United States General Accounting Office

GAO Report to the Chairman, Committee on

Commerce, Science, and Transportation,

U.S. Senate

March 1999 SCHOOLS AND

LIBRARIES PROGRAM

Actions Taken to Improve

Operational Procedures

Prior to Committing

Funds

GAO/RCED-99-51

GAO United States

General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-281644 

March 5, 1999

The Honorable John McCain

Chairman, Committee on Commerce

 Science, and Transportation

United States Senate

Dear Mr. Chairman:

As you know, the Telecommunications Act of 1996 expanded universal

service—affordable, nationwide telephone service—to eligible schools and

libraries and authorized the Federal Communications Commission (FCC) to

implement a program to assist these institutions in acquiring modern

telecommunications services. As implemented by FCC, schools and

libraries eligible for this program could receive discounts from vendors on

the cost of approved telecommunications services, Internet access, and

internal connections. To administer the program, FCC directed the creation

of the Schools and Libraries Corporation (the Corporation), which was

established in late 1997.

Concerned about the Corporation’s start-up activities, you asked us to

review its procedures and internal controls. In our testimony before your

Committee on July 16, 1998, we noted that the Corporation had made

progress in establishing an operational framework for the program that

was consistent with relevant FCC Orders.1

 However, we also found several

areas of concern and recommended that the FCC Chairman direct the

Corporation to take the following actions to strengthen its operations

before issuing any funding commitment letters to applicants:

• analyze a random sample of processed applications to determine if there

are any systemic weaknesses in the application review procedures;

• complete the design of the program’s operational procedures, automated

systems, and internal controls; and

• obtain a report from its independent accountants that finds that the

Corporation has developed an appropriate set of internal controls to

mitigate against waste, fraud, and abuse.

In addition, we recommended that the Corporation conduct in-depth

reviews of applications designated as “high risk” before, rather than after,

issuing commitment letters to these applicants. We also recommended

1

Schools and Libraries Corporation: Actions Needed to Strengthen Program Integrity Operations

Before Committing Funds (GAO/T-RCED-98-243, July 16, 1998).

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B-281644 

that FCC develop goals, measures, and performance targets for the program

that are consistent with the requirements of the Government Performance

and Results Act of 1993.

Following our July testimony, both the FCC Chairman and the Corporation

agreed to implement these recommendations to strengthen program

operations. This report responds to your subsequent request that we

assess the Corporation’s progress in implementing our recommendations.

You also asked us to highlight any additional issues that need to be

monitored as the program moves forward.

Results in Brief The Corporation has taken actions to implement the key

recommendations that we believed needed to be completed prior to

issuing any funding commitment letters to applicants. These included

(1) sampling processed applications to identify and correct any systemic

weaknesses in program integrity review procedures; (2) finalizing the

program’s procedures, automated systems, and internal controls; and

(3) obtaining a report from its independent accountants on the suitability

of the Corporation’s internal controls to prevent or detect material

departures from its Program Objectives. In addition, the Corporation is

taking action on our recommendation to complete special reviews of

“high-risk” applicants before issuing commitment letters to these

applicants. FCC, however, has not yet implemented our recommendation to

develop adequate goals, performance targets, and measures for the

program.

With our key operational recommendations implemented, the Corporation

began issuing its funding commitments for the first year to applicants in

late November 1998. The program, however, still faces major challenges as

it moves into new operational areas, such as reviewing and authorizing

reimbursements to vendors. Given the fact that the program is still

essentially in a start-up mode, close oversight by FCC will be especially

important in helping to identify and resolve operational problems.

Background Universal service traditionally has meant providing residential customers

with affordable, nationwide access to basic telephone service. The

Telecommunications Act of 1996, however, extended universal service

support to eligible schools and libraries. The new program (often referred

to as the “e-rate” program) is designed to improve schools’ and libraries’

access to modern telecommunications services. Generally, educational

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B-281644 

institutions that meet the definition of “schools” laid out in the

Elementary and Secondary Education Act of 1965 are eligible to

participate,2

 as are libraries that can receive assistance from a state’s

library administrative agency under the Library Services and Technology

Act.3

Schools and libraries do not receive direct funding from the program.

