Telecommunications: Concerns Regarding the Structure and FCC's Management of the E-Rate Program
Published: 2005-03-16T00:00:00

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, 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. This testimony is based on GAO's February 2005 report GAO-05-151 , which reviewed (1) the effect of the current structure of the E-rate program on FCC's management of the program, (2) FCC's development and use of E-rate performance goals and measures, and (3) the effectiveness of FCC's program oversight mechanisms.
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 fraud, waste, and abuse within the program. According to FCC officials, oversight of the program is primarily handled through agency rulemaking procedures, beneficiary audits, and appeals decisions. FCC's rulemakings have often lacked specificity and led to a distinction between FCC's rules and the procedures put in place by the program administrator--a distinction that has affected the recovery of funds for program violations. While audits of E-rate beneficiaries have been conducted, FCC has been slow to respond to audit findings and make full use of them to strengthen the program. In addition, the small number of audits completed to date do not provide a basis for accurately assessing the level of fraud, waste, and abuse occurring in the program, although the program administrator is working to address this issue. According to FCC officials, there is also a substantial backlog of E-rate appeals due in part to a shortage of staff and staff turnover. Because appeal decisions establish precedent, this slowness adds uncertainty to the program.

section_title: Letter
paragraphs: We are pleased to be here to discuss the results of our recently completed  review of the Federal Communications Commission’s (FCC) universal  service program for schools and libraries. As you know, the  Telecommunications Act of 1996 expanded the concept of universal  service to include assistance to schools and libraries in acquiring  telecommunications and Internet services; the act charged FCC with  establishing the universal service discount mechanism for eligible schools  and libraries. The commission, in turn, created a large and ambitious  program that became commonly known as the “E-rate” program, and set  the annual funding cap for the program at $2.25 billion. FCC designated  the Universal Service Administrative Company (USAC), a private, not-for- profit corporation established under FCC’s rules, to carry out the day-to- day operations of the E-rate program. FCC retains responsibility for  overseeing the program’s operations and ensuring compliance with the  commission’s rules.
Since 1998, the E-rate program has committed more than $13 billion in  funding to help schools and libraries across the nation acquire  telecommunications and Internet services. Eligible schools and libraries  can apply annually to receive support, which can be used for specific  eligible services and equipment such as telephone services, Internet access  services, and the installation of internal wiring and other related items.  Recently, however, allegations have been made that some E-rate  beneficiaries (schools and libraries) and service providers (e.g.,  telecommunications and network equipment companies) have  fraudulently obtained, wasted, or abused E-rate funding. In May 2004, for  example, one service provider involved in E-rate projects in several states  pleaded guilty to bid rigging and wire fraud and agreed to pay more than  $20 million in criminal fines, civil payments, and restitution.
In light of ongoing concerns about the E-rate program, we were asked to  review various aspects of the program. Specifically, we evaluated (1) the  effect of the current structure of the E-rate program on FCC’s  management of the program, (2) FCC’s development and use of  performance goals and measures in managing the program, and (3) the  effectiveness of FCC’s oversight mechanisms—rulemaking proceedings,  beneficiary audits, and reviews of USAC decisions (appeals)—in managing  the program.
Our testimony is based on a report, being released today, containing the  results of our review and recommendations for improving FCC’s  management and oversight of the E-rate program. In summary, we found  the following:    FCC established E-rate as a multibillion-dollar program operating under an  organizational structure unusual to the federal government, but never  conducted a comprehensive assessment to determine which federal  requirements, policies, and practices apply to the program, to USAC, and  to the Universal Service Fund itself. As a result, FCC has struggled with  determining which fiscal and accountability requirements apply to the  E-rate program. We believe that issues exist concerning the applicability of  certain statutes and the extent to which FCC has delegated certain  functions for the E-rate program to USAC—issues that FCC needs to  explore and resolve.
FCC has not developed meaningful performance goals and measures for  assessing and managing the program. As a result, there is no way to tell  whether the program has resulted in the cost-effective deployment and use  of advanced telecommunications services for schools and libraries.
FCC’s program oversight mechanisms contain weaknesses that limit FCC’s  management of the program and its ability to understand the scope of  waste, fraud, and abuse within the program. For example, FCC’s  rulemakings have often lacked specificity and have led to situations where  important USAC administrative procedures have been deemed  unenforceable by FCC. There is also a significant backlog of E-rate  appeals that adds uncertainty to the program and impacts beneficiaries.
FCC has taken some important steps, particularly in recent months, to  address some of the areas of concern discussed in our report.  Nevertheless, we believe that FCC has not done enough to proactively  manage and provide a framework of government accountability for the  multibillion-dollar E-rate program.
