to the extreme letter of the law or your interpretation of it.

Mr. CAINE. Mr. Chairman, I appreciate your comments, and I

can tell you that I do not think you were here when I had my opening statement. This program is very important to us, and we do not

want to ever jeopardize it, and we have been willing to work with

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you and your staff and the Commission and the SLD to make

changes to the program so that it is successful.

So relative to the purpose and the mission of this program, the

IBM company takes it very seriously, and that is why we are here,

and that is why we are here voluntarily.

Mr. BOHUCHOT. Well, I want to end on this note. We have a document from USAC, and has this been put into the record?

Mr. WALDEN. Yes, it is in the record, Mr. Chairman.

Mr. BOHUCHOT. But the paragraph that has been highlighted

said, ‘‘Mr. Mitchell stated discussions with IBM begin in October

and that he was on a conference call with Steve Mueller and

Charles Gentry. He stated that one of IBM’s selling points was that

they had represented to him that former SLD attorneys worked for

IBM and as a consequence IBM knows all of the loopholes in the

program.’’

You know, we are going to do our very best to close those loopholes, and we are going to hope that the IBMs of the world do their

very best to honor the spirit as well as the exact technicalities of

the new program.

And with that, Mr. Walden, I would yield back.

Mr. WALDEN. Thank you, Mr. Chairman.

And I will tell you after three of these hearings, it makes me

wonder what is going on elsewhere around the country that we

need to continue to look at as this program evolves. We are seeing

some progress in some areas, but it is troubling.

I think the one thing we probably would all agree on is our kids

need access to the Internet in their schools, and it is our responsibility to make sure that happens, but in a way that we can have

a straight face, look at the taxpayers and rate payers and say we

are good guardians and stewards of your money.

And what we have seen in some instances around the country,

Mr. Chairman, we cannot tell them that, and we have got to make

sure and get on top of it, and that is what this committee’s job is

and we will continue to do it.

So I want to thank our witnesses who have spent the day with

us by video an din person, and the record will remain pen for an

additional 30 days for additional questions and comments.

And with that, the Subcommittee on Oversight and Investigations stands adjourned.

[Whereupon, at 6:16 p.m., the hearing was adjourned.]

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