Instead, support comes in the form of discounts on the costs of

telecommunications services. FCC’s orders provided for discounts ranging

from 20 to 90 percent on all commercially available telecommunications

services, Internet access, and internal connections.4

 The act specifies that

every telecommunications carrier providing interstate telecommunications

services must contribute to a universal service fund, unless exempted by

FCC.

5

 This fund is used to reimburse vendors for the discounted services

that they provide to program participants.

Program Administration The act did not prescribe a structure for administering the program.

However, in 1997, FCC directed the establishment of the Schools and

Libraries Corporation to carry out this function. The Corporation works

within the framework of the FCC’s orders and rules to administer certain

program functions.

The Corporation, with a 14-member staff based in Washington, D.C.,

contracted out most of its application-processing, client support, and

review functions to the National Exchange Carrier Association (NECA),

located in New Jersey.6 NECA’s key responsibilities include reviewing

applications to ensure compliance with the program’s requirements and

processing invoices from telecommunications vendors to reimburse them

for the cost of discounts they provide. NECA, in turn, has subcontracted

2

Most public and private schools teaching kindergarten to grade 12 are eligible for support. Examples

of entities not eligible for support are home school programs, private vocational programs, and

institutions of higher education. In addition, private schools with endowments of more than

$50 million are not eligible to participate.

3

Libraries whose budgets are part of a school’s budget are not eligible to receive universal service

support.

4

Eligible telecommunications and Internet services include basic phone service, T-1 lines, dial-up

Internet access, and direct Internet connections. Eligible internal connections include

telecommunications wiring, routers, switches, and network servers that are necessary to transport

information to individual classrooms.

5

The Commission also required certain other providers of telecommunications services to contribute

to the universal service fund.

6

NECA was established at FCC’s direction in 1983 to administer interstate access tariffs and the

revenue distribution process for local telephone companies.

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B-281644 

with two other organizations to help answer applicants’ questions, process

and enter applications into the Corporation’s database, and establish and

maintain the Corporation’s public web site, which contains important

information about program operations and application procedures.7

FCC changed this administrative structure in November 1998 in response to

the Congress’s directive that a single entity administer universal service

support for schools and libraries and rural health care providers. FCC

appointed the Universal Service Administrative Company (USAC) as the

permanent administrator of the universal service fund and directed the

Corporation to merge with USAC by January 1, 1999.8

 Under this merger,

the Corporation’s staff will become part of USAC’s Schools and Libraries

Division, carrying out essentially the same functions as before. Since our

review ended prior to the reorganization, we continue to refer to “the

Corporation” in this report.

Application Process In order to receive universal service support, each applicant completes a

two-stage application process. During the first stage, the applicant submits

a form that lists the services for which discounts are being requested.

These forms are posted on the Corporation’s web site so that vendors can

provide applicants with competitive bids on requested services. The

second stage begins after the applicant accepts a bid and enters into a

contract with a vendor. The applicant submits a second form that details

the types and costs of the services being contracted for and the amount of

the discount being requested. The Corporation checks these forms using

its application review procedures, which are designed to ensure that

support goes only to eligible entities, for eligible services, at appropriate

discount levels. It then issues commitment letters to successful applicants

informing them of the amount of discount they can expect to receive.

7

The Corporation’s Internet web site is at (http://www.slcfund.org).

8

USAC had been established as a subsidiary of NECA to administer the high-cost and low-income

universal service support mechanisms and performs billing, collection, and disbursement functions for

all the universal service support mechanisms. See Changes to the Board of Directors of the National

Exchange Carrier Association, Inc., Federal-State Joint Board on Universal Service, Third Report and

Order and Fourth Order on Reconsideration, and Eighth Order on Reconsideration, CC Docket Nos.

96-45, 97-21, FCC 98-306 (rel. Nov. 20, 1998).

