a

GAO

United States Government Accountability Office

Report to the Chairman, Committee on 

Energy and Commerce, House of 

Representatives

February 2005 TELECOMMUNICATIONS

Greater Involvement 

Needed by FCC in the 

Management and 

Oversight of the 

E-Rate Program

GAO-05-151
www.gao.gov/cgi-bin/getrpt?GAO-05-151.

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-05-151, a report to the 

Chairman, Committee on Energy and 

Commerce, House of Representatives 

February 2005

TELECOMMUNICATIONS 

Greater Involvement Needed by FCC in 

the Management and Oversight 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 

waste, fraud, 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, however, 

allegations of fraud, waste, and 

abuse by some E-rate 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. GAO reviewed (1) the effect 

of the current structure of the Erate program on FCC’s 

management of the program, (2) 

FCC’s development and use of Erate performance goals and 

measures, and (3) the effectiveness 

of FCC’s oversight mechanisms in 

managing the program. 

To strengthen FCC’s management 

and oversight of the E-rate program, 

we are recommending that FCC (1) 

determine comprehensively which 

federal accountability requirements 

apply to E-rate; (2) establish E-rate 

performance goals and measures; 

and (3) take steps to reduce the 

backlog of beneficiary appeals. In 

response, FCC stated that it does 

not concur with (1) because it 

maintains it has done this on a caseby-case basis. We continue to 

believe that major issues remain 

unresolved. FCC concurs with (2) 

and (3), noting that it is already 

taking steps on these issues. 
Page i GAO-05-151 E-Rate Program

Contents

Letter 1

Results in Brief 4

Background 7

FCC Established an Unusual Program Structure without 

Comprehensively Addressing the Applicability of Governmental 

Standards and Fiscal Controls 11

FCC Did Not Develop Useful Performance Goals and Measures for 

Assessing and Managing the E-Rate Program 19

FCC’s Oversight Mechanisms Are Not Fully Effective in Managing 

the E-Rate Program 27

Conclusions 36

Recommendations for Executive Action 37

Agency Comments and Our Evaluation 38

Appendixes

Appendix I: Scope and Methodology 41

Appendix II: Fiscal Law Issues Involving the Universal Service Fund 44

Appendix III: Structure of the Universal Service Administrative 

Company 54

Appendix IV: FCC Staffing Levels in Support of the E-Rate Program 57

Appendix V: Comments from the Federal Communications Commission 58

GAO’s Comments 66

Appendix VI: GAO Contacts and Staff Acknowledgments 70

GAO Contacts 70

Staff Acknowledgments 70

Tables Table 1: E-Rate Program Discount Matrix 9

Table 2: Examples of E-Rate Beneficiary Audit Findings from 

Program Year 1998, Resolved in 2004 32

Table 3: Number of FCC Full-Time Equivalent (FTE) Positions 

Supporting E-Rate Program, Fiscal Years 1997-2004 57

Figure Figure 1: Relationship among Entities Involved in the E-Rate 

Program 56
Contents

Page ii GAO-05-151 E-Rate Program

Abbreviations

CBO Congressional Budget Office

FCC Federal Communications Commission

FTE full-time equivalent

GovGAAP generally accepted accounting principles for federal agencies

IG inspector general

IPIA Improper Payments Information Act of 2002

NCES National Center for Education Statistics

NECA National Exchange Carrier Association 

OMB Office of Management and Budget

PART Program Assessment Rating Tool

SLD Schools and Libraries Division 

USAC Universal Service Administrative Company

USF Universal Service Fund

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Page 1 GAO-05-151 E-Rate Program

United States Government Accountability Office

Washington, D.C. 20548

A

February 9, 2005 Letr

The Honorable Joe Barton

Chairman

Committee on Energy and Commerce

House of Representatives

Dear Mr. Chairman:

Since 1998, the Federal Communications Commission’s (FCC) universal 

service “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 and can spend the funding on specific eligible services and 

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

installation of internal wiring and other related items. For example, with 

the help of E-rate funding, a school district in Alaska that lacked certified 

math teachers was able to provide students with math, algebra, and 

geometry lessons through distance learning. Similarly, the State Library of 

Louisiana has used E-rate funding to help provide Internet connections for 

use by patrons in all of Louisiana’s public libraries. The E-rate program 

processes around 40,000 applications from schools and libraries each year, 

and many of these applicants rely heavily on E-rate support for their 

telecommunications needs. 

Recently, 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 December 2004, another service provider 

agreed to pay almost $9 million and plead guilty to charges related to a 

scheme to defraud the E-rate program by inflating bids, agreeing to submit 

false and fraudulent documents to hide the planned installation of ineligible 

items, and submitting false and fraudulent documents to defeat inquiry into 

the legitimacy of the funding request. Suspected instances of program 

beneficiaries not paying their portion of service costs and of service 

provider procurement irregularities are being investigated. In fact, FCC’s 

Inspector General (IG) has devoted special attention to the E-rate program 

in his most recent reports to Congress. In his May 2004 report, the FCC IG 

stated that he continues to have numerous concerns about the program and 
Page 2 GAO-05-151 E-Rate Program

believes that the program may be subject to a high risk of fraud, waste, and 

abuse through noncompliance and program weakness.1

 

“Universal service” traditionally has meant providing residential customers 

with affordable nationwide access to basic telephone service. 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 a universal service discount mechanism for schools and 

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

that became commonly known as the E-rate program2

 and gave the 

program a $2.25 billion annual funding cap.3 The commission designated a 

not-for-profit corporation, the Universal Service Administrative Company 

(USAC), to carry out the day-to-day operations of the program, although 

FCC retains responsibility for overseeing the program’s operations and 

ensuring compliance with the commission’s rules. 

The public has a vested interest in the proper management of the E-rate 

program. The program is funded through statutorily mandated payments 

into the Universal Service Fund4

 by companies that provide interstate 

1

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

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

2

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

“Education” rate.

3

Because there was no historical record of what it would cost to provide support to schools 

and libraries, FCC based the funding cap on data from McKinsey and Company, the U.S. 

National Committee on Libraries and Information Services, and others that sought to 

estimate the cost of deploying and supporting the ongoing costs of a communications 

network for public schools and libraries. The cap has remained the same since it was 

established in May 1997.

4

Contributions from companies providing interstate telecommunications services are 

deposited into the federal Universal Service Fund, from which disbursements are made for 

the various federal universal service programs, including E-rate. Other universal service 

programs under the Universal Service Fund are the High Cost program, the Low Income 

program, and the Rural Health Care program. The High Cost program assists customers 

living in high-cost, rural, or remote areas through financial support to telephone companies, 

thereby lowering rates for local and long distance service. The Low Income program assists 

qualifying low-income consumers through discounted installation and monthly telephone 

services and free toll limitation service. The Rural Health Care program assists health care 

providers located in rural areas through discounts for telecommunications services. For 

more information on the various universal service programs see GAO, 

Telecommunications: Federal and State Universal Service Programs and Challenges to 

Funding, GAO-02-187 (Washington, D.C.: Feb. 4, 2002). 
Page 3 GAO-05-151 E-Rate Program

telecommunications services. The companies’ “contribution factor” of how 

much they must pay into the Universal Service Fund is established 

quarterly by FCC. In practice, however, many of these companies pass this 

contribution factor along to consumers through fees placed on their phone 

bills. Also, during most of the program’s history, the requests from schools 

and libraries for E-rate funding have greatly exceeded the annual amounts 

available from the program. Thus, any misuse of E-rate funding wastes 

consumers’ money and deprives those schools and libraries whose requests 

for support were denied due to funding limitations. As the steward of this 

program, FCC must ensure that beneficiaries use the funds appropriately 

and that there is financial and managerial accountability surrounding the 

fund.

Since 1998, we have issued eight reports and testimonies discussing 

various aspects of the E-rate program.5 In light of ongoing concerns about 

the E-rate program, you asked us in December 2003 to review the program. 

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. To address these issues, 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 the Office of 

5

See GAO, Telecommunications: FCC Lacked Authority to Create Corporations to 

Administer Universal Service Programs, GAO/T-RCED/OGC-98-84 (Washington, D.C.: Mar. 

31, 1998); Telecommunications: Court Challenges to FCC’s Universal Service Order and 

Federal Support for Telecommunications for Schools and Libraries, GAO/RCED/OGC-98-

172R (Washington, D.C.: May 7, 1998); 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); Telecommunications and Information Technology: 

Federal Programs That Can Be Used to Fund Technology for Schools and Libraries, 

GAO/T-HEHS-98-246 (Washington, D.C.: Sept. 16, 1998); Schools and Libraries Program: 

Actions Taken to Improve Operational Procedures Prior to Committing Funds, 

GAO/RCED-99-51 (Washington, D.C.: Mar. 5, 1999); Schools and Libraries Program: 

Application and Invoice Review Procedures Need Strengthening, GAO-01-105

(Washington, D.C.: Dec. 15, 2000); Schools and Libraries Program: Update on E-rate 

Funding, GAO-01-672 (Washington, D.C.: May 11, 2001); and Schools and Libraries 

Program: Update on State-Level Funding by Category of Service, GAO-01-673 (Washington, 

D.C.: May 11, 2001). In addition, we touched upon the E-rate program in 

Telecommunications Technology: Federal Funding for Schools and Libraries, GAO/HEHS99-133 (Washington, D.C.: Aug. 20, 1999).
Page 4 GAO-05-151 E-Rate Program

Management and Budget (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. We conducted our work from December 2003 through December 

2004 in accordance with generally accepted government auditing 

standards. See appendix I for a more detailed explanation of our scope and 

methodology.

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

organizational structure unusual to the federal government, and then 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. The E-rate program’s structure is unusual 

in a couple of ways: (1) It is administered by a private, not-for-profit 

corporation that has no contract or memorandum of understanding with 

FCC and (2) although the Universal Service Fund is included in the federal 

budget, program funds are maintained outside of the U.S. Treasury, raising 

issues related to the collection, deposit, obligation, and disbursement of 

the funding. Because of this unusual framework, FCC has struggled with 

determining which fiscal and accountability requirements apply to the Erate program. FCC has internally considered the applicability of a number 

of statutes on a case-by-case basis and has concluded that the Universal 

Service Fund constitutes an appropriation and that the fund is subject to 

the Antideficiency Act. However, the laws encompassing fiscal and 

accountability controls are not applied in isolation; rather, they are part of a 

framework that addresses issues of financial and general management of 

federal agencies and programs. FCC’s conclusions concerning the status of 

the Universal Service Fund raise further issues concerning the applicability 

of other fiscal control and accountability statutes (e.g., the Miscellaneous 

Receipts Statute, the Single Audit Act, and the Cash Management 

Improvement Act) 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. Timely resolution of these issues in a comprehensive 

fashion is necessary to ensure that the appropriate governmental 

accountability safeguards are fully in place to help protect the E-rate 

program and the Universal Service Fund from fraud, waste, and abuse.
Page 5 GAO-05-151 E-Rate Program

Although $13 billion in E-rate funding has been committed during the past 7 

years, FCC did not develop performance goals and measures that could be 

used to assess the specific impact of these funds and improve the 

management of the program. For fiscal years 2000 through 2002, FCC’s 

goals focused on achieving certain percentage levels of Internet access for 

schools, public school instructional classrooms, and libraries. However, the 

data that FCC used to report on its progress was limited to public schools 

(rather than including 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. Consequently, a fundamental performance 

question that remains unanswered is how much of the increase in public 

schools’ access to the Internet can be attributed to the E-rate program. 

This, in turn, makes it difficult to address other questions about the 

program, such as its efficiency and cost-effectiveness in supporting the 

telecommunications needs of schools and libraries. In addition, goals for 

improving E-rate program management have not been a feature of FCC’s 

performance plans. For example, two such goals—related to assessing 

competitive bidding requirements for vendor services and improving 

participation by eligible schools and libraries in the program—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. OMB’s 

own review of the program 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.6

 In 

response, FCC staff have been working on developing new performance 

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

approval in fiscal year 2005. 

