GAO

United States General Accounting Office

Report to the Subcommittee on

Commerce, Justice, State, the Judiciary,

and Related Agencies, Committee on

Appropriations, U.S. Senate

December 2000 SCHOOLS AND

LIBRARIES

PROGRAM

Application and

Invoice Review

Procedures Need

Strengthening

GAO-01-105

Page 1 GAO-01-105 Schools and Libraries Program

Contents

Letter 3

Appendixes Appendix I: FCC’s Authority to Set and Modify E-Rate’s

Annual Funding Level 40

Appendix II: Competitive Bidding Requirements 42

Appendix III: Additional Eligible Students and Facilities 46

Appendix IV: Funding Commitments and Authorized

Payments, 1998-99 49

Appendix V: Application Sampling Methodology and

Detailed Results 54

Appendix VI: Administrative Costs of Selected Technology

Support Programs 56

Appendix VII: Comments From the Federal Communications

Commission and Univeral Service Administrative

Company 59

Appendix VIII:GAO Contacts and Staff Acknowledgments 68

Tables Table 1: Amounts of Funds Requested and Committed for

the First 2 Program Years, as of August 31, 2000 16

Table 2: Amounts of Funds Committed and Authorized for

Payment by SLD for the First 2 Program Years, as of

August 31, 2000 17

Table 3: E-Rate Program’s Operating Expenses, 1997-99 29

Table 4: Additional Facilities and Students Eligible for E-Rate

Funding 46

Table 5: Amounts of Funds Requested and Committed for the

First 2 Program Years, as of August 31, 2000 50

Table 6: Amounts of Funds Committed and Authorized for

Payment by SLD for the First 2 Program Years, as of

August 31, 2000 52
Contents

Page 2 GAO-01-105 Schools and Libraries Program

Table 7: Unweighted Results of GAO's Review of Internal

Connections Funding Denied or Committed From

44 Applications From the Second Program Year,

Through November 1999 54

Table 8: GAO's Estimates of Internal Connections Funding

Denied or Committed From the Second Program Year,

Through November 1999 55

Table 9: Fiscal Year 1998 Administrative Costs for Selected

Federal Programs That Target Technology 56

Figures Figure 1: Overview of E-Rate Application and Funding Cycle 10

Figure 2: Examples of Eligible, Conditionally Eligible, and

Ineligible Products and Services 13

Abbreviations

FCC Federal Communications Commission

MSA Metropolitan Statistical Area

NECA National Exchange Carrier Association

PCS personal communications service

SLD Schools and Libraries Division

USAC Universal Service Administrative Company

WAN Wide Area Network
Page 3 GAO-01-105 Schools and Libraries Program

United States General Accounting Office

Washington, D.C. 20548 Letr

December 15, 2000

The Honorable Judd Gregg

Chairman

The Honorable Ernest F. Hollings

Ranking Minority Member

Subcommittee on Commerce, Justice,

State, the Judiciary and Related Agencies

Committee on Appropriations

United States Senate

The Telecommunications Act of 1996 expanded the traditional concept of

universal service—affordable, nationwide telephone service. Among other

things, the act extended universal service support to eligible schools and

libraries and authorized the Federal Communications Commission (FCC)

to implement a program to assist these institutions in acquiring advanced

telecommunications and information services. Under FCC’s program (often

referred to as the “e-rate program”), eligible schools and libraries can apply

individually or as part of district wide or even state wide consortia for

discounts from vendors on the cost of eligible telecommunications

services, Internet access, and internal connections (the equipment needed

to deliver these services). The e-rate program committed over $3.7 billion

to schools and libraries that requested e-rate support during its first 2

years, 1998 and 1999.

We issued several reports in 1998 and 1999 dealing with the program’s startup activities.1 Among other things, we reviewed key aspects of the

program’s administrative structure, the design of its procedures, and its

internal controls for reviewing applications. We made recommendations to

FCC to improve the program’s operations, which program officials

implemented before making their first-year funding commitments to

applicants in late 1998.

1

See Letter to the Honorable Ted Stevens, B-278820, Feb. 10, 1998; Telecommunications:

FCC Lacked Authority to Create Corporations to Administer Universal Service Programs

(GAO/T-RCED/OGC-98-84, 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, May 7, 1998); Schools and Libraries Corporation:

Actions Needed to Strengthen Program Integrity Operations Before Committing Funds

(GAO/T-RCED-98-243, July 16, 1998); and Schools and Libraries Program: Actions Taken to

Improve Operational Procedures Prior to Committing Funds (GAO/RCED-99-51, Mar. 5,

1999).
Page 4 GAO-01-105 Schools and Libraries Program

In June 1999, you directed us to review several additional aspects of the

program as it neared the beginning of its third year.2 Specifically, this report

discusses four issues:

• the amount of e-rate funding requested by applicants, the amount of

funds committed to them, and the amount of committed funds they have

actually used;

• whether e-rate funds have been committed to products and services that

are ineligible for support under the program’s rules;

• whether the administrative costs of the program are increasing and how

they compare with those of other federal support programs; and

• FCC’s progress in establishing performance goals and measures for the

program.

In addition, you asked us to provide information on two related issues.

Appendix I describes FCC’s authority to increase the program’s annual

funding level, currently capped at $2.25 billion. Appendix II compares the

program’s competitive bidding procedures to federal procurement law and

includes information on other e-rate competitive bidding issues.

To evaluate these issues, we reviewed relevant laws and regulations, FCC

orders, and program procedures; analyzed program data on the demand for

funding and funding commitments; obtained the program’s administrative

expenses from audited financial statements; and compared the program’s

competitive bidding procedures to federal government practice. We also

interviewed officials at FCC’s Common Carrier Bureau, as well as at the

Universal Service Administrative Company (USAC) and its Schools and

Libraries Division (SLD), which is responsible for the program’s day-to-day

operations. In addition, we reviewed a sample of 44 out of 9,770

applications that requested and received funding commitments for internal

connections from June through November 1999 to see if ineligible products

and services had received funding commitments. The 44 applications

contained over 2,300 separate requests for internal connections and

accounted for $285 million of the $1.2 billion in second-year funding

commitments for internal connections through November 1999. The results

of these 44 applications are not representative of all 9,770 applications,

since our sampling procedures gave applications for a large amount of

funding a greater chance of being included in our sample. We found that

our sample of 44 applications could not be used to provide reliable

2

S. Rep. No. 106-76 (June 14, 1999).
Page 5 GAO-01-105 Schools and Libraries Program

estimates for all 9,770 applications because there was great variation in the

amounts of the errors we observed from one application to the next in our

sample. As a result, we do not present the results of this analysis in the

body of our report. When using computer-generated data provided by SLD,

we tested their reliability against the actual applications or complementary

data sets. We performed our review from September 1999 through October

2000 in accordance with generally accepted government auditing

standards.

Results in Brief The amount of annual e-rate funding requested by schools and libraries

almost doubled from $2.4 billion in 1998 to an estimated $4.7 billion in 2000.

For the first 2 program years (1998 and 1999), SLD committed a total of $3.7

billion in e-rate funding to applicants. However, at least $1.3 billion (35

percent) of the funds committed in these 2 years had not been paid out as

of the end of August 2000, even though FCC extended its deadlines for

applicants to use their funds. Although funding commitments for the third

program year were not complete at the end of August 2000, about $1.5

billion had already been committed, and SLD estimated that it would be

committing an additional $600 million.

Weaknesses in SLD’s e-rate application review process resulted in

commitments of funds for ineligible products and services. We reviewed 44

second-year applications that received funding commitments for internal

connections—the type of service most likely to include ineligible items.

After screening out $20 million from requests that included ineligible items,

SLD committed $285 million in e-rate funds to these applications for

internal connections. However, we found that SLD reviewers failed to

identify other ineligible items, resulting in at least $6 million in funding

errors. This amount understates the extent of the problem because it does

not include cases in which we found funds mistakenly committed for

ineligible items whose costs could not be determined from the application

materials. Also, it does not include the costs of other items whose eligibility

was questionable but could not be resolved using the application materials

and current review criteria. We traced these funding commitment mistakes

and problems to procedural errors, unclear review criteria, and a lack of

sufficient information in some applications for reviewers to determine the

eligibility of questionable items. In addition, we found that SLD’s process

for reviewing invoice forms prior to disbursing committed funds provides

another opportunity to identify ineligible items. However, the invoice

review process requires applicants to submit much less information than

found on their applications and involves less comprehensive reviews. An
Page 6 GAO-01-105 Schools and Libraries Program

independent auditor hired by SLD has uncovered preliminary evidence that

some program funds were spent on ineligible services after clearing SLD’s

application and invoice reviews. We are making recommendations to

further improve SLD’s ability to identify and deny funding for ineligible

products and services. After reviewing a draft of this report, FCC and USAC

said they had begun to implement the recommendations and had already

completed action on some of them.

Although the e-rate program’s administrative costs grew slightly from 1998

to 2000, they still remain small in relation to the program’s overall funding.

Program officials recently took actions designed to reduce contractors’

costs—the program’s biggest expense. We compared the e-rate program’s

administrative expenses with those of 34 other federal technology support

programs by calculating the administrative expenses for each program as a

percentage of the total funding provided. The e-rate program’s percentage

of 2.4 fell in the middle of the range of the other programs’ percentages.

Until recently, the e-rate program lacked meaningful performance goals

and measures as defined by the Government Performance and Results Act

of 1993. FCC’s initial goals focused on increasing the percentage of school

buildings connected to the Internet, but these connectivity goals were

much lower than the percentage of schools already connected. In

September 2000, FCC finalized new goals and measures that focus on

Internet connections to classrooms. Unlike the old goals, these properly

reflect the percentage of classrooms already connected. The new goals

include having 100 percent of public school instructional classrooms

connected to the Internet by 2002 and 95 percent of private school

instructional classrooms connected by 2003. The plan also seeks to

improve participation in the e-rate program by urban low-income school

districts and rural school districts located outside of towns, as well as rural

libraries and libraries serving small populations. According to FCC data,

the participation rates for these groups currently fall below the average

rates of participation for all groups of applicants.

Background Universal service traditionally has meant providing residential customers

with nationwide access to basic telephone service at reasonable rates. The

Telecommunications Act of 1996, however, broadened the scope of

universal service, in part by extending universal service support to include

eligible schools and libraries. The new program (often referred to as the “erate” program) is designed to improve schools’ and libraries’ access to

advanced telecommunications and information services.
Page 7 GAO-01-105 Schools and Libraries Program

The Telecommunications Act of 1996 did not prescribe to FCC a structure

for administering the program. In 1997, FCC directed the establishment of

the Schools and Libraries Corporation as a not-for-profit organization

working within the framework of FCC orders and rules to carry out the

program’s day-to-day operations, such as processing and reviewing e-rate

applications. In November 1998, FCC changed the program’s administrative

structure in response to legal concerns about FCC’s authority to create a

corporation and the Congress’s directive that a single entity should

administer the e-rate program and a related program that provides

telecommunications support to rural health care providers.3 FCC appointed

an existing body, the Universal Service Administrative Company (USAC),

as the permanent administrator of the program and directed the Schools

and Libraries Corporation to merge with USAC by January 1, 1999.4 Under

this merger, the Corporation’s staff became part of a new USAC unit called

the Schools and Libraries Division (SLD), carrying out essentially the same

functions as before. In this report, we will refer to SLD when discussing

operational issues associated with the program. FCC retains responsibility

for overseeing the program’s operations and ensuring compliance with its

orders. Among other things, FCC reviews USAC’s budget, makes e-rate

policy decisions as needed, and handles appeals about funding decisions

that are not resolved by SLD in favor of the applicant.

3

See Senate Bill 1768 and the Conference Report on H.R. 3579 (H. Rept. No. 105-504).

Section 2004(b) of the Senate bill provided, in part, that the Commission should propose a

structure for the administration of its universal service programs that would consist of one

entity.

4

USAC was originally established as a subsidiary of the National Exchange Carrier

Association (NECA) to administer the high-cost and low-income universal service support

mechanisms. USAC currently performs billing, collection, and disbursement functions for

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

Exchange Carrier Association, Inc., Federal-State 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 8 GAO-01-105 Schools and Libraries Program

Eligibility Defined by

Federal and State Law

Generally, educational institutions that meet the definition of “schools” in

the Elementary and Secondary Education Act of 19655 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.6 Prekindergarten education programs, adult secondary

education programs, and juvenile justice facilities (e.g., classes leading to

the General Educational Development High School Equivalency Test or

other education that does not go beyond grade 12) may also be eligible for

program funding depending on how state law defines elementary and

secondary schools in the state where the program or facility is located.

Appendix III identifies the states where this broader eligibility applies.