Page 4 GAO/RCED-99-51 Schools and Libraries Program
B-281644 

Actions Taken to

Implement Key

Operational

Recommendations

We found that the Corporation has taken actions to implement the key

recommendations we believed should be completed before issuing any

funding commitment letters to applicants. Specifically, the Corporation

has

• sampled applications that were already processed to identify and correct

any systemic weaknesses in its program integrity review procedures;

• finalized the program’s procedures, automated systems, and internal

controls; and

• obtained a report from its independent accountants that the Corporation

had suitably designed its internal controls to prevent or detect material

departures from program objectives, as of November 4, 1998, in

conformity with criteria set forth by the Corporation in its “Management’s

Statement of Universal Service Discount Mechanism Program Objectives

and Internal Control Objectives.”

In addition, the Corporation is following our recommendation to complete

its special reviews of high-risk applications before issuing funding

commitment letters to these applicants. One recommendation, however,

still needs to be implemented: FCC needs to develop adequate goals,

performance targets, and measures for the program.

Procedures Revised for

Review of Services, but

Review of Discounts

Remains an Issue

One of the Corporation’s primary responsibilities is to ensure that funding

goes only to eligible applicants, for eligible services, at the appropriate

levels of discount—as specified by FCC orders. During our initial review in

June and July 1998, we found several areas of potential weakness in the

Corporation’s program integrity procedures that could result in funding

being directed to applicants for ineligible services or at inappropriately

high levels of discount. FCC’s Chairman accepted our recommendation to

delay issuing funding commitment letters until the Corporation randomly

selected applications to assess how well its review procedures were

actually working.

Corporation’s Test for

Applicants’ Eligibility Was

Effective

One of the Corporation’s automated tests is designed to determine

whether an applicant is eligible for support under the program. A

computer program compares the name of the applying school or library

against a database of eligible schools and libraries. Although we did not

identify a weakness with this test approach during our initial review, we

recommended that the Corporation verify the approach’s effectiveness as

part of its review of a random sample of processed applications.

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The verification showed that only one application in a sample of 100 was

from an ineligible applicant. This application, however, had already been

flagged by the Corporation’s automated test for eligible applicants. This

result indicates that the Corporation’s procedures for preventing ineligible

schools and libraries from participating in the program appear to be

working effectively.

Corporation Has Strengthened

Its Test for Eligible Services

As noted earlier, FCC provides discounts for telecommunications services,

Internet access, and internal connections. Checking on the eligibility of

requested services is not easy, however, because of the variety and

technical nature of many of these services—especially those related to

internal connections.9

The Corporation’s review procedures for eligible services use both manual

inspections and an automated system for flagging problem applications.

An important internal control document in this review process is a

checklist of ineligible items, which is used during the initial screening of

applications. If a clerical staff member using this checklist finds an

ineligible item on an application, the application is flagged in the

application processing system for a second, more detailed review by a

professional staff member who checks the eligibility of each requested

service. We found, however, that as the Corporation processed

applications and gained experience in the types of services being

requested, it added items to its checklist of ineligible services. As a result,

different criteria were applied to applications, depending on when they

were first screened. In our early discussions with Corporation officials, we

learned that they did not intend to recheck applications that had been

processed before the checklist was updated. This raised our concern that

some early applications may have cleared the screening process that

should have been flagged for detailed review.

The results of the Corporation’s review of a random sample showed that

weaknesses indeed existed in its procedures for ensuring that only eligible

services receive funding. At least 19 of the 100 applications in the sample

contained requests for ineligible items as defined by FCC orders, totaling

approximately $106,000 in inappropriately requested funding. Of these 19

applications, 7 had been classified as “clean” (that is, containing no

ineligible items) by the Corporation’s earlier review and contained

approximately $6,000 in inappropriately requested funding. The

9

For example, the installation of power poles (metal or plastic pipes used to carry wiring from the

ceiling to the floor) may or may not be eligible for support. Under the program rules, power poles used

for the distribution of telecommunications wiring are considered an eligible internal connection

service. Power poles used for the distribution of electrical wiring are not eligible.

