Telecommunications: Greater Involvement Needed by FCC in the Management and Oversight of the E-Rate Program
Published: 2005-02-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 1998, the Federal Communications Commission's (FCC) E-rate program has committed more than $13 billion to help schools and libraries acquire Internet and telecommunications services. Recently, however, allegations of fraud, waste, and abuse by some E-rate program participants have come to light. As steward of the program, FCC must ensure that participants use E-rate funds appropriately and that there is managerial and financial accountability surrounding the funds. GAO reviewed (1) the effect of the current structure of the E-rate program on FCC's management of the program, (2) FCC's development and use of E-rate performance goals and measures, and (3) the effectiveness of FCC's oversight mechanisms in managing the program.
section_title: What GAO Found
paragraphs: FCC established the E-rate program using an organizational structure unusual to the government without conducting a comprehensive assessment to determine which federal requirements, policies, and practices apply to it. The E-rate program is administered by a private, not-for-profit corporation with no contract or memorandum of understanding with FCC, and program funds are maintained outside of the U.S. Treasury, raising issues related to the collection, deposit, obligation, and disbursement of the funding. While FCC recently concluded that the Universal Service Fund constitutes an appropriation and is subject to the Antideficiency Act, this raises further issues concerning the applicability of other fiscal control and accountability statutes. These issues need to be explored and resolved comprehensively to ensure that appropriate governmental accountability standards are fully in place to help protect the program and the fund from fraud, waste, and abuse. FCC has not developed useful performance goals and measures for assessing and managing the E-rate program. The goals established for fiscal years 2000 through 2002 focused on the percentage of public schools connected to the Internet, but the data used to measure performance did not isolate the impact of E-rate funding from other sources of funding, such as state and local government. A key unanswered question, therefore, is the extent to which increases in connectivity can be attributed to E-rate. In addition, goals for improving E-rate program management have not been a feature of FCC's performance plans. In its 2003 assessment of the program, OMB noted that FCC discontinued E-rate performance measures after fiscal year 2002 and concluded that there was no way to tell whether the program has resulted in the cost-effective deployment and use of advanced telecommunications services for schools and libraries. In response to OMB's concerns, FCC is currently working on developing new E-rate goals. FCC's oversight mechanisms contain weaknesses that limit FCC's management of the program and its ability to understand the scope of any waste, fraud, and abuse within the program. According to FCC officials, oversight of the program is primarily handled through agency rulemaking procedures, beneficiary audits, and appeals decisions. FCC's rulemakings have often lacked specificity and led to a distinction between FCC's rules and the procedures put in place by the program administrator--a distinction that has affected the recovery of funds for program violations. While audits of E-rate beneficiaries have been conducted, FCC has been slow to respond to audit findings and make full use of them to strengthen the program. In addition, the small number of audits completed to date do not provide a basis for accurately assessing the level of fraud, waste, and abuse occurring in the program, although the program administrator is working to address this issue. According to FCC officials, there is also a substantial backlog of E-rate appeals due in part to a shortage of staff and staff turnover. Because appeal decisions establish precedent, this slowness adds uncertainty to the program.

section_title: Letter
paragraphs: Since 1998, the Federal Communications Commission’s (FCC) universal  service “E-rate” program has committed more than $13 billion in funding to  help schools and libraries across the nation acquire telecommunications  and Internet services. Eligible schools and libraries can apply annually to  receive support and can spend the funding on specific eligible services and  equipment, including telephone services, Internet access services, and the  installation of internal wiring and other related items. For example, with  the help of E-rate funding, a school district in Alaska that lacked certified  math teachers was able to provide students with math, algebra, and  geometry lessons through distance learning. Similarly, the State Library of  Louisiana has used E-rate funding to help provide Internet connections for  use by patrons in all of Louisiana’s public libraries. The E-rate program  processes around 40,000 applications from schools and libraries each year,  and many of these applicants rely heavily on E-rate support for their  telecommunications needs.
Recently, allegations have been made that some E-rate beneficiaries  (schools and libraries) and service providers (e.g., telecommunications and  network equipment companies) have fraudulently obtained, wasted, or  abused E-rate funding. In May 2004, for example, one service provider  involved in E-rate projects in several states pleaded guilty to bid rigging and  wire fraud and agreed to pay more than $20 million in criminal fines, civil  payments, and restitution. In December 2004, another service provider  agreed to pay almost $9 million and plead guilty to charges related to a  scheme to defraud the E-rate program by inflating bids, agreeing to submit  false and fraudulent documents to hide the planned installation of ineligible  items, and submitting false and fraudulent documents to defeat inquiry into  the legitimacy of the funding request. Suspected instances of program  beneficiaries not paying their portion of service costs and of service  provider procurement irregularities are being investigated. In fact, FCC’s  Inspector General (IG) has devoted special attention to the E-rate program  in his most recent reports to Congress. In his May 2004 report, the FCC IG  stated that he continues to have numerous concerns about the program and  believes that the program may be subject to a high risk of fraud, waste, and  abuse through noncompliance and program weakness.   “Universal service” traditionally has meant providing residential customers  with affordable nationwide access to basic telephone service. The  Telecommunications Act of 1996 expanded the concept of universal service  to include assistance to schools and libraries in acquiring  telecommunications and Internet services; the act charged FCC with  establishing a universal service discount mechanism for schools and  libraries. The commission, in turn, created a large and ambitious program  that became commonly known as the E-rate program and gave the  program a $2.25 billion annual funding cap. The commission designated a  not-for-profit corporation, the Universal Service Administrative Company  (USAC), to carry out the day-to-day operations of the program, although  FCC retains responsibility for overseeing the program’s operations and  ensuring compliance with the commission’s rules.
The public has a vested interest in the proper management of the E-rate  program. The program is funded through statutorily mandated payments  into the Universal Service Fund by companies that provide interstate  telecommunications services. The companies’ “contribution factor” of how  much they must pay into the Universal Service Fund is established  quarterly by FCC. In practice, however, many of these companies pass this  contribution factor along to consumers through fees placed on their phone  bills. Also, during most of the program’s history, the requests from schools  and libraries for E-rate funding have greatly exceeded the annual amounts  available from the program. Thus, any misuse of E-rate funding wastes  consumers’ money and deprives those schools and libraries whose requests  for support were denied due to funding limitations. As the steward of this  program, FCC must ensure that beneficiaries use the funds appropriately  and that there is financial and managerial accountability surrounding the  fund.
Since 1998, we have issued eight reports and testimonies discussing  various aspects of the E-rate program. In light of ongoing concerns about  the E-rate program, you asked us in December 2003 to review the program.  We evaluated (1) the effect of the current structure of the E-rate program  on FCC’s management of the program, (2) FCC’s development and use of  performance goals and measures in managing the program, and (3) the  effectiveness of FCC’s oversight mechanisms—rulemaking proceedings,  beneficiary audits, and reviews of USAC decisions (appeals)—in managing  the program. To address these issues, we interviewed officials from FCC’s  Wireline Competition Bureau, Enforcement Bureau, Office of General  Counsel, Office of Managing Director, Office of Strategic Planning and  Policy Analysis, and Office of Inspector General. We also interviewed  officials from USAC. In addition, we interviewed officials from the Office of  Management and Budget (OMB) and the Department of Education  regarding performance goals and measures. OMB had conducted its own  assessment of the E-rate program in 2003, which we also discussed with  OMB officials. We reviewed and analyzed FCC, USAC, and OMB documents  related to the management and oversight of the E-rate program. The  information we gathered was sufficiently reliable for the purposes of our  review. We conducted our work from December 2003 through December  2004 in accordance with generally accepted government auditing  standards. See appendix I for a more detailed explanation of our scope and  methodology.
subsections: section_title: Background
paragraphs: The concept of “universal service” has traditionally meant providing  residential telephone subscribers with nationwide access to basic  telephone services at reasonable rates. Universal service programs  traditionally targeted support to low-income customers and customers in  rural and other areas where the costs of providing basic telephone service  were high. The Telecommunications Act of 1996 broadened the scope of  universal service to include, among other things, support for schools and  libraries. The act instructed FCC to establish a universal service support  mechanism to ensure that eligible schools and libraries have affordable  access to and use of certain telecommunications services for educational  purposes. In addition, Congress authorized FCC to “establish  competitively neutral rules to enhance, to the extent technically feasible  and economically reasonable, access to advanced telecommunications and  information services for all public and nonprofit elementary and secondary  school classrooms . . . and libraries. . . .” Based on this direction, and  following the recommendations of the Federal-State Joint Board on  Universal Service, FCC established the schools and libraries universal  service mechanism that is commonly referred to as the E-rate program. The  program is funded through statutorily mandated payments by companies  that provide interstate telecommunications services. Many of these  companies, in turn, pass their contribution costs on to their subscribers  through a line item on subscribers’ phone bills. FCC capped funding for  the E-rate program at $2.25 billion per year, although funding requests by  schools and libraries can greatly exceed the cap. For example, schools and  libraries requested more than $4.2 billion in E-rate funding for the 2004  funding year.
In 1998, FCC appointed USAC as the program’s permanent administrator,  although FCC retains responsibility for overseeing the program’s  operations and ensuring compliance with the commission’s rules. In  response to congressional conference committee direction, FCC has  specified that USAC “may not make policy, interpret unclear provisions of  the statute or rules, or interpret the intent of Congress.” USAC is  responsible for carrying out the program’s day-to-day operations, such as  maintaining a Web site that contains program information and application  procedures; answering inquiries from schools and libraries; processing and  reviewing applications; making funding commitment decisions and issuing  funding commitment letters; and collecting, managing, investing, and  disbursing E-rate funds. FCC permits—and in fact relies on—USAC to  establish administrative procedures that program participants are required  to follow as they work through the application and funding process. The  FCC IG has noted that program participants generally consider USAC the  primary source for guidance on the rules governing the E-rate program. See  appendix III for a more detailed explanation of the structure of USAC.
Under the E-rate program, eligible schools, libraries, and consortia that  include eligible schools and libraries may receive discounts for eligible  services. Eligible schools and libraries may apply annually to receive E-rate  support. The program places schools and libraries into various discount  categories, based on indicators of need, so that the school or library pays a  percentage of the cost for the service and the E-rate program funds the  remainder. E-rate discounts range from 20 percent to 90 percent. Schools  and libraries in areas with higher percentages of students eligible for free  or reduced-price lunches through the National School Lunch Program (or a  federally approved alternative mechanism) qualify for higher discounts on  eligible services. Schools and libraries located in rural areas also receive  greater discounts in most cases, as shown in table 1.
FCC has defined four classes of services that are eligible for E-rate support:  telecommunications services, such as local, long-distance, and  international telephone service as well as high-speed data links (e.g., T-1  lines);  Internet access services, such as broadband Internet access and e-mail   internal connections, such as telecommunications wiring, routers,  switches, and network servers that are necessary to transport  information to individual classrooms; and   basic maintenance on internal connections.
