Testimony 

Before the Subcommittee on Oversight 

and Investigations, Committee on Energy 

and Commerce, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery 

Expected at 2:00 p.m. EST 

Wednesday, March 16, 2005 TELECOMMUNICATIONS

Concerns Regarding the 

Structure and FCC’s 

Management of the E-Rate 

Program 

Statement of Mark L. Goldstein, Director 

Physical Infrastructure Issues 

GAO-05-439T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-439T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Mark L. 

Goldstein at (202) 512-2834 or 

goldsteinm@gao.gov. 

Highlights of GAO-05-439T, a testimony 

before the Subcommittee on Oversight 

and Investigations, Committee on Energy 

and Commerce, House of Representatives 

March 16, 2005

TELECOMMUNICATIONS 

Concerns Regarding the Structure and 

FCC’s Management of the E-Rate 

Program 

FCC established the E-rate program using an organizational structure 

unusual to the government without conducting a comprehensive assessment 

to determine which federal requirements, policies, and practices apply to it. 

The E-rate program is administered by a private, not-for-profit corporation 

with no contract or memorandum of understanding with FCC, and program 

funds are maintained outside of the U.S. Treasury, raising issues related to 

the collection, deposit, obligation, and disbursement of the funding. While 

FCC recently concluded that the Universal Service Fund constitutes an 

appropriation and is subject to the Antideficiency Act, this raises further 

issues concerning the applicability of other fiscal control and accountability 

statutes. These issues need to be explored and resolved comprehensively to 

ensure that appropriate governmental accountability standards are fully in 

place to help protect the program and the fund from fraud, waste, and abuse.

FCC has not developed useful performance goals and measures for assessing 

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

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

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

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

local government. A key unanswered question, therefore, is the extent to 

which increases in connectivity can be attributed to E-rate. In addition, 

goals for improving E-rate program management have not been a feature of 

FCC’s performance plans. In its 2003 assessment of the program, OMB 

noted that FCC discontinued E-rate performance measures after fiscal year 

2002 and concluded that there was no way to tell whether the program has 

resulted in the cost-effective deployment and use of advanced 

telecommunications services for schools and libraries. In response to OMB’s 

concerns, FCC is currently working on developing new E-rate goals. 

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

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

fraud, waste, and abuse within the program. According to FCC officials, 

oversight of the program is primarily handled through agency rulemaking 

procedures, beneficiary audits, and appeals decisions. FCC’s rulemakings 

have often lacked specificity and led to a distinction between FCC’s rules 

and the procedures put in place by the program administrator—a distinction 

that has affected the recovery of funds for program violations. While audits 

of E-rate beneficiaries have been conducted, FCC has been slow to respond 

to audit findings and make full use of them to strengthen the program. In 

addition, the small number of audits completed to date do not provide a 

basis for accurately assessing the level of fraud, waste, and abuse occurring 

in the program, although the program administrator is working to address 

this issue. According to FCC officials, there is also a substantial backlog of 

E-rate appeals due in part to a shortage of staff and staff turnover. Because 

appeal decisions establish precedent, this slowness adds uncertainty to the 

program. 

Since 1998, the Federal 

Communications Commission’s 

(FCC) E-rate program has 

committed more than $13 billion to 

help schools and libraries acquire 

Internet and telecommunications 

services. Recently, allegations of 

fraud, waste, and abuse by some Erate program participants have 

come to light. As steward of the 

program, FCC must ensure that 

participants use E-rate funds 

appropriately and that there is 

managerial and financial 

accountability surrounding the 

funds. This testimony is based on 

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

effect of the current structure of 

the E-rate program on FCC’s 

management of the program, (2) 

FCC’s development and use of Erate performance goals and 

measures, and (3) the effectiveness 

of FCC’s program oversight 

mechanisms. 