Page 6 GAO/RCED-99-51 Schools and Libraries Program
B-281644 

Corporation’s independent accountants, PricewaterhouseCoopers,

subsequently requested the Corporation to conduct a further sample of

300 applications that had been classified as “clean.” This review found

that 4.6 percent, or approximately $314,000, of the discount funding

requested in these applications would have gone to ineligible items.

Given the error level revealed by these two samples, Corporation officials

concluded that their test had to be strengthened. Accordingly, they

changed their review procedures to require staff to perform a complete

manual review of every requested service item in all 32,000 applications,

regardless of whether these applications had been flagged during the

initial screening. To implement these new procedures in a timely manner,

the Corporation’s contractor augmented its permanent staff with

temporary staff to perform the reviews. Training and supervising new staff

is, of course, important in ensuring that the new review procedures are

carried out effectively.

Discount Issue Needs Further

Scrutiny

FCC orders state that the level of discount that each school or library can

receive should be determined by the applicant’s economic need and

location. Discounts range from 20 to 90 percent of the costs of the services

to the applicants, with higher discounts going to those in low-income and

rural areas.10 Applicants calculate the discount level to which they are

entitled by following instructions and criteria on the application form and

certify that their discount calculations are correct.11 When the Corporation

processes an application, it uses an automated test to check the requested

discount level. This test compares the applicant’s requested discount with

a discount level calculated from data on schools in the Corporation’s

database. If the applicant is requesting a higher discount than indicated by

the Corporation’s database, the test can flag the application for special

review. As part of this review, a program official contacts the applicant

and gathers information to determine whether the requested discount level

is in fact correct.

It is possible for the automated system to flag every application that shows

a variance from the Corporation’s own calculation. However, the

Corporation decided that such a stringent approach was not warranted

10The program measures how economically disadvantaged the schools and libraries are by the number

of students eligible to participate in the National School Lunch Program. Rural designations are based

on the Metropolitan Statistical Area listing and the Goldsmith modification covering rural pockets

located within these areas.

11The Corporation provides additional information and tools on its web site, and encourages applicants

to call, e-mail, or send a fax to get additional information and help on filling out their application

forms.

Page 7 GAO/RCED-99-51 Schools and Libraries Program
B-281644 

because of limitations in the database it uses to make its calculations. For

example, the database contains the number of students actually

participating in the National School Lunch Program, rather than the

number eligible to participate, which is the measure adopted by FCC.

Moreover, the data are about a year old. Mindful of these limitations, the

Corporation decided to establish some latitude in its review procedures

for eligible discounts. Thus, the Corporation allows applications to pass

unchallenged through its automated discount review if the requested

discount level does not exceed a certain threshold of variance from the

Corporation’s own calculation. Applications that cross this threshold are

flagged for manual review by a program official. Corporation officials

stated that adopting this procedure was a reasonable business decision

because the cost of manually reviewing all applications that showed any

variance from the Corporation’s own calculations would exceed the

benefits gained.

We found in our initial review, however, that the Corporation had not

performed a sound benefit-cost analysis to justify this business decision.

We were concerned about this situation not only because of the need to

enforce program rules for the sake of equity but also because the total

amount of funding available during the program’s first year was not

enough to cover all of the applicants’ requests for support. Providing

funding for ineligible services or allowing inappropriate discount levels

could result in some applicants’ proper requests for support being denied.

The Corporation’s review of a sample of 100 processed applications

showed that 57 of them requested discount levels that varied from the

Corporation’s own calculation. After obtaining additional information for

these 57 applications, the Corporation determined that at least 9 could not

support their requested level of discounts. The dollar amount of these

inappropriate discount requests totaled about $14,000 out of the

approximately $4.5 million in requested funding.

At the request of its independent accountants, the Corporation conducted

a review of an additional sample. The Corporation selected 50 applications

that requested $100,000 or more in support. In this second sample, 39 of

the 50 processed applications contained discount levels that varied from

the Corporation’s own calculation. The Corporation found that 6 of the 39

applications requested discounts that could not be validated. The funding

that would have been awarded for these inappropriate discount levels

totaled about $35,000 out of approximately $28.5 million in requested

funding.