The list of specific eligible services within each class is updated annually  and posted on USAC’s Web site. FCC’s rules provide that requests for  telecommunications services and Internet access for all discount  categories shall receive first priority for the available funding (Priority One  services). The remaining funds are allocated to requests for support for  internal connections and basic maintenance (Priority Two services),  beginning with the most economically disadvantaged schools and libraries,  as determined by the discount matrix. Because of this prioritization, not all  requests for internal connections necessarily receive funding.
Prior to applying for discounted services, an applicant must conduct a  technology assessment and develop a technology plan to ensure that any  services it purchases will be used effectively. The applicant submits a  form to USAC setting forth its technological needs. Once the school or  library has complied with the commission’s competitive bidding  requirements and entered into agreements with service providers for  eligible services, it must file a second form with USAC that details the types  and costs of the services being contracted for, the vendors providing the  services, and the amount of discount being requested. USAC reviews the  forms and issues funding commitment decision letters (USAC could reduce  the amount requested if the school or library has included ineligible  services in its application or has calculated its discount category  incorrectly). Generally, it is the service provider that seeks  reimbursement from USAC for the discounted portion of the service.
section_title: FCC Established an Unusual Program Structure without Comprehensively Addressing the Applicability of Governmental Standards and Fiscal Controls
paragraphs: FCC established an unusual structure for the E-rate program but has never  conducted a comprehensive assessment of which federal requirements,  policies, and practices apply to the program, to USAC, or to the Universal  Service Fund itself. FCC recently began to address a few of these issues,  concluding that as a permanent indefinite appropriation, the Universal  Service Fund is subject to the Antideficiency Act and its issuance of  commitment letters constitutes obligations for purposes of the act. We  agree with FCC’s determinations on these issues, as explained in detail in  appendix II. However, FCC’s conclusions concerning the status of the  Universal Service Fund raise further issues relating to the collection,  deposit, obligation, and disbursement of those funds—issues that FCC  needs to explore and resolve comprehensively rather than in an ad hoc  fashion as problems arise.
The Telecommunications Act of 1996 neither specified how FCC was to  administer universal service to schools and libraries nor prescribed the  structure and legal parameters of the universal service mechanisms to be  created. The Telecommunications Act required FCC to consider the  recommendations of the Federal-State Joint Board on Universal Service  and then to develop specific, predictable, and equitable support  mechanisms. Using the broad language of the act, FCC crafted an  ambitious program for schools and libraries—roughly analogous to a grant  program—and gave the program a $2.25 billion annual funding cap. To  carry out the day-to-day activities of the E-rate program, FCC relied on a  structure it had used for other universal service programs in the past—a  not-for-profit corporation established at FCC’s direction that would operate  under FCC oversight. However, the structure of the E-rate program is  unusual in several respects compared with other federal programs:  FCC appointed USAC as the permanent administrator of the Universal  Service Fund, and FCC’s Chairman has final approval over USAC’s  Board of Directors. USAC is responsible for administering the program  under FCC orders, rules, and directives. However, USAC is not part of  FCC or any other government entity; it is not a government corporation  established by Congress; and no contract or memorandum of  understanding exists between FCC and USAC for the administration of  the E-rate program. Thus, USAC operates and disburses funds under  less explicit federal ties than many other federal programs.
Questions as to whether the monies in the Universal Service Fund  should be treated as federal funds have troubled the program from the  start. Even though the fund has been listed in the budget of the United  States and, since fiscal year 2004, has been subject to an annual  apportionment from OMB, the monies are maintained outside of  Treasury accounts by USAC and some of the monies have been  invested. The United States Treasury implements the statutory  controls and restrictions involving the proper collection and deposit of  appropriated funds, including the financial accounting and reporting of  all receipts and disbursements, the security of appropriated funds, and  agencies’ responsibilities for those funds.
As explained below, appropriated funds are subject, unless specifically  exempted by law, to a variety of statutory controls and restrictions. These  controls and restrictions, among other things, limit the purposes for which  federal funds can be used and provide a scheme of accountability for  federal monies. Key requirements are in Title 31 of the United States Code  and the appropriate Treasury regulations, which govern fiscal activities  relating to the management, collection, and distribution of public money.
Since the inception of the E-rate program, FCC has struggled with  identifying the nature of the Universal Service Fund and the managerial,  fiscal, and accountability requirements that apply to the fund. FCC’s Office  of Inspector General first looked at the Universal Service Fund in 1999 as  part of its audit of the commission’s fiscal year 1999 financial statement  because FCC had determined that the Universal Service Fund was a  component of FCC for financial reporting purposes. During that audit, the  FCC IG questioned commission staff regarding the nature of the fund and,  specifically, whether it was subject to the statutory and regulatory  requirements for federal funds. In the next year’s audit, the FCC IG noted  that the commission could not ensure that Universal Service Fund  activities were in compliance with all laws and regulations because the  issue of which laws and regulations were applicable to the fund was still  unresolved at the end of the audit.
FCC officials told us that the commission has substantially resolved the  IG’s concerns through recent orders, including FCC’s 2003 order that USAC  begin preparing Universal Service Fund financial statements consistent  with generally accepted accounting principles for federal agencies  (GovGAAP) and keep the fund in accordance with the United States  Government Standard General Ledger. While it is true that these steps and  other FCC determinations discussed below should provide greater  protections for universal service funding, FCC has addressed only a few of  the issues that need to be resolved. In fact, staff from the FCC’s IG’s office  told us that they do not believe the commission’s GovGAAP order  adequately addressed their concerns because the order did not  comprehensively detail which fiscal requirements apply to the Universal  Service Fund and which do not.
FCC has, however, made some determinations concerning the status of the  Universal Service Fund and the fiscal controls that apply. FCC’s  determinations, and our analysis, in brief, are discussed below. (See app. II  for our more thorough legal analysis of fiscal law issues involving the  Universal Service Fund.)
Status of funds as appropriated funds. In assessing the financial  statement reporting requirements for FCC components in 2000, FCC  concluded that the Universal Service Fund constitutes a permanent  indefinite appropriation (i.e., funding appropriated or authorized by law to  be collected and available for specified purposes without further  congressional action). We agree with FCC’s conclusion. Typically, Congress  will use language of appropriation, such as that found in annual  appropriations acts, to identify a fund or account as an appropriation and  to authorize an agency to enter into obligations and make disbursements  out of available funds. Congress, however, appropriates funds in a variety  of ways other than in regular appropriations acts. Thus, a statute that  contains a specific direction to pay and a designation of funds to be used  constitutes an appropriation. In these statutes, Congress (1) authorizes  the collection of fees and their deposit into a particular fund, and (2) makes  the fund available for expenditure for a specified purpose without further  action by Congress. This authority to obligate or expend collections  without further congressional action constitutes a continuing  appropriation or a permanent appropriation of the collections. Because  the Universal Service Fund’s current authority stems from a statutorily  authorized collection of fees from telecommunications carriers and the  expenditure of those fees for a specified purpose (that is, the various types  of universal service), it meets both elements of the definition of a  permanent appropriation.
Decision regarding the Antideficiency Act. As noted above, in October  2003, FCC ordered USAC to prepare financial statements for the Universal  Service Fund, as a component of FCC, consistent with GovGAAP, which  FCC and USAC had not previously applied to the fund. In February 2004,  staff from USAC realized during contractor-provided training on GovGAAP  procedures that the commitment letters sent to beneficiaries (notifying  them whether or not their funding is approved and in what amount) might  be viewed as “obligations” of appropriated funds. If so, and if FCC also  found the Antideficiency Act—which does not allow an agency or program  to make obligations in excess of available budgetary resources—to be  applicable to the E-rate program, then USAC would need to dramatically  increase the program’s cash-on-hand and lessen the program’s  investments to provide budgetary authority sufficient to satisfy the  Antideficiency Act. As a result, USAC suspended funding commitments in  August 2004 while waiting for a commission decision on how to proceed.  At the end of September 2004—facing the end of the fiscal year—FCC  decided that commitment letters were obligations, that the Antideficiency  Act did apply to the program, and that USAC would need to immediately  liquidate some of its investments to come into compliance with the  Antideficiency Act. According to USAC officials, the liquidations cost the  fund approximately $4.6 million in immediate losses and could potentially  result in millions in foregone annual interest income.
FCC was slow to recognize and address the issue of the applicability of the  Antideficiency Act, resulting in the abrupt decision to suspend funding  commitment decision letters and liquidate investments. In response to  these events, in December 2004, Congress passed a bill granting the  Universal Service Fund a one-year exemption from the Antideficiency  Act. Nevertheless, FCC’s conclusion on this issue was correct: Absent a  statutory exemption, the Universal Service Fund is subject to the  Antideficiency Act, and its funding commitment decision letters constitute  obligations for purposes of the act.
The Antidefiency Act applies to “official or employee of the United  States Government . . . mak or authorizing an expenditure or  obligation . . . from an appropriation or fund.” 31 U.S.C. § 1341(a). As  discussed above, the Universal Service Fund is an “appropriation or fund.”   Even though USAC—a private entity whose employees are not federal  officers or employees—is the administrator of the program and the entity  that obligates and disburses money from the fund, application of the act is  not negated. This is because, as recognized by FCC, it, and not USAC, is the  entity that is legally responsible for the management and oversight of the E- rate program and because FCC’s employees are federal officers and  employees of the United States subject to the Antideficiency Act. Thus, the  Universal Service Fund will again be subject to the Antideficiency Act  when the one-year statutory exemption expires, unless action is taken to  extend or make permanent the exemption.
An important issue that arises from the application of the Antideficiency  Act to the Universal Service Fund is what actions constitute obligations  chargeable against the fund. Under the Antideficiency Act, an agency may  not incur an obligation in excess of the amount available to it in an  appropriation or fund. Thus, proper recording of obligations with respect  to the timing and amount of such obligations permits compliance with the  Antideficiency Act by ensuring that agencies have adequate budget  authority to cover all of their obligations. Our decisions have defined an  “obligation” as a commitment creating a legal liability of the government,  including a “legal duty . . . which could mature into a liability by virtue of  actions on the part of the other party beyond the control of the United  States. . . .”
With respect to the Universal Service Fund, the funding commitment  decision letter provides the school or library with the authority to obtain  services from a provider with the commitment that the school or library  will receive a discount and the service provider will be paid for the  discounted portion with E-rate funding. Although the school or library  could decide not to seek the services or the discount, so long as the funding  commitment decision letter remains valid and outstanding, USAC and FCC  no longer control the Universal Service Fund’s liability; it is dependent on  the actions taken by the school or library. Consequently, we agree with FCC  that a recordable obligation is incurred at the time of issuance of the  funding commitment decision letter indicating approval of the applicant’s  discount.
While we agree with FCC’s determinations that the Universal Service Fund  is a permanent appropriation subject to the Antideficiency Act and that its  funding commitment decision letters constitute recordable obligations of  the Universal Service Fund, there are several significant fiscal law issues  that remain unresolved. We believe that where FCC has determined that  fiscal controls and policies do not apply, the commission should reconsider  these determinations in light of the status of universal service monies as  federal funds. For example, in view of its determination that the fund  constitutes an appropriation, FCC needs to reconsider the applicability of  the Miscellaneous Receipts Statue, 31 U.S.C. § 3302, which requires that  money received for the use of the United States be deposited in the  Treasury unless otherwise authorized by law. FCC also needs to assess the applicability of other fiscal control and accountability statutes (e.g., the  Single Audit Act and the Cash Management Improvement Act).