FCC’s three key oversight mechanisms for the E-rate program—rulemaking 

procedures, beneficiary audits, and reviews of USAC decisions (appeals 

decisions)—are not fully effective in managing the program. FCC’s 

rulemakings have often lacked specificity and led to situations where 

USAC, in crafting the details needed to operate the program, has 

6

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

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

part of the executive budget formulation process. 
Page 6 GAO-05-151 E-Rate Program

established administrative procedures that arguably rise to the level of 

policy decisions, even though USAC is prohibited from making program 

policies. This creates a situation where important USAC administrative 

procedures have been deemed unenforceable by FCC with regard to the 

recovery of funds for violations of those procedures. While audits have 

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

audit findings in the past. Also, neither FCC nor USAC have conducted a 

large enough number of beneficiary audits to be able to statistically support 

an accurate assessment of the level of waste, fraud, and abuse in the 

program. FCC is examining a proposal by USAC for resolving audit 

findings, and the FCC IG and USAC are planning to conduct a larger 

number of audits that will allow for an estimation of the annual amount of 

improper payments by the E-rate program. According to FCC officials, 

FCC’s oversight through appeals decisions suffers from a significant 

appeals backlog due in part to a shortage of FCC staff and staff turnover. 

Thus, issues raised on appeal may not be addressed in a timely manner. 

Because appeals decisions are used as precedent, this slowness adds 

uncertainty to the program and impacts beneficiaries.

To address the management and oversight problems we have identified, we 

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

comprehensive assessment to determine whether all necessary 

government accountability requirements, policies, and practices have been 

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

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

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

program’s appeals backlog, including ensuring that adequate staffing 

resources are devoted to E-rate appeals. 

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

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

the program, and anticipates taking additional steps during the coming 

year. FCC concurred with our recommendations on establishing 

performance goals and measures and developing a strategy for reducing 

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

it conduct a comprehensive assessment concerning the applicability of 

government accountability requirements, policies, and practices. FCC 

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

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

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

constitutes an appropriation under the current structure of the E-rate 
Page 7 GAO-05-151 E-Rate Program

program and the extent to which FCC has delegated some program 

functions to USAC. 

Background The concept of “universal service” has traditionally meant providing 

residential telephone subscribers with nationwide access to basic 

telephone services at reasonable rates. Universal service programs 

traditionally targeted support to low-income customers and customers in 

rural and other areas where the costs of providing basic telephone service 

were high. The Telecommunications Act of 1996 broadened the scope of 

universal service to include, among other things, support for schools and 

libraries. The act instructed FCC 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.7

 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. . . .”8

 Based on this direction, and 

following the recommendations of the Federal-State Joint Board on 

Universal Service,9

 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.10 Many of these 

companies, in turn, pass their contribution costs on to their subscribers 

through a line item on subscribers’ phone bills.11 FCC capped funding for 

the E-rate program at $2.25 billion per year, although funding requests by 

7

47 U.S.C. § 254(h)(1)(B).

8

47 U.S.C. § 254(h)(2).

9

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.

10These 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.

11The 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.
Page 8 GAO-05-151 E-Rate Program

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,12

although FCC retains responsibility for overseeing the program’s 

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

response to congressional conference committee direction,13 FCC has 

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

the statute or rules, or interpret the intent of Congress.”14 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. The 

FCC IG has noted that program participants generally consider USAC the 

primary source for guidance on the rules governing the E-rate program. See 

appendix III for a more detailed explanation of the structure of USAC.

12In 1998, we issued a legal opinion on the then-current structure of the E-rate program 

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

program. Under the Government Corporation Control Act, an agency must have specific 

statutory authority to establish a corporation. 31 U.S.C. § 9102. We concluded that FCC did 

not have authority to create a separate independent corporation to administer the E-rate 

program. B-278820, Feb. 10, 1998. Subsequently, FCC eliminated the Schools and Libraries 

Corporation as a separate entity and restructured the universal service program to its 

present form. We have not addressed FCC’s authority to establish the current organizational 

structure. In 1998, in view of the questions surrounding the establishment of USAC itself, the 

commission requested statutory authorization from Congress. No legislation was enacted. 

FCC has not sought any further congressional authorization or direction on the nature of the 

Universal Service Fund or the establishment of USAC.

13See S.1768, 105th Cong., § 2004(b)(2)(A) (1998).

1447 C.F.R. § 54.702(c). 
Page 9 GAO-05-151 E-Rate Program

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

include eligible schools and libraries15 may receive discounts for eligible 

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

support. The program places schools and libraries into various discount 

categories, based on indicators of need, 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. Schools 

and libraries in areas with higher percentages of students eligible for free 

or reduced-price lunches through the National School Lunch Program (or a 

federally approved alternative mechanism) qualify for higher discounts on 

eligible services. Schools and libraries located in rural areas16 also receive 

greater discounts in most cases, as shown in table 1.

Table 1: E-Rate Program Discount Matrix 

Source: 47 C.F.R. § 54.505(c).

15Eligibility 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.

16An applicant is classified as rural based on the definition adopted by the U.S. Department 

of Health and Human Services’ Office of Rural Health Policy.

Percent

Students eligible for school lunch program

Urban

discount

Rural

discount

less than 1 20 25

1–19 40 50

20–34 50 60

35–49 60 70

50–74 80 80

75–100 90 90
Page 10 GAO-05-151 E-Rate Program

FCC has defined four classes of services that are eligible for E-rate support:

• telecommunications services, such as local, long-distance, and 

international telephone service as well as high-speed data links (e.g., T-1 

lines);

• Internet access services, such as broadband Internet access and e-mail 

services; 

• internal connections, such as telecommunications wiring, routers, 

switches, and network servers that are necessary to transport 

information to individual classrooms; and 

• basic maintenance on internal connections.

The list of specific eligible services within each class is updated annually 

and posted on USAC’s Web site. FCC’s rules provide that requests for 

telecommunications services and Internet access for all discount 

categories shall receive first priority for the available funding (Priority One 

services). The remaining funds are allocated to requests for support for 

internal connections and basic maintenance (Priority Two services), 

beginning with the most economically disadvantaged schools and libraries, 

as determined by the discount matrix. Because of this prioritization, not all 

requests for internal connections necessarily receive funding.17

17Starting in funding year 2005, eligible entities will only be able to receive support for 

internal connections in two out of every five funding years. All requests for Priority One 

services that have been found consistent with FCC rules through the Program Integrity 

Assurance review process have been funded since the beginning of the program.
Page 11 GAO-05-151 E-Rate Program

Prior to applying for discounted services, an applicant must conduct a 

technology assessment and develop a technology plan to ensure that any 

services it purchases will be used effectively.18 The applicant submits a 

form to USAC setting forth its technological needs. Once the school or 

library has complied with the commission’s competitive bidding 

requirements and entered into agreements with service providers for 

eligible services, it must file a second form with USAC that details the types 

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

services, and the amount of discount being requested. USAC reviews the 

forms and issues funding commitment decision letters (USAC could reduce 

the amount requested if the school or library has included ineligible 

services in its application or has calculated its discount category 

incorrectly19). Generally, it is the service provider that seeks 

reimbursement from USAC for the discounted portion of the service.20

FCC Established an 

Unusual Program 

Structure without 

Comprehensively 

Addressing the 

Applicability of 

Governmental 

Standards and Fiscal 

Controls

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 its issuance of 

commitment letters constitutes obligations for purposes of the act. We 

agree with FCC’s determinations on these issues, as explained in detail in 

appendix II. 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 

18Applicants do not actually have to submit any proof of having an approved technology plan 

until much later in the process. Applicants that seek discounts only for basic, long distance, 

or cellular telephone services are not required to prepare a technology plan.

19The program relies on applicants to self-certify important information. For example, in 

addition to calculating their own discount categories based on USAC’s formula, applicants 

must certify that they: (1) based their requests on approved technology plans (if it was 

required); (2) have sufficient funding to pay for the nondiscounted portion of eligible costs 

and for ineligible resources, such as computers and software, that are necessary to use the 

requested services; and (3) complied with all applicable state and local laws or rules 

regarding procurement.

20The school or library could also pay the service provider in full and then seek 

reimbursement from USAC for the discount portion.
Page 12 GAO-05-151 E-Rate Program

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. The Telecommunications Act required FCC to consider the 

recommendations of the Federal-State Joint Board on Universal Service 

and then to develop specific, predictable, and equitable support 

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

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

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

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

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

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

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

unusual in several respects compared with other federal programs:

• FCC appointed USAC as the permanent administrator of the Universal 

Service Fund,21 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.

21USAC 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. 
Page 13 GAO-05-151 E-Rate Program

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

should be treated as federal funds have troubled the program from the 

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

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

apportionment from OMB, the monies are maintained outside of 

Treasury accounts by USAC and some of the monies have been 

invested.22 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.23 

As explained below, appropriated funds are subject, unless specifically 

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

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

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

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

and the appropriate Treasury regulations,24 which govern fiscal activities 

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

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

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

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

of Inspector General first looked at the Universal Service Fund in 1999 as 

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

because FCC had determined that the Universal Service Fund was a 

component of FCC for financial reporting purposes. During that audit, the 

FCC IG questioned commission staff regarding the nature of the fund and, 

specifically, whether it was subject to the statutory and regulatory 

requirements for federal funds. In the next year’s audit, the FCC IG noted 

22The 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. 

23See 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. 

24As set forth in part 31 of the Code of Federal Regulations or the Treasury Financial Manual.
Page 14 GAO-05-151 E-Rate Program

that the commission could not ensure that Universal Service Fund 

activities were in compliance with all laws and regulations because the 

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

unresolved at the end of the audit. 

FCC officials told us that the commission has substantially resolved the 

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

begin preparing Universal Service Fund financial statements consistent 

with generally accepted accounting principles for federal agencies 

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

Government Standard General Ledger. While it is true that these steps and 

other FCC determinations discussed below should provide greater 

protections for universal service funding, FCC has addressed only a few of 

the issues that need to be resolved. In fact, staff from the FCC’s IG’s office 

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

adequately addressed their concerns because the order did not 

comprehensively detail which fiscal requirements apply to the Universal 

Service Fund and which do not.

FCC has, however, made some determinations concerning the status of the 

Universal Service Fund and the fiscal controls that apply. FCC’s 

determinations, and our analysis, in brief, are discussed below. (See app. II 

for our more thorough legal analysis of fiscal law issues involving the 

Universal Service Fund.) 

Status of funds as appropriated funds. In assessing the financial 

statement reporting requirements for FCC components in 2000, FCC 

concluded that the Universal Service Fund constitutes a permanent 

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

be collected and available for specified purposes without further 

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

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

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

to authorize an agency to enter into obligations and make disbursements 

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

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

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

constitutes an appropriation.25 In these statutes, Congress (1) authorizes 

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

2563 Comp. Gen. 331 (1984); 13 Comp. Gen. 77 (1933).
Page 15 GAO-05-151 E-Rate Program

the fund available for expenditure for a specified purpose without further 

action by Congress. This authority to obligate or expend collections 

without further congressional action constitutes a continuing 

appropriation or a permanent appropriation of the collections.26 Because 

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

authorized collection of fees from telecommunications carriers and the 

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

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

permanent appropriation.

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

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

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

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

staff from USAC realized during contractor-provided training on GovGAAP 

procedures that the commitment letters sent to beneficiaries (notifying 

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

be viewed as “obligations” of appropriated funds.27 If so, and if FCC also 

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

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

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

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

investments28 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 

26E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (D.C. Cir. 1965), cert. denied, 384 U.S. 

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

27An “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.

28According 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 16 GAO-05-151 E-Rate Program

fund approximately $4.6 million in immediate losses and could potentially 

result in millions in foregone annual interest income. 