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. The Telecommunications Act of  1996 broadened the scope of universal service to include, among other  things, support for schools and libraries. The act instructed the  commission to establish a universal service support mechanism to ensure  that eligible schools and libraries have affordable access to and use of  certain telecommunications services for educational purposes. 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 a 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.
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. USAC reviews all of the applications and related forms and issues  funding commitment decision letters. Generally, it is the service provider  that seeks reimbursement from USAC for the discounted portion of the  service rather than the school or library.
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 that USAC’s issuance  of commitment letters constitutes obligations for purposes of the act.  However, FCC’s conclusions concerning the status of the Universal  Service Fund raise further issues relating to the collection, deposit,  obligation, and disbursement of those funds—issues that FCC needs to  explore and resolve comprehensively rather than in an ad hoc fashion as  problems arise.
The Telecommunications Act of 1996 neither specified how FCC was to  administer universal service to schools and libraries nor prescribed the  structure and legal parameters of the universal service mechanisms to be  created. To carry out the day-to-day activities of the E-rate program, FCC  relied on a structure it had used for other universal service programs in  the past—a not-for-profit corporation established at FCC’s direction that  would operate under FCC oversight. However, the structure of the E-rate  program is unusual in several respects compared with other federal  programs:    FCC appointed USAC as the permanent administrator of the Universal  Service Fund, 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  the Office of Management and Budget (OMB), the monies are maintained  outside of Treasury accounts by USAC and some of the monies have been  invested. 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.
Since the inception of the E-rate program, FCC has struggled with  identifying the nature of the Universal Service Fund and the managerial,  fiscal, and accountability requirements that apply to the fund. In the past,  FCC’s Inspector General (IG) has noted that the commission could not  ensure that Universal Service Fund activities were in compliance with all  laws and regulations because the issue of which laws and regulations were  applicable to the fund was unresolved. During our review, FCC officials  told us that the commission has substantially resolved the IG’s concerns  through recent orders, including FCC’s 2003 order that USAC begin  preparing Universal Service Fund financial statements consistent with  generally accepted accounting principles for federal agencies (GovGAAP)  and keep the fund in accordance with the United States Government  Standard General Ledger. While it is true that these steps and other FCC  determinations should provide greater protections for universal service  funding, FCC has addressed only a few of the issues that need to be  resolved. In fact, staff from the FCC’s IG’s office told us that they do not  believe the commission’s GovGAAP order adequately addressed their  concerns because the order did not comprehensively detail which fiscal  requirements apply to the Universal Service Fund and which do not.
FCC maintains that it has undertaken a timely and extensive analysis of  the significant legal issues associated with the status of the Universal  Service Fund and has generally done so on a case-by-case basis. We  recognize that FCC has engaged in internal deliberations and external  consultations and analysis of a number of statutes. However, we do not  believe that this was done in a timely manner or that it is appropriate to do  this on a case-by-case basis, which puts FCC and the program in the  position of reacting to problems as they occur rather than setting up an  organization and internal controls designed to ensure compliance with  applicable laws.
As you know, Mr. Chairman, a problem with this ad hoc approach was  dramatically illustrated with regard to the applicability of the  Antideficiency Act to the Universal Service Fund. In October 2003, FCC  ordered USAC to prepare financial statements for the Universal Service  Fund, as a component of FCC, consistent with GovGAAP, which FCC and  USAC had not previously applied to the fund. In February 2004, staff from  USAC realized during contractor-provided training on GovGAAP  procedures that the commitment letters sent to beneficiaries (notifying  them whether their funding is approved and in what amount) might be  viewed as “obligations” of appropriated funds. If so viewed, and if FCC  also found the Antideficiency Act—which does not allow an agency or  program to make obligations in excess of available budgetary resources— to be applicable to the E-rate program, then USAC would need to  dramatically increase the program’s cash-on-hand and lessen the  program’s 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. 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.
As we explain more fully in our report, Mr. Chairman, we agree with FCC’s  determinations that the Universal Service Fund is a permanent  appropriation subject to the Antideficiency Act and that its funding  commitment decision letters constitute recordable obligations of the  Universal Service Fund. However, there are several significant fiscal law  issues that remain unresolved. We believe that where FCC has determined  that fiscal controls and policies do not apply, the commission should  reconsider these determinations in light of the status of universal service  monies as federal funds. For example, in view of its determination that the  fund constitutes an appropriation, FCC needs to reconsider the  applicability of the Miscellaneous Receipts Statute, 31 U.S.C. § 3302, which  requires that money received for the use of the United States be deposited  in the Treasury unless otherwise authorized by law. 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. We are encouraged that  FCC just announced that it has contracted with the National Academy of  Public Administration (NAPA) for NAPA to study and explore alternative  models to the current organizational and governance structure of the  Universal Service Fund program. We believe this study will go a long way  toward addressing the concerns outlined in our report and we look  forward to seeing the results of NAPA’s efforts.