Another major issue that remains to be resolved involves the extent to  which FCC has delegated some functions for the E-rate program to USAC.  For example, are the disbursement policies and practices for the E-rate  program consistent with statutory and regulatory requirements for the  disbursement of public funds? Are some of the functions carried out by  USAC, even though they have been characterized as administrative or  ministerial, arguably inherently governmental activities that must be  performed by government personnel?  Resolving these issues in a  comprehensive fashion, rather than continuing to rely on reactive, case-by- case determinations, is key to ensuring that FCC establishes the proper  foundation of government accountability standards and safeguards for the  E-rate program and the Universal Service Fund.
section_title: FCC Did Not Develop Useful Performance Goals and Measures for Assessing and Managing the E-Rate Program
paragraphs: Although $13 billion in E-rate funding has been committed to beneficiaries  during the past 7 years, FCC did not develop useful performance goals and  measures to assess the specific impact of these funds on schools’ and  libraries’ Internet access and to improve the management of the program,  despite a recommendation by us in 1998 to do so. At the time of our current  review, FCC staff was considering, but had not yet finalized, new E-rate  goals and measures in response to OMB’s concerns about this deficiency in  a 2003 OMB assessment of the program.
subsections: section_title: FCC’s Performance Goals and Measures Were Not Useful in Assessing the Impact of E-Rate Funds
paragraphs: One of the management tasks facing FCC is to establish strategic goals for  the E-rate program, as well as annual goals linked to them. The  Telecommunications Act of 1996 did not include specific goals for  supporting schools and libraries, but instead used general language  directing FCC to establish competitively neutral rules for enhancing access  to advanced telecommunications and information services for all public  and nonprofit private elementary and secondary school classrooms and  libraries. As the agency accountable for the E-rate program, FCC is  responsible under the Government Performance and Results Act of 1993  (Results Act) for establishing the program’s long-term strategic goals and  annual goals, measuring its own performance in meeting these goals, and  reporting publicly on how well it is doing.
In testimony before the Senate Committee on Commerce, Science, and  Transportation in July 1998, we stated that the E-rate program was  beginning its first funding year without clear and specific goals and  measures. FCC simply noted in its performance plan for fiscal year 1999  that it would “work to improve the connections of classrooms, libraries,  and rural health care facilities to the Internet by the end of   1999.” This type of general statement, with no specific goals and measures  for agency accountability, is not in accord with the Results Act. We  recommended in our testimony that FCC develop specific E-rate goals and  measures before the end of fiscal year 1998, in time to gauge the effect of  the program’s first year of operations. As we stated at that time,  performance measurement is critical to determining a program’s progress  in meeting its intended outcomes. Without clearly articulated goals and  reliable performance data, Congress, FCC, and USAC would have a difficult  time assessing the effectiveness of the program and determining whether  operational changes were needed. Although FCC responded that our  recommendation was “reasonable,” we noted in our subsequent March  1999 report on the program that FCC had not acted on our  recommendation and again stressed the importance of implementing it.   FCC began including specific E-rate goals and measures in its fiscal year  2000 budget estimate submission to Congress and continued to set annual  E-rate goals for fiscal years 2001 and 2002. No annual goals for fiscal years  2003 or 2004 were included in FCC’s performance reports, however.
The goals and measures that FCC set for fiscal years 2000 through 2002  were not useful in assessing the impact of E-rate program funding. The  goals focused on achieving certain percentage levels of Internet  connectivity during a given fiscal year for schools, public school  instructional classrooms, and libraries. For example, FCC set a fiscal year  2001 goal of having 90 percent of public school instructional classrooms  connected to the Internet. FCC measured its performance in meeting these  goals using nationwide survey data from the Department of Education’s  National Center for Education Statistics (NCES) on the percentages of  public schools and public school instructional classrooms that are  connected to the Internet. The percentages are based on a nationally  representative sample of approximately 1,000 public schools that are  surveyed about Internet access and Internet-related topics. A fundamental  problem with using these NCES percentages is that a nationally  representative sample covers both public schools that received E-rate  funding for internal connections and those that did not. The percentages,  therefore, do not directly measure the impact of E-rate funds, as opposed  to other sources of funding, on increases in the percentage of schools  connected to the Internet. This is a significant problem because the  applicants’ requests for E-rate funds for internal connections have  exceeded the amounts available for that purpose by billions of dollars. As a  result, while E-rate funds for internal connections have been provided on a  priority basis to applicants eligible for very high discounts (generally 70  percent to 80 percent or higher), funding has typically not been available to  meet the internal connections requests of the other applicants. Only in the  second funding year (1999) were funds sufficient to cover eligible internal  connections requests for applicants in all of the discount bands. The  applicants who were denied E-rate support for internal connections have  had to rely on other funding sources for their internal connections needs,  such as state and local government.
Even with these E-rate funding limitations, there has been significant  growth in Internet access for public schools since the program issued its  first funding commitments in late 1998. At the time, according to NCES  data, 89 percent of all public schools and 51 percent of public school  instructional classrooms already had Internet access. By 2002, 99 percent  of public schools and 92 percent of public school instructional classrooms  had Internet access. Yet although billions of dollars in E-rate funds have  been committed since 1998, adequate program data was not developed to  answer a fundamental performance question: How much of the increase  since 1998 in public schools’ Internet access has been a result of the E-rate  program, as opposed to other sources of federal, state, local, and private  funding?
Another problem is that FCC did not consistently set annual goals for the  two other major groups of E-rate beneficiaries—libraries and private  schools. For example, FCC’s budget submission to Congress in February  2000 included a fiscal year 2001 goal of having 90 percent of libraries  connected to the Internet. But this goal was dropped from FCC’s  subsequent performance reports and budget estimate submissions, and no  other library connectivity goal was set. As for private schools, no specific  Internet connectivity goal was set for them until early 2002, when FCC  included a fiscal year 2003 goal of having 85 percent of private school  instructional classrooms connected to the Internet in both its fiscal year  2003 budget estimate to Congress (dated February 2002) and its 2001  annual performance report (dated March 2002). But these were the only  instances where this goal appeared. It was dropped from FCC’s subsequent  budget estimate submissions and annual performance reports. In addition  to these goal-setting shortcomings, no performance measurement data for  either libraries’ or private schools’ Internet connectivity levels have been  included in any of FCC’s annual budget estimate submissions or  performance reports.
The failure to measure the program’s impact on public and private schools  and libraries over the past 7 years undercuts one of the fundamental  purposes the Results Act: to have federal agencies adopt a fact-based,  businesslike framework for program management and accountability. The  problem is not just a lack of data for accurately characterizing program  results in terms of increasing Internet access. Other basic questions about  the E-rate program also become more difficult to address, such as the  program’s efficiency and cost-effectiveness in supporting the  telecommunications needs of schools and libraries.
section_title: E-Rate Management Improvement Goals Not Featured in FCC Performance Plans
paragraphs: Performance goals and measures are used not only to assess a program’s  impact, but also to develop strategies for resolving mission-critical  management problems. Under the Results Act, managers should use  performance data to identify performance gaps and determine where to  target their resources to improve overall mission accomplishment.
However, management-oriented goals have not been a feature of FCC’s  performance plans, despite long-standing concerns about the program’s  effectiveness in key areas. For example, E-rate applicants’ technology  needs are posted on USAC’s Web site to allow service providers an  opportunity to bid on them. FCC has maintained that absent competitive  bidding, the prices charged by service providers could be needlessly high,  unnecessarily depleting the program’s funds and limiting its ability to  support other applicants. In the commission’s fiscal year 2000 budget  estimate submission, FCC included a goal for ensuring that the program’s  competitive bidding process led to bids by two or more service providers  for the majority of applicants. However, this goal was dropped from FCC’s  subsequent budget submissions and annual performance reports. No other  goal was developed in its place to assess how well the competitive bidding  process is working.
In another example, FCC found that the E-rate participation rates for urban  low-income school districts and rural school districts fell below the  average participation rate for all eligible schools. In preparing our  December 2000 report on the E-rate program, FCC officials told us they had  finalized a new performance plan for the E-rate program that included  tactical goals targeted at increasing participation by both of these groups,  as well as rural libraries and libraries serving small areas. During our  current review, when we asked FCC officials about the plan, we were told  that it had not been implemented and that none of the FCC staff currently  working on E-rate was familiar with the plan.
Another ongoing program management issue is that a significant amount of  funds committed annually go unused by the applicants that requested  them. This is troubling because, as noted earlier, the demand for funding is  high and there is typically not enough money each year to meet all funding  requests for internal connections. In December 2000, we recommended  that FCC ascertain and address the difficulties that applicants may be  having in this regard. FCC responded that it would undertake an analysis,  with USAC, of the factors leading to funds being committed to applicants  but not used; and USAC responded that it would develop and pursue  options for narrowing the gap between commitments and disbursements,  and discuss the options with FCC. Here again was an opportunity to  develop a performance goal and measure to address this program  management problem, but none was developed. Similarly, no  performance goals and measures have been included in FCC’s performance  reports related to the management responsibility of identifying and  mitigating fraud, waste, and abuse of program funds.
section_title: FCC Is Currently Considering E-Rate Goals in Response to OMB’s Concerns
paragraphs: OMB also has raised concerns about FCC’s lack of E-rate performance  goals and measures. In its 2003 assessment of the E-rate program, OMB,  using its Program Assessment Rating Tool (PART), noted that FCC  discontinued specific E-rate program measures after fiscal year 2002.   OMB’s overall PART rating for the E-rate program was “results not  demonstrated.”  This does not necessarily mean that the program is  ineffective, but rather that its effectiveness is unknown. OMB observed  that the program lacked long-term, outcome-oriented performance goals  and efficiency measures against which to measure the program’s success in  promoting connectivity and to improve and refine the program going  forward. Because of this, OMB stated that it is not clear what the end goal  of the E-rate program is or how to measure its effectiveness other than  incremental increases in the number of classrooms and libraries connected  to the Internet. While recognizing that E-rate funding is generally going to  the intended beneficiaries of the program, OMB concluded that there was  no way to tell whether the program has resulted in cost-effective  deployment and use of advanced telecommunications services for schools  and libraries. OMB also noted that there was little oversight to ensure that  the program beneficiaries were using the funding appropriately and  effectively. Among other things, OMB’s report recommended that for fiscal  year 2005, FCC should develop a long-term outcome goal for the program,  and consider reinstituting a connectivity measure and developing an  efficiency measure.