What GAO Recommends

In its report, GAO recommends 

that FCC (1) comprehensively 

determine which federal 

accountability requirements apply 

to E-rate; (2) establish meaningful 

E-rate performance goals and 

measures; and (3) take steps to 

reduce its backlog of appeals. In 

response, FCC stated that it does 

not concur with (1) because it 

maintains it has done this on a 

case-by-case basis. GAO continues 

to believe that major issues remain 

unresolved. FCC concurs with (2) 

and (3), noting that it is already 

taking steps on these issues. 
Page 1 GAO-05-439T 

Mr. Chairman and Members of the Subcommittee: 

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

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

service program for schools and libraries. As you know, the 

Telecommunications Act of 1996 expanded the concept of universal 

service to include assistance to schools and libraries in acquiring 

telecommunications and Internet services; the act charged FCC with 

establishing the universal service discount mechanism for eligible schools 

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

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

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

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

overseeing the program’s operations and ensuring compliance with the 

commission’s rules. 

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

funding to help schools and libraries across the nation acquire 

telecommunications and Internet services. Eligible schools and libraries 

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

eligible services and equipment such as telephone services, Internet access 

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

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

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

telecommunications and network equipment companies) have 

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

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

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

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

In light of ongoing concerns about the E-rate program, we were asked to 

review various aspects of the program. Specifically, we evaluated (1) the 

effect of the current structure of the E-rate program on FCC’s 

management of the program, (2) FCC’s development and use of 

performance goals and measures in managing the program, and (3) the 

effectiveness of FCC’s oversight mechanisms—rulemaking proceedings, 

beneficiary audits, and reviews of USAC decisions (appeals)—in managing 

the program. 

Our testimony is based on a report, being released today, containing the 

results of our review and recommendations for improving FCC’s 
Page 2 GAO-05-439T 

management and oversight of the E-rate program.1 In summary, we found 

the following: 

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

organizational structure unusual to the federal government, but never 

conducted a comprehensive assessment to determine which federal 

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

to the Universal Service Fund itself. As a result, FCC has struggled with 

determining which fiscal and accountability requirements apply to the 

E-rate program. We believe that issues exist concerning the applicability of 

certain statutes and the extent to which FCC has delegated certain 

functions for the E-rate program to USAC—issues that FCC needs to 

explore and resolve. 

• FCC has not developed meaningful performance goals and measures for 

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

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

of advanced telecommunications services for schools and libraries. 

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

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

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

rulemakings have often lacked specificity and have led to situations where 

important USAC administrative procedures have been deemed 

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

appeals that adds uncertainty to the program and impacts beneficiaries. 

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

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

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

manage and provide a framework of government accountability for the 

multibillion-dollar E-rate program. 

The concept of “universal service” has traditionally meant providing 

residential telephone subscribers with nationwide access to basic 

telephone services at reasonable rates. The Telecommunications Act of 

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

 1

Telecommunications: Greater Involvement Needed by FCC in the Management and 

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

is available on GAO’s Web site at www.gao.gov. 

Background 
Page 3 GAO-05-439T 

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

commission to establish a universal service support mechanism to ensure 

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

certain telecommunications services for educational purposes.2

 In 

addition, Congress authorized FCC to “establish competitively neutral 

rules to enhance, to the extent technically feasible and economically 

reasonable, access to advanced telecommunications and information 

services for all public and nonprofit elementary and secondary school 

classrooms . . . and libraries. . . .”3 Based on this direction, and following 

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

FCC established the schools and libraries universal service mechanism 

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

through statutorily mandated payments by companies that provide 

interstate telecommunications services.5

 Many of these companies, in turn, 

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

subscribers’ phone bills.6

 FCC capped funding for the E-rate program at 

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

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

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

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

although FCC retains responsibility for overseeing the program’s 

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

 In 

response to congressional conference committee direction,8

 FCC has 

 2

47 U.S.C. § 254(h)(1)(B). 

3

47 U.S.C. § 254(h)(2). 

4

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

recommendations to implement the universal service provisions of the 

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

utility commissioners, and a consumer advocate representative. 

5

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

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

6

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

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

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

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

7

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

policies. 