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

Antideficiency Act, resulting in the abrupt decision to suspend funding 

commitment decision letters and liquidate investments. In response to 

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

Universal Service Fund a one-year exemption from the Antideficiency 

Act.29 Nevertheless, FCC’s conclusion on this issue was correct: Absent a 

statutory exemption, the Universal Service Fund is subject to the 

Antideficiency Act, and its funding commitment decision letters constitute 

obligations for purposes of the act. 

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

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

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

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

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

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

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

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

entity that is legally responsible for the management and oversight of the Erate program and because FCC’s employees are federal officers and 

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

Universal Service Fund will again be subject to the Antideficiency Act 

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

extend or make permanent the exemption.

An important issue that arises from the application of the Antideficiency 

Act to the Universal Service Fund is what actions constitute obligations 

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

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

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

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

Antideficiency Act by ensuring that agencies have adequate budget 

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

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

29Universal 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.
Page 17 GAO-05-151 E-Rate Program

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

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

States. . . .”30 

With respect to the Universal Service Fund, the funding commitment 

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

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

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

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

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

commitment decision letter remains valid and outstanding, USAC and FCC 

no longer control the Universal Service Fund’s liability; it is dependent on 

the actions taken by the school or library. Consequently, we agree with FCC 

that a recordable obligation is incurred at the time of issuance of the 

funding commitment decision letter indicating approval of the applicant’s 

discount.

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

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

funding commitment decision letters constitute recordable obligations of 

the Universal Service Fund, there are several significant fiscal law issues 

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

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

these determinations in light of the status of universal service monies as 

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

constitutes an appropriation, FCC needs to reconsider the applicability of 

the Miscellaneous Receipts Statue, 31 U.S.C. § 3302, which requires that 

money received for the use of the United States be deposited in the 

Treasury unless otherwise authorized by law.

31 FCC also needs to assess

30See B-300480, April 9, 2003. 

31Because 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.
Page 18 GAO-05-151 E-Rate Program

the applicability of other fiscal control and accountability statutes (e.g., the 

Single Audit Act and the Cash Management Improvement Act).32 

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?33 Are some of the functions carried out by 

USAC, even though they have been characterized as administrative or 

ministerial, arguably inherently governmental activities34 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. 

32For example, in October 2003, when the FCC ordered USAC to comply with GovGAAP, it 

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

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

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.

33See 31 U.S.C. §§ 3321, 3322, 3325, and the Treasury Financial Manual.

34See OMB Circular A-76, May 29, 2003, which defines an inherently governmental activity as 

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

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

governmental activities include the establishment of procedures and processes related to 

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

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

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

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

governmental activity. 
Page 19 GAO-05-151 E-Rate Program

FCC Did Not Develop 

Useful Performance 

Goals and Measures for 

Assessing and 

Managing the E-Rate 

Program

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. 

FCC’s Performance Goals 

and Measures Were Not 

Useful in Assessing the 

Impact of E-Rate Funds

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.35 As the agency accountable for the E-rate program, FCC is 

responsible under the Government Performance and Results Act of 1993 

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

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

reporting publicly on how well it is doing.36

3547 U.S.C. § 254(h)(2)(A).

36For 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).
Page 20 GAO-05-151 E-Rate Program

In testimony before the Senate Committee on Commerce, Science, and 

Transportation in July 1998, we stated that the E-rate program was 

beginning its first funding year without clear and specific goals and 

measures. FCC simply noted in its performance plan for fiscal year 1999 

that it would “work to improve the connections of classrooms, libraries, 

and rural health care facilities to the Internet by the end of [fiscal year] 

1999.” This type of general statement, with no specific goals and measures 

for agency accountability, is not in accord with the Results Act. We 

recommended in our testimony that FCC develop specific E-rate goals and 

measures before the end of fiscal year 1998, in time to gauge the effect of 

the program’s first year of operations.37 As we stated at that time, 

performance measurement is critical to determining a program’s progress 

in meeting its intended outcomes. Without clearly articulated goals and 

reliable performance data, Congress, FCC, and USAC would have a difficult 

time assessing the effectiveness of the program and determining whether 

operational changes were needed. Although FCC responded that our 

recommendation was “reasonable,” we noted in our subsequent March 

1999 report on the program that FCC had not acted on our 

recommendation and again stressed the importance of implementing it.38 

FCC began including specific E-rate goals and measures in its fiscal year 

2000 budget estimate submission to Congress and continued to set annual 

E-rate goals for fiscal years 2001 and 2002. No annual goals for fiscal years 

2003 or 2004 were included in FCC’s performance reports, however.39

The goals and measures that FCC set for fiscal years 2000 through 2002 

were not useful in assessing the impact of E-rate program funding. The 

goals focused on achieving certain percentage levels of Internet 

connectivity during a given fiscal year for schools, public school 

37See 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).

38See GAO, Schools and Libraries Program: Actions Taken to Improve Operational 

Procedures Prior to Committing Funds, GAO/RCED-99-51 (Washington, D.C.: Mar. 5, 1999).

39FCC’s fiscal year 2003 budget estimate to Congress (dated February 2002) and its 2001 

annual performance report (dated March 2002) included E-rate goals for fiscal year 2003 of 

connecting 100 percent of public school instructional classrooms and 85 percent of private 

school instructional classrooms to the Internet. However, these goals for fiscal year 2003 

were dropped from subsequent budget submissions and annual performance reports. FCC’s 

last connectivity goal to be carried forward into subsequent budget submissions and annual 

performance reports—that 93 percent of public school instructional classrooms have 

Internet access—was for fiscal year 2002.
Page 21 GAO-05-151 E-Rate Program

instructional classrooms, and libraries. For example, FCC set a fiscal year 

2001 goal of having 90 percent of public school instructional classrooms 

connected to the Internet. FCC measured its performance in meeting these 

goals using nationwide survey data from the Department of Education’s 

National Center for Education Statistics (NCES) on the percentages of 

public schools and public school instructional classrooms that are 

connected to the Internet. The percentages are based on a nationally 

representative sample of approximately 1,000 public schools that are 

surveyed about Internet access and Internet-related topics. A fundamental 

problem with using these NCES percentages is that a nationally 

representative sample covers both public schools that received E-rate 

funding for internal connections and those that did not. The percentages, 

therefore, do not directly measure the impact of E-rate funds, as opposed 

to other sources of funding, on increases in the percentage of schools 

connected to the Internet. This is a significant problem because the 

applicants’ requests for E-rate funds for internal connections have 

exceeded the amounts available for that purpose by billions of dollars. As a 

result, while E-rate funds for internal connections have been provided on a 

priority basis to applicants eligible for very high discounts (generally 70 

percent to 80 percent or higher), funding has typically not been available to 

meet the internal connections requests of the other applicants. Only in the 

second funding year (1999) were funds sufficient to cover eligible internal 

connections requests for applicants in all of the discount bands. The 

applicants who were denied E-rate support for internal connections have 

had to rely on other funding sources for their internal connections needs, 

such as state and local government. 

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 NCES 

data, 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.40 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 

40See 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 22 GAO-05-151 E-Rate Program

program, as opposed to other sources of federal, state, local, and private 

funding?

Another problem is that FCC did not consistently set annual goals for the 

two other major groups of E-rate beneficiaries—libraries and private 

schools. For example, FCC’s budget submission to Congress in February 

2000 included a fiscal year 2001 goal of having 90 percent of libraries 

connected to the Internet. But this goal was dropped from FCC’s 

subsequent performance reports and budget estimate submissions, and no 

other library connectivity goal was set. As for private schools, no specific 

Internet connectivity goal was set for them until early 2002, when FCC 

included a fiscal year 2003 goal of having 85 percent of private school 

instructional classrooms connected to the Internet in both its fiscal year 

2003 budget estimate to Congress (dated February 2002) and its 2001 

annual performance report (dated March 2002). But these were the only 

instances where this goal appeared. It was dropped from FCC’s subsequent 

budget estimate submissions and annual performance reports. In addition 

to these goal-setting shortcomings, no performance measurement data for 

either libraries’ or private schools’ Internet connectivity levels have been 

included in any of FCC’s annual budget estimate submissions or 

performance reports.

The failure to measure the program’s impact on public and private schools 

and libraries over the past 7 years undercuts one of the fundamental 

purposes 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. 

E-Rate Management 

Improvement Goals Not 

Featured in FCC 

Performance Plans

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.41 Under the Results Act, managers should use 

performance data to identify performance gaps and determine where to 

target their resources to improve overall mission accomplishment. 

41See, GAO, Agency Performance Plans: Examples of Practices That Can Improve 

Usefulness to Decisionmakers, GAO/GGD/AIMD-99-69 (Washington, D.C.: Feb. 26, 1999).
Page 23 GAO-05-151 E-Rate Program

However, management-oriented goals have not been a feature of FCC’s 

performance plans, despite long-standing concerns about the program’s 

effectiveness in key areas. For example, E-rate applicants’ technology 

needs are posted on USAC’s Web site to allow service providers an 

opportunity to bid on them. FCC has maintained that absent competitive 

bidding, the prices charged by service providers could be needlessly high, 

unnecessarily depleting the program’s funds and limiting its ability to 

support other applicants. In the commission’s fiscal year 2000 budget 

estimate submission, FCC included a goal for ensuring that the program’s 

competitive bidding process led to bids by two or more service providers 

for the majority of applicants. However, this goal was dropped from FCC’s 

subsequent budget submissions and annual performance reports. No other 

goal was developed in its place to assess how well the competitive bidding 

process is working.

In another example, FCC found that the E-rate participation rates for urban 

low-income school districts and rural school districts fell below the 

average participation rate for all eligible schools. In preparing our 

December 2000 report on the E-rate program, FCC officials told us they had 

finalized a new performance plan for the E-rate program that included 

tactical goals targeted at increasing participation by both of these groups, 

as well as rural libraries and libraries serving small areas.42 During our 

current review, when we asked FCC officials about the plan, we were told 

that it had not been implemented and that none of the FCC staff currently 

working on E-rate was familiar with the plan. 

42See GAO, Schools and Libraries Program: Application and Invoice Review Procedures 

Need Strengthening, GAO-01-105 (Washington, D.C.: Dec. 15, 2000).
Page 24 GAO-05-151 E-Rate Program

Another ongoing program management issue is that a significant amount of 

funds committed annually go unused by the applicants that requested 

them. This is troubling because, as noted earlier, the demand for funding is 

high and there is typically not enough money each year to meet all funding 

requests for internal connections. In December 2000, we recommended 

that FCC ascertain and address the difficulties that applicants may be 

having in this regard. FCC responded that it would undertake an analysis, 

with USAC, of the factors leading to funds being committed to applicants 

but not used; and USAC responded that it would develop and pursue 

options for narrowing the gap between commitments and disbursements, 

and discuss the options with FCC. Here again was an opportunity to 

develop a performance goal and measure to address this program 

management problem, but none was developed.43 Similarly, no 

performance goals and measures have been included in FCC’s performance 

reports related to the management responsibility of identifying and 

mitigating fraud, waste, and abuse of program funds.

FCC Is Currently 

Considering E-Rate Goals in 

Response to OMB’s 

Concerns 

OMB also has raised concerns about FCC’s lack of E-rate performance 

goals and measures. In its 2003 assessment of the E-rate program, OMB, 

using its Program Assessment Rating Tool (PART), noted that FCC 

discontinued specific E-rate program measures after fiscal year 2002.44 

OMB’s overall PART rating for the E-rate program was “results not 

demonstrated.” This does not necessarily mean that the program is 

ineffective, but rather that its effectiveness is unknown.45 OMB observed 

43See GAO, Schools and Libraries Program: Application and Invoice Review Procedures 

Need Strengthening, GAO-01-105 (Washington, D.C.: Dec. 15, 2000). FCC now allows unused 

E-rate funds to be carried over into a subsequent funding year. For example, in June 2004, 

FCC announced that $150 million in unused funds would be carried forward from funding 

year 2001 to increase funds for funding year 2004 in excess of the annual cap. However, 

neither FCC nor USAC have dealt with identifying the underlying causes of why millions of 

dollars in committed funds go unused and determining whether changes in program rules 

and procedures are needed to address difficulties that applicants may be having in using the 

funds committed to them. 