FCC officials told us they have been working with OMB to respond to the  concerns raised in its PART assessment and that several FCC staff have  recently received training in the development of performance measures. At  the time of our review, FCC was considering goals that involve classroom  connectivity and program efficiency. As we discussed earlier, any  meaningful goals on connectivity would need to have associated  measurement data that could isolate the impact of E-rate funding on  changes in connectivity in order to assess the program’s impact. It should  be noted that with 99 percent of public schools and 92 percent of public  school instructional classrooms connected to the Internet in 2002  (according to the most current NCES report on public school connectivity  at the time of our review), applicants are moving past achieving initial  connectivity to maintaining and upgrading existing connections over the  long term. As a result, simple measures of Internet connectivity will be  much less useful indicators of the program’s performance than in past  years.
As for the program’s efficiency in providing support for  telecommunications services, FCC staff told us they are considering a  measure that would calculate and track the E-rate disbursements for each  school (or school system) divided by the number of students, further  broken down by the eligible services categories. An efficiency measure  would be valuable, as there has been a long-standing concern about some  applicants requesting funding for technology that greatly exceeds their  needs (sometimes referred to as “goldplating”). While “E-rate dollars-per- student” ratios might be interesting data to assess in this regard, a  performance measure needs to have a goal associated with it in order to be  a meaningful tool for performance management. Currently, the program  rules do not expressly establish a clear test for cost-effectiveness that  could be used as a measurable goal, although in late 2003, FCC asked for  comment on whether it would be beneficial or administratively feasible to  develop such a test. At the time we concluded our review, FCC planned to  finalize performance measures for the E-rate program and seek OMB  approval in fiscal year 2005.
As noted above, OMB’s PART assessment recommended that FCC develop  a long-term outcome goal for the program. “Outcomes” are the results or  benefits of the products or services provided by the program. A basic  policy issue associated with the E-rate program involves assessing the  extent to which the billions of dollars of support for telecommunications  services are providing the sought-after return on investment:  improvement  in the quality of education. As we noted in our 2000 report on the program,  the complex issue of measuring educational outcomes lies outside FCC’s  expertise and comes under the purview of the Department of Education.   FCC officials told us they have made initial contact with staff at the  Department of Education to discuss the development of a long-term E-rate  outcome measure. According to FCC’s current timetable, the collection and  analysis of data for outcome measures would start with funding year 2006.
section_title: FCC’s Oversight Mechanisms Are Not Fully Effective in Managing the E-Rate Program
paragraphs: FCC testified before Congress in June 2004 that it relies on three chief  components in overseeing the E-rate program: rulemaking proceedings,  beneficiary audits, and fact-specific adjudicatory decisions (i.e., appeals  decisions). We found weaknesses with FCC’s implementation of each of  these mechanisms, limiting the effectiveness of FCC’s oversight of the  program and the enforcement of program procedures to guard against  waste, fraud, and abuse of E-rate funding.
subsections: section_title: FCC’s Rulemakings Have Led to Problems with USAC’s Procedures and Enforcement of Those Procedures
paragraphs: As part of its oversight of the E-rate program, FCC is responsible for  establishing new rules and policies for the program and making changes to  existing rules, as well as for providing the detailed guidance that USAC  requires to effectively administer the program. FCC carries out this  responsibility through its rulemaking process. FCC’s E-rate rulemakings,  however, have often been broadly worded and lacking specificity. Thus,  USAC has needed to craft the more detailed administrative procedures  necessary to implement the rules. However, in crafting administrative  procedures, USAC is strictly prohibited under FCC rules from making  policy, interpreting unclear provisions of the statute or rules, or  interpreting the intent of Congress. We were told by FCC and USAC  officials that USAC does not put procedures in place without some level of  FCC approval. We were told that this approval is sometimes informal, such  as e-mail exchanges or telephone conversations between FCC and USAC  staff. This approval can come in more formal ways as well, such as when  the commission expressly endorses USAC operating procedures in  commission orders or codifies USAC procedures into FCC’s rules.
However, two problems have arisen with USAC administrative procedures.  First, although USAC is prohibited from making policy, some USAC  procedures arguably rise to the level of policy decisions. Second, even  though USAC procedures are issued with some degree of FCC approval,  enforcement problems could arise when audits uncover violations of USAC  procedures by beneficiaries or service providers. The FCC IG has  expressed concern over situations where USAC administrative procedures  have not been formally codified because commission staff have stated that,  in such situations, there is generally no legal basis to recover funds from  applicants that failed to comply with the USAC administrative procedures.
Throughout the history of the program, USAC has found it necessary to  create additional procedures to effectively and efficiently process more  than 40,000 applications annually. However, these procedures sometimes  deal with more than just ministerial details. For example, procedures that  affect funding decisions arguably rise to the level of policy decisions. In  June 2004, USAC was able to identify at least a dozen administrative  procedures that, if violated by the applicant, would lead to complete or  partial denial of the funding request even though there was no precisely  corresponding FCC rule. The FCC IG stated in May 2004 in his Semiannual  Report to Congress that he believes the distinction between FCC rules and  USAC administrative procedures represents a weakness in program design,  fails to give program participants a clear understanding of the rules and the  consequences associated with rule violations, and complicates the design  and implementation of effective program oversight.
The critical nature of USAC’s administrative procedures is further  illustrated by FCC’s repeated codification of them throughout the history of  the program. For example, in 1999, USAC implemented a procedure known  as “the 30-percent policy.” This procedure sought to avoid blanket denials  of funding requests because of minor errors in the eligibility of the services  requested, while at the same time prompting applicants to prepare their  applications carefully and make a conscientious effort to exclude ineligible  items. If more than 30 percent of the services for which discounts were  requested were ineligible, USAC denied the funding request rather than  undertake the administratively burdensome task of correcting the request  and refiguring the amount based only on the eligible services requested. In  April 2003, in the commission’s Second Report and Order in its E-rate  docket, FCC codified USAC’s 30-percent policy, stating that the  commission found the procedure “improves program operation and is  important in reducing the administrative costs of the program.” In fact,  the procedures put in place by USAC generally appear to be sensible and  represent thoughtful administration of the E-rate program. Nonetheless,  USAC is prohibited from making program rules. FCC’s codification of  USAC procedures—after those procedures have been put in place and  applied to program participants—raises concerns about whether these  procedures are more than ministerial and are, in fact, policy changes that  should be coming from FCC in the first place. Moreover, in its August 2004  order (in a section dealing with the resolution of audit findings), the  commission directs USAC to annually “identify any USAC administrative  procedures that should be codified in our rules to facilitate program  oversight.” This process begs the question of which entity is really  establishing the rules of the E-rate program and raises concerns about the  depth of involvement by FCC staff with the management of the program.
The other problem with USAC administrative procedures is the question of  enforcement of those procedures through recovery of funds for procedural  violations. FCC has generally held that funds can be recovered from a  beneficiary or service provider only if an FCC rule was violated. In its  August 2004 order, after several years of E-rate audits by USAC and the  FCC IG, the commission attempted to clarify the rules of the program with  relation to recovery of funds. In the order, the commission describes nine  overall categories of statutory violations or FCC rule violations that would  result in fund recovery being sought, in whole or in part, from beneficiaries  or service providers. With respect to violations of USAC operating  procedures, FCC said in its August 2004 order that it intends to evaluate  whether there are USAC procedures that should be codified into the  commission’s rules and whether violation of any of these codified  procedures should also be a basis for recovery of funding. The  commission noted that recovery of funds may not be appropriate for  violations of procedural rules codified to enhance operations.  Nevertheless, the commission stated that applicants will be required to  comply with procedural rules and that applications that do not comply will  be rejected. The commission noted, however, that if the codified  procedural rule violation “is inadvertently overlooked during the  application phase and funds are disbursed, the commission will not require  that they be recovered, except to the extent that such rules are essential to  the financial integrity of the program, as designated by the agency, or that  circumstances suggest the possibility of waste, fraud, or abuse, which will  be evaluated on a case-by-case basis.”
Thus, even under the August 2004 FCC order, the commission did not  clearly address the treatment of beneficiaries who violate a USAC  administrative procedure that has not been codified. This creates a  potentially unfair situation when the procedure is one that can lead to  denial of an application. That is, if violation of the procedure is caught in  the application process, funding will be denied. However, if the violation  slips by in the application process, funding is granted, and the violation is  later caught during a beneficiary audit, no recovery of funding can be  attempted since there was no actual rule violation by the beneficiary. Also,  as noted earlier, the FCC order also leaves to USAC the initial  determination of which procedures should be codified rather than having  FCC make that determination. Lastly, FCC did not establish a time frame  for its review of USAC procedures.
section_title: FCC Has Been Slow to Address Problems Raised by Audit Findings
paragraphs: FCC’s use of beneficiary audits as an oversight mechanism has also had  weaknesses, although FCC and USAC are now working to address some of  these weaknesses. In December 2000, we recommended that USAC  establish a quality assurance function responsible for ensuring that its  funding decisions adhere to FCC’s program eligibility rules. In response to  our recommendation, USAC increased both its in-house audit staff and the  number of beneficiary audits conducted by outside accounting firms.   Since 2000, there have been 122 beneficiary audits conducted by outside  firms, 57 by USAC staff, and 14 by the FCC IG (2 of which were performed  under agreement with the Inspector General of the Department of the  Interior).
Beneficiary audits are the most robust mechanism available to the  commission in the oversight of the E-rate program, yet FCC generally has  been slow to respond to audit findings and has not made full use of the  audit findings as a means to understand and resolve problems within the  program. First, audit findings can indicate that a beneficiary or service  provider has violated existing E-rate program rules. In these cases, USAC  or FCC can seek recovery of E-rate funds, if justified. In the FCC IG’s May  2004 Semiannual Report, however, the IG observes that audit findings are  not being addressed in a timely manner and that, as a result, timely action is  not being taken to recover inappropriately disbursed funds. The IG notes  that in some cases the delay is caused by USAC and, in other cases, the  delay is caused because USAC is not receiving timely guidance from the  commission (USAC must seek guidance from the commission when an  audit finding is not a clear violation of an FCC rule or when policy  questions are raised). Regardless, the recovery of inappropriately  disbursed funds is important to the integrity of the program and needs to  occur in a timely fashion.
Second, under GAO’s Standards for Internal Controls in the Federal  Government, agencies are responsible for promptly reviewing and  evaluating findings from audits, including taking action to correct a  deficiency or taking advantage of the opportunity for improvement. Thus, if  an audit shows a problem but no actual rule violation, FCC should be  examining why the problem arose and determining if a rule change is  needed to address the problem (or perhaps simply addressing the problem  through a clarification to applicant instructions or forms). FCC has been  slow, however, to use audit findings to make programmatic changes. For  example, table 2 below shows audit findings from the 1998 program year  that were only recently resolved by FCC’s August 2004 rulemaking.
As table 2 illustrates, audit findings related to the lack of record retention  by beneficiaries were a problem. Given that the E-rate program operates  similarly in some ways to a grant program, FCC should have had in place a  record retention policy at the start of the program as a basic accountability  measure since record retention is fundamental to an audit trail. In fact,  early in the program, FCC did create rules on beneficiary and service  provider document retention, but the rules contained a potentially  enormous loophole. Under FCC’s rules, program participants were required  only to maintain “the kind of procurement records that they maintain for  other purchases.” Thus, if a school or library had no record retention  policy for other purchases, they did not need to retain records related to E- rate purchases. FCC proposed a more comprehensive record retention  policy in December 2003 and released it for comment. In August 2004—7  years into the existence of the E-rate program—FCC adopted record  retention rules that call for beneficiaries and service providers to retain E- rate program-related records for at least five years.