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B-281644 

Having considered these results, Corporation officials decided that they

did not need to change their procedures for reviewing requested discount

rates for the first funding year. As before, they maintained that the amount

of inappropriate funding in question was not large enough to warrant the

time and cost of performing follow-ups on every application that showed

any variation from the discount level calculated by the Corporation’s

automated check.

We remain concerned, however, that the amount of inappropriate

discounts passing unchallenged through the review process, though

relatively low now, could grow larger in subsequent funding years. We

therefore believe that the Corporation needs to explore methods for

mitigating this risk in a cost-beneficial manner. Aware of our continuing

concern, the FCC Chairman directed the Corporation in November 1998 to

work with FCC staff “to establish a method for improving the procedures

for ensuring that discounts are provided in accordance with the discount

levels set forth in the Commission’s rules.”

Final Operating

Procedures Have Been

Established

At the time of our initial review in June and July 1998, the Corporation had

not yet finalized all the procedures, automated systems, and internal

controls needed to make funding commitments and approve vendors’

compensation for the discounted services provided to applicants.

Nevertheless, the Corporation was planning to issue funding commitment

letters before the remaining procedures were finalized. We maintained,

however, that this approach would have put the Corporation at risk of

being unable to process nearly $2 billion in vendors’ invoices in a timely

manner. Corporation officials themselves estimated that in cases where

services were already being provided to applicants, invoices for payment

could be sent in by vendors as soon as 15 days after commitment letters

were sent out, thereby triggering the reimbursement process. Therefore,

we recommended in our July 1998 testimony that the Corporation make no

funding commitments until it had finalized all of its operating procedures

and automated systems. FCC and the Corporation accepted this

recommendation.

The Corporation needed until early November 1998 to finalize its operating

procedures, complete the testing of the automated systems supporting

these procedures, and secure the Office of Management and Budget’s

approval of the applicant and vendor forms needed for the reimbursement

process. This delay occurred in part because on June 22, 1998, FCC

released a reconsideration order that significantly altered the program.

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B-281644 

Specifically, the program’s funding year was changed from a calendar year

cycle to a fiscal year cycle, and the period for the first round of funding

was changed from 12 months to 18 months. The order also adjusted the

maximum amounts that could be collected and spent during 1998 and the

first 6 months of 1999, directing the Corporation to commit no more than

$1.925 billion for the schools and libraries program during this time frame.

Because this amount was not expected to cover all of the applicants’

requests, FCC directed the Corporation to give funding priority to

applicants’ requests for telecommunications services and Internet access.

Once these requests are satisfied, the remaining funds are to be used for

internal connections, with priority given to applicants eligible for higher

discounts. To implement these new priority rules, the Corporation had to

significantly revise its funding award process and automated support

systems.

In addition, the Corporation found that some established procedures

needed to be modified as it learned lessons from reviewing the first round

of applications. For example, the Corporation initially cautioned schools

and libraries that they would not receive discounts on any items in their

funding requests that had included ineligible services mixed with eligible

services. However, when the Corporation began reviewing applications, it

found some cases in which applicants included an ineligible service that

accounted for only a small percentage of the total cost of the service item

being requested.12 As a result, the Corporation, with FCC’s concurrence,

modified its procedures so as to provide funding for items that were

substantially correct even though they contained some ineligible services.

Specifically, if the ineligible services accounted for less than 50 percent of

the total dollar amount of the item requested, the Corporation would

separate out the cost of the ineligible services and provide discount

funding for the remaining eligible services.

Independent Accountants’

Report on the

Corporation’s Internal

Controls Has Been

Completed

In December 1997, FCC’s Chairman directed the Corporation to contract

with an independent accounting firm to assess—before any program

disbursements were made—whether the program’s processes and

procedures provided the controls needed to mitigate against fraud, waste,

and abuse. In December 1997, with the approval of the Corporation’s

Board of Directors, the Corporation engaged the services of Coopers &

Lybrand, LLP (which became PricewaterhouseCoopers, LLP, on July 1,

12A sample showed that 6 out of 100 applications had funding requests that contained ineligible items.