Eligible schools and libraries may apply annually for e-rate support. Over

30,000 applications were submitted during each of the program’s first 3

program years (1998-2000) from schools and libraries in each of the 50

states, the District of Columbia, and Puerto Rico.7 Individual applications

can cover single schools, whole school districts, consortia, or even schools

in entire cities and states. Applicants can also submit multiple applications

each year for different services. The amount of support sought in an

individual application can range from hundreds of dollars to tens of

millions of dollars, depending on the number of schools or libraries

covered by the application and the extent of the services for which funding

is sought.

5

20 U.S.C. 8801(14) and (25).

6

20 U.S.C. 9122. 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. Libraries

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

support.

7

Schools and libraries located in American Samoa, Guam, the Northern Mariana Islands, and

the U.S. Virgin Islands have also requested funds in one or all of the program years.
Page 9 GAO-01-105 Schools and Libraries Program

Funding Is Provided

Through Discounts on

Contracted Services

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

Instead, the program requires applicants to seek competitive bids from

technology vendors for telecommunications services, Internet access, and

internal connections that are eligible for e-rate support. The program

reimburses the applicants’ vendors for discounts the vendors provide on

the costs of services, as approved by SLD during the application process.

Alternatively, if the applicant has already paid in full for the service, it may

seek reimbursement from SLD. Approved reimbursements are paid to the

service provider, which passes them on to the applicant. The discount

levels range from 20 to 90 percent, with schools and libraries located in

rural and low-income areas receiving the highest discounts.8 See figure 1

for an overview of the e-rate application and funding cycle.

8

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

the number of students eligible to participate in the national school lunch program. Urban

and rural designations are based on the Metropolitan Statistical Area (MSA) listing.
Page 10 GAO-01-105 Schools and Libraries Program

Figure 1: Overview of E-Rate Application and Funding Cycle

(1) Applicants submit 

descriptions of services 

they are seeking. SLD posts 

descriptions on its Web site.

(6) Applicants inform 

SLD when vendors 

begin providing services. 

(7) Vendors send invoices 

for discounted share of costs 

to SLD. Applicants that have 

paid vendors directly request 

reimbursement.

(2) After 4 weeks, 

applicants may choose 

their vendors and sign 

contracts for services.

(5) SLD commits funds 

for eligible requests and 

notifies applicants and 

vendors via letter.

(8) SLD authorizes payment 

of valid invoices and requests 

for reimbursement from 

universal service fund. 

(3) Applicants submit 

requests for e-rate funds 

to cover the discounted 

share of eligible services. 

(4) SLD reviews 

applications for the 

eligibility of requested 

services and entities.
Page 11 GAO-01-105 Schools and Libraries Program

The discounts are funded by the universal service fund, which is one of the

financial support mechanisms used to compensate telephone companies

and other communications entities for providing access to

telecommunications services at reasonable and affordable prices to highcost areas, low-income households, and rural health care providers in

addition to schools and libraries. The Telecommunications Act specifies

that every telecommunications carrier providing interstate

telecommunications services must contribute to this fund, unless

exempted by FCC.9 A portion of this fund is used to compensate vendors

for the discounts they provide to e-rate program participants. Unless the

Commission takes action, $2.25 billion is available for e-rate discounts each

year.

Not All Telecommunications

Products and Services Are

Eligible for Support

The e-rate program does not provide support for all the

telecommunications services that schools and libraries may need or desire.

The Telecommunications Act directed FCC to convene a Federal-State

Joint Board on universal service. Based on the board’s recommendations,

FCC’s May 1997 Universal Service Order, along with several subsequent

orders, defines three classes of service 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 (such as

T-1 lines);

• Internet access services, such as dial-up Internet access, and e-mail

services; and

• internal connections, such as telecommunications wiring, routers,

switches, and network servers that are necessary to transport

information to individual classrooms.

Charges for telecommunications and Internet access services can include

both recurring costs, such as monthly service, and one-time installation

costs. Internal connections are generally one-time costs to purchase and

install eligible equipment and software. Some items within these categories

are eligible only if certain conditions are met. For example, personal

communications service (PCS) and cellular telephone service are

conditionally eligible if used at a place of instruction for educational

purposes. Other items are always ineligible for e-rate support, even though

9

The Commission also required certain other providers of telecommunications services,

such as payphone service providers, to contribute to the universal service fund.
Page 12 GAO-01-105 Schools and Libraries Program

they may be necessary or desirable for providing students or library

patrons with access to advanced telecommunications services, such as the

Internet. Ineligible items include personal computers, modems in personal

computers, virus protection software, and content-filtering software

designed to block access to objectionable Web sites. Figure 2 illustrates

some of the common eligible and ineligible products and services. FCC’s

Schools and Libraries Eligibility List provides additional information on the

items that can be funded under each of these categories.
Page 13 GAO-01-105 Schools and Libraries Program

Figure 2: Examples of Eligible, Conditionally Eligible, and Ineligible Products and Services

Telephone/data services

Computers used as 

web/mail servers

Central phone systems

Software

Maintenance

Video services

Modems installed in 

personal computers

Televisions

Wiring Telephones

Computers used as 

individual workstations

Eligible for Funding Conditionally Eligible

for Funding

Ineligible for Funding
Page 14 GAO-01-105 Schools and Libraries Program

Schools and libraries are allowed to contract with the same vendor for both

eligible and ineligible services. However, in preparing their e-rate

applications, applicants are required to exclude the cost of all ineligible

items from their funding requests.

Although E-Rate

Funding Requests Have

Increased, a Significant

Amount of Committed

Funds Has Not Been

Used

The annual amount of e-rate funds requested by applicants has grown

sharply, from $2.4 billion for the first program year (1998) to an estimated

$4.7 billion for the third program year (2000). This latter amount greatly

surpasses the annual e-rate funding cap of $2.25 billion, which FCC

established at the outset of the program. For the first 2 program years (1998

and 1999), SLD committed a combined total of $3.7 billion in e-rate support

in response to applicants’ requests. However, as of August 31, 2000, at least

$1.3 billion of this $3.7 billion in committed funds was still unused. Because

FCC extended its deadlines, some applicants receiving funds for the

second program year will have until September 30, 2001, to receive onetime services. As of August 31, 2000, SLD had committed $1.5 billion for the

third program year and expected to commit another $600 million.

Amount of Requested

Funding Has Increased

Sharply

Section 254 of the Communications Act of 1934, as amended, provided FCC

with the authority to set the funding level for the e-rate program. Acting on

the recommendations of the Federal-State Joint Board, which estimated

the demand for e-rate support, FCC established a $2.25 billion annual

funding cap for the program. Each year, FCC determines the funding level

for the program, based on projected demand, subject to the cap. Appendix I

provides additional details on FCC’s authority to set and modify this cap.
Page 15 GAO-01-105 Schools and Libraries Program

Table 1 shows the amounts of e-rate funds requested by applicants and

committed to them by SLD for the first 2 program years. (Funding

commitments for the third program year were not complete at the time our

review ended.) For the first program year, FCC set the funding level at

$1.925 billion.10 This was enough to fund all the applicants’ requests for

eligible telecommunications services and Internet access support, but not

enough to cover all requests for eligible internal connections support. The

program’s funding priorities call for telecommunications services and

Internet access requests to be funded first, with any remaining funding

going to internal connections for the most disadvantaged applicants. As a

result, only those applicants with discount rates of 70 percent or higher

received e-rate funding for their internal connections.11 For the second

program year, FCC raised the funding level to the full $2.25 billion allowed

under the cap. SLD received about $2.7 billion in requests but found, after

reviewing them against various eligibility criteria, that all eligible requests

could be funded for only $1.99 billion. According to SLD officials, FCC

directed them to reopen the second-year application period so that they

could use the remainder of the funds.12 These additional applications,

requesting an estimated $370 million, had not been processed at the time

our review ended and are not included in table 1.

10 FCC also extended the first program year from 12 to 18 months.

11As table 1 shows, the total amount of first year funds committed was $1.731 billion. This

amount does not equal the total amount of authorized funding available that year ($1.925

billion). SLD held some funds in reserve to cover appeals by applicants that were denied

funding. Program funds are also used to cover the program’s administrative costs.

12SLD is reviewing applications received between Apr. 7, 1999, and Mar. 31, 2000, for the

remaining second-year program funding.
Page 16 GAO-01-105 Schools and Libraries Program

Table 1: Amounts of Funds Requested and Committed for the First 2 Program Years, as of August 31, 2000

a

Does not include requested and committed amounts for additional applications accepted after April 7,

1999.

Source: SLD’s database.

The funding commitment process for the third year was still under way

when we ended our audit. SLD estimated, however, that the total amount of

third-year funding requested by applicants is about $4.7 billion, almost

double the request level for the program’s first year. Since this amount is

well above the funding level of $2.25 billion that FCC set for this year, many

requests will not be met. As noted above, the program’s funding priorities

call for telecommunications services and Internet access requests to be

funded first, with any remaining funding going to internal connections. SLD

officials estimated that they would be able to fund eligible internal

connection service requests only for applicants that have a discount rate of

82 percent or higher. As of August 31, 2000, SLD had committed $1.5 billion

for the third year and estimated that it would be committing an additional

$600 million once all the third-year applications were processed.

A Significant Amount of

Funds Committed to

Applicants Has Not Been

Used

Although SLD commits program funds to applicants on the basis of their

application requests, it does not authorize payouts of committed funds

until it receives valid invoices showing that the applicants have obtained

the requested products and services. In accordance with its internal control

procedures, SLD will not approve payments of committed funds until (1)

applicants certify that they have begun to receive e-rate-supported services

from their vendors and (2) vendors file invoice forms requesting

reimbursement for the e-rate-supported services that they have provided to

the applicants. In many cases, applicants and their vendors have not yet

submitted this material. As of August 31, 2000, at least 35 percent ($1.3

billion) of the $3.7 billion in program funds committed to applicants during

the first and second program years had not yet been paid out. Table 2

summarizes the amounts of first- and second-year funding that were

First program year (1998) Second program year (1999)a

Service type

Amount requested by

applicants

Amount committed by

SLD

Amount requested by

applicants

Amount committed by

SLD

Telecommunications $725,533,870 $679,158,138 $770,554,717 $579,455,836

Internet access 138,977,710 135,647,152 185,823,153 148,408,155

Internal connections 1,536,573,944 917,092,722 1,754,481,404 1,242,965,575

Total $2,401,085,524 $1,731,898,012 $2,710,859,274 $1,988,829,566
Page 17 GAO-01-105 Schools and Libraries Program

committed to applicants and the amounts that SLD authorized to be paid

out as of August 31, 2000. Appendix IV contains the same data broken out

by each state, the District of Columbia, and the Commonwealth of Puerto

Rico.

Table 2: Amounts of Funds Committed and Authorized for Payment by SLD for the First 2 Program Years, as of August 31, 2000

Source: SLD’s database.

FCC required that applicants use all funds committed to them in the first

program year no later than June 30, 1999. In March 1999, FCC granted a

partial extension of this deadline, allowing the payment of funds

committed for one-time services provided through September 30, 1999.

FCC permitted this extension because a number of schools and libraries

received late notice of funding commitment decisions, making it difficult

for them to initiate the installation of internal connection services.13 In

December 1999, FCC waived the new deadline for those applicants that had

received late funding commitments following appeal decisions, requested a

change in vendors, or for some reason had their payments delayed. The

waiver generally gives an applicant an additional 180 days from the time of

receiving the late commitment letter or changing the vendor to use its

funds committed for one-time services.14 Despite these extensions, about

$337 million of the total funds committed during the first program year had

not been authorized for payment as of August 31, 2000.

First program year (1998) Second program year (1999)

Service type

Program funds

committed

Program funds

authorized for

payment

Program funds

committed

Program funds

authorized for

payment

Telecommunications $679,158,138 $507,321,407 $579,455,836 $233,465,766

Internet access 135,647,152 95,165,521 148,408,155 68,118,565

Internal connections 917,092,722 792,059,949 1,242,965,575 707,530,523

Total $1,731,898,012 $1,394,546,877 $1,988,829,566 $1,009,114,854

13In addition, FCC noted the extension would allow schools to use internal connection

funding over the summer months when schools were in recess.

14Because of these extensions and pending appeals, SLD estimates that it is possible that as

much as $44 million committed in the first year could still be paid out.
Page 18 GAO-01-105 Schools and Libraries Program

For the second program year, FCC originally established a deadline of June

30, 2000, for receiving services supported by committed funds. FCC

subsequently extended this deadline for one-time services to September 30,

2000, largely because SLD again notified applicants of their funding

commitments later than anticipated. As of August 31, 2000 (30 days before

the deadline), about $980 million of these committed funds, or nearly 50

percent, had not been authorized for payment. On October 31, 2000, FCC

again extended this deadline. Applicants meeting certain criteria now have

until September 30, 2001, to use second-year funds committed for one-time

services.