In its August 2004 order, the commission concluded that a standardized,  uniform process for resolving audit findings was necessary, and directed  USAC to submit to FCC a proposal for resolving audit findings. FCC also  instructed USAC to specify deadlines in its proposal “to ensure audit  findings are resolved in a timely manner.” USAC submitted its Proposed  Audit Resolution Plan to FCC on October 28, 2004. The plan memorializes  much of the current audit process and provides deadlines for the various  stages of the audit process. FCC released the proposed audit plan for  public comment in December 2004.
In addition to the Proposed Audit Resolution Plan, the commission  instructed USAC to submit a report to FCC on a semiannual basis  summarizing the status of all outstanding audit findings. The commission  also stated that it expects USAC to identify for commission consideration  on at least an annual basis all audit findings raising management concerns  that are not addressed by existing FCC rules. Lastly, the commission took  the unusual step of providing a limited delegation to the Wireline  Competition Bureau (the bureau within FCC with the greatest share of the  responsibility for managing the E-rate program) to address audit findings  and to act on requests for waivers of rules warranting recovery of funds.   These actions could help ensure, on a prospective basis, that audit findings  are more thoroughly and quickly addressed. However, much still depends  on timely action being taken by FCC, particularly if audit findings suggest  the need for a rulemaking.
In addition to problems with responding to audit findings, the audits  conducted to date have been of limited use because neither FCC nor USAC  have conducted an audit using a statistical approach that would allow them  to project the audit results to all E-rate beneficiaries. Thus, at present, no  one involved with the E-rate program has a basis for making a definitive  statement about the amount of waste, fraud, and abuse in the program.   Of the various groups of beneficiary audits conducted to date, all were of  insufficient size and design to analyze the amount of fraud or waste in the  program or the number of times that any particular problem might be  occurring programwide. FCC’s IG and USAC are currently working to  address this problem by following OMB’s guidance on the Improper  Payments Information Act of 2002 (IPIA). IPIA requires that agencies  annually estimate the amount of improper payments for programs and  activities susceptible to significant improper payments. In response to  IPIA, FCC and USAC are currently in the process of soliciting and  evaluating responses to a Request for Proposals issued to procure the  services of an independent auditor to conduct approximately 250  beneficiary audits in the E-rate program.
We examined the methodology used by FCC’s IG and USAC for arriving at a  sample size of 250, and it appears that they properly used OMB guidance  under IPIA in determining the sample size. However, because the effort is  still in the beginning stages, they were not able to provide additional  information on the sample design, such as the method of sample selection,  stratification criteria, and estimation methods. Sample design will be  critical in determining the value of the information gained from the audits.  In addition, FCC IG officials estimated the cost at approximately $50,000  per audit. With an anticipated total cost of $12.5 million (250 audits at  $50,000 per audit), this is an expensive effort. If the cost of the 250 audits  varies by the size of the grant, the sample design could be optimized based  on variable cost, which may either yield a tighter precision of the estimate  of the amount of improper payments or reduce the total cost of the audit. It  should also be noted that because this represents a sizable increase from  prior audits, FCC may face an even greater challenge in resolving the audit  findings in a timely manner.
Lastly, we were told by USAC officials that they have recently contracted  with a consulting firm to conduct approximately 1,000 site visits a year to  program beneficiaries beginning in mid-January 2005. Although these are  not audits, USAC testified in June 2004 that the site visits will allow USAC  to assess more fully, in real time, how E-rate funds are being used, to learn  about and publicize best practices in education technology and program  compliance, and to help ensure that products and services have in fact  been delivered and are being used effectively. For each visit, the selected  vendor will, among other things, conduct a physical inspection of  equipment and services purchased with E-rate funds. A checklist, outlining  the steps for review, is to be followed for each visit to ensure consistency.  The deliverables will include a formal report on each beneficiary visited, a  monthly report on best practices observed and outreach suggestions, and  immediate notification to USAC in instances where significant  noncompliance is discovered.
section_title: FCC Has Been Slow to Act on Some E-Rate Appeals
paragraphs: Under FCC’s rules, program participants can seek review of USAC’s  decisions, although FCC’s appeals process for the E-rate program has  been slow in some cases. Because appeals decisions are used as precedent,  this slowness adds uncertainty to the program and impacts beneficiaries.  FCC rules state that FCC is to decide appeals within 90 days, although FCC  can extend this period. There is currently a substantial appeals backlog at  FCC (i.e., appeals pending for longer than 90 days). Out of 1,865 appeals to  FCC from 1998 through the end of 2004, approximately 527 appeals remain  undecided, of which approximately 458 (25 percent) are backlog appeals.
Perhaps of most concern are the subset of appeals dealing with recovery of  funding erroneously committed to schools and libraries. According to  USAC, recovery has been slowed, in part, because FCC has not been timely  in resolving these types of appeals from beneficiaries. In fact, through  October 2004, of the approximately $36 million in E-rate funding for which  USAC has brought recovery actions since the beginning of the program,  only $3.2 million has been recovered and approximately $14.4 million is  tied up in appeals with FCC. This is money that might be placed back into  the E-rate program for disbursement to applicants.
We were told by FCC officials that some of the backlog is due to staffing  issues. FCC officials said they do not have enough staff to handle appeals in  a timely manner. FCC officials also noted that there has been frequent staff  turnover within the E-rate program, adding some delay to appeals  decisions because new staff necessarily take time to learn about the  program and the issues. (See app. IV for additional information on FCC  staffing levels in support of the E-rate program.)  Additionally, we were told  that another factor contributing to the backlog is that the appeals have  become more complicated as the program has matured. For example,  applicants are increasingly appealing decisions concerning eligible  services. These appeals can be difficult to resolve because the technology  needs of participants in the program can be complex. Lastly, some appeals  may be tied up if the issue is currently in the rulemaking process.
The appeals backlog is of particular concern given that the E-rate program  is a technology program. An applicant who appeals a funding denial and  works through the process to achieve a reversal and funding two years  later might have ultimately won funding for outdated technology.
section_title: Conclusions
paragraphs: FCC has not done enough to proactively manage and provide a framework  of government accountability for the multibillion-dollar E-rate program.  FCC established an unusual structure for the E-rate program but has never  conducted a comprehensive assessment of which federal requirements,  policies, and practices apply to the program, to USAC, or to the Universal  Service Fund. FCC has recently begun to address a few of these issues,  concluding that the Universal Service Fund constitutes an appropriation  and that the Fund is subject to the Antideficiency Act. Nevertheless,  fundamental issues affecting the E-rate program remain to be resolved.  Resolving these issues in a comprehensive fashion is key to ensuring that  FCC applies the appropriate government accountability standards and  safeguards to the E-rate program and to the Universal Service Fund.
In managing the program, FCC has not developed specific and meaningful  goals and measures to assess the impact of E-rate funding, address mission  critical management problems, and establish the direction of the program  as schools and libraries move beyond initial Internet connectivity to long- term maintenance concerns. Moreover, FCC has consistently shifted many  important responsibilities onto USAC, such as identifying which  administrative procedures should be adopted as commission rules and  handling resolutions of audit findings. Combined with the weaknesses in  FCC’s oversight mechanisms, these problems create barriers to  enforcement, uncertainty about what the program’s requirements really  are, and questions about the soundness of the program’s structure and  accountability amid recent cases of fraud, waste, and abuse. This mixture  of E-rate problems—related both to the structure of the program and to  FCC’s shortcomings in carrying out key E-rate management  responsibilities—indicates the need for corrective actions by FCC.
Finally, regardless of the problems with the E-rate program, schools and  libraries across the country use E-rate funds for their purchases of  telecommunications services. Any reassessment of the program must take  the needs of the beneficiaries into account. It is particularly important that  efforts to protect the program from fraud, waste, and abuse do not result in  a program that is excessively burdensome on program participants.
section_title: Recommendations for Executive Action
paragraphs: Given the critical importance of telecommunications technologies to  schools and libraries, we recommend that the Chairman of the Federal  Communications Commission direct FCC staff to take the following three  actions: 1. Conduct and document a comprehensive assessment to determine  whether all necessary government accountability requirements,  policies, and practices have been applied and are fully in place to  protect the program and the funding. The assessment should include,  but not be limited to  the implications of FCC’s determination that the Universal Service  Fund constitutes an appropriation by identifying the fiscal controls  that apply and do not apply to the Universal Service Fund, including  the collection, deposit, obligation, and disbursement of funds; and  an evaluation of the legal authority for the organizational structure  for carrying out the E-rate program, including the relationship  between FCC and USAC and their respective authorities and roles in  implementing the E-rate program.
Because of the complexities posed by FCC’s arrangements with USAC  and the questions that flow from these arrangements, FCC may want to  request an advance decision from the Comptroller General under 31  U.S.C. § 3529. Section 3529 provides the heads of agencies and  certifying and disbursing officers of the government an opportunity to  request decisions from the Comptroller General on matters of  appropriations law in order to ensure compliance with fiscal law.    2. Establish performance goals and measures for the E-rate program that  are consistent with the Government Performance and Results Act. FCC  should use the resulting performance data to develop analyses of the  actual impact of E-rate funding and to determine areas for improved  program operations.  3. Develop a strategy for reducing the E-rate program’s appeals backlog,  including ensuring that adequate staffing resources are devoted to E- rate appeals resolution.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to FCC for review and comment. In its  comments, which are reprinted in appendix V, FCC noted that it took a  number of steps during 2004 to improve its management and oversight of  the E-rate program. These included the adoption of new rules regarding the  recovery of improperly disbursed funds; the implementation of new  accounting requirements related to the Universal Service Fund; new efforts  to deter waste, fraud, and abuse; and work with the FCC IG to develop a  plan for conducting hundreds of additional beneficiary audits. FCC  commented that it has strengthened its oversight and management of  USAC through the establishment of a high-level working group to  coordinate oversight and has adopted rules codifying certain USAC  procedures. FCC also noted that it is currently evaluating USAC’s existing  operations and administrative procedures to determine which should be  codified into FCC rules.
FCC reaffirmed its belief that the current structure of USAC is consistent  with congressional intent and guidance, adding that it nevertheless intends  to consider whether to modify the manner in which the Universal Service  Fund is administered. During the coming year, FCC anticipates examining  whether and how to modify its existing administrative structure and  processes as they apply to the E-rate program. FCC intends to consider  other administrative structures and their implications, including those  relying on contractual arrangements. Other actions under consideration  include initiating a notice-and-comment rulemaking proceeding to assess  the management of the E-rate program and the Universal Service Fund;  retaining an outside contractor to evaluate the program and make  recommendations for improving its administration; and requiring certain  beneficiaries to obtain an independent audit of their compliance with FCC  rules.