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.
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.
For fiscal years 2000 through 2002, FCC’s goals focused on achieving  certain percentage levels of Internet connectivity during a given fiscal year  for schools, public school instructional classrooms, and libraries.  However, the data that FCC used to report on its progress was limited to  public schools (thereby excluding two other major groups of  beneficiaries—private schools and libraries) and did not isolate the impact  of E-rate funding from other sources of funding, such as state and local  government. This is a significant measurement problem because, over the  years, the demand for internal connections funding by applicants has  exceeded the E-rate funds available for this purpose by billions of dollars.  Unsuccessful applicants had to rely on other sources of support to meet  their internal connection needs. Even with these E-rate funding  limitations, there has been significant growth in Internet access for public  schools since the program issued its first funding commitments in late  1998. At the time, according to data from the Department of Education’s  National Center for Educational Statistics (NCES), 89 percent of all public  schools and 51 percent of public school instructional classrooms already  had Internet access. By 2002, 99 percent of public schools and 92 percent  of public school instructional classrooms had Internet access. Yet  although billions of dollars in E-rate funds have been committed since  1998, adequate program data was not developed to answer a fundamental  performance question: How much of the increase since 1998 in public  schools’ Internet access has been a result of the E-rate program, as  opposed to other sources of federal, state, local, and private funding?
Performance goals and measures are used not only to assess a program’s  impact but also to develop strategies for resolving mission-critical  management problems. However, management-oriented goals have not  been a feature of FCC’s performance plans, despite long-standing  concerns about the program’s effectiveness in key areas. For example, two  such goals—related to assessing how well the program’s competitive  bidding process was working and increasing program participation by low- income and rural school districts and rural libraries—were planned but  not carried forward.
FCC did not include any E-rate goals for fiscal years 2003 and 2004 in its  recent annual performance reports. The failure to measure effectively the  program’s impact on public and private schools and libraries over the past  7 years undercuts one of the fundamental purposes of the Results Act: to  have federal agencies adopt a fact-based, businesslike framework for  program management and accountability. The problem is not just a lack of  data for accurately characterizing program results in terms of increasing  Internet access. Other basic questions about the E-rate program also  become more difficult to address, such as the program’s efficiency and  cost-effectiveness in supporting the telecommunications needs of schools  and libraries. For example, a review of the program by OMB in 2003  concluded that there was no way to tell whether the program has resulted  in the cost-effective deployment and use of advanced telecommunications  services for schools and libraries. OMB also noted that there was little  oversight to ensure that the program beneficiaries were using the funding  appropriately and effectively. In response to these concerns, FCC staff  have been working on developing new performance goals and measures  for the E-rate program and plan to finalize them and seek OMB approval in  fiscal year 2005.
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 or making changes to  existing rules, as well as providing the detailed guidance that USAC  requires to effectively administer the program. FCC carries out this  responsibility through its rulemaking process. FCC’s E-rate rulemakings,  however, have often been broadly worded and lacking specificity. Thus,  USAC has needed to craft the more detailed administrative procedures  necessary to implement the rules. However, in crafting administrative  procedures, USAC is strictly prohibited under FCC rules from making  policy, interpreting unclear provisions of the statute or rules, or  interpreting the intent of Congress. We were told by FCC and USAC  officials that USAC does not put procedures in place without some level of  FCC approval. We were also told that this approval is sometimes informal,  such as e-mail exchanges or telephone conversations between FCC and  USAC staff. This approval can come in more formal ways as well, such as  when the commission expressly endorses USAC operating procedures in  commission orders or codifies USAC procedures into FCC’s rules.  However, two problems have arisen with USAC administrative  procedures.
First, although USAC is prohibited under FCC rules from making policy,  some USAC procedures deal with more than just ministerial details and  arguably rise to the level of policy decisions. For example, in June 2004,  USAC was able to identify at least a dozen administrative procedures that,  if violated by the applicant, would lead to complete or partial denial of the  funding request even though there was no precisely corresponding FCC  rule. The critical nature of USAC’s administrative procedures is further  illustrated by FCC’s repeated codification of them throughout the history  of the program. FCC’s codification of USAC procedures—after those  procedures have been put in place and applied to program participants— raises concerns about whether these procedures are more than ministerial  and are, in fact, policy changes that should be coming from FCC in the  first place. Moreover, in its August 2004 order (in a section dealing with  the resolution of audit findings), the commission directs USAC to annually  “identify any USAC administrative procedures that should be codified in  our rules to facilitate program oversight.” This process begs the question  of which entity is really establishing the rules of the E-rate program and  raises concerns about the depth of involvement by FCC staff with the  management of the program.