It is currently unclear what percentage of committed funds will ultimately

be used. Given the deadline extensions and waivers, SLD officials expect

that additional applicants and vendors will eventually file the required

forms and receive some of the committed funding, while others may never

claim all of the funds committed to them because they did not obtain all of

the items included in their request. FCC has already used $447 million of

first-year program funds to reduce the amount that telecommunications

carriers paid into the universal service fund in the second and third

program years. Both FCC and SLD officials stated that a comprehensive

analysis has not been conducted to determine why some committed funds

have not been claimed or whether changes in program procedures could

reduce the amount of unused funds.

Weaknesses Found in

Application and

Invoice Review

Procedures

Weaknesses in SLD’s application review process caused some funds to be

committed for ineligible products and services. We reviewed 44 secondyear applications that received funding commitments for internal

connections—the type of service most likely to include ineligible items.

After screening out $20 million from requests that included ineligible items,

SLD committed $285 million in e-rate funds to these applications. However,

we found that SLD reviewers had failed to identify other ineligible items

that resulted in at least $6 million in funding errors. This amount

understates the extent of the problem because it does not include cases we

found in which funds were mistakenly committed for ineligible items

whose costs could not be determined from the application materials.

Furthermore, it does not include the costs of other items whose eligibility

was questionable but could not be resolved using the application materials

and current review criteria. We traced these funding commitment mistakes

and problems to procedural errors, unclear review criteria, and a lack of

sufficient information in some applications that prevented reviewers from

determining the eligibility of questionable items. In addition, we found that
Page 19 GAO-01-105 Schools and Libraries Program

SLD’s process for reviewing invoice forms prior to disbursing committed

funds provides another opportunity to identify ineligible items. However,

the invoice review process requires applicants to submit much less

information than is found on their applications and involves less

comprehensive reviews. An independent auditor hired by SLD has

uncovered preliminary evidence that some program funds were spent on

ineligible services after the requests for these funds cleared SLD’s

application and invoice reviews. SLD officials have begun efforts to

address some of these weaknesses.

Application Review

Includes Procedures to

Prevent Funding of

Ineligible Items

One of SLD’s key management objectives is to ensure that e-rate funds are

provided only to eligible entities for eligible products and services. Not

only is it inequitable for some applicants to receive funding for ineligible

products while others do not, but such errors deplete the funds available to

other applicants. This latter point is particularly important because, as we

noted earlier, there was not enough funding available during the first and

third program years (1998 and 2000) to meet all the applicants’ requests.

SLD’s primary internal control for ensuring that program funds are not

directed to ineligible products and services is the application review

process. This process calls for more than one reviewer to examine virtually

all applications, identify all ineligible items that an applicant may have

included, and exclude these items from the funding commitment made to

the applicant. One key aspect of this process calls for reviewers to compare

the services described in each application to a database listing more than

750 telecommunications services, Internet access services, and internal

connection items.15 For each item, the database identifies the type of

service, provides a definition, and specifies whether it is eligible, ineligible,

or eligible only if certain conditions are met. Any funding request that

includes an ineligible entity or an ineligible product or service must be

reduced by the cost of the ineligible item. If the cost of ineligible items

totals more than 30 percent of the funding request, then the whole request

is denied.16

15This aspect of the review process was implemented as a result of our testimony Schools

and Libraries Corporation: Actions Needed to Strengthen Program Integrity Operations

Before Committing Funds (GAO/T-RCED-98-243, July 16, 1998), which found that the same

review criteria were not being applied to all applications.

16This procedure was put in place to prompt applicants to prepare their applications

carefully and make a conscientious effort to exclude ineligible items.
Page 20 GAO-01-105 Schools and Libraries Program

While the process used to review the eligibility of services is the same for

all applications, the amount of effort needed to review an application

varies. Some applications are quite large, covering many schools and

containing hundreds of separate requests for products and services, each

of which needs to be reviewed, whereas other applications include only a

few products or services. Applications also vary in the amount of

information provided. Some applications we reviewed included detailed

descriptions of every product or service for which support was requested.

In other cases, reviewers had to ask applicants for more information to

understand what services they had included.

The importance of the application review process is underscored by the

fact that applicants can request substantial funding for ineligible items. For

example, for the 1999 program year, SLD officials said that they had

identified and denied nearly $400 million in internal connection funding

requests for ineligible items or requests that did not meet other eligibility

rules.17 Once SLD reviews the applications and adjusts the requested

amounts to remove the cost of ineligible items, it makes its funding

determinations. Each applicant receives a letter detailing the amount of

funding committed for each funding request and noting any funding that

was denied.

Some Ineligible Internal

Connection Items Were

Included in Second-Year

Funding Commitments

To test the effectiveness of SLD’s application review process, we examined

a sample of applications that received funding commitments for internal

connections during the second program year (1999), the one most recently

completed at the time of our review. Our objective was to determine how

effective the process was in funding only eligible items. We focused on

internal connections because many ineligible products and services fall

into this category. All of the applications in our sample had gone through

SLD’s review process and had received funding commitments. Our sample

universe was the 9,770 applications that had received funding for internal

connections for the 1999 program year. We selected applications for review

with a probability proportionate to their size, as measured by the number

of dollars committed for internal connections. Our sample included 44

applications that accounted for more than $285 million of the $1.2 billion in

17SLD officials stated that, during the 1999 program year, they denied a total of $700 million

in funding requests for ineligible items or requests that did not meet other eligibility rules.

These denials included requests for telecommunications, Internet, and internal connection

services.
Page 21 GAO-01-105 Schools and Libraries Program

second-year funds committed for internal connections through November

1999. These applications contained over 2,300 separate funding requests for

internal connections, many of which contained dozens of internal

connection items. Because of the great variation in the amounts of the

errors we observed from one application to the next in our sample, we

were unable to reliably estimate the total amount of funding for ineligible

or potentially ineligible services committed by SLD in the second program

year. Additional information on our sampling methodology appears in

appendix V.

We found that SLD reviewers correctly identified and screened out $20

million from requests that included ineligible items before committing $285

million in internal connections funding to the 44 applications. This $20

million includes both ineligible items and requests in which more than 30

percent of the cost was for ineligible items (a condition that results in a

denial of funding for the entire request). The following examples illustrate

some of the ineligible items that SLD caught during the application review

process:

• $6.8 million was correctly denied to an applicant requesting ineligible

multimedia equipment.

• $4.2 million was correctly denied to an applicant requesting ineligible

satellite and computer services, Wide Area Network (WAN) equipment,

software, and maintenance.

• $3.7 million was correctly denied to an applicant requesting equipment

identified as part of an ineligible WAN.

• About $336,000 was correctly denied to an applicant requesting wiring at

ineligible locations, including a stadium and housing, as well as

ineligible software, modems, and telephones.

Overall, we believe that about $193 million of the $285 million in

commitments was correctly reviewed and processed. We found, however,

that SLD reviewers missed other ineligible items in these 44 applications

and incorrectly included them in funding commitments made to applicants.

Specifically, we found that SLD improperly committed at least $6 million

for ineligible items or for requests in which more than 30 percent of the

funding was for ineligible items and should have been denied entirely.

Some of the ineligible items missed by reviewers involved relatively small

amounts. For example, $6,000 was incorrectly committed to one applicant

for ineligible WAN equipment. Other missed items involved larger amounts

of funding, as the following cases show:
Page 22 GAO-01-105 Schools and Libraries Program

• About $1.8 million was incorrectly committed to an applicant for

ineligible videoconference capabilities.

• About $2 million was incorrectly committed to an applicant for

ineligible maintenance services that were intended to be delivered

outside the program year.

• About $306,000 was incorrectly committed to an applicant for ineligible

interface cards, video cameras, and maintenance.

• About $50,000 was incorrectly committed to an applicant for services to

ineligible locations and for ineligible telephone maintenance.

In addition, we found that SLD committed funds to requests when (1) an

applicant included an ineligible item whose cost was not identified or (2)

the eligibility of the requested services could not be determined because

descriptive information in the application material was not sufficiently

clear. These problems occurred in requests that totaled $86 million, but we

did not have enough information to determine what proportion of this

amount might involve ineligible items. Specific examples include the

following:

• One application submitted by a city school district included more than

600 requests. The attachment to the application listed a number of

eligible services and items, including servers, switches, and hubs, as

well as an ineligible software product. Since the application did not

specify the amount of funding related to the ineligible software, or even

which of the 600 requests included the ineligible item, neither we nor

SLD could determine how much of the $21 million requested in this

application and committed to the applicant was committed in error.

• Another applicant (a school system) requested about $1.2 million for

approximately 93 file servers. The application, however, suggests that an

ineligible service center could be one of the locations scheduled to

receive a server. Neither we nor SLD could determine whether and to

what extent the applicant was going to use program funding for this

ineligible location.

• Still another applicant asked for $2.7 million to support the installation

of voice, data, and video cabling. SLD approved this request because the

list of eligible services it maintains indicates that each of the requested

services is eligible. However, the list also includes a description noting

that video services are eligible only under certain circumstances.

Neither we nor SLD could determine if the applicant intended to use the

television cabling to provide ineligible video services (which would

make the cabling itself ineligible). SLD stated that reviewers should
Page 23 GAO-01-105 Schools and Libraries Program

have sought additional information from the applicant to resolve this

matter.

Inadequate Information and

Unclear Guidance Weaken

the Review Process

As shown by the proceeding examples, weaknesses exist in the application

review process. Some mistakes appear to be the result of human error,

since the information needed to make a correct determination was

available in the application materials. For example, one application clearly

indicated that the applicant intended to use $1.7 million in program funds

to upgrade its telephone systems to include videoconferencing

capabilities—an ineligible service. However, other errors appear to be the

result of problems in the application and review process. First, applicants

did not always describe the services for which they requested funding in

enough detail to enable the reviewers to determine whether any of the

requested services were ineligible. For their part, SLD reviewers did not

always contact applicants for additional information needed to make

informed decisions about the eligibility of requested services. Second, the

program’s policies and guidance do not always effectively define which

services are eligible for funding support.

Inadequate Information in

Applications

E-rate applications do not always include detailed information on the

services for which funding is requested. This is the result of FCC’s policy to

allow the applicants flexibility in how they document their funding

requests. The e-rate application requires one line of basic information for

each funding request, including such information as the vendor, the general

type of service requested, the total monthly and annual costs, and the

discount rate requested. In addition, applicants are required to provide an

attachment for each request that includes “a concise but specific

itemization of services provided.” In the applications we reviewed, some

applicants listed every item for which they were requesting support, while

others included only a general description of the requested services,

making it difficult to readily determine if these requests included ineligible

items.

Procedures direct SLD reviewers to contact applicants for additional

information if the application is unclear. Moreover, for conditionally

eligible services, reviewers are required to determine whether the

requested service will be used according to the program’s rules. If the

reviewers cannot make that determination from the information provided

in the application, they are required to ask the applicant for clarification.

However, we found that this procedure was not being consistently followed

for the applications that we reviewed. We identified several instances when
Page 24 GAO-01-105 Schools and Libraries Program

reviewers approved requests for conditionally eligible services without

having documentation showing how the services would be used. For

example, two applicants requested program funds for network equipment

maintenance, which is eligible for program support if the equipment being

maintained is eligible. However, the applicant did not identify the

equipment to be maintained, and SLD approved the request without

seeking additional information.

Similarly, service to administrative buildings is conditionally eligible. Such

a building is eligible only if needed to provide service to instructional

buildings. However, we found instances when SLD approved requests for

services to buildings despite evidence that they could be ineligible

administrative sites. For example, an applicant included in its list of sites to

be funded one site that had no students. SLD fully funded this request, even

though the application did not specify whether the site with no students

was an instructional or an administrative building. SLD stated that while

additional information should have been requested, reviewers did not ask

for additional information on this conditionally eligible item because they

assumed the request was eligible.

Lack of Clarity as to the

Eligibility of Some Items

FCC’s rules do not always clearly define which services and entities are

ineligible for program funding. For example, FCC’s rules state that WANs

are not eligible for funding but do not provide clear guidance on what

should be considered a WAN.18 As a result, SLD reviewed 1999 applications

under a policy that rejected any item specifically identified as part of a

WAN, such as components with the acronym “WAN” in their description.

However, similar items that did not include the acronym “WAN” in their

description were approved. For example, SLD denied one applicant’s

request for radios used to cross a public right-of-way. However, SLD

approved a request by another applicant because the acronym “WAN” was

not used in the application’s description of wireless transmitters capable of

transmitting data up to 600 feet from the school. When we pointed out this

inconsistency, SLD (with FCC’s concurrence) changed its procedures for

dealing with WANs. Under the new procedures, all types of networking

equipment located within school and library facilities are considered

eligible, regardless of how they are labeled. Only the actual wires that carry

data across public rights-of-way are considered ineligible WAN

components.