Under the Corporation’s old procedures, approximately $482,000 of a total of $2.7 million in requested

discount funding for the 100 applications would have been denied. Under the new procedures, the

Corporation approved approximately $388,000 (80 percent) of this $482,000.

Page 10 GAO/RCED-99-51 Schools and Libraries Program
B-281644 

1998). The independent accountants were to examine the Corporation’s

assertions that internal controls over the processing of funding requests

from applicants were suitably designed to detect material departures from

the Program Objectives set forth in the Corporation’s document,

“Management’s Statement of Universal Service Discount Mechanism

Program Objectives and Internal Control Objectives.”

At the time of our initial review during June and July 1998, the Corporation

planned to issue funding commitment letters to applicants before the

independent accountants had completed their review but not disburse any

funds until the review was complete. We were concerned, however, that

setting the funding commitment process in motion before the underlying

control design has been fully reviewed would undercut the purpose and

value of the independent review. Therefore, we recommended that the

Corporation refrain from making funding commitments until it had

obtained a report from its independent accountants stating that an

appropriate set of internal controls was in place. Both FCC and the

Corporation accepted this recommendation. On November 4, 1998, the

independent accountants’ report was issued stating that the Corporation

had suitably designed internal controls to prevent or detect material

departures from its Program Objectives as of November 4, 1998.

Scope of the Independent

Review

The Corporation engaged the independent accountants to determine

whether the internal controls over its processing of funding requests from

applicants were in accordance with these six Program Objectives:

• All applications are processed in accordance with FCC’s priority rules.

• Only eligible schools and libraries receive discounts.

• Only eligible services as defined by FCC’s orders are funded.

• Discount percentages are approved in accordance with the criteria

specified under FCC’s orders and rules.

• Payments to vendors are authorized in a timely manner.

• Funding commitments do not exceed the program’s funding limits.

The independent accountants’ work included reviewing the Corporation’s

procedures and documentation related to its control environment,

application controls, computer controls, and monitoring controls. In

addition, the independent accountants discussed control issues with the

Corporation’s management and closed them out, as appropriate, when

satisfied with the documentation and the suitability of the design. Before

issuing a final report, the independent accountants briefed the

Corporation’s Board of Directors, the FCC’s Common Carrier Bureau, and

Page 11 GAO/RCED-99-51 Schools and Libraries Program
B-281644 

the FCC Chairman. Because the Corporation was in a start-up phase during

1998, the independent accountants were not engaged to examine and

report on the actual operating effectiveness of these internal controls.

During the course of its review, the independent accountants became

concerned, as we were, about the efficacy of the Corporation’s review

procedures for ensuring that only eligible services receive support at the

appropriate level of discount. The weakness in the service review

procedures, discussed earlier, was addressed to the independent

accountants’ satisfaction when the Corporation changed them to require a

complete review of all requested services on all applications before

committing funds. The independent accountants’ concern with the

discount review focused on the Corporation’s decision to allow some

applications to go through the review process unchallenged even though

they were requesting a higher discount than calculated by the Corporation

in its review process. Near the end of the independent accountants’ review

in November 1998, the Corporation modified its written program objective

for discounts to reflect its practice of accepting and approving discounts

that are higher than its own discount calculation, provided that they are

within a certain threshold of variance. The Corporation cited limitations in

its verification sources, discussed earlier, as the reason for adopting this

procedure. With this modification, the independent accountants concluded

that the Corporation’s internal controls were suitably designed to prevent

or detect material departures from the Program Objectives, as amended by

management.

Concerns Resolved Over

the Timing of “High-Risk”

Reviews

As an extra quality control step, the Corporation planned to conduct

special reviews of applications that it considered to be high risk. The

Corporation designates applications as high risk on the basis of several

criteria, including the size of the request, evidence from external sources

of possible program compliance issues, and indications that a school has

an endowment of more than $50 million.