Regarding our recommendations, FCC officials told us they did not concur  with our recommendation to conduct a comprehensive assessment  concerning the applicability of government accountability requirements,  policies, and practices. FCC maintains that it has conducted timely and  extensive analysis of significant legal issues related to the status of the fund  on a case-by-case basis, and provided examples. Although we recognize  that FCC has engaged in internal deliberations and external consultations  and analyses of a number of statutes, we do not believe this has been done  in a timely manner or that it is appropriate to do so on a case-by-case basis.  A definitive determination on the entire framework of laws that apply or do  not apply to this program and to the Universal Service Fund itself would  enable FCC to make proactive operational decisions on what steps it  should take and what internal controls it should have in place. As noted in  our report, we continue to believe that major issues remain unresolved  such as defining the relationship between FCC and USAC and their  respective authorities and roles in implementing the E-rate program and  identifying whether other actions taken in the universal service programs  constitute obligations and ensuring that those are properly recorded. FCC  officials told us that they concurred with our recommendations for  establishing performance goals and measures and developing a strategy for  reducing the backlog of appeals, noting that the commission is already  taking steps to address these recommendations.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after the  date of this letter. At that time, we will send copies to interested  congressional committees; the Chairman, FCC; the Chief Executive Officer,  USAC; and other interested parties. We also will make copies available to  others upon request. In addition, this report will be available at no cost on  the GAO Web site at http://www.gao.gov. If you have any questions about  this report, please contact me at (202) 512-2834 or goldsteinm@gao.gov.  Key contributors to this report are listed in appendix VI.
section_title: Scope and Methodology
paragraphs: Our objectives were to review and evaluate: (1) the effect of the current  structure of the E-rate program on the Federal Communications  Commission’s (FCC) management of the program, (2) FCC’s establishment  of and use of goals and performance measures in managing the program,  and (3) the effectiveness of FCC’s oversight mechanisms—rulemaking  proceedings, beneficiary audits, and reviews of the Universal Service  Administrative Company’s (USAC) decisions (appeals)—in managing the  program.
To provide information on the effect of the current structure of the E-rate  program, we reviewed provisions of the Telecommunications Act, as well  as documents and records used by FCC to implement and administer the E- rate program. We also assessed the extent to which FCC had established  managerial and financial government accountability standards, safeguards,  and legal relationships for the E-rate program and the Universal Service  Fund. Additionally, we interviewed officials from FCC’s Wireline  Competition Bureau, Office of General Counsel, Office of Managing  Director, and Office of Inspector General. We also interviewed officials  from the Office of Management and Budget (OMB) and USAC, the not-for- profit corporation that administers the E-rate program under FCC  oversight.
To respond to the second objective on FCC’s use of goals and performance  measures in managing the program, we reviewed provisions of the  Government Performance and Results Act of 1993, as well as documents  and records used by FCC to establish goals and performance measures— budget justifications, performance plans, and strategic plans. We also  reviewed OMB’s Program Assessment Rating Tool that assessed FCC’s  performance goals and related measures for the E-rate program. In  addition, we discussed this issue with officials from FCC’s Wireline  Competition Bureau, Office of Managing Director, Office of Strategic  Planning and Policy Analysis, and Office of Inspector General. We also  interviewed officials from the Office of Management and Budget and  Department of Education.
Finally, to evaluate FCC’s oversight mechanisms for managing the program,  we reviewed relevant documents relating to all three oversight  mechanisms: (1) rulemaking proceedings, (2) beneficiary audits, and (3)  fact-specific adjudicatory decisions (i.e., appeals decisions). Specifically,  we reviewed FCC orders and provisions of the Code of Federal  Regulations, which sets forth FCC’s rulemaking process. In addition, we  reviewed relevant USAC documents and policies, including its procedures  that are in place to aid in the administration of the program. To assess  FCC’s oversight mechanism of auditing, we reviewed the FCC Inspector  General’s (IG) Semi-Annual Reports to Congress, GAO’s Standards for  Internal Controls in the Federal Government, recent FCC orders, and  beneficiary audits used to assess program compliance. Our statistician also  examined the methodology (based on interviews with and documentation  provided by FCC and USAC) that the FCC IG and USAC have proposed for  the next round of beneficiary audits. To gain an understanding of how FCC  manages appeals, we reviewed relevant documents and gathered data from  FCC and USAC regarding the number of outstanding appeals and USAC  recovery actions tied up in FCC appeals.
To assess the reliability of the FCC appeals data and USAC recovery  actions tied up in FCC appeals, we (1) reviewed related documentation, (2)  conducted electronic testing of the source databases, and (3) interviewed  knowledgeable agency officials about the quality of the data. We found  that one database was limited in producing reports that track historical  trends. However, this limitation was minor in the context of our  engagement. As a result, we determined that the data were sufficiently  reliable for the purposes of this report. Finally, we discussed this issue with  officials from FCC’s Wireline Competition Bureau, Office of General  Counsel, Office of Managing Director, Office of Inspector General, and  USAC.
We also reviewed internal memorandums provided by FCC’s Office of  General Counsel to determine how FCC has applied federal requirements,  policies, and practices to the E-rate program and to the Universal Service  Fund. We interviewed FCC officials to obtain their views concerning  whether monies in the Universal Service Fund should be treated as federal  funds and the effect of using government accounting standards on the fund.
Funding commitments since the inception of the program, the number of  USAC appeals, and USAC recoveries tied up in appeals to USAC were used  only as background information in the report to provide context for our  findings; therefore, the data were not verified for data reliability purposes.  However, to assess the reliability of funding for which USAC has brought  recovery actions, we (1) reviewed related documentation, (2) conducted  electronic testing of the source databases, and (3) interviewed  knowledgeable agency officials about the quality of the data. As a result, we  determined that the data were sufficiently reliable for the purposes of this  report. We also determined that other relevant documents and records that  we gathered were sufficiently reliable for the purposes of our review.
Our review was performed from December 2003 through December 2004 in  accordance with generally accepted government auditing standards.
section_title: Fiscal Law Issues Involving the Universal Service Fund
paragraphs: There have been questions from the start of the E-rate program regarding  the nature of the Universal Service Fund (USF) and the applicability of  managerial, fiscal, and financial accountability requirements to USF. FCC  has never clearly determined the nature of USF, and the Office of  Management and Budget (OMB), the Congressional Budget Office (CBO),  and GAO have at various times noted that USF has not been recognized or  treated as federal funds for several purposes. However, FCC has never  confronted or assessed these issues in a comprehensive fashion and has  only recently begun to address a few of these issues. In particular, FCC has  recently concluded that as a permanent indefinite appropriation, USF is  subject to the Antideficiency Act and its funding commitment decision  letters constitute obligations for purposes of the Antideficiency Act. As  explained below, we agree with FCC’s determination. However, FCC’s  conclusions concerning the status of USF raise further issues related to the  collection, deposit, obligation, and disbursement of those funds—issues  that FCC needs to explore and resolve.
subsections: section_title: Background
paragraphs: Universal service has been a basic goal of telecommunications regulation  since the 1950s, when FCC focused on increasing the availability of  reasonably priced, basic telephone service. See Texas Office of Public  Utility Counsel v. FCC, 183 F.3d 393, 405-406 (5th Cir., 1999), cert. denied  sub nom; Celpage Inc. v. FCC, 530 U.S. 1210 (2000). FCC has not relied  solely on market forces, but has used a combination of explicit and implicit  subsidies to achieve this goal. Id. Prior to 1983, FCC used the regulation of  AT&T’s internal rate structure to garner funds to support universal service.  With the breakup of AT&T in 1983, FCC established a Universal Service  Fund administered by the National Exchange Carrier Association (NECA).  NECA is an association of incumbent local telephone companies, also  established at the direction of FCC. Among other things, NECA was to  administer universal service through interstate access tariffs and the  revenue distribution process for the nation’s local telephone companies. At  that time, NECA, a nongovernmental entity, privately maintained the  Universal Service Fund outside the U.S. Treasury.
Section 254 of the Telecommunications Act of 1996 codified the concept of  universal service and expanded it to include support for acquisition by  schools and libraries of telecommunications and Internet services. Pub. L.  No. 104-104, § 254, 110 Stat. 56 (1996) (classified at 47 U.S.C. § 254). The act  defines universal service, generally, as a level of telecommunications  services that FCC establishes periodically after taking into account various  considerations, including the extent to which telecommunications services  are essential to education, public health, and public safety. 47 U.S.C. § 254  (c)(1). The act also requires that “every telecommunications carrier that  provides interstate telecommunications services shall contribute . . . to the  specific, predictable, and sufficient mechanisms” established by FCC “to  preserve and advance universal service.” Id., §254 (d). The act did not  specify how FCC was to administer the E-rate program, but required FCC,  acting on the recommendations of the Federal-State Joint Board, to define  universal service and develop specific, predictable, and equitable support  mechanisms.
FCC designated the Universal Service Administrative Company (USAC), a  nonprofit corporation that is a wholly owned subsidiary of NECA, as the  administrator of the universal service mechanisms. USAC administers the  program pursuant to FCC orders, rules, and directives. As part of its duties,  USAC collects the carriers’ universal service contributions, which  constitute the Universal Service Fund, and deposits them to a private bank  account under USAC’s control and in USAC’s name. FCC has directed the  use of USF to, among other things, subsidize advanced telecommunications  services for schools and libraries in a program commonly referred to as the E-rate program. Pursuant to the E-rate program, eligible schools and  libraries can apply annually to receive support and can spend the funding  on specific eligible services and equipment, including telephone services,  Internet access services, and the installation of internal wiring and other  related items. Generally, FCC orders, rules, and directives, as well as  procedures developed by USAC, establish the program’s criteria. USAC  carries out the program’s day-to-day operations, such as answering  inquiries from schools and libraries; processing and reviewing applications;  making funding commitment decisions and issuing funding commitment  decision letters; and collecting, managing, investing, and disbursing E-rate  funds.
Eligible schools and libraries may apply annually to receive E-rate support.  The program places schools and libraries into various discount categories,  based on indicators of need. As a result of the application of the discount  rate to the cost of the service, the school or library pays a percentage of the  cost for the service and the E-rate program covers the remainder. E-rate  discounts range from 20 percent to 90 percent.