18See 47 C.F.R. 54.500 and 54.518.
Page 25 GAO-01-105 Schools and Libraries Program

FCC has also identified teacher training as an ineligible service but does

not specifically define the type of training that is ineligible or discuss the

training of other personnel. As a result, SLD approved several requests for

what it assumed was initial training provided by vendors on the use of

eligible items. For example, one applicant submitted a request stating that

over $4,500 in program funds would be spent for “on-premises training” and

“on-site translation.” SLD approved the request, considering it a reasonable

cost of installing eligible equipment. FCC staff stated that this policy is

consistent with the intent of the original order, which identified training as

an ineligible item and FCC subsequently specified as teacher training. FCC

staff concluded that basic instruction in using eligible equipment is eligible,

provided it is “reasonable.” However, they have not defined any criteria to

determine when these training costs should be considered reasonable or

provided guidance to SLD on how training costs should be reviewed.

Similarly, we identified several requests to fund project design costs and

contingency fees. Guidance provided by FCC describes “room design

consulting and system integration” as ineligible services. However, FCC

staff responsible for e-rate oversight told us that design costs and

contingency fees are eligible for program funds if they are related to

eligible services and are “reasonable.” Again, FCC has not defined what is

reasonable. In one case involving these services, SLD approved a $3 million

request from one applicant that included over $621,000 in design costs and

almost $200,000 in contingency fees. Because this request also included

some ineligible services, program officials have yet to determine how much

of the requested design and contingency fees should have been denied.

Although they stated that the applicant’s contingency fee was not

unreasonable because it represented only 6 percent of the contract’s total

cost, they did not define the precise threshold that SLD could use to

determine whether similar requests are reasonable.

In addition, FCC staff stated in June 1998 that no universal service support

will be provided for the costs of tearing down walls to install wiring,

repairing carpets, or repainting. The applications we reviewed, however,

included funding SLD had approved for an indeterminate amount of

repainting and construction of walls and doors. For example, SLD

approved a request by one applicant for over $18 million in program funds

for a vendor to install new central telephone systems in 133 schools. At the

request of an SLD reviewer, the applicant later provided a comprehensive

list of the equipment and cabling to be included in 1 of the 133 schools.

Although this list included the costs of constructing a wall and door, SLD

stated that these costs might be allowable if they resulted from and were
Page 26 GAO-01-105 Schools and Libraries Program

required for the installation of the equipment. As of September 2000, FCC

staff had not determined if these items were eligible to receive funding,

although they said that nominal repair and painting may sometimes be

linked to installation. FCC staff had not provided this additional guidance

to SLD.

We also found that SLD sometimes failed to inform applicants that they had

requested funds for ineligible services, even though its internal procedures

require such notification. For example, one applicant requested more than

$7.7 million for a districtwide cabling project, including approximately

$183,000 in equipment and maintenance that were not eligible for e-rate

support. While SLD denied the funds requested for the ineligible items, its

letter to the applicant did not explain the basis for the reduction or caution

the applicant not to spend any e-rate funds on the ineligible equipment and

maintenance. Without such explicit notification, an applicant could

mistakenly apply funds to ineligible items.

Most Invoices Paid Without

Detailed Review

SLD’s invoice review procedures provide another opportunity to prevent

funding from going to ineligible products and services. Both the applicant

and its vendor must file additional forms before committed e-rate funds are

paid. However, these forms contain less information and are reviewed in a

less comprehensive manner than e-rate applications.

One way in which the invoice review process differs from the application

review process is that neither the applicant nor the vendor is required to

provide a descriptive listing of the products and services for which the

invoice seeks payment. The form submitted by the applicant simply states

that it has begun receiving services under an approved request. The invoice

form submitted by vendors also includes few details. It essentially requires

the vendor to identify itself, the application and request number for which

it is seeking reimbursement, and the total amount of reimbursement

requested. Both the applicant and the vendor must certify on their forms

that the information they are providing is accurate.19

19When an applicant has paid a vendor the entire cost of an approved service, the applicant

may apply for reimbursement through its service provider to SLD of the approved,

discounted cost. As when vendors submit invoices, the forms do not require detailed

information on the services provided.
Page 27 GAO-01-105 Schools and Libraries Program

In contrast to the application review process, when every application is

checked for ineligible services, the invoice review process scrutinizes only

a limited number of invoices to determine what services are being funded.

SLD’s invoice reviews begin with an automated validation process that

determines if all the required information is included on an invoice form.20

Once this validation is complete, the invoice is approved for payment,

denied for payment, put on hold, or assigned to a reviewer for a special

review. Invoices are generally chosen for a special review because they are

considered to be “high risk.” For example, invoices from an applicant or

vendor that has previously violated program rules generally receive special

reviews. In some cases, SLD requires the applicant or vendor to submit

detailed billing statements as part of a special review.

Prior to January 2000, reviewers were not required to verify that only

eligible products and services were included in any billing information

submitted by applicants or vendors during the invoice review process.

Because of ongoing concerns about vulnerabilities in this review process,

SLD clarified its procedures in early 2000 to require reviewers to examine

all submitted billing information for evidence of ineligible services.

However, these new procedures are still more limited than those applied to

applications because SLD does not require additional billing information

for all special reviews. Even for cases that require additional information,

SLD did not specify what level of detail should be provided. Since they

began, SLD’s special reviews have identified a limited number of invoices

that requested payment for ineligible services, resulting in a denial of

payment. For example, one applicant’s vendor requested payment of about

$535,000 in program funding for an ineligible service. As a result, SLD

withheld some of the funds related to the invoice. In addition, SLD plans to

modify the applicant’s funding commitment to deny the amount associated

with the ineligible service.

SLD officials also told us in September 2000 that they were taking further

steps to improve their invoice review process. Another detailed review will

be added to identify invoices associated with funding commitments that

were modified by SLD from the original requests because they included

ineligible items. According to SLD officials, procedures for this additional

detailed invoice review are being developed. Also, on October 12, 2000,

SLD released a request for proposals for the evaluation and improvement

20These checks include determining if the invoice is missing information about the contact,

vendor, or service delivery dates.
Page 28 GAO-01-105 Schools and Libraries Program

of its invoice authorization and payment procedures.

As part of its ongoing quality control efforts, SLD has a contract with an

outside auditor (Arthur Andersen LLP) to conduct site visits to a number of

applicants that received funding during the first program year after clearing

SLD’s application and invoice reviews.21 At the time we completed our

review, SLD had received information from the auditor that some funds

approved for payment had not been used in accordance with the program’s

rules. In October 2000, SLD officials told us that over half of the auditor’s

reviews had been completed or virtually completed with no major

reportable findings. However, the remaining reviews have disclosed some

violations, including cases in which program funds were used to pay for

ineligible services and services delivered outside the program year. At one

location, there are preliminary indications that program funds could have

been intentionally misused. USAC forwarded this information to FCC, and

as a result, this case is under investigation by FCC’s Office of Inspector

General.

Administrative Costs

Remain a Small

Percentage of Overall

Funding

The e-rate program’s administrative costs for 1997 through 1999, together

with the projected costs for 2000, show some overall growth despite earlier

expectations that they would decline following the program’s start-up

phase. Program officials recently took action to reduce contract costs—the

source of most of the increase—but it is too early to determine the success

of their effort. Even with this growth, however, administrative costs remain

a small percentage of the program’s total costs. We compared the e-rate

program with 34 other federal programs that can provide technology

funding to schools and libraries by calculating each program’s

administrative costs as a percentage of its total program costs. The e-rate

program’s administrative costs were 2.4 percent of its total program costs,

while the others ranged from less than 1 percent to 15 percent. Overall, the

percentage of administrative costs was higher for 12 of the 34 programs

than for the e-rate program, lower for 21, and the same for 1. However, it is

difficult to draw conclusions from this comparison, given the many

differences in these programs’ characteristics and operations.

21SLD selected a diverse sample of applications based on a variety of factors, including highrisk designations.
Page 29 GAO-01-105 Schools and Libraries Program

Operating Expenses of the

E-Rate Program

Administrator

Most of the administrative cost of the e-rate program stems from the

operations of the program administrator. Table 3 provides a breakdown of

the operating expenses for the Schools and Libraries Corporation (which

operated from the inception of the program in September 1997 through

1998), and the current administrator, the Schools and Libraries Division of

USAC (which has operated since January 1, 1999). The data, based on

independently audited financial statements, cover two time frames: the 16

months of the Corporation’s operational lifetime and the first 12 months of

the current administrator’s operations.

Table 3: E-Rate Program’s Operating Expenses, 1997-99

Source: Report by Arthur Andersen LLP to USAC’s Board of Directors, dated Apr. 12, 2000.

Audited financial statements for 2000 are not yet available. However, USAC

submits projections of its operating expenses to FCC in advance of each

quarter of the calendar year. The projected expenses for the four quarters

of 2000 total somewhat over $34 million. According to USAC, the actual

expenses should come close to these projections.

Together, the audited financial statements and the projections for 2000

indicate a small, but steady, growth in administrative expenses. In

testimony before the Senate Committee on Commerce, Science, and

Dollars in thousands

Expense category

Schools and Libraries Corporation

(Sept. 1997 to Dec. 1998)

Schools and Libraries Division, USAC

(Jan. 1999 to Dec. 1999)

Compensation and related expenses

(includes program’s staff salaries and

benefits)

$1,269 $881

Professional fees (includes legal, audit,

bookkeeping expenses)

1,574 510

Other operating expense (includes rent,

taxes, office supplies, postage and freight,

travel, telephone, computer support, dues,

and subscriptions)

1,140 899

Depreciation and amortization (includes

furniture and computer software)

— 89

Contractual expenses (includes salaries and

expenses of NECA and its subcontractors

for day-to-day e-rate program support

operations)

23,341 26,555

Total $27,324 $28,934
Page 30 GAO-01-105 Schools and Libraries Program

Transportation on July 16, 1998, the head of the Schools and Libraries

Corporation at that time stated that “[i]n future years, with start-up costs

behind us, we anticipate administrative costs will decline accordingly.” As

table 3 indicates, there were decreases in several expense categories in

1999. These decreases are attributable to the change in program

administrators. According to USAC’s Chief Executive Officer, consolidating

e-rate program operations with USAC’s existing universal service

operations and rebidding contacts produced savings in compensation and

benefits, insurance, rent, independent audits, and general accounting.

However, contract costs for the day-to-day operational support performed

by NECA increased, rather than decreased. The former administrator of the

Schools and Libraries Corporation awarded a support services contract to

NECA without using a competitive bidding process involving formal

requests for proposals. NECA’s contract was a “time and materials”

contract under which the Corporation agreed to pay “all reasonable, actual

costs” incurred by NECA in carrying out the agreed upon work. The heavy

workload for 1999 contributed to the increase in contract costs.

The policy of USAC, the current program administrator, requires that all

contracts over $100,000 be put out for competitive bid unless an exception

is approved by its Board. Accordingly, in December 1999, USAC issued a

request for proposals for programmatic support services for the e-rate

program and a related telecommunications program covering rural health

care providers.22 Unlike the previous contract, whose price was based on

actual costs, the new solicitation was for a firm fixed-price contract. At the

conclusion of the competitive bidding process, USAC announced in May

2000 that it had awarded this new contract to the incumbent, NECA. The 3-

year contract, running from July 2000 through June 2003, is valued at $61.6

million and covers both the schools and libraries and rural health support

mechanisms. USAC estimates that the new contract will result in a 25-

percent savings over the old contract. However, the actual savings depend

on the accuracy of the workload assumptions included in the contract’s

statement of work. Although a lower-than-expected workload could result

in reduced contract costs, a higher-than-expected workload could result in

additional costs.

22The Rural Health Care Program is a universal service support program authorized by the

Congress to provide reduced rates to rural health care providers for telecommunications

services related to the use of telemedicine and telehealth. It can provide up to $400 million

in support annually.
Page 31 GAO-01-105 Schools and Libraries Program

USAC also plans to solicit competitive bids for its billing and collections

services, which could result in additional savings in administrative costs.

The request for proposals for this service is expected to be issued this fall,

with the aim of having a new contract in place by July 2001. In addition,

USAC plans to seek competitive bids on its employee benefits package,

which could further reduce some administrative costs.

FCC’s E-Rate Administrative

Costs

The salaries of the FCC staff working on the program are another

component of the e-rate program’s administrative costs. At the time of our

review, four managers and nine staff in FCC’s Common Carrier Bureau

were spending some portion of their time on e-rate activities, such as

reviewing USAC documents, forms, and audit plans; dealing with policy

questions; responding to inquiries from the public and the Congress;

performing outreach to the applicant and vendor communities; reviewing

and providing feedback on USAC’s operational and financial audits; and

resolving appeals from schools and libraries.