The Corporation estimated that about 1,600 of the approximately 32,600

applications were high risk. These represent about $1.2 billion of the

$2 billion requested by all applicants for the program’s first year. As part of

its high-risk reviews, the Corporation plans to require these applicants to

submit additional material to support their funding requests. This material

is then to be reviewed by program staff to check for conformity to

program rules.

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B-281644 

Because these high-risk reviews are an important internal control, we

were concerned about their timing. The Corporation originally planned to

wait until after the applicants had received their funding commitment

letters before doing their high-risk reviews. Under this scenario, if the

Corporation found a problem with a high-risk application during its special

review, it might have to reduce or withdraw the funding commitment that

it had already made. In such cases, applicants who decided to begin

receiving contracted services on the basis of their funding commitment

letters could find themselves responsible for paying more than they had

planned.

Accordingly, in our July 1998 testimony, we recommended that the

Corporation complete these special reviews before sending funding

commitment letters to high-risk applicants. The Corporation agreed to

change its procedures and in October 1998 began conducting its first

special reviews of the high-risk applications. In October 1998, Corporation

officials stated that none of these approximately 1,600 applications would

receive funding commitment letters until their selective reviews were

completed.

FCC Still Needs to Develop

Goals and Measures for the

Program

Performance measurement is critical for determining a program’s progress

in meeting its intended outcomes. During our initial review, we noted that

FCC’s combined “Strategic Plan for Fiscal Years 1997-2002 and Annual

Performance Plan for Fiscal Year 1999” provided no specific strategic

goals, performance measures, or target levels of performance for the

program. Without clear goals and measures, the Congress, FCC, and the

Corporation would have a difficult time assessing the effectiveness of the

program and determining whether operational changes are needed.

Accordingly, we recommended that the FCC Chairman direct responsible

FCC staff to develop goals and measures for the program before the end of

fiscal year 1998 so that the Congress and others would be able to assess

the results of the program’s first year of operations.

This recommendation still needs to be implemented. FCC’s February 1999

“Annual Performance Plan for Fiscal Year 2000” still fails to provide

well-defined goals, performance targets, and measures. For example, it is

unclear whether FCC intends to use “schools” or “classrooms” as the unit

of measurement in tracking access to advanced telecommunications

services—a point of major significance. In our subsequent discussions

with FCC and Corporation officials, we found that FCC did not coordinate

with program officials when developing its revised plan. As we noted in

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our previous testimony, we have issued guidance on developing effective

strategic plans.13 One of the key practices in developing these plans is to

involve stakeholders—such as school and library officials—in the

goal-setting process. The involvement of the Congress is also

indispensable to defining goals, as are the agency’s customers—in this

case, the schools and libraries themselves.

Corporation officials have already identified a number of data sources that

could be used to develop baseline data and measure trends in areas such

as Internet connections. They are also posting the results of their funding

decisions on the Corporation’s web site, broken down by states, types of

services funded, and the percentage of funding going to rural/low-income

areas. In addition, Corporation officials are currently exploring ways to

measure the efficiency of their work processes. While these efforts are

useful, it is important that FCC take the lead as part of its policy-making

and oversight responsibilities to define specific goals and measures for the

program, particularly as they relate to the outcomes being achieved by the

expenditure of funds.

Other Management

Challenges Will Need

Close Attention

When we completed our audit in early December 1998, the Corporation

was finishing its review of applications and starting to make funding

decisions, a process that was going much more slowely than expected. As

a result, our review did not include certain key activities that the

Corporation had not yet completed or begun. These include

• implementing the newly revised review procedures, especially for

high-risk applications;

• setting priorities for funding commitments in accordance with FCC’s orders

and rules;

• dealing with applicants’ appeals on commitment decisions, including

establishing a funding reserve to cover those that are successful; and

• reviewing and authorizing vendors’ requests for reimbursement.

These are challenging activities in themselves and will be even more

challenging because they can overlap in time. For example, the

reimbursement activity will involve processing tens of thousands of forms

submitted by successful applicants and their vendors. While this activity is

occurring, applications for the second funding cycle will be coming in.