Once the school or library has complied with the program’s requirements  and entered into agreements with vendors for eligible services, the school  or library must file a form with USAC noting the types and costs of the  services being contracted for, the vendors providing the services, and the  amount of discount being requested. USAC reviews the forms and issues  funding commitment decision letters. The funding commitment decision  letters notify the applicants of the decisions regarding their E-rate  discounts. These funding commitment decision letters also notify the  applicants that USAC will send the information on the approved E-rate  discounts to the providers so that “preparations can be made to begin  implementing . . . E-rate discount(s) upon the filing  of . . .  Form 486.” The applicant files FCC Form 486 to notify USAC that services  have started and USAC can pay service provider invoices. Generally, the  service provider seeks reimbursement from USAC for the discounted  portion of the service, although the school or library also could pay the  service provider in full and then seek reimbursement from USAC for the  discount portion.
section_title: What Is the Universal Service Fund?
paragraphs: The precise phrasing of the questions regarding the nature of USF has  varied over the years, including asking whether they are federal funds,  appropriated funds, or public funds and, if so, for what purposes?  While  the various fiscal statutes may use these different terms to describe the  status of funds, we think the fundamental issue is what statutory controls  involving the collection, deposit, obligation, and disbursement of funds  apply to USF. As explained below, funds that are appropriated funds are  subject, unless specifically exempted by law, to a variety of statutory  provisions providing a scheme of funds controls. See B-257525, Nov. 30,  1994; 63 Comp. Gen. 31 (1983); 35 Comp. Gen. 436 (1956); B-204078.2, May  6, 1988. On the other hand, funds that are not appropriated funds are not  subject to such controls unless the law specifically applies such controls.  Thus, we believe the initial question is whether USF funds are appropriated  funds.
FCC has concluded that USF constitutes a permanent indefinite  appropriation. We agree with FCC’s conclusion. Typical language of  appropriation identifies a fund or account as an appropriation and  authorizes an agency to enter into obligations and make disbursements out  of available funds. For example, Congress utilizes such language in the  annual appropriations acts. See 1 U.S.C. § 105 (requiring regular annual  appropriations acts to bear the title “An Act making appropriations. . .”).  Congress, however, appropriates funds in a variety of ways other than in  regular annual appropriation acts. Indeed, our decisions and those of the  courts so recognize.
Thus, a statute that contains a specific direction to pay, and a designation  of funds to be used, constitutes an appropriation. 63 Comp. Gen. 331  (1984); 13 Comp. Gen. 77 (1933). In these statutes, Congress (1) authorizes  the collection of fees and their deposit into a particular fund, and (2) makes  the fund available for expenditure for a specified purpose without further  action by Congress. This authority to obligate or expend collections  without further congressional action constitutes a continuing  appropriation or a permanent appropriation of the collections. E.g., United  Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (D.C. Cir. 1965), cert. denied, 384  U.S. 971 (1966); 69 Comp. Gen. 260, 262 (1990); 73 Comp. Gen. 321 (1994).  Our decisions are replete with examples of permanent appropriations, such  as revolving funds and various special deposit funds, including mobile  home inspection fees collected by the Secretary of Housing and Urban  Development, licensing revenues received by the Commission on the  Bicentennial, tolls and other receipts deposited in the Panama Canal  Revolving Fund, user fees collected by the Saint Lawrence Seaway  Development Corporation, user fees collected from tobacco producers to  provide tobacco inspection, certification and other services, and user fees  collected from firms using the Department of Agriculture’s meat grading  services. It is not essential for Congress to expressly designate a fund as  an appropriation or to use literal language of “appropriation,” so long as  Congress authorizes the expenditure of fees or receipts collected and  deposited to a specific account or fund. In cases where Congress does not  intend these types of collections or funds to be considered “appropriated  funds,” it explicitly states that in law. See e.g., 12 U.S.C. § 244 (the Federal  Reserve Board levies assessments on its member banks to pay for its  expenses and “funds derived from such assessments shall not be construed  to be government funds or appropriated moneys”); 12 U.S.C. § 1422b(c)  (the Office of Federal Housing Enterprise Oversight levies assessments  upon the Federal Home Loan Banks and from other sources to pay its  expenses, but such funds “shall not be construed to be government funds  or appropriated monies, or subject to apportionment for the purposes of  chapter 15 of title 31, or any other authority”).
Like the above examples, USF’s current authority stems from a statutorily  authorized collection of fees from telecommunications carriers, and  expenditures for a specified purpose—that is, the various types of  universal service. Thus, USF meets both elements of the definition of a  permanent appropriation.
We recognize that prior to the passage of the Telecommunications Act of  1996, there existed an administratively sanctioned universal service fund.  With the Telecommunications Act of 1996, Congress specifically expanded  the contribution base of the fund, statutorily mandated contributions into  the fund, and designated the purposes for which the monies could be  expended. These congressional actions established USF in a manner that  meets the elements for a permanent appropriation and Congress did not  specify that USF should be considered anything other than an  appropriation.
section_title: Does the Antideficiency Act Apply to USF?
paragraphs: Appropriated funds are subject to a variety of statutory controls and  restrictions. These controls and restrictions, among other things, limit the  purposes for which they may be used and provide a scheme of funds  control. See e.g., 63 Comp. Gen. 110 (1983); B-257525, Nov. 30, 1994; B- 228777, Aug. 26, 1988; B-223857, Feb. 27, 1987; 35 Comp. Gen. 436 (1956). A  key component of this scheme of funds control is the Antideficiency Act. B- 223857, Feb. 27, 1987. The Antideficiency Act has been termed “the  cornerstone of congressional efforts to bind the executive branch of  government to the limits on expenditure of appropriated funds.”   Primarily, the purpose of the Antideficiency Act is to prevent the obligation  and expenditure of funds in excess of the amounts available in an  appropriation or in advance of the appropriation of funds. 31 U.S.C. §  1341(a)(1). FCC has determined that the Antideficiency Act applies to USF,  and as explained below, we agree with FCC’s conclusion.
The Antideficiency Act applies to “officer or employee of the United  States Government . . . mak or authoriz an expenditure or  obligation . . . from an appropriation or fund.” 31 U.S.C. § 1341(a). As  established above, USF is an “appropriation or fund.” The fact that USAC, a  private entity whose employees are not federal officers or employees, is the  administrator of the E-rate program and obligates and disburses funds from  USF is not dispositive of the application of the Antideficiency Act. This is  because, as the FCC recognizes, it, not USAC, is the entity that is legally  responsible for the management and oversight of the E-rate program and  FCC’s employees are federal officers and employees of the United States  subject to the Antideficiency Act.
Where entities operate with funds that are regarded as appropriated funds,  such as some government corporations, they, too, are subject to the  Antideficiency Act. See e.g., B-223857, Feb. 27, 1987 (funds available to  Commodity Credit Corporation pursuant to borrowing authority are  subject to Antideficiency Act); B-135075-O.M., Feb. 14, 1975 (Inter- American Foundation). The Antideficiency Act applies to permanent appropriations such as revolving funds and special funds. 72 Comp. Gen.  59 (1992) (Corps of Engineers Civil Works Revolving Fund subject to  Antideficiency Act); B-120480, Sep. 6, 1967, B-247348, June 22, 1992, and B- 260606, July 25, 1997 (GPO revolving funds subject to Antideficiency Act);  71 Comp. Gen. 224 (1992) (special fund that receives fees, reimbursements,  and advances for services available to finance its operations is subject to  Antideficiency Act).
Where Congress intends for appropriated funds to be exempt from the  application of statutory controls on the use of appropriations, including the  Antideficiency Act, it does so expressly. See e.g., B-193573, Jan. 8, 1979; B- 193573, Dec. 19, 1979; B-217578, Oct. 16, 1986 (Saint Lawrence Seaway  Development Corporation has express statutory authority to determine the  character and necessity of its obligations and is therefore exempt from  many of the restrictions on the use of appropriated funds that would  otherwise apply); B-197742, Aug. 1, 1986 (Price-Anderson Act expressly  exempts the Nuclear Regulatory Commission from Antideficiency Act  prohibition against obligations or expenditures in advance or in excess of  appropriations). There is no such exemption for FCC or USF from the  prohibitions of the Antideficiency Act. Thus, USF is subject to the  Antideficiency Act.
section_title: Do the Funding Commitment Decision Letters Issued to Schools and Libraries Constitute Obligations?
paragraphs: An important issue that arises from the application of the Antideficiency  Act to USF is what actions constitute obligations chargeable against the  fund. Understanding the concept of an obligation and properly recording  obligations are important because an obligation serves as the basis for the  scheme of funds control that Congress envisioned when it enacted fiscal  laws such as the Antideficiency Act. B-300480, Apr. 9, 2003. For USF’s  schools and libraries program, one of the main questions is whether the  funding commitment decision letters issued to schools and libraries are  properly regarded as obligations. FCC has determined that funding  commitment decision letters constitute obligations. And again, as  explained below, we agree with FCC’s determination.
Under the Antideficiency Act, an agency may not incur an obligation in  excess of the amount available to it in an appropriation or fund. 31 U.S.C.  § 1341(a). Thus, proper recording of obligations with respect to the timing  and amount of such obligations permits compliance with the  Antideficiency Act by ensuring that agencies have adequate budget  authority to cover all of their obligations. B-300480, Apr. 9, 2003. We have  defined an “obligation” as a “definite commitment that creates a legal  liability of the government for the payment of goods and services ordered  or received.”  Id. A legal liability is generally any duty, obligation or  responsibility established by a statute, regulation, or court decision, or  where the agency has agreed to assume responsibility in an interagency  agreement, settlement agreement or similar legally binding document. Id.  citing to Black’s Law Dictionary 925 (7th ed. 1999). The definition of  “obligation” also extends to “ legal duty on the part of the United States  which constitutes a legal liability or which could mature into a legal liability  by virtue of actions on the part of the other party beyond the control of the  United States. . . .” Id. citing to 42 Comp. Gen. 733 (1963); see also  McDonnell Douglas Corp. v. United States, 37 Fed. Cl. 295, 301 (1997).
The funding commitment decision letters provided to applicant schools  and libraries notify them of the decisions regarding their E-rate discounts.  In other words, it notifies them whether their funding is approved and in  what amounts. The funding commitment decision letters also notify  schools and libraries that the information on the approved E-rate discounts  is sent to the providers so that “preparations can be made to begin  implementing . . . E-rate discount(s) upon the filing  of . . .  Form 486.”  The applicant files FCC Form 486 to notify USAC that services  have started and USAC can pay service provider invoices. At the time a  school or library receives a funding commitment decision letter, the FCC  has taken an action that accepts a “legal duty . . . which could mature into a  legal liability by virtue of actions on the part of the grantee beyond the  control of the United States.”  Id. citing 42 Comp. Gen. 733, 734 (1963). In  this instance, the funding commitment decision letter provides the school  or library with the authority to obtain services from a provider with the  commitment that it will receive a discount and the provider will be  reimbursed for the discount provided. While the school or library could  decide not to seek the services or the discount, so long as the funding  commitment decision letter remains valid and outstanding, USAC and FCC  no longer control USF’s liability; it is dependent on the actions taken by the  other party—that is, the school or library. In our view, a recordable USF  obligation is incurred at the time of issuance of the funding commitment  decision letter indicating approval of the applicant’s discount. Thus, these  obligations should be recorded in the amounts approved by the funding  commitment decision letters. If at a later date, a particular applicant uses  an amount less than the maximum or rejects funding, then the obligation  amount can be adjusted or deobligated, respectively.