The portion of FCC staff salaries that can be allocated to e-rate

administrative activities cannot be precisely determined because the

Common Carrier Bureau’s procedures do not call for the staff to track the

amount of time they spend working on e-rate activities. However, Common

Carrier Bureau officials estimate their staff cost for administering the

program during fiscal year 2000 to be roughly $420,000 (the equivalent of

about 5 full-time staff years). This is an increase from the fiscal year 1998

workload, which FCC estimated to be the equivalent of 2 full-time staff

years. Common Carrier Bureau officials attributed the increased staff

workload to several factors related to the e-rate program: the need for FCC

to respond to numerous appeals (as of July 2000, it had resolved 185

appeals and had 253 pending); a steadily growing number of administrative

and policy issues; and audits and inquiries from the executive and

legislative branches.
Page 32 GAO-01-105 Schools and Libraries Program

Comparison of

Administrative Costs for ERate and Related Federal

Programs

In August 1999, we reported on 35 federal programs (including the e-rate

program) that could be used as a source of federal funding for schools and

libraries.23 Using fiscal year 1998 data, we found that the annual

administrative costs of the programs varied widely, with the National

Science Foundation’s Connections to the Internet Program having the

lowest costs at $4,000 and FCC’s e-rate program having the highest costs at

$26,909,000.24 However, to compare the programs, we calculated the

administrative costs as a percentage of the total program costs.25 For

example, the program costs for Connections to the Internet for fiscal year

1998 were only $147,000, making the administrative costs 2.6 percent of the

program costs. For the e-rate program with its much higher funding level,

the administrative costs were 2.4 percent of the program costs, somewhat

lower than for the Connections to the Internet program.26

Our analysis showed that the administrative costs of the 35 programs,

expressed as a percentage of the programs’ total fiscal year 1998 costs,

ranged from less than 0.02 percent for the Department of Education’s

Emergency Immigrant Education Assistance Program to 15 percent for the

Department of Commerce’s Telecommunications and Information

Infrastructure Assistance Program. Twelve of the programs had higher

percentages of administrative costs to total program costs than the e-rate

program; the e-rate program and another program had the same

percentage; and 21 others had lower percentages. This analysis can be

23Telecommunications Technology: Federal Funding for Schools and Libraries (GAO/HEHS99-133, Aug. 20, 1999).

24The e-rate administrative costs used in our analysis of the 35 programs cover the 12-month

period from Jan. 1, 1998, through Dec. 31, 1998. This total includes both FCC and SLD e-rate

administrative costs for this period.

25Administrative costs as a percentage of total program costs are calculated by dividing the

1998 administrative costs by the sum of the 1998 program funding and the 1998

administrative costs, except for programs (like the e-rate program) that pay administrative

costs out of program funds. For those programs, administrative costs as a percentage of

total program costs are calculated by dividing the 1998 administrative costs by the 1998

program funding.

26The e-rate program was funded at $1.66 billion for the 18-month period from Jan. 1, 1998,

through June 30, 1999. In order to calculate administrative costs as a percentage of total

program costs on an annual basis, the 18-month figure of $1.66 billion was reduced by onethird to $1.1 billion. Even though funding commitments were not made until late 1998 and

early 1999, the applicants were being reimbursed the discounted portion of bills they paid in

full as early as Jan. 1998. Therefore, the one-third reduction is a reasonably accurate

estimate.
Page 33 GAO-01-105 Schools and Libraries Program

further refined by focusing on the 10 programs out of the 35 that

specifically target their funds to technology initiatives, rather than simply

including technology among the items they can fund. Of these 10

technology-targeted programs (which include the e-rate program), 6 had

higher percentages of administrative costs to total program costs than the

e-rate program and 3 had lower percentages. See appendix VI for details on

these 10 programs.

It is difficult to draw precise comparisons among these programs because

the nature of their administrative costs can vary. For example, some of the

programs distribute funding through a formula grant process, while others

use a competitive grant process that includes reviewing and scoring

applications as part of a selection process. And while most competitive

grant programs hired outside experts to review applications, one program

used volunteers and another used only agency staff. Moreover, the

Department of Education considers the cost of reviewers a “program

expense,” whereas other agencies consider this cost an “administrative

expense.” Other key variables include the number of applications reviewed

and the amount of funding distributed.

FCC Has Recently

Established New

Performance Goals and

Measures for the

Program

After some false starts, FCC recently developed meaningful performance

goals and measures for the e-rate program. Performance measurement is

critical to managing a program and determining its progress in meeting

intended outcomes. In our July 1998 testimony before the Senate

Committee on Commerce, Science, and Transportation, we noted that

FCC’s e-rate program lacked the kinds of specific goals and measures

called for under the Government Performance and Results Act of 1993 (the

Results Act).27 At that time, we noted that FCC had simply informed the

Congress in its annual 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.” We

recommended that FCC develop specific goals and measures for the

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

first year’s funding. We reiterated this recommendation in our March 1999

report on the program, just after the first e-rate funding commitments had

been made to applicants.

27The Results Act defines a performance goal as a target level of performance expressed as a

tangible, measurable objective against which actual achievement is to be compared.
Page 34 GAO-01-105 Schools and Libraries Program

The program participation goals and measures that FCC set during the two

budget cycles following our July 1998 recommendation did not resolve our

initial concern. In February 1999, as part of its fiscal year 2000 budget

submission to the Congress, FCC listed a goal of ensuring that 30 percent of

eligible schools and libraries would have Internet access by the end of

fiscal year 2000. This goal was not meaningful because it was well under

the prevailing conditions. According to survey data from Department of

Education’s National Center for Education Statistics, 89 percent of public

schools and 67 percent of private schools were already connected to the

Internet in 1998. For the fiscal year 2001 budget submission (dated Feb.

2000), FCC raised the goal to having 90 percent of schools and libraries

connected to the Internet by fiscal year 2001. But even this much higher

goal still fell short of actual conditions at public schools and libraries. The

National Center for Education Statistics reported that in 1999, over 95

percent of all public schools had Internet access. Even those public schools

serving the most economically disadvantaged or rural areas were reported

to be at least 90 percent connected in 1999. As for libraries, the American

Library Association reported in April 2000 that more than 90 percent of

them were connected to the Internet. The one area where the fiscal year

2001 goal had potential relevance was private schools, since only 67

percent of them were connected in 1998 (the most recent data available).28

During our review, we spoke with FCC staff about the need for effective

performance goals and measures. On September 29, 2000, FCC finalized a

new performance plan for the e-rate program that has two key features: (1)

it recognizes that nearly all school buildings are already connected to the

Internet, and (2) it targets populations that are underserved by the e-rate

program. Instead of focusing on connections to school buildings, the plan

focuses on improving Internet connections to “instructional classrooms.”

The new goal is to have 100 percent of public school instructional

classrooms connected to the Internet by 2002 and 95 percent of private

school instructional classrooms connected by 2003. To help accomplish

this strategic goal, the plan includes tactical goals targeted at increasing

participation in the e-rate program by urban low-income school districts

and rural school districts located outside of towns. According to FCC’s

data, the participation rates for both of these groups currently fall below

28The results of several years of surveys on Internet access by the National Center for

Education Statistics are summarized in Internet Access in U.S. Public Schools and

Classrooms: 1994-99 (NCES 2000-086, Feb. 2000) and Computer and Internet Access in

Private Schools and Classrooms: 1995 and 1998 (NCES 2000-044, Feb. 2000).
Page 35 GAO-01-105 Schools and Libraries Program

the average participation rate for all eligible schools. Similarly, the plan

seeks to increase the e-rate program participation rates for rural libraries

and libraries serving small areas, which currently lag behind the

participation rates for libraries serving larger areas. These new goals,

benchmarked to current Internet connectivity rates and program

participation rates, should help FCC to assess whether the program is

reaching the full spectrum of eligible applicants.

It should be noted that FCC’s participation goals do not attempt to measure

the impact of advanced telecommunications on improving educational

outcomes. This complex issue lies outside the range of FCC’s expertise and

comes under the purview of the Department of Education, which has

developed related performance goals and measures.

Conclusions In our July 1998 testimony, we recognized that the e-rate program faced

many challenges and difficulties during its first year of operation. These

challenges continue as the program enters its fourth year. SLD succeeded

in committing over $3.7 billion to applicants during the 1998 and 1999

program years. However, a significant amount of these funds has not yet

been paid out, even though the deadlines for applicants and vendors to use

the funds have been extended more than once. Identifying and addressing

the causes of this problem could help increase the amount of funding that

is actually used to bring telecommunications services to schools and

libraries. In addition, it would be undesirable to have a significant

percentage of committed funds go unused at a time when the level of

requests for funding greatly exceeds the annual amount available.

In addition, more funding would be available for eligible requests if SLD’s

review procedures were more effective at identifying and denying ineligible

requests. Despite procedures requiring reviewers to deny funding for

ineligible items and to confirm that conditionally eligible services are being

used according to program rules, we identified millions of dollars in funds

incorrectly committed to ineligible products and services. In some cases,

reviewers simply overlooked ineligible items that were clearly identified by

applicants. In other cases, the lack of clear, consistent rules likely

contributed to mistakes made by both applicants and reviewers.

Furthermore, the reviewers’ ability to identify ineligible requests is limited

when applications include vague or broad terms to describe the services

for which funding is requested. The frequency of such cases could be

reduced if the review procedures and criteria were clarified and if the
Page 36 GAO-01-105 Schools and Libraries Program

applicants submitted more details about the items for which they intend to

use program funds.

Finally, SLD’s practice of approving most vendors’ invoices without

reviewing how and where the committed funds are actually being spent

leaves the program vulnerable to further funding errors and potential

abuse. In particular, the larger applications involving dozens of sites and

millions of dollars need a higher level of quality assurance to determine

that funds are being spent as approved.

SLD has already taken some steps to address the issues we identified, such

as contracting with an outside auditor to review a limited number of

applicants, and is considering others. However, given the large amount of

funds involved in the e-rate program, cost-effective quality assurance

procedures that result in more consistent and reliable application and

invoice reviews are warranted. Because the next program year is not

scheduled to begin until July 2001, we believe that SLD and FCC have

adequate time to implement our recommendations.

Recommendations for

Executive Action

In order to (1) improve the application review and invoicing process to

prevent funds from being used for ineligible services and (2) maximize the

funding available to applicants to support eligible services, we recommend

that the Chairman, FCC, direct responsible FCC staff to complete the

following four actions before funding commitments are made for the fourth

program year:

• Finalize all outstanding program rules and review procedures, including

determining the extent to which training, design, contingency, and

repair fees are eligible for program support.

• Implement procedures for promptly clarifying additional eligibility

issues that arise during the application review process and publicizing

such clarifications to the applicant community in a timely manner.

• Revise the list of eligible services available to applicants so that it

clearly identifies which services are eligible and ineligible for program

support. Additionally, the list should clearly identify as “conditionally

eligible” all products and services whose eligibility is subject to

conditions included in their descriptions, such as cellular telephone

service and video services.

• Revise the e-rate program’s application to require more detailed

information from applicants on the services they intend to purchase

with program funds.
Page 37 GAO-01-105 Schools and Libraries Program

In addition, the Chairman, FCC, should direct responsible staff to develop a

strategy for reducing the percentages of committed funds that go unused

by applicants. This effort should include (1) contacting applicants to

ascertain their reasons for not fully using their committed funds and (2)

determining whether changes to program rules and procedures are needed

to address the difficulties that applicants may be having in this regard.

Finally, the Chairman, FCC, should direct the Chief Executive Officer of

USAC to establish a quality assurance function in USAC responsible for (1)

ensuring that SLD’s funding decisions follow FCC’s program eligibility

rules, as well as SLD’s management goals and procedures; and (2)

developing effective internal control procedures over the disbursement of

funds to ensure that they have been used as approved.

Agency Comments We provided a draft of this report to FCC and USAC for comments. In

general, they agreed with our findings and recommendations. They stated

that they had begun to implement the recommendations and completed

some actions, which have already led to significant improvements in the

program. However, USAC provided details on some points in our report

that USAC believed could be misinterpreted. The full text of FCC’s and

USAC’s comments appears with our responses in appendix VII. FCC and

USAC also provided us with technical clarifications, which we included in

the report where appropriate.

We are sending copies of this report to interested congressional

committees; the Chairman, Commissioners, and Managing Director of FCC;

the Director, Office of Management and Budget; and other interested

parties. We will also make copies available to others upon request.
Page 38 GAO-01-105 Schools and Libraries Program

If you or your staff have any questions about this report, please call me on

(202) 512-7631. Key contributors to this report are listed in appendix VII.