8

See S.1768, 105th Cong., § 2004(b)(2)(A) (1998). 
Page 4 GAO-05-439T 

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

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

 USAC is 

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

maintaining a Web site that contains program information and application 

procedures; answering inquiries from schools and libraries; processing 

and reviewing applications; making funding commitment decisions and 

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

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

establish administrative procedures that program participants are required 

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

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

include eligible schools and libraries10 may receive discounts for eligible 

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

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

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

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

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

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

that seeks reimbursement from USAC for the discounted portion of the 

service rather than the school or library.11

 9

47 C.F.R. § 54.702(c). 

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

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

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

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

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

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

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

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

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

reimbursement from USAC for the discount portion. 
Page 5 GAO-05-439T 

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

conducted a comprehensive assessment of which federal requirements, 

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

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

concluding that as a permanent indefinite appropriation, the Universal 

Service Fund is subject to the Antideficiency Act and that USAC’s issuance 

of commitment letters constitutes obligations for purposes of the act. 

However, FCC’s conclusions concerning the status of the Universal 

Service Fund raise further issues relating to the collection, deposit, 

obligation, and disbursement of those funds—issues that FCC needs to 

explore and resolve comprehensively rather than in an ad hoc fashion as 

problems arise. 

The Telecommunications Act of 1996 neither specified how FCC was to 

administer universal service to schools and libraries nor prescribed the 

structure and legal parameters of the universal service mechanisms to be 

created. To carry out the day-to-day activities of the E-rate program, FCC 

relied on a structure it had used for other universal service programs in 

the past—a not-for-profit corporation established at FCC’s direction that 

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

program is unusual in several respects compared with other federal 

programs: 

• FCC appointed USAC as the permanent administrator of the Universal 

Service Fund,12 and FCC’s Chairman has final approval over USAC’s Board 

of Directors. USAC is responsible for administering the program under 

FCC orders, rules, and directives. However, USAC is not part of FCC or 

any other government entity; it is not a government corporation 

established by Congress; and no contract or memorandum of 

understanding exists between FCC and USAC for the administration of the 

E-rate program. Thus, USAC operates and disburses funds under less 

explicit federal ties than many other federal programs. 

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

be treated as federal funds have troubled the program from the start. Even 

though the fund has been listed in the budget of the United States and, 

since fiscal year 2004, has been subject to an annual apportionment from 

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

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

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

was never conducted. 

FCC Established an 

Unusual Program 

Structure without 

Comprehensively 

Addressing the 

Applicability of 

Governmental 

Standards and Fiscal 

Controls 
Page 6 GAO-05-439T 

the Office of Management and Budget (OMB), the monies are maintained 

outside of Treasury accounts by USAC and some of the monies have been 

invested.13 The United States Treasury implements the statutory controls 

and restrictions involving the proper collection and deposit of 

appropriated funds, including the financial accounting and reporting of all 

receipts and disbursements, the security of appropriated funds, and 

agencies’ responsibilities for those funds.14

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

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

fiscal, and accountability requirements that apply to the fund. In the past, 

FCC’s Inspector General (IG) has noted that the commission could not 

ensure that Universal Service Fund activities were in compliance with all 

laws and regulations because the issue of which laws and regulations were 

applicable to the fund was unresolved. During our review, FCC officials 

told us that the commission has substantially resolved the IG’s concerns 

through recent orders, including FCC’s 2003 order that USAC begin 

preparing Universal Service Fund financial statements consistent with 

generally accepted accounting principles for federal agencies (GovGAAP) 

and keep the fund in accordance with the United States Government 

Standard General Ledger.15 While it is true that these steps and other FCC 

determinations should provide greater protections for universal service 

funding, FCC has addressed only a few of the issues that need to be 

resolved. In fact, staff from the FCC’s IG’s office told us that they do not 

believe the commission’s GovGAAP order adequately addressed their 

concerns because the order did not comprehensively detail which fiscal 

requirements apply to the Universal Service Fund and which do not. 

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

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

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

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

Mr. Christopher Wright, FCC General Counsel, dated April 28, 2000. 

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

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

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

all receipts and disbursements of the federal government. 