Additional issues that remain to be resolved by FCC include whether other  actions taken in the universal service program constitute obligations and  the timing of and amounts of obligations that must be recorded. For  example, this includes the projections and data submissions by USAC to  FCC and by participants in the High Cost and Low Income Support  Mechanisms to USAC. FCC has indicated that it is considering this issue  and consulting with the Office of Management and Budget. FCC should  also identify any other actions that may constitute recordable obligations  and ensure those are properly recorded.
section_title: Structure of the Universal Service Administrative Company
paragraphs: Various policies to promote universal service—providing residential  customers with affordable, nationwide access to basic telephone service— have generally been around since the 1950s. Congress codified and made  significant changes to universal service policy in the Telecommunications  Act of 1996. However, Congress did not prescribe a structure for  administering the universal service programs and instead called for a  Federal-State Joint Board on Universal Service (Joint Board) to make  recommendations to FCC.
At the time of the act, the National Exchange Carrier Association (NECA)  was responsible for administering the existing universal service  mechanisms providing support for high-cost areas and low-income  individuals. NECA is an association of incumbent local telephone  companies that was established at FCC’s direction in 1983 (in anticipation  of the breakup of the Bell System) to administer interstate access tariffs  and the revenue distribution process for the nation’s nearly 1,000 local  telephone companies. In November 1996, the Joint Board recommended  that, in the interest of providing services to schools and libraries and health  care providers quickly, FCC should appoint NECA as the temporary  administrator of universal service to these groups, subject to changes in  NECA’s governance to make NECA more representative of the  telecommunications industry as a whole. Under the Joint Board’s  recommendation, NECA would continue this role until a permanent  administrator was appointed. The Joint Board recommended that FCC  establish an advisory board to select and oversee a neutral third-party  administrator for all universal service programs and suggested criteria to  be used in that selection. The Joint Board further recommended that FCC  allow NECA to change its membership and governance in a manner that  would allow it to compete for the role of permanent administrator in the  advisory board’s selection process.
On the basis of the Joint Board’s recommendations, FCC agreed in a May  1997 order to appoint NECA as the temporary administrator, subject to  changes in NECA’s governance. It also agreed to create a federal advisory  committee, whose sole responsibility would be to recommend an  administrator, and directed that the administrator should select a  contractor to manage the application process for schools and libraries.  NECA later determined that developing a satisfactory board structure to be  able to bid for the permanent administrator role might not be possible.  Thus, NECA proposed to FCC in January 1997 that it be allowed to  establish a separate subsidiary to administer universal service.
In July 1997, FCC issued an order directing NECA to create two  independent nonprofit corporations—one to administer the program for  schools and libraries (the Schools and Libraries Corporation) and one to  administer the program for rural health care providers (the Rural Health  Care Corporation). FCC’s order further specified that these corporations  would continue to administer the programs even after the appointment of a  permanent administrator. To carry out billing, collecting, and disbursement  activities for these programs, FCC directed NECA to create a nonprofit  subsidiary. FCC further directed that the subsidiary create a special  committee of its board of directors to administer the universal service  programs for high-cost areas and low-income individuals. NECA created  the Universal Service Administrative Company (USAC) as the subsidiary.
In November 1998, FCC changed the universal service structure in  response to legal concerns about FCC’s authority to create the two  independent corporations and Congress’s directive that a single entity  administer universal service support. FCC appointed an existing body,  USAC, as the permanent administrator of the program and directed the  Schools and Libraries Corporation and the Rural Health Care Corporation  to merge with USAC by January 1, 1999. Under this merger, the staff of the  Schools and Libraries Corporation became part of a new Schools and  Libraries Division (SLD) within USAC, carrying out essentially the same  functions as before, such as processing and reviewing E-rate applications.  However, SLD contracts out most of its billing, collecting, and  disbursement activities to USAC. In addition, in 2000 NECA formed an  unaffiliated, for-profit corporation, NECA Services Inc., to pursue new  business opportunities. USAC later contracted most of its application  processing, client support, and review functions to NECA Services Inc. See  figure 1.
section_title: Comments from the Federal Communications Commission
paragraphs: The following are GAO’s comments on the Federal Communications  Commission’s letter dated January 14, 2005.
subsections: section_title: GAO’s Comments
paragraphs: 1. As stated in our report, we have not addressed FCC’s authority to  establish the current organizational structure. We recognize that FCC  has reported to Congress on its implementation of the current  organizational structure and it believes that structure is consistent with  congressional intent and conforms to congressional guidance.  However, at the time this structure was established by FCC, numerous  issues such as the status of the Universal Service Fund as federal  funds—specifically a permanent indefinite appropriation—and the  applicability of fiscal statutes such as the Antideficiency Act had not  been resolved. It is critical to the management of federal funds that the  funds be properly collected, deposited, obligated, and expended by  authorized parties in accordance with those determinations regarding  the status of the funds. Thus, we believe FCC should consider whether  the current organizational structure and roles and responsibilities of  FCC and USAC are consistent with law and comply with fiscal and  accountability requirements for federal funds. FCC states that it intends  to consider whether to modify the manner in which the Universal  Service Fund is administered, including possible changes to the  underlying administrative structure. We believe this would be a positive  step toward carrying out our recommendation.  2. FCC states that it has undertaken a timely and extensive analysis of the  significant legal issues related to the status of the Universal Service  Fund and has generally done so on a case-by-case basis. We recognize  that FCC has engaged in internal deliberations and external  consultations and analysis of a number of statutes. However, we do not  believe this has been done in a timely manner or that it is appropriate to  do so on a case-by-case basis.
Addressing the applicability of the statutes on a case-by-case basis, as  issues have arisen, has put FCC and the program in the position of  reacting to problems as they occur rather than setting up an  organization and internal controls designed to ensure compliance with  applicable laws. The laws encompassing fiscal and accountability  controls are not applied in isolation; rather, they are part of a  framework that addresses issues of financial and general management  of federal agencies and programs. The E-rate program was established  over seven years ago, yet FCC is still analyzing whether certain statutes  or requirements apply to the program and what actions it must take to  implement those statutes and ensure compliance with them.  The  recent issues involving the Antideficiency Act best illustrate the  problem with this case-by-case approach.  As explained in our report, it  was not until the fall of 2004 that the applicability and consequences of  the Antideficiency Act were resolved.  Moreover, this was not the first  time issues regarding the Antideficiency Act had been raised. In July  1998, a question had been raised regarding USAC’s authority to  commecially borrow funds. At that time, USAC was instructed to  refrain from commercial borrowing while FCC was examining the  applicability of the Antideficiency Act to USAC’s operations. While FCC  determined that USAC should not borrow commercially in 1998, the  question of whether there were other consequences for the E-rate  program regarding the applicability of the Antideficiency Act was not  addressed. Had FCC taken a comprehensive approach to the  application of fiscal and accountability statutes such as the  Antideficiency Act when the program was created or soon thereafter,  FCC would have been in a position to determine what steps they should  have taken and what internal controls they should have had in place to  ensure compliance with those statutes. For example, with respect to  the Antideficiency Act, they could have determined whether actions  they were taking were obligations that needed to be recorded and, if so,  made any necessary changes to the program to ensure that they had  sufficient amounts in the Universal Service Fund to cover those  obligations.
Furthermore, while certain determinations may have been made  internally, they have neither been analyzed nor definitively determined  in FCC’s orders on the E-rate program. In addition, USAC has not  always received instruction on how to carry out all of these  requirements. For example, as noted in our report, in its October 2003  order applying GovGAAP to the Universal Service Fund, FCC stated  that “the Funds may be subject to a number of federal financial and  reporting statutes” (emphasis added) and “relevant portions of the  Federal Financial Management Improvement Act of 1996,” but did not  specify which specific statutes or the relevant portions or further  analyze their applicability.
3.
In our report, we list several examples of fiscal control and  accountability statutes. FCC states in its letter that it has already made  a determination of each statute’s applicability to the Universal Service  Fund. We agree that FCC has made a determination involving the  applicability of the Improper Payments Information Act, and we  therefore deleted our references to this act. We recognize that FCC has  consulted with other agencies such as OMB and Treasury regarding the  applicability of the Miscellaneous Receipts Act, the Single Audit Act,  and the Cash Management Improvement Act. However, we believe that  where FCC has determined that fiscal controls and policies do not  apply, the commission should reconsider these determinations in light  of the status of universal service monies as federal funds. Such a  reconsideration is particularly important in the case of the  Miscellaneous Receipts Act, where OMB and FCC determined in 2000  that the act did not apply because the funds were not public monies for  the use of the United States.
Our recommendation focuses on a proactive, comprehensive analysis  and determination of legal requirements rather than a continued  approach of reactive case-by-case determinations. A definitive  determination on the entire framework of laws that apply or do not  apply to this program would enable FCC to make operational decisions  on what steps they should take and what internal controls they should  have in place to ensure compliance with applicable laws.  4. As stated in our report, due to the complexities posed by these issues,  GAO remains available to provide an advance decision to FCC under 31  U.S.C. § 3529.  5. Our report does not note that “FCC had established some performance  measures, but determined that it needed to establish better and more  comprehensive ways of measuring E-rate performance.”  It also does  not note that the reason FCC stopped using the number of public  schools connected to the Internet was that it was no longer a useful  measure of the program. Our report states that prior to fiscal year 2000,  FCC had no specific goals and measures for the program; that for fiscal  years 2000 through 2002, the goals and measures set by FCC were not  useful for assessing the impact of E-rate program funding because the  measures used did not directly measure the impact of E-rate funding;  and that since fiscal year 2002 there have been no E-rate performance  goals and measures at all. In its letter, FCC states that it is actively  working to re-establish performance goals and measures that are  consistent with the Government Performance and Results Act. Our  finding is that FCC never established E-rate goals and measures that  were consistent with the act in the first place, despite our  recommendation in 1998 (and reiterated in 1999) to do so. In a  multibillion-dollar program now entering its eighth funding year, this is  a serious management deficiency.
In its letter, FCC notes that it needs to seek comment from stakeholders  regarding performance measures. GAO’s guidance on implementing the  Results Act supports this approach: Stakeholder involvement in  defining goals is particularly important in a political environment, and  the involvement of Congress is indispensable. While we understand the  time involved in crafting useful performance goals and measures and  complying with the notice-and-comment requirements of the  Administrative Procedure Act, we urge FCC to move as quickly as  possible in its efforts. 6. Our draft report included appeals numbers that were different from  those in FCC’s letter. It appears that our numbers included waiver  requests as well as appeals. We have changed our report to reflect the  numbers included in FCC’s letter, which, according to FCC, are current  as of January 1, 2005. This numerical difference does not reflect any  material change. 7. We are encouraged that FCC has begun redirecting staff and hiring  additional attorneys to Universal Service Fund oversight and program  management, including the resolution of E-rate appeals. It is a  particularly positive step that FCC has established a measurable goal of  resolving all backlogged E-rate appeals by the end of calendar year  2005.
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to those named above, Carol Anderson-Guthrie, Andy Clinton,  Derrick Collins, Sandra DePaulis, Edda Emmanuelli-Perez, Chad Factor,  Moses Garcia, Lynn Gibson, Karen O’Conor, Mindi Weisenbloom, and  Alwynne Wilbur made key contributions to this report.