Stanley J. Czerwinski

Director, Physical Infrastructure Issues
Page 39 GAO-01-105 Schools and Libraries Program
Page 40 GAO-01-105 Schools and Libraries Program

Appendix I

FCC’s Authority to Set and Modify E-Rate’s Apendxies

Annual Funding Level ApendxiI

Section 254 of the Communications Act of 1934, as amended, provides the

Federal Communications Commission with the authority to set the level of

funding for the e-rate program.1 Among other things, this provision

required the Commission, acting on the recommendations of a FederalState Joint Board, to establish predictable and sufficient mechanisms to

preserve and advance universal service. 47 U.S.C. 254(a)(d). The Joint

Board recommended a $2.25 billion annual cap on support for schools and

libraries. The Board based its estimate on cost data extrapolated from a

1995 McKinsey and Company report entitled Connecting K-12 Schools to

the Information Superhighway adjusted to reflect the Board’s modeling

assumptions.2 On the basis of this and a few other sources, the Joint Board

estimated “that the total cost of the [eligible] communications services

[sought by schools and libraries] . . . would be approximately $3.1 to $3.4

billion annually during an initial four year deployment period, and

approximately $2.4 to $2.7 billion annually during subsequent years.”3 The

Commission has not revisited this issue to obtain more current cost data.

According to FCC officials, the Commission adopted the $2.25 billion

annual cap recommended by the Joint Board in accordance with section

254.4 Each year, the Commission bases the funding level for the schools and

libraries program on demand and on the expense of administering the

program, subject to the cap. FCC officials stated that as long as the

Commission adopts a funding level that is less than or equal to the cap, no

formal proceeding is generally necessary. They noted that the funding

levels for the first and second year were promulgated through formal FCC

orders because of extenuating circumstances. However, the funding level

for the third year was simply announced by the Chairman through a public

statement.5

1

Section 254 was added by the Telecommunications Act of 1996.

2

For example, the Board adjusted the McKinsey base cost estimates for the full classroom

model. This model assumes one computer for every five students in all classrooms, with a T1 connection.

3

Federal-State Joint Board on Universal Service Recommended Decision, 12 FCC Rcd. 87,

369-70, para. 554 (1996).

4

Letter from Federal Communications Commission Chairman, William E. Kennard to U.S.

General Accounting Office Assistant General Counsel Michael R. Volpe, dated Apr. 28, 2000.

5

Statement of FCC Chairman William E. Kennard and Commissioner Gloria Tristani, 2000

FCC LEXIS 1906, Apr. 13, 2000.
Appendix I

FCC’s Authority to Set and Modify E-Rate’s

Annual Funding Level

Page 41 GAO-01-105 Schools and Libraries Program

Although the demand for program funds increased sharply in the third year

(to $4.7 billion, according to program officials’ estimates), the Commission

maintained the funding level for the schools and libraries program at the

$2.25 billion annual cap. FCC officials stated that a readjustment of the cap

would require an amendment of FCC’s rules. As of September 2000, no

rulemaking proceeding was under way to consider readjusting the cap.

Questions have been raised as to whether e-rate funds are federal funds.

The Congressional Budget Office and the Office of Management and

Budget count payments into the universal service fund as federal revenues

and payments from the fund (including payments for e-rate support) as

federal outlays. Both agencies have interpreted the act to mean that the

expenditures from the fund should be part of the federal budget because

the transfer of income between various classes of telephone users would

not occur but for the exercise of the sovereign power of the United States.6

Nevertheless, both the Commission and the Office of Management and

Budget have determined that these funds are appropriately maintained

outside the Treasury by a nongovernmental manager. Action by the U.S.

Senate appears to concur with this assessment. In 1997, the Senate passed

a “sense of the Senate” provision that stated, “Federal and State universal

service contributions are administered by an independent, non-Federal

entity and are not deposited into the Federal Treasury and therefore are not

available for Federal appropriations.”7

6

Congressional Budget Office, Federal Subsidies of Advanced Telecommunications for

Schools, Libraries, and Health Care Providers, Jan. 1998, p. 5.

7

See section 614, H.R. 2267, as passed by the Senate (Oct. 1, 1997).
Page 42 GAO-01-105 Schools and Libraries Program

Appendix II

Competitive Bidding Requirements ApendxiI

FCC’s rules generally require applicants to seek competitive bids for all

services eligible for e-rate support.1 The Commission found competitive

bidding to be the most efficient means of ensuring that applicants were

informed about all of the choices available to them. It also found that

without competitive bidding, an applicant may not receive the most costeffective services available, resulting in a higher-than-necessary demand

for e-rate support and, consequently, less support available for other

applicants.2

Applicants May Consider

Factors Other Than Price in

Selecting a Bid

FCC’s competitive bidding rules require applicants, as an initial step, to

provide the Schools and Libraries Division (SLD) with a description of the

services for which e-rate support is sought. SLD then posts this description

on its public Web site for all potential competing vendors to review. An

applicant must wait at least 4 weeks from the time the description is posted

on the Web site before entering into an agreement with a vendor in order to

give vendors an opportunity to evaluate and respond to the applicant’s

stated needs. SLD will deny (and has denied) funding for services based on

contracts that were signed fewer than 28 days after the related service

descriptions were posted.

FCC concluded that applicants should consider price to be the primary

factor in selecting a bid. However, FCC does not require applicants to

select the lowest bid offered, even among bids for comparable services. In

its Universal Service Order, FCC concurred with the Joint Board’s

recommendation that applicants should be given “maximum flexibility” to

take service quality into account and choose the offering that meets their

needs “most effectively and efficiently,” where this is consistent with other

procurement rules under which they must operate. The Commission noted

several other factors that applicants could also consider in determining

which vendor meets their needs “most effectively and efficiently.” These

additional factors—when permitted by state and local procurement rules—

include “prior experience, including past performance; personnel

qualifications, including technical excellence; management capability,

including schedule compliance; and environmental objectives.”3 FCC

1

Pre-existing contracts, as defined by FCC’s rules, are exempt from competitive bidding

requirements. 47 C.F.R. sec. 54.511(c).

2

Universal Service Order, 12 FCC Rcd. at 9029, para. 480.

3

Universal Service Order, at 9028, para. 481.
Appendix II

Competitive Bidding Requirements

Page 43 GAO-01-105 Schools and Libraries Program

cautioned, however, that when comparable services are being offered,

price needs to be carefully considered “to ensure that any considerations

between price and technical excellence (or other factors) are reasonable.”

Although federal procurement regulations are not applicable to the

contracts between e-rate applicants and their vendors, FCC’s e-rate

competitive bidding rules are similar to the rules and factors used in federal

procurements. In federal procurements, price must always be considered—

but is not necessarily the primary factor—in determining which bid is most

advantageous to the government. Federal contract officials may also

address the quality of the product or service by considering, along with

price, evaluation factors such as prior experience, personnel qualifications,

and technical excellence to form a reasonable basis for selecting an offer.

With negotiated procurements, federal acquisition regulations state that

“the objective of source selection is to select the proposal that represents

the best value.” And with invitations for bid, the regulations state that the

award is made to the “responsible bidder whose bids, conforming to the

invitation, will be most advantageous to the Government, considering only

the price and price-related factors . . . included in the invitation.”

FCC has noted that its competitive bidding requirements are not intended

to preempt state and local bidding requirements. In fact, in addition to

complying with FCC’s rules, applicants are required to certify on their

applications that they have complied with all applicable state and local

laws regarding procurements of services for which e-rate support is sought.

One of the reasons that FCC maintains it is sensible to rely on state and

local procurement practices for determining compliance with its own

competitive bidding requirements is “because such rules and practices will

generally consider price to be a ‘primary factor’ . . . and select the most

cost-effective bid.”

No Performance Data

Related to Vendor

Competition

Neither FCC nor SLD has data on the extent to which applicants did not

choose the lowest bidders. Although applicants must maintain records of

their bidding process, they were not required to report the number of bids

they received or the number of times they did not choose vendors offering

the lowest-priced bids. Given the large number of applicants that have

received funding so far, it is likely that there are many thousands of vendor

contracts associated with the e-rate funding. Tracking this issue in detail,

therefore, would be a time-consuming undertaking for both applicants and

program officials. In 1999, FCC did establish a performance goal related to

vendor competition, which was to ensure that a majority of the requests for
Appendix II

Competitive Bidding Requirements

Page 44 GAO-01-105 Schools and Libraries Program

services posted on SLD’s Web site received two or more bids. However,

FCC did not gather any data to measure its performance in meeting this

goal and decided to drop the goal from its subsequent performance plans.

E-Rate Appeals Have

Focused on Funding

Decisions, Not Competition

Issues

Vendors that have concerns about the competitive bidding process can

raise them through an appeal to SLD or FCC. Both applicants and vendors

can appeal to SLD regarding decisions it makes about e-rate applications

and funding. If not satisfied with SLD’s determination, they can appeal to

FCC. According to SLD and FCC officials, as of the end of September 2000,

there were only four appeals related to vendor competition issues.

SLD received two appeals from a vendor in Alaska that was not awarded

contracts with two school districts, even though it had submitted the

lowest-price estimates. In one of the cases, SLD’s general counsel

determined that the school district had considered price as the primary

factor when reviewing bids from different vendors and denied the appeal.

In the other case, SLD determined that price had not been considered the

primary factor and informed the school district that its application would

not be considered for e-rate funding.

FCC dealt with two other vendor appeals. One vendor appealed the

outcome of a competitive bidding process, complaining that the

Department of Education of the State of Tennessee (the applicant)

awarded more bid points to a rival vendor’s bid, even though the rival’s

initial bid was greater. The rival was ultimately awarded the contract. SLD’s

position on the vendor’s complaint was that it would “defer to the state and

local competitive bidding procurement review and procedures and

findings.” In reviewing the appeal, FCC determined that the applicant

adequately considered price, as well as other factors, in determining the

most cost-effective bid. FCC therefore denied the vendor’s appeal.4 In

another case, the applicant had the vendor prepare the applicant’s

description of requested services, and the vendor was listed as the point of

contact. The vendor was ultimately awarded the contract for the requested

services. SLD denied funding because of the vendor’s inappropriate

involvement. The vendor appealed to FCC, but FCC upheld in part SLD’s

decision to deny funding to the applicant on the ground that having a

4 FCC 99-216, (Order) rel. Aug. 11, 1999. Other issues were also considered in this case.
Appendix II

Competitive Bidding Requirements

Page 45 GAO-01-105 Schools and Libraries Program

vendor involved in the competitive bidding process in this way was

contrary to the principle of fair and open competition.5

SLD’s Reviews Disclosed

Some Cases Involving

Unfair Competition

SLD has identified other cases through its own review procedures when a

vendor’s actions have led SLD to conclude that the vendor engaged in

unfair competition. For example, in the third program year, SLD found that

about 160 of more than 200 applications prepared by the same consultant

indicated that a particular vendor had been selected to deliver the

requested services. In addition, regardless of the school size or number of

students, every sample contract with the vendor provided for the same

number of servers at each location. SLD conducted a more thorough

review and discovered, among other things, that the consultant was listed

as a beneficiary in each of a sample of contracts that it reviewed and there

was evidence that prices had been inflated. On the basis of this

information, SLD, with FCC’s knowledge, concluded there was evidence

that prices had been inflated, and SLD denied every application associated

with this consultant and vendor. The total amount of third-year program

funding denied for these applications was approximately $26 million.

5 FCC 00-167, (Order) rel. May 23, 2000.
Page 46 GAO-01-105 Schools and Libraries Program

Appendix III

Additional Eligible Students and Facilities ApendxiI

The e-rate program is directed at providing support to public and private

elementary and secondary schools and libraries. Prekindergarten

education programs, adult secondary education programs, and juvenile

justice facilities (e.g., classes leading to the General Educational

Development High School Equivalency Test, or other education that does

not go beyond grade 12) may be eligible for program funding depending on

how state law defines elementary and secondary schools in the state where

the program or facility is located. Table 4 provides the results of USAC's

analysis of each state's definition of elementary and secondary schools for

the second and third program year funding decisions. (“Yes” indicates that

the category of facility or student is eligible for e-rate funding.)