15See FCC, Order, In the Matter of Application of Generally Accepted Accounting 

Principles for Federal Agencies and Generally Accepted Government Auditing Standards 

to the Universal Service Fund, FCC 03-232 (Washington, D.C.; Oct. 3, 2003). 
Page 7 GAO-05-439T 

FCC maintains that it has undertaken a timely and extensive analysis of 

the significant legal issues associated with the status of the Universal 

Service Fund and has generally done so on a case-by-case basis. We 

recognize that FCC has engaged in internal deliberations and external 

consultations and analysis of a number of statutes. However, we do not 

believe that this was done in a timely manner or that it is appropriate to do 

this on a case-by-case basis, which puts FCC and the program in the 

position of reacting to problems as they occur rather than setting up an 

organization and internal controls designed to ensure compliance with 

applicable laws. 

As you know, Mr. Chairman, a problem with this ad hoc approach was 

dramatically illustrated with regard to the applicability of the 

Antideficiency Act to the Universal Service Fund. In October 2003, FCC 

ordered USAC to prepare financial statements for the Universal Service 

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

USAC had not previously applied to the fund. In February 2004, staff from 

USAC realized during contractor-provided training on GovGAAP 

procedures that the commitment letters sent to beneficiaries (notifying 

them whether their funding is approved and in what amount) might be 

viewed as “obligations” of appropriated funds.16 If so viewed, and if FCC 

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

program to make obligations in excess of available budgetary resources—

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

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

program’s investments17 to provide budgetary authority sufficient to satisfy 

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

in August 2004 while waiting for a commission decision on how to 

proceed. At the end of September 2004—facing the end of the fiscal year—

FCC decided that commitment letters were obligations; that the 

Antideficiency Act did apply to the program; and that USAC would need to 

immediately liquidate some of its investments to come into compliance 

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

cost the fund approximately $4.6 million in immediate losses and could 

 16An “obligation” is an action that creates a legal liability or definite commitment on the 

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

17According to USAC, the Universal Service Fund was invested in a variety of securities, 

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

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

on particular investments, although investments were made with FCC knowledge and 

oversight through formal audits and informal meetings and review. 
Page 8 GAO-05-439T 

potentially result in millions in foregone annual interest income. In 

response to these events, in December 2004, Congress passed a bill 

granting the Universal Service Fund a one-year exemption from the 

Antideficiency Act.18

As we explain more fully in our report, Mr. Chairman, we agree with FCC’s 

determinations that the Universal Service Fund is a permanent 

appropriation subject to the Antideficiency Act and that its funding 

commitment decision letters constitute recordable obligations of the 

Universal Service Fund. However, there are several significant fiscal law 

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

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

reconsider these determinations in light of the status of universal service 

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

fund constitutes an appropriation, FCC needs to reconsider the 

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

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

in the Treasury unless otherwise authorized by law.19 FCC also needs to 

assess the applicability of other fiscal control and accountability statutes 

(e.g., the Single Audit Act and the Cash Management Improvement Act).20

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

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

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

program consistent with statutory and regulatory requirements for the 

disbursement of public funds?21 Are some of the functions carried out by 

 18Universal Service Antideficiency Temporary Suspension Act, Pub. L. No. 108-494, § 302, 

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

Act until December 31, 2005. 

19Because OMB and FCC had believed the funds were not public monies “for the use of the 

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

Universal Service Fund as subject to that statute. 

20For example, in October 2003, when FCC ordered USAC to comply with GovGAAP, it 

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

of 1996. In that same order, FCC stated that “the funds may be subject to a number of 

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

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

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

also told us that they were uncertain whether procurement requirements such as the 

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

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

21See 31 U.S.C. §§ 3321, 3322, 3325, and the Treasury Financial Manual. 
Page 9 GAO-05-439T 

USAC, even though they have been characterized as administrative or 

ministerial, arguably inherently governmental activities22 that must be 

performed by government personnel? Resolving these issues in a 

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

foundation of government accountability standards and safeguards for the 

E-rate program and the Universal Service Fund. We are encouraged that 

FCC just announced that it has contracted with the National Academy of 

Public Administration (NAPA) for NAPA to study and explore alternative 

models to the current organizational and governance structure of the 

Universal Service Fund program. We believe this study will go a long way 

toward addressing the concerns outlined in our report and we look 

forward to seeing the results of NAPA’s efforts. 

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

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

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

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

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

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

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

deficiency in a 2003 OMB assessment of the program. 