Second, even though USAC procedures are issued with some degree of  FCC approval, enforcement problems could arise when audits uncover  violations of USAC procedures by beneficiaries or service providers. The  FCC IG has expressed concern over situations where USAC administrative  procedures have not been formally codified because commission staff  have stated that, in such situations, there is generally no legal basis to  recover funds from applicants that failed to comply with the USAC  procedures. In its August 2004 order, the commission attempted to clarify  the rules of the program with relation to recovery of funds. However, even  under the August 2004 order, the commission did not clearly address the  treatment of beneficiaries who violate a USAC administrative procedure  that has not been codified.
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. 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, several important audit findings from the 1998 program year  were only recently resolved by an FCC rulemaking in August 2004.
In its August 2004 order, the commission concluded that a standardized,  uniform process for resolving audit findings was necessary, and directed  USAC to submit to FCC a proposal for resolving audit findings. FCC also  instructed USAC to specify deadlines in its proposal “to ensure audit  findings are resolved in a timely manner.” 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 waiver 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 effort using a statistical approach that  would allow them to project the audit results to all E-rate beneficiaries.  Thus, at present, no one involved with the E-rate program has a basis for  making a definitive statement about the amount of waste, fraud, and abuse  in the program. Of the various groups of beneficiary audits conducted to  date, all were of insufficient size and design to analyze the amount of fraud  or waste in the program or the number of times that any particular  problem might be occurring programwide. At the time we concluded our  review, FCC and USAC were in the process of soliciting and reviewing  responses to a Request for Proposal for audit services to conduct  additional beneficiary audits.
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. At the time of our review there was a  substantial appeals backlog at FCC (i.e., appeals pending for longer than  90 days). Out of 1,865 appeals to FCC from 1998 through the end of 2004,  approximately 527 appeals remain undecided, of which 458 (25 percent)  are backlog appeals.
We were told by FCC officials that some of the backlog is due to staffing  issues. FCC officials said they do not have enough staff to handle appeals  in a timely manner. FCC officials also noted that there has been frequent  staff turnover within the E-rate program, which adds some delay to  appeals decisions because new staff necessarily take time to learn about  the program and the issues. Additionally, we were told that another factor  contributing to the backlog is that the appeals have become more  complicated as the program has matured. Lastly, some appeals may be tied  up if the issue is currently in the rulemaking process.
The appeals backlog is of particular concern given that the E-rate program  is a technology program. An applicant who appeals a funding denial and  works through the process to achieve a reversal and funding two years  later might have ultimately won funding for outdated technology. FCC  officials told us that they are working to resolve all backlogged E-rate  appeals by the end of calendar year 2005.
In summary, Mr. Chairman, we remain concerned that FCC has not done  enough to proactively manage and provide a framework of government  accountability for the multibillion-dollar E-rate program. Lack of clarity  about what accountability standards apply to the program causes  confusion among program participants and can lead to situations where  funding commitments are interrupted pending decisions about applicable  law, such as happened with the Antideficiency Act in the fall of 2004.  Ineffective performance goals and measures make it difficult to assess the  program’s effectiveness and chart its future course. Weaknesses in  oversight and enforcement can lead to misuse of E-rate funding by  program participants that, in turn, deprives other schools and libraries  whose requests for support were denied due to funding limitations.
To address these management and oversight problems identified in our  review of the E-rate program, our report recommends that the Chairman  of FCC direct commission staff to (1) conduct and document a  comprehensive assessment to determine whether all necessary  government accountability requirements, policies, and practices have been  applied and are fully in place to protect the E-rate program and universal  service funding; (2) establish meaningful performance goals and measures  for the E-rate program; and (3) develop a strategy for reducing the E-rate  program’s appeals backlog, including ensuring that adequate staffing  resources are devoted to E-rate appeals.
section_title: Scope and Methodology
paragraphs: We conducted our work from December 2003 through December 2004 in  accordance with generally accepted government auditing standards. We  interviewed officials from FCC’s Wireline Competition Bureau,  Enforcement Bureau, Office of General Counsel, Office of Managing  Director, Office of Strategic Planning and Policy Analysis, and Office of  Inspector General. We also interviewed officials from USAC. In addition,  we interviewed officials from OMB and the Department of Education  regarding performance goals and measures. OMB had conducted its own  assessment of the E-rate program in 2003, which we also discussed with  OMB officials. We reviewed and analyzed FCC, USAC, and OMB  documents related to the management and oversight of the E-rate  program. The information we gathered was sufficiently reliable for the  purposes of our review. See our full report for a more detailed explanation  of our scope and methodology.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions that you or other Members of the  Subcommittee may have.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further information about this testimony, please contact me at (202)  512-2834. Edda Emmanuelli-Perez, John Finedore, Faye Morrison, and  Mindi Weisenbloom also made key contributions to this statement.
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