Table 4: Additional Facilities and Students Eligible for E-Rate Funding

Prekindergarten Adult secondary education Juvenile justice

Statea Facilities Students Facilities Students Facilities Students

Alabama No No No No Yes Yes

Alaska Yes Yes No Yes No Yes

American Samoa No No No No Yes Yes

Arizona No No No No No Yes

Arkansas No No No No No Yes

California Yes Yes Yes Yes Yes Yes

Colorado No No No No No No

Connecticut No Yes No Yes Yesb Yesb

Delaware No No No No Yes Yes

District of Columbia No No No No Yes Yes

Florida Yes Yes Yes Yes Yes Yes

Georgia No Yes No Yes Yes Yes

Guam No No No No No No

Hawaii Yes Yes Yes Yes Yes Yes

Idaho No No No No No Yes

Illinois No Yes No Yes No Yes

Indiana No No No Yes Yes Yes

Iowa Yes Yes Yes Yes Yes Yes

Kansas No Yes No No Yes Yes

Kentucky No No No No No No

Louisiana Yes Yes Yes Yes Yes Yes

Maine No No No Yes Yes Yes
Appendix III

Additional Eligible Students and Facilities

Page 47 GAO-01-105 Schools and Libraries Program

a

USAC's legal counsel has not reviewed the eligibility of additional programs or facilities in the

Northern Mariana Islands.

b

Only juvenile justice schools in District 1 are eligible.

Maryland Yes Yes No Yesc No No

Massachusetts No No No No No No

Michigan No No No No Yes Yes

Minnesota No No No No No Yes

Mississippi No Yes No Yes Yes Yes

Missouri No Yes No Yes No Yes

Montana No No No No No No

Nebraska No No No No No No

Nevada No No No No No No

New Hampshire No No No Yes No No

New Jersey No Yes No No Yesd Yes

New Mexico No No No No No Yesd

New York No Yes No Yes Yes Yes

North Carolina No Yes No No Yes Yes

North Dakota No No Yes Yes Yes Yes

Ohio No No No No No No

Oklahoma Yes Yes No Yes Yes Yes

Oregon No No No No No Yes

Pennsylvania No No No No Yes Yes

Puerto Rico No No Yes Yes Yes Yes

Rhode Island Yes Yes Yes Yes Yes Yes

South Carolina No No No No Yesd Yes

South Dakota No Yes No No Yesd Yes

Tennessee No No No No Yes Yes

Texas No Yes No Yes Yes Yes

U.S. Virgin Islands No No Yes Yes Yes Yes

Utah No No No No No No

Vermont No No No No Yes Yes

Virginia No No No Yes Yes Yes

Washington Yes Yes Yes Yes Yesd Yes

West Virginia No No No Yes Yes Yes

Wisconsin No Yes No No Yes Yes

Wyoming No No No No No No

(Continued From Previous Page)

Prekindergarten Adult secondary education Juvenile justice

Statea Facilities Students Facilities Students Facilities Students
Appendix III

Additional Eligible Students and Facilities

Page 48 GAO-01-105 Schools and Libraries Program

c

For General Educational Development (High School Equivalency).

d

Only juvenile justice schools listed in statutes are eligible.

Source: SLD.
Page 49 GAO-01-105 Schools and Libraries Program

Appendix IV

Funding Commitments and Authorized

Payments, 1998-99 ApendxiIV

SLD provided us with a copy of its database for the first 3 program years.

This database included all commitments and authorized payments of

committed funds as of August 31, 2000. Since SLD's database is constantly

changing as funding decisions and appeal decisions are reached, the data

included in this report constitute a snapshot in time. In addition, we were

unable to report the actual amount of discount funding requested by

applicants, since SLD has modified the requests. For example, some entries

in the database include the original amounts requested minus funding for

ineligible services removed by SLD. Other entries were adjusted to correct

mathematical errors made by the applicants.1 In addition, we found that

discount funding restored through the appeal process was not reflected

consistently in the database—the committed amounts but not the

requested amounts were adjusted to reflect the appeal decisions. As a

result, some applicants appeared to receive more discount funds than the

database showed them requesting. SLD officials stated, however, that no

applicant received more discount funding than requested.2

Table 5 shows the amounts of discount funding requested by applicants, as

well as the amounts of discount funding committed to applicants by SLD in

the first 2 program years. Table 6 presents the amounts of these committed

funds that SLD authorized to be paid out to vendors participating in the

program.3

1

SLD officials said they could examine the record for each application in the database to

determine the original amount of discount funding requested but doing so would be costly

and time-consuming.

2

In the first program year, the data show that the schools and libraries that applied for

discount funding from Tennessee received more funding than requested. According to SLD

officials, this discrepancy reflects FCC's reversal of an SLD decision to deny funds to the

Tennessee Department of Education. While SLD updated its data to reflect the funds

committed, it did not update the amount requested, which had been reduced to reflect the

original denial. We could not verify the accuracy of this statement.

3

According to SLD's database, American Samoa, the Northern Mariana Islands, and the U.S.

Virgin Islands were committed $10.9 million in discount funds during the first 2 program

years. As of Aug. 31, 2000, SLD had authorized payment of about $8.8 million (81 percent) of

these funds. Guam did not request any program funding during the first 2 program years.
Appendix IV

Funding Commitments and Authorized

Payments, 1998-99

Page 50 GAO-01-105 Schools and Libraries Program

Table 5: Amounts of Funds Requested and Committed for the First 2 Program Years, as of August 31, 2000

First program year (1998) Second program year (1999)

State

Amount requested by

applicants

Amount committed by

SLD

Amount requested by

applicants

Amount committed

by SLD

Alabama $56,882,765 $46,885,216 $35,038,876 $26,652,386

Alaska 15,276,225 13,577,806 16,521,143 12,189,113

Arizona 51,191,444 35,640,711 55,670,736 38,716,994

Arkansas 15,831,916 13,408,504 13,263,241 10,497,241

California 288,618,184 212,079,600 396,351,207 256,663,058

Colorado 25,608,514 14,316,805 14,703,097 11,786,626

Connecticut 33,548,696 24,192,938 46,207,112 32,133,484

Delaware 4,062,132 1,017,272 1,435,969 1,393,689

District of Columbia 17,575,100 4,866,571 21,822,021 9,348,789

Florida 76,942,833 49,676,963 109,560,958 73,022,870

Georgia 90,932,457 78,357,505 104,153,221 91,565,615

Hawaii 7,307,019 5,891,308 6,277,569 5,301,184

Idaho 6,220,849 4,620,940 6,096,407 5,124,101

Illinois 113,401,873 81,032,031 199,076,472 162,605,582

Indiana 33,757,611 21,906,914 27,661,323 22,876,019

Iowa 26,214,828 7,343,810 12,612,038 8,140,673

Kansas 15,550,865 10,462,313 19,364,587 14,990,120

Kentucky 57,099,768 50,354,985 75,868,966 57,599,372

Louisiana 45,321,832 40,153,955 46,941,793 37,725,411

Maine 3,963,159 3,014,559 6,025,067 3,649,468

Maryland 23,002,868 15,026,602 28,263,284 22,062,531

Massachusetts 43,592,441 30,264,968 42,756,850 33,836,941

Michigan 94,992,053 58,533,358 111,139,905 78,997,144

Minnesota 33,976,833 24,757,330 41,242,594 29,290,076

Mississippi 26,675,416 24,373,162 34,968,751 30,240,179

Missouri 35,363,557 24,916,281 33,732,699 28,776,550

Montana 4,736,337 3,674,052 4,468,041 3,776,331

Nebraska 6,384,251 4,926,858 8,175,526 6,811,847

Nevada 9,840,915 5,380,808 5,219,146 3,147,926

New Hampshire 3,151,087 1,619,847 1,801,528 1,269,103

New Jersey 82,341,010 62,698,153 69,456,029 42,938,426

New Mexico 35,762,517 19,308,898 32,967,739 29,168,906

New York 215,937,895 172,068,433 266,812,092 195,037,891
Appendix IV

Funding Commitments and Authorized

Payments, 1998-99

Page 51 GAO-01-105 Schools and Libraries Program

a

Guam did not request any program funds in the first and second program years.

b

The Northern Mariana Islands did not request any program funds the first program year.

Source: SLD's database.

First program year (1998) Second program year (1999)

State

Amount requested by

applicants

Amount committed by

SLD

Amount requested by

applicants

Amount committed

by SLD

North Carolina 36,970,225 26,908,604 44,328,601 37,790,543

North Dakota 4,528,745 2,585,531 2,690,849 2,212,311

Ohio 74,650,282 58,136,696 52,361,094 42,615,140

Oklahoma 41,015,572 33,696,296 70,186,268 34,114,998

Oregon 14,086,139 9,596,037 14,489,153 11,101,943

Pennsylvania 83,437,796 52,219,303 95,013,595 56,633,437

Puerto Rico 47,692,072 47,646,855 68,570,966 67,842,733

Rhode Island 7,044,468 6,010,398 10,356,442 7,831,110

South Carolina 30,540,070 26,365,435 46,266,917 32,368,742

South Dakota 4,487,782 2,965,172 3,046,233 2,150,742

Tennessee 49,092,319 51,665,111 69,320,100 61,632,448

Texas 198,643,013 129,802,466 189,290,644 135,891,161

Utah 7,522,346 6,386,095 6,537,625 5,430,865

Vermont 3,503,543 2,073,329 2,060,499 1,604,751

Virginia 39,762,879 25,494,960 37,450,614 25,284,943

Washington 51,234,165 29,442,396 47,515,398 31,341,756

West Virginia 10,543,250 9,350,687 9,421,348 9,375,906

Wisconsin 87,400,413 38,244,130 34,933,585 26,134,345

Wyoming 2,125,917 1,221,264 5,391,091 4,989,311

American Samoa, Northern

Mariana Islands, U.S. Virgin

Islandsa

5,739,277b 5,737,792 5,972,267 5,146,738

Total $2,401,085,524 $1,731,898,012 $2,710,859,274 $1,988,829,566

(Continued From Previous Page)
Appendix IV

Funding Commitments and Authorized

Payments, 1998-99

Page 52 GAO-01-105 Schools and Libraries Program

Table 6: Amounts of Funds Committed and Authorized for Payment by SLD for the First 2 Program Years, as of August 31, 2000

First program year (1998) Second program year (1999)

State

Program funds

committed

Program funds

authorized for

payment

Program funds

committed

Program funds

authorized for

payment

Alabama $46,885,216 $40,810,055 $26,652,386 $16,211,376

Alaska 13,577,806 8,759,085 12,189,113 6,111,844

Arizona 35,640,711 30,105,673 38,716,994 22,931,162

Arkansas 13,408,504 10,543,027 10,497,241 6,636,497

California 212,079,600 164,843,376 256,663,058 121,723,361

Colorado 14,316,805 11,494,794 11,786,626 5,445,640

Connecticut 24,192,938 21,492,462 32,133,484 25,514,375

Delaware 1,017,272 922,451 1,393,689 536,682

District of Columbia 4,866,571 4,624,354 9,348,789 1,127,049

Florida 49,676,963 41,429,911 73,022,870 35,303,208

Georgia 78,357,505 56,795,293 91,565,615 43,662,006

Hawaii 5,891,308 5,191,882 5,301,184 3,016,966

Idaho 4,620,940 3,508,863 5,124,101 2,650,957

Illinois 81,032,031 63,829,587 162,605,582 56,493,845

Indiana 21,906,914 16,127,441 22,876,019 14,194,016

Iowa 7,343,810 5,578,971 8,140,673 3,554,659

Kansas 10,462,313 7,874,118 14,990,120 7,622,748

Kentucky 50,354,985 38,220,231 57,599,372 22,063,658

Louisiana 40,153,955 33,608,775 37,725,411 26,358,899

Maine 3,014,559 2,243,649 3,649,468 1,863,445

Maryland 15,026,602 13,321,165 22,062,531 11,678,928

Massachusetts 30,264,968 24,954,239 33,836,941 23,638,936

Michigan 58,533,358 49,684,389 78,997,144 38,099,072

Minnesota 24,757,330 20,244,463 29,290,076 16,493,348

Mississippi 24,373,162 19,221,676 30,240,179 19,383,924

Missouri 24,916,281 20,637,661 28,776,550 17,341,361

Montana 3,674,052 2,797,163 3,776,331 2,649,380

Nebraska 4,926,858 4,196,382 6,811,847 3,158,944

Nevada 5,380,808 4,067,259 3,147,926 1,899,684

New Hampshire 1,619,847 1,269,193 1,269,103 617,911

New Jersey 62,698,153 53,437,478 42,938,426 20,413,844

New Mexico 19,308,898 12,660,849 29,168,906 20,499,847

New York 172,068,433 139,049,679 195,037,891 95,404,330
Appendix IV

Funding Commitments and Authorized

Payments, 1998-99

Page 53 GAO-01-105 Schools and Libraries Program

a

Guam did not request any program funds in the first and second program years.

b

The Northern Mariana Islands did not request any program funds the first program year.

Source: SLD database.