44OMB developed PART as a diagnostic tool to provide a consistent approach to evaluating 

federal programs as part of the executive budget formulation process. The goal of PART is 

to evaluate program performance, determine the causes for strong or weak performance, 

and take action to remedy deficiencies and achieve better results. OMB chose to review the 

E-rate program because of the large amount of dollars involved.

45For a discussion of the PART assessment process, see GAO, Performance Budgeting: 

Observations on the Use of OMB’s Program Assessment Rating Tool for Fiscal Year 2004 

Budget, GAO-04-174 (Washington, D.C.: Jan. 30, 2004).
Page 25 GAO-05-151 E-Rate Program

that the program lacked long-term, outcome-oriented performance goals 

and efficiency measures against which to measure the program’s success in 

promoting connectivity and to improve and refine the program going 

forward. Because of this, OMB stated that it is not clear what the end goal 

of the E-rate program is or how to measure its effectiveness other than 

incremental increases in the number of classrooms and libraries connected 

to the Internet. While recognizing that E-rate funding is generally going to 

the intended beneficiaries of the program, OMB concluded that there was 

no way to tell whether the program has resulted in cost-effective 

deployment and use of advanced telecommunications services for schools 

and libraries. OMB also noted that there was little oversight to ensure that 

the program beneficiaries were using the funding appropriately and 

effectively. Among other things, OMB’s report recommended that for fiscal 

year 2005, FCC should develop a long-term outcome goal for the program, 

and consider reinstituting a connectivity measure and developing an 

efficiency measure. 

FCC officials told us they have been working with OMB to respond to the 

concerns raised in its PART assessment and that several FCC staff have 

recently received training in the development of performance measures. At 

the time of our review, FCC was considering goals that involve classroom 

connectivity and program efficiency. As we discussed earlier, any 

meaningful goals on connectivity would need to have associated 

measurement data that could isolate the impact of E-rate funding on 

changes in connectivity in order to assess the program’s impact. It should 

be noted that with 99 percent of public schools and 92 percent of public 

school instructional classrooms connected to the Internet in 2002 

(according to the most current NCES report on public school connectivity 

at the time of our review), applicants are moving past achieving initial 

connectivity to maintaining and upgrading existing connections over the 

long term. As a result, simple measures of Internet connectivity will be 

much less useful indicators of the program’s performance than in past 

years.
Page 26 GAO-05-151 E-Rate Program

As for the program’s efficiency in providing support for 

telecommunications services, FCC staff told us they are considering a 

measure that would calculate and track the E-rate disbursements for each 

school (or school system) divided by the number of students, further 

broken down by the eligible services categories. An efficiency measure 

would be valuable, as there has been a long-standing concern about some 

applicants requesting funding for technology that greatly exceeds their 

needs (sometimes referred to as “goldplating”). While “E-rate dollars-perstudent” ratios might be interesting data to assess in this regard, a 

performance measure needs to have a goal associated with it in order to be 

a meaningful tool for performance management. Currently, the program 

rules do not expressly establish a clear test for cost-effectiveness that 

could be used as a measurable goal, although in late 2003, FCC asked for 

comment on whether it would be beneficial or administratively feasible to 

develop such a test.46 At the time we concluded our review, FCC planned to 

finalize performance measures for the E-rate program and seek OMB 

approval in fiscal year 2005.

As noted above, OMB’s PART assessment recommended that FCC develop 

a long-term outcome goal for the program. “Outcomes” are the results or 

benefits of the products or services provided by the program. A basic 

policy issue associated with the E-rate program involves assessing the 

extent to which the billions of dollars of support for telecommunications 

services are providing the sought-after return on investment: improvement 

in the quality of education. As we noted in our 2000 report on the program, 

the complex issue of measuring educational outcomes lies outside FCC’s 

expertise and comes under the purview of the Department of Education.47 

FCC officials told us they have made initial contact with staff at the 

Department of Education to discuss the development of a long-term E-rate 

outcome measure. According to FCC’s current timetable, the collection and 

analysis of data for outcome measures would start with funding year 2006.

46See FCC, Third Report and Order and Second Further Notice of Proposed Rulemaking, 

FCC 03-323 (Washington, D.C.; Dec. 23, 2003), paragraph 87.

47See GAO, Schools and Libraries Program: Application and Invoice Review Procedures 

Need Strengthening, GAO-01-105 (Washington, D.C.: Dec. 15, 2000).
Page 27 GAO-05-151 E-Rate Program

FCC’s Oversight 

Mechanisms Are Not 

Fully Effective in 

Managing the E-Rate 

Program 

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.

FCC’s Rulemakings Have 

Led to Problems with 

USAC’s Procedures and 

Enforcement of Those 

Procedures

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

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

existing rules, as well as for 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 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 from making policy, some USAC 

procedures arguably rise to the level of policy decisions. Second, even 

though USAC procedures are issued with some degree of FCC approval, 

enforcement problems could arise when audits uncover violations of USAC 

procedures by beneficiaries or service providers. The FCC IG has 

expressed concern over situations where USAC administrative procedures 

have not been formally codified because commission staff have stated that, 

in such situations, there is generally no legal basis to recover funds from 

applicants that failed to comply with the USAC administrative procedures. 

Throughout the history of the program, USAC has found it necessary to 

create additional procedures to effectively and efficiently process more 

than 40,000 applications annually. However, these procedures sometimes 
Page 28 GAO-05-151 E-Rate Program

deal with more than just ministerial details. For example, procedures that 

affect funding decisions arguably rise to the level of policy decisions. 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 FCC IG stated in May 2004 in his Semiannual 

Report to Congress that he believes the distinction between FCC rules and 

USAC administrative procedures represents a weakness in program design, 

fails to give program participants a clear understanding of the rules and the 

consequences associated with rule violations, and complicates the design 

and implementation of effective program oversight.

The critical nature of USAC’s administrative procedures is further 

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

the program. For example, in 1999, USAC implemented a procedure known 

as “the 30-percent policy.”48 This procedure sought to avoid blanket denials 

of funding requests because of minor errors in the eligibility of the services 

requested, while at the same time prompting applicants to prepare their 

applications carefully and make a conscientious effort to exclude ineligible 

items. If more than 30 percent of the services for which discounts were 

requested were ineligible, USAC denied the funding request rather than 

undertake the administratively burdensome task of correcting the request 

and refiguring the amount based only on the eligible services requested. In 

April 2003, in the commission’s Second Report and Order in its E-rate 

docket, FCC codified USAC’s 30-percent policy, stating that the 

commission found the procedure “improves program operation and is 

important in reducing the administrative costs of the program.”49 In fact, 

the procedures put in place by USAC generally appear to be sensible and 

represent thoughtful administration of the E-rate program. Nonetheless, 

USAC is prohibited from making program rules. FCC’s codification of 

USAC procedures—after those procedures have been put in place and 

applied to program participants—raises concerns about whether these 

48Although FCC rules prohibit USAC from making policy, even the commission referred to 

USAC’s procedure as the 30-percent “policy.” According to a USAC official, USAC originally 

thought that it had to deny any application that contained a request for an ineligible service 

or item. To avoid this, USAC suggested a 10-percent threshold. During 1998, FCC staff 

suggested that the threshold be set at 50 percent. In 1999, the threshold was changed to 30 

percent and later codified at that level.

49FCC, Second Report and Order and Further Notice of Proposed Rulemaking, In the 

Matter of Schools and Libraries Universal Service Support Mechanism, FCC 03-101 

(Washington, D.C.; Apr. 30, 2003), paragraph 40.
Page 29 GAO-05-151 E-Rate Program

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.”50 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.

The other problem with USAC administrative procedures is the question of 

enforcement of those procedures through recovery of funds for procedural 

violations. FCC has generally held that funds can be recovered from a 

beneficiary or service provider only if an FCC rule was violated. In its 

August 2004 order, after several years of E-rate audits by USAC and the 

FCC IG, the commission attempted to clarify the rules of the program with 

relation to recovery of funds. In the order, the commission describes nine 

overall categories of statutory violations or FCC rule violations that would 

result in fund recovery being sought, in whole or in part, from beneficiaries 

or service providers. With respect to violations of USAC operating 

procedures, FCC said in its August 2004 order that it intends to evaluate 

whether there are USAC procedures that should be codified into the 

commission’s rules and whether violation of any of these codified 

procedures should also be a basis for recovery of funding.51 The 

commission noted that recovery of funds may not be appropriate for 

violations of procedural rules codified to enhance operations. 

Nevertheless, the commission stated that applicants will be required to 

comply with procedural rules and that applications that do not comply will 

be rejected. The commission noted, however, that if the codified 

procedural rule violation “is inadvertently overlooked during the 

application phase and funds are disbursed, the commission will not require 

that they be recovered, except to the extent that such rules are essential to 

50FCC, Fifth Report and Order, In the Matter of Schools and Libraries Universal Service 

Support Mechanism, FCC-04-190 (Washington, D.C.; Aug. 13, 2004), paragraph 78. 

51In its August 2004 E-rate order, FCC directed USAC to submit to the commission a list 

summarizing all current USAC administrative procedures identifying, where appropriate, 

the specific rules or statutory requirements that such procedures further, and those 

procedures that serve to protect against waste, fraud, and abuse (FCC 04-190 at paragraph 

80). On October 29, 2004, USAC submitted to FCC a 52-page document listing the USAC 

procedures that were currently used in making E-rate funding decisions, but that were not 

explicitly stated in a commission rule. Under the August 2004 FCC order, USAC is to 

produce such a document annually.
Page 30 GAO-05-151 E-Rate Program

the financial integrity of the program, as designated by the agency, or that 

circumstances suggest the possibility of waste, fraud, or abuse, which will 

be evaluated on a case-by-case basis.”52 

Thus, even under the August 2004 FCC order, the commission did not 

clearly address the treatment of beneficiaries who violate a USAC 

administrative procedure that has not been codified. This creates a 

potentially unfair situation when the procedure is one that can lead to 

denial of an application. That is, if violation of the procedure is caught in 

the application process, funding will be denied. However, if the violation 

slips by in the application process, funding is granted, and the violation is 

later caught during a beneficiary audit, no recovery of funding can be 

attempted since there was no actual rule violation by the beneficiary. Also, 

as noted earlier, the FCC order also leaves to USAC the initial 

determination of which procedures should be codified rather than having 

FCC make that determination. Lastly, FCC did not establish a time frame 

for its review of USAC procedures.

FCC Has Been Slow to 

Address Problems Raised by 

Audit Findings

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. In December 2000, we recommended that USAC 

establish a quality assurance function responsible for ensuring that its 

funding decisions adhere to FCC’s program eligibility rules.53 In response to 

our recommendation, USAC increased both its in-house audit staff and the 

number of beneficiary audits conducted by outside accounting firms. 54 

Since 2000, there have been 122 beneficiary audits conducted by outside 

52FCC 04-190, paragraph 19. The commission’s actual sentence only referred to “the 

procedural violation,” but read in the context of the entire paragraph, the commission 

appears to be discussing procedures that have been codified into its rules. 

53See GAO-01-105, 37. 