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

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

Telecommunications Act of 1996 did not include specific goals for 

supporting schools and libraries, but instead used general language 

directing FCC to establish competitively neutral rules for enhancing 

access to advanced telecommunications and information services for all 

public and nonprofit private elementary and secondary school classrooms 

and libraries.23 As the agency accountable for the E-rate program, FCC is 

responsible under the Government Performance and Results Act of 1993 

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

 22See OMB Circular A-76, May 29, 2003, which defines an inherently governmental activity 

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

in making decisions for the government.” 

2347 U.S.C. § 254(h)(2)(A). 

FCC Did Not Develop 

Useful Performance 

Goals and Measures 

for Assessing and 

Managing the E-Rate 

Program 
Page 10 GAO-05-439T 

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

reporting publicly on how well it is doing.24

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

certain percentage levels of Internet connectivity during a given fiscal year 

for schools, public school instructional classrooms, and libraries. 

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

public schools (thereby excluding two other major groups of 

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

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

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

years, the demand for internal connections funding by applicants has 

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

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

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

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

schools since the program issued its first funding commitments in late 

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

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

schools and 51 percent of public school instructional classrooms already 

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

of public school instructional classrooms had Internet access.25 Yet 

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

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

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

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

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

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

impact but also to develop strategies for resolving mission-critical 

management problems. However, management-oriented goals have not 

 24For additional details on the Results Act and its requirements, see GAO, Executive Guide: 

Effectively Implementing the Government Performance and Results Act, 

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

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

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

Libraries Corporation: Actions Needed to Strengthen Program Integrity Operations 

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

16. 

25See NCES, Internet Access in U.S. Public Schools and Classrooms: 1994-2002, NCES2004-011 (Washington, D.C.; October 2003). This was the most recent update available at 

the time of our review. 
Page 11 GAO-05-439T 

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

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

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

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

not carried forward. 

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

recent annual performance reports. The failure to measure effectively the 

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

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

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

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

data for accurately characterizing program results in terms of increasing 

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

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

cost-effectiveness in supporting the telecommunications needs of schools 

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

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

in the cost-effective deployment and use of advanced telecommunications 

services for schools and libraries.26 OMB also noted that there was little 

oversight to ensure that the program beneficiaries were using the funding 

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

have been working on developing new performance goals and measures 

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

fiscal year 2005. 

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

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

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

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

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

program and the enforcement of program procedures to guard against 

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

 26OMB reviewed E-rate using its Program Assessment Rating Tool (PART), which is a 

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

part of the executive budget formulation process. 

FCC’s Oversight 

Mechanisms Are Not 

Fully Effective in 

Managing the E-Rate 

Program 
Page 12 GAO-05-439T 

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

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

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

requires to effectively administer the program. FCC carries out this 

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

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

USAC has needed to craft the more detailed administrative procedures 

necessary to implement the rules. However, in crafting administrative 

procedures, USAC is strictly prohibited under FCC rules from making 

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

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

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

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

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

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

when the commission expressly endorses USAC operating procedures in 

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

However, two problems have arisen with USAC administrative 

procedures. 

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

some USAC procedures deal with more than just ministerial details and 

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

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

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

funding request even though there was no precisely corresponding FCC 

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

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

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

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

raises concerns about whether these procedures are more than ministerial 

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

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

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

“identify any USAC administrative procedures that should be codified in 

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

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

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

management of the program. 

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

FCC approval, enforcement problems could arise when audits uncover 

violations of USAC procedures by beneficiaries or service providers. The 

FCC’s Rulemakings Have 

Led to Problems with 

USAC’s Procedures and 

Enforcement of Those 

Procedures 
Page 13 GAO-05-439T 

FCC IG has expressed concern over situations where USAC administrative 

procedures have not been formally codified because commission staff 

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

recover funds from applicants that failed to comply with the USAC 

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

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

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

treatment of beneficiaries who violate a USAC administrative procedure 

that has not been codified. 

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

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

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

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

which were performed under agreement with the Inspector General of the 

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

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

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

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

resolve problems within the program. 