First program year (1998) Second program year (1999)

State

Program funds

committed

Program funds

authorized for

payment

Program funds

committed

Program funds

authorized for

payment

North Carolina 26,908,604 21,035,624 37,790,543 23,723,984

North Dakota 2,585,531 2,191,752 2,212,311 1,327,158

Ohio 58,136,696 50,030,883 42,615,140 19,290,911

Oklahoma 33,696,296 27,887,035 34,114,998 22,592,264

Oregon 9,596,037 7,558,639 11,101,943 4,133,059

Pennsylvania 52,219,303 45,341,213 56,633,437 23,731,474

Puerto Rico 47,646,855 22,056,308 67,842,733 27,497,004

Rhode Island 6,010,398 5,843,552 7,831,110 3,993,011

South Carolina 26,365,435 23,001,684 32,368,742 19,022,935

South Dakota 2,965,172 2,010,585 2,150,742 976,252

Tennessee 51,665,111 45,767,927 61,632,448 37,864,701

Texas 129,802,466 114,831,265 135,891,161 80,295,742

Utah 6,386,095 5,216,653 5,430,865 2,296,329

Vermont 2,073,329 1,303,886 1,604,751 666,551

Virginia 25,494,960 21,227,017 25,284,943 12,831,582

Washington 29,442,396 22,468,500 31,341,756 13,959,886

West Virginia 9,350,687 5,519,416 9,375,906 2,663,463

Wisconsin 38,244,130 31,935,968 26,134,345 11,898,359

Wyoming 1,221,264 853,053 4,989,311 2,188,798

American Samoa, Northern

Mariana Islands, U.S. Virgin

Islandsa

5,737,792b 4,920,320 5,146,738 3,889,492

Total $1,731,898,012 $1,394,546,877 $1,988,829,566 $1,009,114,854

(Continued From Previous Page)
Page 54 GAO-01-105 Schools and Libraries Program

Appendix V

Application Sampling Methodology and

Detailed Results ApendxiV

One of the objectives mandated for inclusion in our review was to

determine whether ineligible products and services had received e-rate

funding support. From the 9,770 applications for the second program year

(1999), we reviewed a sample of 44 that received funding commitments for

internal connections. This was the most recent complete funding year at

the time of our review, and internal connections was the area most likely to

include ineligible products and services. The 44 applications in our sample

contained over 2,300 separate requests for internal connections and

accounted for $285 million of the $1.2 billion in second-year internal

connections funding committed through November 1999. The applications

were selected for review with probability proportionate to size, as

measured by the number of dollars committed for internal connections.

For example, an application with a $2 million commitment for internal

connections was twice as likely to be selected for our review as an

application with a $1 million internal connections commitment. The

applications we reviewed included a geographically dispersed group of 22

states or territories. The amount of program funding committed for internal

connections in these applications ranged from $57.3 million to $5,527. The

unweighted results of our review are presented in table 7.

Table 7: Unweighted Results of GAO's Review of Internal Connections Funding

Denied or Committed From 44 Applications From the Second Program Year, Through

November 1999

Note: These results exclude applications on which SLD denied all requests for internal connections

funding.

a

Dollars included in this category come from requests containing ineligible services with unknown

costs or services whose eligibility could not be determined.

Dollars in millions

Unweighted results from 44 applications

Dollars denied or

committed

Total funding denied by SLD $20.2

Committed Funding

Funding based on requests with no evidence of ineligible

services

$192.5

Funding based on requests with clear evidence of ineligible

services

6.3

Funding based on requests with evidence of ineligible or

potentially ineligible servicesa

86.4

Total funding committed $285.2
Appendix V

Application Sampling Methodology and

Detailed Results

Page 55 GAO-01-105 Schools and Libraries Program

We properly weighted the results from our sample shown in table 7 to

represent the population of 9,770 applications containing funds committed

to internal connections. These estimates for the 9,770 applications are

presented in table 8. However, the estimates contain a substantial margin of

error because there was great variation in the amounts of the errors we

observed from one application to the next in our sample. As a result, we do

not present the results of this analysis in the body of our report.

Table 8: GAO's Estimates of Internal Connections Funding Denied or Committed

From the Second Program Year, Through November 1999

a

Margin of error is reported at the 95-percent confidence level.

b

This estimate includes the amount SLD denied on applications when some internal connections

funding was committed; it excludes amounts on applications with all requests for internal connections

denied.

c

Not applicable.

Dollars in millions

Dollars SLD denied or committed Estimate Margin of errora

Total funding denied by SLDb $135.7 $98.2

Committed Funding

Funding based on requests with no evidence of

ineligible services

$780.5 $138.0

Funding based on requests with clear evidence of

ineligible services

87.6 80.5

Funding based on requests with evidence of

ineligible or potentially ineligible services

348.1 130.1

Total $1,216.3 c
Page 56 GAO-01-105 Schools and Libraries Program

Appendix VI

Administrative Costs of Selected Technology

Support Programs ApendxiVI

Table 9 provides information on the fiscal year 1998 administrative costs of

10 federal programs that specifically target funds for technology. The first

four technology programs target funds exclusively to schools and libraries.

The other six programs have goals and activities that are targeted to

technology, but not exclusively to schools and libraries. More detailed

information on these and 25 other programs that schools and libraries

could use as a source of funding for telecommunications and information

technology in fiscal year 1998 is found in our August 1999 report on this

subject.1

Table 9: Fiscal Year 1998 Administrative Costs for Selected Federal Programs That Target Technology

1 Telecommunications Technology: Federal Funding for Schools and Libraries (GAO/HEHS99-133, Aug. 20, 1999).

Dollars in thousands

Program (Agency) Program goals

1998 estimated

administrative costsa

1998 program

fundingb

Federal administrative

costs as a percentage

of total program

costsc

Star Schools (Dept.

of Education)

To use distance learning to (1)

improve instruction in mathematics,

science, foreign languages, and

other subjects, such as literacy skills

and vocational education, and (2)

serve underserviced populations,

including the disadvantaged,

illiterate, limited-English proficient,

and individuals with disabilities.

$1,175 $34,000 3.3

Technology

Innovation Challenge

Grants (Dept. of

Education)

To implement, evaluate, and

document innovative applications of

information and computer

technologies to support systemic

educational reform.

740 106,000 0.7

Technology Literacy

Challenge Fund

(Dept. of Education)

To implement state strategies

designed to enable all schools to

integrate technology into the

curriculum so that all students

become technologically literate in

reading, math, science, and other

core academic skills essential for

their success in the 21st century.

71 425,000 <0.1
Appendix VI

Administrative Costs of Selected Technology

Support Programs

Page 57 GAO-01-105 Schools and Libraries Program

a

Administrative costs are in addition to program funding except where noted. In those cases,

administrative costs are included in program funding.

b

Program funding includes all funding available as grants and includes—but may not be limited to—

funds spent on technology.

E-Rate Program for

Schools and Libraries

(FCC)

To improve schools' and libraries'

access to modern

telecommunications services.

26,909d 1,108,982e

in discounts

for the 12 mos.

beginning

Jan. 1, 1998.

2.4e

Special Education

Technology and

Media Services for

Individuals with

Disabilities (Dept. of

Education)

To promote the development,

demonstration, and utilization of

technology and to support

educational media activities for

children with disabilities.

786 34,023 2.3

Public

Telecommunications

Facilities Program

(Dept. of Commerce)

To extend telecommunications

services, including public

broadcasting and nonbroadcast

technologies; increase public

broadcasting services and facilities

available to, operated by, and owned

by minorities and women;

strengthen the capability of existing

public television and radio stations;

and facilitate the development of a

variety of technology-oriented

distance learning projects.

1,823 (included in program

funding)

21,767 8.4

Telecommunications

and Information

Infrastructure

Assistance Program

(Dept. of Commerce)

To promote the development,

widespread availability, and use of

advanced telecommunications and

information technologies to serve

the public interest.

3,271 (included in program

funding)

21,782 15.0

Distance Learning

and Telemedicine

Grants (Dept. of

Agriculture)

To enhance learning and health care

opportunities for rural residents.

2,010 12,500 13.9

Information Systems

and Access Grants

(National Institutes of

Health)

To foster the use of computer and

telecommunications technologies to

coordinate and disseminate health

information.

97 1,550 5.9

Connections to the

Internet (National

Science Foundation)

Encourage Internet connections for

highly innovative strategies with

potential for accelerating network

development.

4 147 2.6

(Continued From Previous Page)

Dollars in thousands

Program (Agency) Program goals

1998 estimated

administrative costsa

1998 program

fundingb

Federal administrative

costs as a percentage

of total program

costsc
Appendix VI

Administrative Costs of Selected Technology

Support Programs

Page 58 GAO-01-105 Schools and Libraries Program

c

Administrative costs as a percentage of total program costs are calculated by dividing the 1998

administrative costs by the sum of the 1998 program funding and the 1998 administrative costs, except

for programs that pay administrative costs out of program funds. In those cases, the administrative cost

as a percentage of program funding is calculated by dividing the 1998 administrative cost by the 1998

program funding.

d

Includes both FCC's and SLD's administrative costs.

e

The e-rate program was funded for the 18-month period from Jan. 1, 1998, through June 30, 1999,

and the administrative costs are for the 12-month period from Jan. 1, 1998, through Dec. 31, 1998. In

order to calculate administrative costs as a percentage of total program costs on an annual basis, the

18-month figure of $1.66 billion was reduced by one-third to $1.1 billion. Even though funding

commitments were not made until late 1998 and early 1999, the applicants were being reimbursed the

discounted portion of the bills they paid in full as early as Jan. 1998. Therefore, the one-third reduction

is a reasonably accurate estimate.
Page 59 GAO-01-105 Schools and Libraries Program

Appendix VII

Comments From the Federal Communications

Commission and Univeral Service

Administrative Company ApendxiVI
Appendix VII

Comments From the Federal

Communications Commission and Univeral

Service Administrative Company

Page 60 GAO-01-105 Schools and Libraries Program
Appendix VII

Comments From the Federal

Communications Commission and Univeral

Service Administrative Company

Page 61 GAO-01-105 Schools and Libraries Program
Appendix VII

Comments From the Federal

Communications Commission and Univeral

Service Administrative Company

Page 62 GAO-01-105 Schools and Libraries Program

See comment 1.
Appendix VII

Comments From the Federal

Communications Commission and Univeral

Service Administrative Company

Page 63 GAO-01-105 Schools and Libraries Program

See comment 2.

See comment 3.
Appendix VII

Comments From the Federal

Communications Commission and Univeral

Service Administrative Company

Page 64 GAO-01-105 Schools and Libraries Program
Appendix VII

Comments From the Federal

Communications Commission and Univeral

Service Administrative Company

Page 65 GAO-01-105 Schools and Libraries Program
Appendix VII

Comments From the Federal

Communications Commission and Univeral

Service Administrative Company

Page 66 GAO-01-105 Schools and Libraries Program
Appendix VII

Comments From the Federal

Communications Commission and Univeral

Service Administrative Company

Page 67 GAO-01-105 Schools and Libraries Program

The following are GAO’s comments on the Universal Service

Administrative Company’s letter dated November 22, 2000.

GAO’s Comments 1. While our methodology was designed to select more high-dollar

applications than would be expected under a random sample, a significant

number of the applications we reviewed were for less than $500,000.

Twelve of the 44 were for amounts under $250,000, and another 7 were for

amounts between $250,000 and $500,000. We found errors in these

applications as well. Also, we did not attempt to measure the complexity of

any application.

2. While we agree that some of the funding we classify as “committed in

error” was for services that are themselves eligible, we disagree that such

funding should be excluded from the level of error. Our methodology

followed SLD’s quality assurance procedures, which require the complete

denial of any request in which at least 30 percent of the amount requested

is ineligible. In addition, the $20 million SLD denied to the applications in

our sample includes funding that SLD denied under this procedure.

Therefore, when comparing the $20 million SLD denied with the $6 million

it should have denied but did not deny, it is appropriate to include all

reasons for denial.

3. We excluded from our sample any applications that were denied in full

because there was no chance that funds would have been committed in

error. This exclusion is consistent with SLD’s internal goals, which measure

improper funding as a percentage of funds committed. USAC’s response

states that SLD denied $700 million for the second program year. This

amount represents the total amount denied for all reasons and all

categories of service. The portion of this total that relates to denials for

internal connections is $400 million.
Page 68 GAO-01-105 Schools and Libraries Program

Appendix VIII

GAO Contacts and Staff Acknowledgments ApendxiVI

GAO Contacts Stanley J. Czerwinski, (202) 512-7631

John P. Finedore, (202) 512-6248

Acknowledgments Other key contributors to this report were Karen Bracey, Krista Ely, D.

Allan Rogers, Teresa Russell, James R. Sweetman, Jr., Michael R. Volpe,

Edward Warner, and Mindi Weisenbloom.

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