54USAC also maintains a whistleblower hotline to provide the public with a means of 

reporting activities that may violate E-rate program rules. USAC’s Special Investigations 

Team investigates every call to determine if further action is required. Since 2001, USAC has 

received and followed up on over 100 calls per year. In addition to the whistleblower hotline, 

USAC, with support from FCC, created in May 2003 a 14-member Task Force on the 

Prevention of Waste, Fraud and Abuse to share their perspectives on where the program 

could be susceptible to waste, fraud, and abuse and what specific steps could be taken to 

address those areas. The task force released its report on September 22, 2003. Most of the 

task force’s recommendations have been implemented or are under consideration by USAC 

or FCC. 
Page 31 GAO-05-151 E-Rate Program

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.55 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. The IG notes 

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

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

commission (USAC must seek guidance from the commission when an 

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

questions are raised). Regardless, the recovery of inappropriately 

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

occur in a timely fashion.

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

Government,

56 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, table 2 below shows audit findings from the 1998 program year 

that were only recently resolved by FCC’s August 2004 rulemaking. 

55USAC, 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.

56GAO/AIMD-00-21.3.1
Page 32 GAO-05-151 E-Rate Program

Table 2: Examples of E-Rate Beneficiary Audit Findings from Program Year 1998, 

Resolved in 2004

Source: GAO analysis of USAC audit reports.

As table 2 illustrates, audit findings related to the lack of record retention 

by beneficiaries were a problem. Given that the E-rate program operates 

similarly in some ways to a grant program, FCC should have had in place a 

record retention policy at the start of the program as a basic accountability 

measure since record retention is fundamental to an audit trail. In fact, 

early in the program, FCC did create rules on beneficiary and service 

provider document retention, but the rules contained a potentially 

enormous loophole. Under FCC’s rules, program participants were required 

only to maintain “the kind of procurement records that they maintain for 

other purchases.”57 Thus, if a school or library had no record retention 

policy for other purchases, they did not need to retain records related to Erate purchases. FCC proposed a more comprehensive record retention 

policy in December 2003 and released it for comment. In August 2004—7 

years into the existence of the E-rate program—FCC adopted record 

retention rules that call for beneficiaries and service providers to retain Erate program-related records for at least five years.

Issue

Types of audit findings included in beneficiary 

audits

Record retention—competitive 

bidding 

Copies of contracts could not be provided upon 

request. In addition, evidence could not be 

provided of compliance with competitive bidding 

requirements.

Services provided within funding year Services delivered after the last date to receive 

services.

Record retention—equipment and 

services

E-rate equipment could not be identified because 

fixed asset details were insufficient to identify 

specific equipment.

Technology plans Beneficiary was not monitoring its technology plan 

implementation.

57At the same time, however, applicants had to certify on FCC Form 471 that they would 

retain for 5 years any and all worksheets and other records that they relied upon to fill out 

their applications and, if audited, would make such records available to USAC. We were told 

by FCC that the form does not carry the force of a rule.
Page 33 GAO-05-151 E-Rate Program

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.”58 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 2004.59

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 waivers of rules warranting recovery of funds.60 

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. 

58FCC 04-190, paragraph 74.

59Comments were due January 5, 2005; reply comments were due January 20, 2005.

60FCC 04-190, paragraph 75. 
Page 34 GAO-05-151 E-Rate Program

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 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.61 

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. FCC’s IG and USAC are currently working to 

address this problem by following OMB’s guidance on the Improper 

Payments Information Act of 2002 (IPIA). IPIA requires that agencies 

annually estimate the amount of improper payments for programs and 

activities susceptible to significant improper payments. In response to 

IPIA, FCC and USAC are currently in the process of soliciting and 

evaluating responses to a Request for Proposals issued to procure the 

services of an independent auditor to conduct approximately 250 

beneficiary audits in the E-rate program.

We examined the methodology used by FCC’s IG and USAC for arriving at a 

sample size of 250, and it appears that they properly used OMB guidance 

under IPIA in determining the sample size. However, because the effort is 

still in the beginning stages, they were not able to provide additional 

information on the sample design, such as the method of sample selection, 

stratification criteria, and estimation methods. Sample design will be 

critical in determining the value of the information gained from the audits. 

In addition, FCC IG officials estimated the cost at approximately $50,000 

per audit. With an anticipated total cost of $12.5 million (250 audits at 

$50,000 per audit), this is an expensive effort. If the cost of the 250 audits 

varies by the size of the grant, the sample design could be optimized based 

on variable cost, which may either yield a tighter precision of the estimate 

of the amount of improper payments or reduce the total cost of the audit. It 

should also be noted that because this represents a sizable increase from 

61In 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 saying that FCC had “enabled 

implementation of the [E-rate] statutory goals with a minimum of fraud, waste, and abuse.”
Page 35 GAO-05-151 E-Rate Program

prior audits, FCC may face an even greater challenge in resolving the audit 

findings in a timely manner. 

Lastly, we were told by USAC officials that they have recently contracted 

with a consulting firm to conduct approximately 1,000 site visits a year to 

program beneficiaries beginning in mid-January 2005. Although these are 

not audits, USAC testified in June 2004 that the site visits will allow USAC 

to assess more fully, in real time, how E-rate funds are being used, to learn 

about and publicize best practices in education technology and program 

compliance, and to help ensure that products and services have in fact 

been delivered and are being used effectively. For each visit, the selected 

vendor will, among other things, conduct a physical inspection of 

equipment and services purchased with E-rate funds. A checklist, outlining 

the steps for review, is to be followed for each visit to ensure consistency. 

The deliverables will include a formal report on each beneficiary visited, a 

monthly report on best practices observed and outreach suggestions, and 

immediate notification to USAC in instances where significant 

noncompliance is discovered.

FCC Has Been Slow to Act 

on Some E-Rate Appeals 

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

decisions,62 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. There is currently a substantial appeals backlog at 

FCC (i.e., appeals pending for longer than 90 days). Out of 1,865 appeals to 

FCC from 1998 through the end of 2004, approximately 527 appeals remain 

undecided, of which approximately 458 (25 percent) are backlog appeals.63

62Virtually 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.

63The 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 36 GAO-05-151 E-Rate Program

Perhaps of most concern are the subset of appeals dealing with recovery of 

funding erroneously committed to schools and libraries.64 According to 

USAC, recovery has been slowed, in part, because FCC has not been timely 

in resolving these types of appeals from beneficiaries. In fact, through 

October 2004, of the approximately $36 million in E-rate funding for which 

USAC has brought recovery actions since the beginning of the program, 

only $3.2 million has been recovered and approximately $14.4 million is 

tied up in appeals with FCC.65 This is money that might be placed back into 

the E-rate program for disbursement to applicants.

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, adding some delay to appeals 

decisions because new staff necessarily take time to learn about the 

program and the issues. (See app. IV for additional information on FCC 

staffing levels in support of the E-rate program.) Additionally, we were told 

that another factor contributing to the backlog is that the appeals have 

become more complicated as the program has matured. For example, 

applicants are increasingly appealing decisions concerning eligible 

services. These appeals can be difficult to resolve because the technology 

needs of participants in the program can be complex. 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. 

Conclusions FCC has not done enough to proactively manage and provide a framework 

of government accountability for the multibillion-dollar E-rate program. 

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

conducted a comprehensive assessment of which federal requirements, 

64When USAC finds that funds were disbursed to a beneficiary or service provider in error or 

that fraud, waste, or abuse has taken place, USAC must seek to recover the funds through 

cash payments. 

65Approximately $8.9 million in recoveries is tied up in appeals with USAC, $8.7 million is in 

various stages of the improperly dispersed funds recovery process, and $800,000 has been 

referred to FCC.
Page 37 GAO-05-151 E-Rate Program

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

Service Fund. FCC has recently begun to address a few of these issues, 

concluding that the Universal Service Fund constitutes an appropriation 

and that the Fund is subject to the Antideficiency Act. Nevertheless, 

fundamental issues affecting the E-rate program remain to be resolved. 

Resolving these issues in a comprehensive fashion is key to ensuring that 

FCC applies the appropriate government accountability standards and 

safeguards to the E-rate program and to the Universal Service Fund. 

In managing the program, FCC has not developed specific and meaningful 

goals and measures to assess the impact of E-rate funding, address mission 

critical management problems, and establish the direction of the program 

as schools and libraries move beyond initial Internet connectivity to longterm maintenance concerns. Moreover, FCC has consistently shifted many 

important responsibilities onto USAC, such as identifying which 

administrative procedures should be adopted as commission rules and 

handling resolutions of audit findings. Combined with the weaknesses in 

FCC’s oversight mechanisms, these problems create barriers to 

enforcement, uncertainty about what the program’s requirements really 

are, and questions about the soundness of the program’s structure and 

accountability amid recent cases of fraud, waste, and abuse. This mixture 

of E-rate problems—related both to the structure of the program and to 

FCC’s shortcomings in carrying out key E-rate management 

responsibilities—indicates the need for corrective actions by FCC. 

Finally, regardless of the problems with the E-rate program, schools and 

libraries across the country use E-rate funds for their purchases of 

telecommunications services. Any reassessment of the program must take 

the needs of the beneficiaries into account. It is particularly important that 

efforts to protect the program from fraud, waste, and abuse do not result in 

a program that is excessively burdensome on program participants.

Recommendations for 

Executive Action

Given the critical importance of telecommunications technologies to 

schools and libraries, we recommend that the Chairman of the Federal 

Communications Commission direct FCC staff to take the following three 

actions:

1. Conduct and document a comprehensive assessment to determine 

whether all necessary government accountability requirements, 

policies, and practices have been applied and are fully in place to 
Page 38 GAO-05-151 E-Rate Program

protect the program and the funding. The assessment should include, 

but not be limited to

• the implications of FCC’s determination that the Universal Service 

Fund constitutes an appropriation by identifying the fiscal controls 

that apply and do not apply to the Universal Service Fund, including 

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

• an evaluation of the legal authority for the organizational structure 

for carrying out the E-rate program, including the relationship 

between FCC and USAC and their respective authorities and roles in 

implementing the E-rate program.

Because of the complexities posed by FCC’s arrangements with USAC 

and the questions that flow from these arrangements, FCC may want to 

request an advance decision from the Comptroller General under 31 

U.S.C. § 3529. Section 3529 provides the heads of agencies and 

certifying and disbursing officers of the government an opportunity to 

request decisions from the Comptroller General on matters of 

appropriations law in order to ensure compliance with fiscal law. 

2. Establish performance goals and measures for the E-rate program that 

are consistent with the Government Performance and Results Act. FCC 

should use the resulting performance data to develop analyses of the 

actual impact of E-rate funding and to determine areas for improved 

program operations. 

3. Develop a strategy for reducing the E-rate program’s appeals backlog, 

including ensuring that adequate staffing resources are devoted to Erate appeals resolution. 

Agency Comments and 

Our Evaluation 

We provided a draft of this report to FCC for review and comment. In its 

comments, which are reprinted in appendix V, FCC noted that it took a 

number of steps during 2004 to improve its management and oversight of 

the E-rate program. These included the adoption of new rules regarding the 

recovery of improperly disbursed funds; the implementation of new 

accounting requirements related to the Universal Service Fund; new efforts 

to deter waste, fraud, and abuse; and work with the FCC IG to develop a 

plan for conducting hundreds of additional beneficiary audits. FCC 

commented that it has strengthened its oversight and management of 

USAC through the establishment of a high-level working group to 
Page 39 GAO-05-151 E-Rate Program

coordinate oversight and has adopted rules codifying certain USAC 

procedures. FCC also noted that it is currently evaluating USAC’s existing 

operations and administrative procedures to determine which should be 

codified into FCC rules. 

FCC reaffirmed its belief that the current structure of USAC is consistent 

with congressional intent and guidance, adding that it nevertheless intends 

to consider whether to modify the manner in which the Universal Service 

Fund is administered. During the coming year, FCC anticipates examining 

whether and how to modify its existing administrative structure and 

processes as they apply to the E-rate program. FCC intends to consider 

other administrative structures and their implications, including those 

relying on contractual arrangements. Other actions under consideration 

include initiating a notice-and-comment rulemaking proceeding to assess 

the management of the E-rate program and the Universal Service Fund; 

retaining an outside contractor to evaluate the program and make 

recommendations for improving its administration; and requiring certain 

beneficiaries to obtain an independent audit of their compliance with FCC 

rules.