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

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

seek recovery of E-rate funds, if justified.27 In the FCC IG’s May 2004 

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

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

not being taken to recover inappropriately disbursed funds.28 The IG notes 

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

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

commission (USAC must seek guidance from the commission when an 

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

questions are raised). Regardless, the recovery of inappropriately 

 27USAC, through its duties as administrator of the fund, initially seeks recovery of 

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

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

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

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

debarment period in order to protect the public interest. 

28See FCC, Office of the Inspector General Semiannual Report to Congress, October 1, 

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

FCC Has Been Slow to 

Address Problems Raised 

by Audit Findings 
Page 14 GAO-05-439T 

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

occur in a timely fashion. 

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

Government,29 agencies are responsible for promptly reviewing and 

evaluating findings from audits, including taking action to correct a 

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

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

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

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

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

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

example, several important audit findings from the 1998 program year 

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

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

uniform process for resolving audit findings was necessary, and directed 

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

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

findings are resolved in a timely manner.”30 USAC submitted its Proposed 

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

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

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

public comment in December 2004.31

In addition to the Proposed Audit Resolution Plan, the commission 

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

summarizing the status of all outstanding audit findings. The commission 

also stated that it expects USAC to identify for commission consideration 

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

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

the unusual step of providing a limited delegation to the Wireline 

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

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

and to act on requests for waiver of rules warranting recovery of funds.32

 29GAO/AIMD-00-21.3.1.

30FCC, Fifth Report and Order, In the Matter of Schools and Libraries Universal Service 

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

31Comments were due January 5, 2005; reply comments were due January 20, 2005. 

32FCC 04-190, para. 75. 
Page 15 GAO-05-439T 

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

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

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

the need for a rulemaking. 

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

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

USAC have conducted an audit effort using a statistical approach that 

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

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

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

in the program.33 Of the various groups of beneficiary audits conducted to 

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

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

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

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

responses to a Request for Proposal for audit services to conduct 

additional beneficiary audits. 

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

decisions,34 although FCC’s appeals process for the E-rate program has 

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

precedent, this slowness adds uncertainty to the program and impacts 

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

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

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

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

 33In testimony before the House Subcommittee on Oversight and Investigations of the 

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

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

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

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

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

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

implementation of the [E-rate] statutory goals with a minimum of fraud, waste, and abuse.” 

34Virtually all of the decisions made by FCC and USAC in their management and 

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

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

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

FCC Has Been Slow to Act 

on Some E-Rate Appeals 
Page 16 GAO-05-439T 

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

are backlog appeals.35

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

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

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

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

appeals decisions because new staff necessarily take time to learn about 

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

contributing to the backlog is that the appeals have become more 

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

up if the issue is currently in the rulemaking process. 

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

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

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

later might have ultimately won funding for outdated technology. FCC 

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

appeals by the end of calendar year 2005. 

In summary, Mr. Chairman, we remain concerned that FCC has not done 

enough to proactively manage and provide a framework of government 

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

about what accountability standards apply to the program causes 

confusion among program participants and can lead to situations where 

funding commitments are interrupted pending decisions about applicable 

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

Ineffective performance goals and measures make it difficult to assess the 

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

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

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

whose requests for support were denied due to funding limitations. 

To address these management and oversight problems identified in our 

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

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

comprehensive assessment to determine whether all necessary 

 35The bulk of the appeals are to USAC, which received a total of 16,782 appeals from the 

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

undecided as of September 20, 2004. 
Page 17 GAO-05-439T 

government accountability requirements, policies, and practices have been 

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

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

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

program’s appeals backlog, including ensuring that adequate staffing 

resources are devoted to E-rate appeals. 

We conducted our work from December 2003 through December 2004 in 

accordance with generally accepted government auditing standards. We 

interviewed officials from FCC’s Wireline Competition Bureau, 

Enforcement Bureau, Office of General Counsel, Office of Managing 

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

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

we interviewed officials from OMB and the Department of Education 

regarding performance goals and measures. OMB had conducted its own 

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

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

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

program. The information we gathered was sufficiently reliable for the 

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

of our scope and methodology. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 

to respond to any questions that you or other Members of the 

Subcommittee may have. 

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

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

Mindi Weisenbloom also made key contributions to this statement. 

Scope and 

Methodology 

GAO Contact and 

Staff 

Acknowledgments 

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