This application period began on December 1, 1998, and was originally

13See Executive Guide: Effectively Implementing the Government Performance and Results Act

(GAO/GGD-96-118, June 1996) and Agencies’ Strategic Plans Under GPRA: Key Questions to Facilitate

Congressional Review (Version 1, GAO/GGD-10.1.16, May 1997).

Page 14 GAO/RCED-99-51 Schools and Libraries Program
B-281644 

scheduled to close in mid-February. However, the Corporation extended

the deadline to mid-March 1999 because of the delay in getting out the first

year’s commitment letters. The closing date was extended again, to April 6,

1999, because commitment letters were still going out in February 1999.

This extension, together with the added workload of vendor

reimbursements, raises the question of whether the program staff and

contractors will have enough time to carefully review and process all the

new applications by July 1999—the start of the next funding period.

Given these issues, FCC’s role in overseeing the program will be more

important than ever. In many ways, the Corporation is still in a start-up

mode and continues to need help in resolving operational problems. FCC’s

oversight will also be important to ensure that the program’s transition

from the Schools and Libraries Corporation to USAC goes smoothly and

that USAC management is appropriately engaged in maintaining and

improving the overall integrity of the program’s operations.

Scope and

Methodology

To track the progress being made in implementing our recommendations,

we held ongoing discussions with FCC and Corporation officials. We

reviewed draft and final operational procedures, documentation for the

automated systems, and other material related to internal controls. We

also visited with the Corporation’s contractor in New Jersey, which has

major responsibilities for developing and implementing program

procedures and automated information systems. In addition, we met with

PricewaterhouseCoopers to discuss the scope and results of its

independent review of the suitability of the design of the Corporation’s

internal controls. We performed our review from June 1998 through

December 1998 in accordance with generally accepted government

auditing standards.

Agency Comments We provided a draft of this report to the Federal Communications

Commission, the Schools and Libraries Corporation (now the Schools and

Libraries Division of the Universal Service Administrative Company), and

PricewaterhouseCoopers for their review and comment. We subsequently

met with officials from the Schools and Libraries Division, the Common

Carrier Bureau of the Federal Communications Commission, and

PricewaterhouseCoopers. All three concurred with our findings and

provided several points of clarification, which we incorporated into our

final report. Appendix I contains the Schools and Libraries Division’s letter

commenting on our draft report. The President of the Division stated that

Page 15 GAO/RCED-99-51 Schools and Libraries Program
B-281644 

our report captures fairly the work undertaken to provide for effective

internal controls. She added that using the experience gained in

processing the first year’s applications, the Division will implement new

and tighter procedures for evaluating discounts in response to direction

from the Chairman of the Federal Communications Commission.

Regarding the need to establish adequate performance goals and measures

for the program, Federal Communications Commission officials told us

that they recognize the importance of the recommendation in our

July 1998 testimony and intend to address it, but they did not indicate a

time frame for doing so.

We are sending copies of this report to interested congressional

committees, the Chairman and Commissioners of the Federal

Communications Commission, the Chief Executive Officer of the

Universal Service Administrative Company, and the President of the

Schools and Libraries Division of the Universal Service Administrative

Company. Copies of this report will also be made available to others upon

request.

If you have any questions about this report, please call me at

(202) 512-7631. Major contributors to this report are listed in appendix II.

Sincerely yours,

Judy A. England-Joseph

Director, Housing and Community

 Development Issues

Page 16 GAO/RCED-99-51 Schools and Libraries Program
Page 17 GAO/RCED-99-51 Schools and Libraries Program
Appendix I 

Comments From the Schools and Libraries

Division, Universal Service Administrative

Company

Page 18 GAO/RCED-99-51 Schools and Libraries Program
Appendix II 

Major Contributors to This Report

Resources,

Community, and

Economic

Development

Division, Washington,

D.C.

John P. Finedore

Teresa R. Russell

James R. Sweetman, Jr.

Office of the General

Counsel

Michael R. Volpe

Mindi Weisenbloom

(385775) Page 19 GAO/RCED-99-51 Schools and Libraries Program
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