Regarding our recommendations, FCC officials told us they did not concur 

with our recommendation to conduct a comprehensive assessment 

concerning the applicability of government accountability requirements, 

policies, and practices. FCC maintains that it has conducted timely and 

extensive analysis of significant legal issues related to the status of the fund 

on a case-by-case basis, and provided examples. Although we recognize 

that FCC has engaged in internal deliberations and external consultations 

and analyses of a number of statutes, we do not believe this has been done 

in a timely manner or that it is appropriate to do so on a case-by-case basis. 

A definitive determination on the entire framework of laws that apply or do 

not apply to this program and to the Universal Service Fund itself would 

enable FCC to make proactive operational decisions on what steps it 

should take and what internal controls it should have in place. As noted in 

our report, we continue to believe that major issues remain unresolved 

such as defining the relationship between FCC and USAC and their 

respective authorities and roles in implementing the E-rate program and 

identifying whether other actions taken in the universal service programs 

constitute obligations and ensuring that those are properly recorded. FCC 

officials told us that they concurred with our recommendations for 

establishing performance goals and measures and developing a strategy for 

reducing the backlog of appeals, noting that the commission is already 

taking steps to address these recommendations.
Page 40 GAO-05-151 E-Rate Program

As agreed with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after the 

date of this letter. At that time, we will send copies to interested 

congressional committees; the Chairman, FCC; the Chief Executive Officer, 

USAC; and other interested parties. We also will make copies available to 

others upon request. In addition, this report will be available at no cost on 

the GAO Web site at http://www.gao.gov. If you have any questions about 

this report, please contact me at (202) 512-2834 or goldsteinm@gao.gov. 

Key contributors to this report are listed in appendix VI.

Sincerely yours, 

Mark L. Goldstein

Director, Physical Infrastructure Issues
Page 41 GAO-05-151 E-Rate Program

Appendix I

Scope and Methodology ApApenednxidexiIs

Our objectives were to review and evaluate: (1) the effect of the current 

structure of the E-rate program on the Federal Communications 

Commission’s (FCC) management of the program, (2) FCC’s establishment 

of and use of goals and performance measures in managing the program, 

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

proceedings, beneficiary audits, and reviews of the Universal Service 

Administrative Company’s (USAC) decisions (appeals)—in managing the 

program. 

To provide information on the effect of the current structure of the E-rate 

program, we reviewed provisions of the Telecommunications Act, as well 

as documents and records used by FCC to implement and administer the Erate program. We also assessed the extent to which FCC had established 

managerial and financial government accountability standards, safeguards, 

and legal relationships for the E-rate program and the Universal Service 

Fund. Additionally, we interviewed officials from FCC’s Wireline 

Competition Bureau, Office of General Counsel, Office of Managing 

Director, and Office of Inspector General. We also interviewed officials 

from the Office of Management and Budget (OMB) and USAC, the not-forprofit corporation that administers the E-rate program under FCC 

oversight.

To respond to the second objective on FCC’s use of goals and performance 

measures in managing the program, we reviewed provisions of the 

Government Performance and Results Act of 1993, as well as documents 

and records used by FCC to establish goals and performance measures—

budget justifications, performance plans, and strategic plans. We also 

reviewed OMB’s Program Assessment Rating Tool that assessed FCC’s 

performance goals and related measures for the E-rate program. In 

addition, we discussed this issue with officials from FCC’s Wireline 

Competition Bureau, Office of Managing Director, Office of Strategic 

Planning and Policy Analysis, and Office of Inspector General. We also 

interviewed officials from the Office of Management and Budget and 

Department of Education.

Finally, to evaluate FCC’s oversight mechanisms for managing the program, 

we reviewed relevant documents relating to all three oversight 

mechanisms: (1) rulemaking proceedings, (2) beneficiary audits, and (3) 

fact-specific adjudicatory decisions (i.e., appeals decisions). Specifically, 

we reviewed FCC orders and provisions of the Code of Federal 

Regulations, which sets forth FCC’s rulemaking process. In addition, we 

reviewed relevant USAC documents and policies, including its procedures 
Appendix I

Scope and Methodology

Page 42 GAO-05-151 E-Rate Program

that are in place to aid in the administration of the program. To assess 

FCC’s oversight mechanism of auditing, we reviewed the FCC Inspector 

General’s (IG) Semi-Annual Reports to Congress, GAO’s Standards for 

Internal Controls in the Federal Government, recent FCC orders, and 

beneficiary audits used to assess program compliance. Our statistician also 

examined the methodology (based on interviews with and documentation 

provided by FCC and USAC) that the FCC IG and USAC have proposed for 

the next round of beneficiary audits. To gain an understanding of how FCC 

manages appeals, we reviewed relevant documents and gathered data from 

FCC and USAC regarding the number of outstanding appeals and USAC 

recovery actions tied up in FCC appeals.

To assess the reliability of the FCC appeals data and USAC recovery 

actions tied up in FCC appeals, we (1) reviewed related documentation, (2) 

conducted electronic testing of the source databases, and (3) interviewed 

knowledgeable agency officials about the quality of the data.1

 We found 

that one database was limited in producing reports that track historical 

trends. However, this limitation was minor in the context of our 

engagement. As a result, we determined that the data were sufficiently 

reliable for the purposes of this report. Finally, we discussed this issue with 

officials from FCC’s Wireline Competition Bureau, Office of General 

Counsel, Office of Managing Director, Office of Inspector General, and 

USAC.

We also reviewed internal memorandums provided by FCC’s Office of 

General Counsel to determine how FCC has applied federal requirements, 

policies, and practices to the E-rate program and to the Universal Service 

Fund. We interviewed FCC officials to obtain their views concerning 

whether monies in the Universal Service Fund should be treated as federal 

funds and the effect of using government accounting standards on the fund.

Funding commitments since the inception of the program, the number of 

USAC appeals, and USAC recoveries tied up in appeals to USAC were used 

only as background information in the report to provide context for our 

findings; therefore, the data were not verified for data reliability purposes. 

However, to assess the reliability of funding for which USAC has brought 

recovery actions, we (1) reviewed related documentation, (2) conducted 

electronic testing of the source databases, and (3) interviewed 

1

We also cross-walked the number of FCC appeals and FCC commitment adjustment 

appeals back to the respective source databases. 
Appendix I

Scope and Methodology

Page 43 GAO-05-151 E-Rate Program

knowledgeable agency officials about the quality of the data. As a result, we 

determined that the data were sufficiently reliable for the purposes of this 

report. We also determined that other relevant documents and records that 

we gathered were sufficiently reliable for the purposes of our review. 

Our review was performed from December 2003 through December 2004 in 

accordance with generally accepted government auditing standards.
Page 44 GAO-05-151 E-Rate Program

Appendix II

Fiscal Law Issues Involving the Universal 

Service Fund ApendxiI

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

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

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

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

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

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

treated as federal funds for several purposes.1

 However, FCC has never 

confronted or assessed these issues in a comprehensive fashion and has 

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

recently concluded that as a permanent indefinite appropriation, USF is 

subject to the Antideficiency Act and its funding commitment decision 

letters constitute obligations for purposes of the Antideficiency Act. As 

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

conclusions concerning the status of USF raise further issues related to the 

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

that FCC needs to explore and resolve. 

Background Universal service has been a basic goal of telecommunications regulation 

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

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

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

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

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

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

AT&T’s internal rate structure to garner funds to support universal service. 

With the breakup of AT&T in 1983, FCC established a Universal Service 

Fund administered by the National Exchange Carrier Association (NECA). 

NECA is an association of incumbent local telephone companies, also 

established at the direction of FCC. Among other things, NECA was to 

1

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

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

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

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

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

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

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

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

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

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

management formally define in writing the financial management roles and responsibilities 

of FCC and USAC to avoid confusion and misunderstanding. 
Appendix II

Fiscal Law Issues Involving the Universal 

Service Fund

Page 45 GAO-05-151 E-Rate Program

administer universal service through interstate access tariffs and the 

revenue distribution process for the nation’s local telephone companies. At 

that time, NECA, a nongovernmental entity, privately maintained the 

Universal Service Fund outside the U.S. Treasury. 

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

universal service and expanded it to include support for acquisition by 

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

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

defines universal service, generally, as a level of telecommunications 

services that FCC establishes periodically after taking into account various 

considerations, including the extent to which telecommunications services 

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

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

provides interstate telecommunications services shall contribute . . . to the 

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

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

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

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

universal service and develop specific, predictable, and equitable support 

mechanisms. 

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

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

administrator of the universal service mechanisms.2

 USAC administers the 

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

USAC collects the carriers’ universal service contributions, which 

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

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

use of USF to, among other things, subsidize advanced telecommunications 

services for schools and libraries in a program commonly referred to as the

2

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

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

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

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

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

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

Libraries Corporation as a separate entity, and restructured the universal service program to 

its present form. 
Appendix II

Fiscal Law Issues Involving the Universal 

Service Fund

Page 46 GAO-05-151 E-Rate Program

E-rate program.3 Pursuant to the E-rate program, eligible schools and 

libraries can apply annually to receive support and can spend the funding 

on specific eligible services and equipment, including telephone services, 

Internet access services, and the installation of internal wiring and other 

related items. Generally, FCC orders, rules, and directives, as well as 

procedures developed by USAC, establish the program’s criteria. USAC 

carries out the program’s day-to-day operations, such as answering 

inquiries from schools and libraries; processing and reviewing applications; 

making funding commitment decisions and issuing funding commitment 

decision letters; and collecting, managing, investing, and disbursing E-rate 

funds.

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

The program places schools and libraries into various discount categories, 

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

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

cost for the service and the E-rate program covers the remainder. E-rate 

discounts range from 20 percent to 90 percent. 

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

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

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

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

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

funding commitment decision letters.4

 The funding commitment decision 

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

discounts. These funding commitment decision letters also notify the 

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

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

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

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

have started and USAC can pay service provider invoices. Generally, the 

service provider seeks reimbursement from USAC for the discounted 

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

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

discount portion. 

3

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

“Education” rate. 

4

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

services in its application or has calculated its discount category incorrectly.
Appendix II

Fiscal Law Issues Involving the Universal 

Service Fund

Page 47 GAO-05-151 E-Rate Program

What Is the Universal 

Service Fund?

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

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

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

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

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

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

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

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

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

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

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

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

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

funds. 

FCC has concluded that USF constitutes a permanent indefinite 

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

appropriation identifies a fund or account as an appropriation and 

authorizes an agency to enter into obligations and make disbursements out 

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

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

appropriations acts to bear the title “An Act making appropriations. . .”). 

Congress, however, appropriates funds in a variety of ways other than in 

regular annual appropriation acts.5

 Indeed, our decisions and those of the 

courts so recognize. 

5

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

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

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

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

authority to obligate and expend the proceeds of offsetting receipts and collections”) and 31 

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

obligation or expenditure”). 
Appendix II

Fiscal Law Issues Involving the Universal 

Service Fund

Page 48 GAO-05-151 E-Rate Program

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

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

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

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

the fund available for expenditure for a specified purpose without further 

action by Congress. This authority to obligate or expend collections 

without further congressional action constitutes a continuing 

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

Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (D.C. Cir. 1965), cert. denied, 384 

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

Our decisions are replete with examples of permanent appropriations, such 

as revolving funds and various special deposit funds, including mobile 

home inspection fees collected by the Secretary of Housing and Urban 

Development,6

 licensing revenues received by the Commission on the 

Bicentennial,7 tolls and other receipts deposited in the Panama Canal 

Revolving Fund,8 user fees collected by the Saint Lawrence Seaway 

Development Corporation,9 user fees collected from tobacco producers to 

provide tobacco inspection, certification and other services,10 and user fees 

collected from firms using the Department of Agriculture’s meat grading 

services.11 It is not essential for Congress to expressly designate a fund as 

an appropriation or to use literal language of “appropriation,” so long as 

Congress authorizes the expenditure of fees or receipts collected and 

deposited to a specific account or fund.12 In cases where Congress does not 

intend these types of collections or funds to be considered “appropriated 

funds,” it explicitly states that in law. See e.g., 12 U.S.C. § 244 (the Federal 

Reserve Board levies assessments on its member banks to pay for its 

expenses and “funds derived from such assessments shall not be construed 

to be government funds or appropriated moneys”); 12 U.S.C. § 1422b(c) 

(the Office of Federal Housing Enterprise Oversight levies assessments 

upon the Federal Home Loan Banks and from other sources to pay its 

6

59 Comp. Gen. 215 (1980).

7

B-228777, Aug. 26, 1988.

8

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

9

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

1063 Comp. Gen. 285 (1984). 

11B-191761, Sept. 22, 1978.

12B-193573, Dec. 19, 1979.
Appendix II

Fiscal Law Issues Involving the Universal 

Service Fund

Page 49 GAO-05-151 E-Rate Program

expenses, but such funds “shall not be construed to be government funds 

or appropriated monies, or subject to apportionment for the purposes of 

chapter 15 of title 31, or any other authority”).

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

authorized collection of fees from telecommunications carriers, and 

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

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

permanent appropriation. 

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

1996, there existed an administratively sanctioned universal service fund. 

With the Telecommunications Act of 1996, Congress specifically expanded 

the contribution base of the fund, statutorily mandated contributions into 

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

expended. These congressional actions established USF in a manner that 

meets the elements for a permanent appropriation and Congress did not 

specify that USF should be considered anything other than an 

appropriation.14 

Does the Antideficiency Act 

Apply to USF?

Appropriated funds are subject to a variety of statutory controls and 

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

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

control. See e.g., 63 Comp. Gen. 110 (1983); B-257525, Nov. 30, 1994; B13The United States Court of Appeals for the Fifth Circuit has recognized the governmental 

character of the funds. Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393, 426-428 

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

Fifth Circuit held that USF funds are statutorily mandated special assessments supporting a 

federal program mandated by Congress. FCC has also requested that the Department of 

Justice recognize that USF are federal funds for purposes of representing FCC and the 

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

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

universal service contributions are administered by an independent nonfederal entity and 

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

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

the purpose of that resolution was to respond to an attempt to withhold USF payments as a 

means to balance the federal budget or achieve budget savings. We understand section 614, 

H.R. 2267 intended to insulate USF from budgetary pressures and not to express a view on 

the proper fiscal treatment of USF. Our interpretation of USF as a permanent appropriation 

is consistent with the intent that USF is only available for universal service and could only 

be changed if Congress amended the law to permit USF to be used for other purposes. 
Appendix II

Fiscal Law Issues Involving the Universal 

Service Fund

Page 50 GAO-05-151 E-Rate Program

228777, Aug. 26, 1988; B-223857, Feb. 27, 1987; 35 Comp. Gen. 436 (1956). A 

key component of this scheme of funds control is the Antideficiency Act. B223857, Feb. 27, 1987. The Antideficiency Act15 has been termed “the 

cornerstone of congressional efforts to bind the executive branch of 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FCC’s employees are federal officers and employees of the United States 

subject to the Antideficiency Act.17 

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

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

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

Commodity Credit Corporation pursuant to borrowing authority are 

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

1531 U.S.C. §§ 1341, 1342 and 1517.

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

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

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

of the statute or rules, or interpreting the intent of Congress. 47 C.F.R. § 54.702(c). As 

addressed below, one of the issues that remains to be resolved is whether USAC is 

authorized to take the actions that obligate and disburse USF funds pursuant to FCC orders, 

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

obligations and disbursements are specifically authorized by FCC officials and employees.
Appendix II

Fiscal Law Issues Involving the Universal 

Service Fund

Page 51 GAO-05-151 E-Rate Program

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

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

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

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

and advances for services available to finance its operations is subject to 

Antideficiency Act). 

Where Congress intends for appropriated funds to be exempt from the 

application of statutory controls on the use of appropriations, including the 

Antideficiency Act, it does so expressly. See e.g., B-193573, Jan. 8, 1979; B193573, Dec. 19, 1979; B-217578, Oct. 16, 1986 (Saint Lawrence Seaway 

Development Corporation has express statutory authority to determine the 

character and necessity of its obligations and is therefore exempt from 

many of the restrictions on the use of appropriated funds that would 

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

exempts the Nuclear Regulatory Commission from Antideficiency Act 

prohibition against obligations or expenditures in advance or in excess of 

appropriations). There is no such exemption for FCC or USF from the 

prohibitions of the Antideficiency Act. Thus, USF is subject to the 

Antideficiency Act. 

Do the Funding 

Commitment Decision 

Letters Issued to Schools 

and Libraries Constitute 

Obligations? 

An important issue that arises from the application of the Antideficiency 

Act to USF is what actions constitute obligations chargeable against the 

fund. Understanding the concept of an obligation and properly recording 

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

scheme of funds control that Congress envisioned when it enacted fiscal 

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

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

funding commitment decision letters issued to schools and libraries are 

properly regarded as obligations. FCC has determined that funding 

commitment decision letters constitute obligations. And again, as 

explained below, we agree with FCC’s determination. 

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

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

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

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

revolving fund without further congressional action. See 72 Comp. Gen. 59 (1992).
Appendix II

Fiscal Law Issues Involving the Universal 

Service Fund

Page 52 GAO-05-151 E-Rate Program

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

and amount of such obligations permits compliance with the 

Antideficiency Act by ensuring that agencies have adequate budget 

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

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

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

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

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

where the agency has agreed to assume responsibility in an interagency 

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

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

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

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

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

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

McDonnell Douglas Corp. v. United States, 37 Fed. Cl. 295, 301 (1997). 

The funding commitment decision letters provided to applicant schools 

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

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

what amounts. The funding commitment decision letters also notify 

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

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

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

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

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

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

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

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

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

this instance, the funding commitment decision letter provides the school 

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

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

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

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

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

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

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

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

other sacrifice of resources as a result of past transactions or events. See B-300480, Apr. 9, 

2003, and FASAB Statement of Federal Financial Accounting Standards Number 1. 
Appendix II

Fiscal Law Issues Involving the Universal 

Service Fund

Page 53 GAO-05-151 E-Rate Program

commitment decision letter remains valid and outstanding, USAC and FCC 

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

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

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

decision letter indicating approval of the applicant’s discount. Thus, these 

obligations should be recorded in the amounts approved by the funding 

commitment decision letters. If at a later date, a particular applicant uses 

an amount less than the maximum or rejects funding, then the obligation 

amount can be adjusted or deobligated, respectively.

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

actions taken in the universal service program constitute obligations and 

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

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

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

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

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

also identify any other actions that may constitute recordable obligations 

and ensure those are properly recorded.
Page 54 GAO-05-151 E-Rate Program

Appendix III

Structure of the Universal Service 

Administrative Company ApendxiI

Various policies to promote universal service—providing residential 

customers with affordable, nationwide access to basic telephone service—

have generally been around since the 1950s. Congress codified and made 

significant changes to universal service policy in the Telecommunications 

Act of 1996. However, Congress did not prescribe a structure for 

administering the universal service programs and instead called for a 

Federal-State Joint Board on Universal Service (Joint Board) to make 

recommendations to FCC.1

 

At the time of the act, the National Exchange Carrier Association (NECA) 

was responsible for administering the existing universal service 

mechanisms providing support for high-cost areas and low-income 

individuals. NECA is an association of incumbent local telephone 

companies that was established at FCC’s direction in 1983 (in anticipation 

of the breakup of the Bell System) to administer interstate access tariffs 

and the revenue distribution process for the nation’s nearly 1,000 local 

telephone companies. In November 1996, the Joint Board recommended 

that, in the interest of providing services to schools and libraries and health 

care providers quickly, FCC should appoint NECA as the temporary 

administrator of universal service to these groups, subject to changes in 

NECA’s governance to make NECA more representative of the 

telecommunications industry as a whole. Under the Joint Board’s 

recommendation, NECA would continue this role until a permanent 

administrator was appointed. The Joint Board recommended that FCC 

establish an advisory board to select and oversee a neutral third-party 

administrator for all universal service programs and suggested criteria to 

be used in that selection. The Joint Board further recommended that FCC 

allow NECA to change its membership and governance in a manner that 

would allow it to compete for the role of permanent administrator in the 

advisory board’s selection process.

On the basis of the Joint Board’s recommendations, FCC agreed in a May 

1997 order to appoint NECA as the temporary administrator, subject to 

changes in NECA’s governance. It also agreed to create a federal advisory 

committee, whose sole responsibility would be to recommend an 

administrator, and directed that the administrator should select a 

contractor to manage the application process for schools and libraries. 

NECA later determined that developing a satisfactory board structure to be 

1

GAO, Telecommunications: FCC Lacked Authority to Create Corporations to Administer 

Universal Service Programs, GAO/T-RCED/OGC-98-84 (Washington, D.C.: Mar. 31, 1998).
Appendix III

Structure of the Universal Service 

Administrative Company

Page 55 GAO-05-151 E-Rate Program

able to bid for the permanent administrator role might not be possible. 

Thus, NECA proposed to FCC in January 1997 that it be allowed to 

establish a separate subsidiary to administer universal service. 

In July 1997, FCC issued an order directing NECA to create two 

independent nonprofit corporations—one to administer the program for 

schools and libraries (the Schools and Libraries Corporation) and one to 

administer the program for rural health care providers (the Rural Health 

Care Corporation). FCC’s order further specified that these corporations 

would continue to administer the programs even after the appointment of a 

permanent administrator. To carry out billing, collecting, and disbursement 

activities for these programs, FCC directed NECA to create a nonprofit 

subsidiary. FCC further directed that the subsidiary create a special 

committee of its board of directors to administer the universal service 

programs for high-cost areas and low-income individuals. NECA created 

the Universal Service Administrative Company (USAC) as the subsidiary.

In November 1998, FCC changed the universal service structure in 

response to legal concerns about FCC’s authority to create the two 

independent corporations and Congress’s directive that a single entity 

administer universal service support.2

 FCC appointed an existing body, 

USAC, as the permanent administrator of the program and directed the 

Schools and Libraries Corporation and the Rural Health Care Corporation 

to merge with USAC by January 1, 1999. Under this merger, the staff of the 

Schools and Libraries Corporation became part of a new Schools and 

Libraries Division (SLD) within USAC, carrying out essentially the same 

functions as before, such as processing and reviewing E-rate applications. 

However, SLD contracts out most of its billing, collecting, and 

disbursement activities to USAC. In addition, in 2000 NECA formed an 

unaffiliated, for-profit corporation, NECA Services Inc., to pursue new 

business opportunities. USAC later contracted most of its application 

processing, client support, and review functions to NECA Services Inc. See 

figure 1.

2

GAO, Schools and Libraries Program: Actions Taken to Improve Operational Procedures 

Prior to Committing Funds, GAO/RCED-99-51 (Washington, D.C.: Mar. 5, 1999).
Appendix III

Structure of the Universal Service 

Administrative Company

Page 56 GAO-05-151 E-Rate Program

Figure 1: Relationship among Entities Involved in the E-Rate Program

National Exchange Carrier

Association (NECA)

Not-for-profit corporation;

sole USAC stockholder

Universal Service 

Administrative 

Company (USAC)

Not-for-profit corporation;

administers all universal 

service programs 

Schools and Libraries 

Division (SLD)

Division of USAC;

carries out day-to-day 

program operations

Source: GAO analysis of USAC information.

USAC contracts with

NECA Services Inc.

to provide programmatic

support services to SLD

USAC performs

billing,collecting, and

disbursements for all

universal service programs,

including E-rate

NECA Services Inc.

For-profit company

(independent from NECA)
Page 57 GAO-05-151 E-Rate Program

Appendix IV

FCC Staffing Levels in Support of the E-Rate 

Program ApendxiIV

Table 3: Number of FCC Full-Time Equivalent (FTE)a Positions Supporting E-Rate Program, Fiscal Years 1997-2004

Source: FCC.

Notes: N/A = not applicable.

a

Full-time equivalent (FTE) is a measure of federal civilian employment. One FTE is equal to 1 workyear of 2,080 hours.

b

All E-rate related investigation and audit work performed by FCC’s Enforcement Bureau is contained 

in the figures for 2003 and 2004. The Enforcement Bureau was established in 1999 and first assigned 

an audit function in the commission’s 2002 reorganization.

c

This estimate is for all universal service programs.

Fiscal years

FCC 

bureau/office 1997 1998 1999 2000 2001 2002 2003 2004

Enforcement Bureaub

Professional N/A N/A N/A N/A N/A N/A 0.50 0.75

Managerial N/A N/A N/A N/A N/A N/A 0.20 0.50

Administrative N/A N/A N/A N/A N/A N/A 0.20 0.30

Subtotal 0.90 1.55

Office of General Counsel

Professional 0.65-0.70 0.30-0.40 0.80-0.90 0.55-0.60 0.30-0.35 0.35-0.40 0.30-0.40 0.30-0.40

Managerial 0.65 0.10-0.15 0.40 0.40 0.20-0.23 0.20-0.25 0.25-0.30 0.10-0.15

Subtotal 1.30-1.35 0.40-0.55 1.20-1.30 0.95-1 0.50-0.58 0.55-0.65 0.55-0.70 0.40-0.55

Office of Managing Director

Professional 0.00 0.00 0.25 0.50 0.50 1.00 1.00 1.10

Managerial 0.00 0.00 0.25 0.25 0.25 0.30 0.30 0.30

Subtotal 0.00 0.00 0.50 0.75 0.75 1.30 1.30 1.40

Office of Strategic Planning

Professional 1.50c 0.10 0.10 0.10 0.10 0.10 0.50 0.50

Subtotal 1.50 0.10 0.10 0.10 0.10 0.10 0.50 0.50

Wireline Competition Bureau

Professional 4.00 6.00 10.00 13.00 10.00 9.00 8.00 5.80

Managerial 0.30 0.30 0.30 1.30 2.00 1.00 1.00 1.00

Administrative 1.20 1.60 2.20 2.50 2.80 2.80 2.20 2.20

Front office 

managerial

0.50 0.50 0.50 0.50 0.50 1.00 0.83 1.33

Subtotal 6.00 8.40 13.00 17.30 15.30 13.80 12.03 10.33

Total 8.80-8.85 8.90-9.05 14.80-14.90 19.10-19.15 16.65-16.73 15.75-15.85 15.28-15.43 14.18-14.33
Page 58 GAO-05-151 E-Rate Program

Appendix V

Comments from the Federal Communications 

Commission ApendxiV

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.

Now on pp. 36 and 37.

Now on p. 37.
Appendix V

Comments from the Federal Communications 

Commission 

Page 59 GAO-05-151 E-Rate Program

Now on pp. 37 and 38.

Now on p. 38.
Appendix V

Comments from the Federal Communications 

Commission 

Page 60 GAO-05-151 E-Rate Program
Appendix V

Comments from the Federal Communications 

Commission 

Page 61 GAO-05-151 E-Rate Program

Now on p. 12.

See comment 1.

Now on p. 11.

See comment 2.
Appendix V

Comments from the Federal Communications 

Commission 

Page 62 GAO-05-151 E-Rate Program
Appendix V

Comments from the Federal Communications 

Commission 

Page 63 GAO-05-151 E-Rate Program

Now on pp. 17 and 18.

See comment 3.

See comment 4.
Appendix V

Comments from the Federal Communications 

Commission 

Page 64 GAO-05-151 E-Rate Program

Now on pp. 19 and 25.

See comment 5.

Now on p. 19.

See comment 6.

See comment 7.

Now on p. 26.

Now on pp. 20 and 21.
Appendix V

Comments from the Federal Communications 

Commission 

Page 65 GAO-05-151 E-Rate Program
Appendix V

Comments from the Federal Communications 

Commission 

Page 66 GAO-05-151 E-Rate Program

The following are GAO’s comments on the Federal Communications 

Commission’s letter dated January 14, 2005. 

GAO’s Comments 1. As stated in our report, we have not addressed FCC’s authority to 

establish the current organizational structure. We recognize that FCC 

has reported to Congress on its implementation of the current 

organizational structure and it believes that structure is consistent with 

congressional intent and conforms to congressional guidance. 

However, at the time this structure was established by FCC, numerous 

issues such as the status of the Universal Service Fund as federal 

funds—specifically a permanent indefinite appropriation—and the 

applicability of fiscal statutes such as the Antideficiency Act had not 

been resolved. It is critical to the management of federal funds that the 

funds be properly collected, deposited, obligated, and expended by 

authorized parties in accordance with those determinations regarding 

the status of the funds. Thus, we believe FCC should consider whether 

the current organizational structure and roles and responsibilities of 

FCC and USAC are consistent with law and comply with fiscal and 

accountability requirements for federal funds. FCC states that it intends 

to consider whether to modify the manner in which the Universal 

Service Fund is administered, including possible changes to the 

underlying administrative structure. We believe this would be a positive 

step toward carrying out our recommendation. 

2. FCC states that it has undertaken a timely and extensive analysis of the 

significant legal issues related to 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 this has been done in a timely manner or that it is appropriate to 

do so on a case-by-case basis. 

Addressing the applicability of the statutes on a case-by-case basis, as 

issues have arisen, has put 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. The laws encompassing fiscal and accountability 

controls are not applied in isolation; rather, they are part of a 

framework that addresses issues of financial and general management 

of federal agencies and programs. The E-rate program was established 

over seven years ago, yet FCC is still analyzing whether certain statutes 
Appendix V

Comments from the Federal Communications 

Commission 

Page 67 GAO-05-151 E-Rate Program

or requirements apply to the program and what actions it must take to 

implement those statutes and ensure compliance with them. The 

recent issues involving the Antideficiency Act best illustrate the 

problem with this case-by-case approach. As explained in our report, it 

was not until the fall of 2004 that the applicability and consequences of 

the Antideficiency Act were resolved. Moreover, this was not the first 

time issues regarding the Antideficiency Act had been raised. In July 

1998, a question had been raised regarding USAC’s authority to 

commecially borrow funds. At that time, USAC was instructed to 

refrain from commercial borrowing while FCC was examining the 

applicability of the Antideficiency Act to USAC’s operations. While FCC 

determined that USAC should not borrow commercially in 1998, the 

question of whether there were other consequences for the E-rate 

program regarding the applicability of the Antideficiency Act was not 

addressed. Had FCC taken a comprehensive approach to the 

application of fiscal and accountability statutes such as the 

Antideficiency Act when the program was created or soon thereafter, 

FCC would have been in a position to determine what steps they should 

have taken and what internal controls they should have had in place to 

ensure compliance with those statutes. For example, with respect to 

the Antideficiency Act, they could have determined whether actions 

they were taking were obligations that needed to be recorded and, if so, 

made any necessary changes to the program to ensure that they had 

sufficient amounts in the Universal Service Fund to cover those 

obligations. 

Furthermore, while certain determinations may have been made 

internally, they have neither been analyzed nor definitively determined 

in FCC’s orders on the E-rate program. In addition, USAC has not 

always received instruction on how to carry out all of these 

requirements. For example, as noted in our report, in its October 2003 

order applying GovGAAP to the Universal Service Fund, 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. 

3. In our report, we list several examples of fiscal control and 

accountability statutes. FCC states in its letter that it has already made 

a determination of each statute’s applicability to the Universal Service 

Fund. We agree that FCC has made a determination involving the 
Appendix V

Comments from the Federal Communications 

Commission 

Page 68 GAO-05-151 E-Rate Program

applicability of the Improper Payments Information Act, and we 

therefore deleted our references to this act. We recognize that FCC has 

consulted with other agencies such as OMB and Treasury regarding the 

applicability of the Miscellaneous Receipts Act, the Single Audit Act, 

and the Cash Management Improvement Act. However, 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. Such a 

reconsideration is particularly important in the case of the 

Miscellaneous Receipts Act, where OMB and FCC determined in 2000 

that the act did not apply because the funds were not public monies for 

the use of the United States. 

Our recommendation focuses on a proactive, comprehensive analysis 

and determination of legal requirements rather than a continued 

approach of reactive case-by-case determinations. A definitive 

determination on the entire framework of laws that apply or do not 

apply to this program would enable FCC to make operational decisions 

on what steps they should take and what internal controls they should 

have in place to ensure compliance with applicable laws. 

4. As stated in our report, due to the complexities posed by these issues, 

GAO remains available to provide an advance decision to FCC under 31 

U.S.C. § 3529. 

5. Our report does not note that “FCC had established some performance 

measures, but determined that it needed to establish better and more 

comprehensive ways of measuring E-rate performance.” It also does 

not note that the reason FCC stopped using the number of public 

schools connected to the Internet was that it was no longer a useful 

measure of the program. Our report states that prior to fiscal year 2000, 

FCC had no specific goals and measures for the program; that for fiscal 

years 2000 through 2002, the goals and measures set by FCC were not 

useful for assessing the impact of E-rate program funding because the 

measures used did not directly measure the impact of E-rate funding; 

and that since fiscal year 2002 there have been no E-rate performance 

goals and measures at all. In its letter, FCC states that it is actively 

working to re-establish performance goals and measures that are 

consistent with the Government Performance and Results Act. Our 

finding is that FCC never established E-rate goals and measures that 

were consistent with the act in the first place, despite our 

recommendation in 1998 (and reiterated in 1999) to do so. In a 
Appendix V

Comments from the Federal Communications 

Commission 

Page 69 GAO-05-151 E-Rate Program

multibillion-dollar program now entering its eighth funding year, this is 

a serious management deficiency. 

In its letter, FCC notes that it needs to seek comment from stakeholders 

regarding performance measures. GAO’s guidance on implementing the 

Results Act supports this approach: Stakeholder involvement in 

defining goals is particularly important in a political environment, and 

the involvement of Congress is indispensable. While we understand the 

time involved in crafting useful performance goals and measures and 

complying with the notice-and-comment requirements of the 

Administrative Procedure Act, we urge FCC to move as quickly as 

possible in its efforts.

6. Our draft report included appeals numbers that were different from 

those in FCC’s letter. It appears that our numbers included waiver 

requests as well as appeals. We have changed our report to reflect the 

numbers included in FCC’s letter, which, according to FCC, are current 

as of January 1, 2005. This numerical difference does not reflect any 

material change.

7. We are encouraged that FCC has begun redirecting staff and hiring 

additional attorneys to Universal Service Fund oversight and program 

management, including the resolution of E-rate appeals. It is a 

particularly positive step that FCC has established a measurable goal of 

resolving all backlogged E-rate appeals by the end of calendar year 

2005. 
Page 70 GAO-05-151 E-Rate Program

Appendix VI

GAO Contacts and Staff Acknowledgments ApendxiVI

GAO Contacts John Finedore, (202) 512-6248

Teresa Russell, (214) 777-5604

Faye Morrison, (202) 512-6448

Staff 

Acknowledgments

In addition to those named above, Carol Anderson-Guthrie, Andy Clinton, 

Derrick Collins, Sandra DePaulis, Edda Emmanuelli-Perez, Chad Factor, 

Moses Garcia, Lynn Gibson, Karen O’Conor, Mindi Weisenbloom, and 

Alwynne Wilbur made key contributions to this report.

(543089)
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