Telecommunications: Application of the Antideficiency Act and Other Fiscal Controls to FCC's E-Rate Program
Published: 2005-04-11T00:00:00

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. 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, including the applicability of the Antideficiency Act, (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 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 the Universal Service Administrative Company, and to the Universal Service Fund itself. FCC has addressed these issues on a case-by-case basis, but this has put FCC and the E-rate 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. With regard to the Antideficiency Act, we agree with FCC's conclusions that the Universal Service Fund is a permanent indefinite appropriation, is subject to that act, and that the issuance of E-rate funding commitment letters constitutes obligations for purposes of the act. We believe that Congress should consider either granting the Universal Service Fund a two- or three-year exemption from the Antideficiency Act or crafting a limited exemption that would provide management flexibility. For example, Congress could specify that FCC could use certain receivables or assets as budgetary resources. These more limited solutions would allow time for the National Academy of Public Administration to complete its study of the Universal Service Fund program and report its findings to FCC. Congress and FCC could then comprehensively assess, based on decisions concerning the structure of the program, which federal requirements, policies, and practices should apply to the fund and to any entities administering the program. It could then be determined whether a permanent and complete exemption from the Antideficiency Act is warranted. 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. In its 2003 assessment of the program, OMB concluded that there was no way to tell whether the program has resulted in the cost-effective deployment and use of advanced telecommunications services. In response, FCC is working with OMB on developing new E-rate measures. According to FCC officials, oversight of the program is primarily handled through agency rulemaking procedures, beneficiary audits, and appeals decisions. FCC's rulemakings, however, have often lacked specificity, which has affected the recovery of funds for program violations. FCC has also been slow to respond to beneficiary audit findings and make full use of them to strengthen the program. In addition, the small number of these audits completed to date do not provide a basis for accurately assessing the level of fraud, waste, and abuse occurring in the program. According to FCC officials, there is also a substantial backlog of E-rate appeals.

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 and to discuss specifically the  applicability of the Antideficiency Act to the program. 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 February 2005, we issued a report on 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 today is based on this report, which contains a fuller  discussion of 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 the  Universal Service Administrative Company, and to the Universal Service  Fund itself. FCC has addressed these issues on a case-by-case basis, but  this has put FCC and the E-rate 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.
With regard to the Antideficiency Act, we agree with FCC’s conclusions  that the Universal Service Fund is a permanent indefinite appropriation, is  subject to that act, and that the issuance of E-rate funding commitment  letters constitutes obligations for purposes of the act. We believe that  Congress should consider either granting the Universal Service Fund a  two- or three-year exemption from the Antideficiency Act or crafting a  limited exemption that would provide management flexibility. For  example, Congress could specify that FCC could use certain receivables or  assets as budgetary resources. These more limited solutions would allow  time for the National Academy of Public Administration to complete its  study of the Universal Service Fund program and report its findings to  FCC. Congress and FCC could then comprehensively assess, based on  decisions concerning the structure of the program, which federal  requirements, policies, and practices  should apply to the fund and to any  entities administering the program. It could then be determined whether a  permanent and complete exemption from the Antideficiency Act is  warranted.
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. To address the management and  oversight problems we have identified, we recommended in our report  that the Chairman of FCC: (1) conduct and document a comprehensive  assessment to determine whether all necessary government accountability  requirements, policies, and practices have been applied and are fully in  place to protect the E-rate program and universal service funding; (2)  establish meaningful performance goals and measures for the E-rate  program; and (3) develop a strategy for reducing the E-rate program’s  appeals backlog, including that adequate staffing resources are devoted to  E-rate appeals.
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 only recently began to address a few of these  issues.
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.
section_title: FCC’s Decision on the Antideficiency Act Should Be Addressed in a Broader Context
paragraphs: FCC has made some determinations concerning the status of the Universal  Service Fund and the fiscal controls that apply. For example, FCC has  concluded that the Universal Service Fund is a permanent indefinite  appropriation subject to the Antideficiency Act and that its issuance of  funding commitment letters constitutes recordable obligations for  purposes of the act. We agree with FCC’s determinations on these issues,  as explained in detail in appendix I. 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.
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 Antideficiency 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.
Additional issues that remain to be resolved by FCC include whether other  actions taken in the Universal Service Fund program constitute obligations  and the timing 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 that those are properly recorded.
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 (see app. I), 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. federal financial and reporting statutes” (emphasis added) and “relevant portions of the  Federal Financial Management Improvement Act of 1996,” but did not specify which  specific statutes or the relevant portions or further analyze their applicability.  FCC  officials also told us that it was uncertain whether procurement requirements such as the  Federal Acquisition Regulation (FAR) applied to arrangements between FCC and USAC,  but they recommended that those requirements be followed as a matter of policy. investment, and monitoring of program funds offers models for improving  the operation of the Universal Service Fund.
We believe that NAPA’s 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.  Given this important ongoing study and the unresolved  issues mentioned previously, Congress may wish to consider deferring a  decision on permanently exempting the Universal Service Fund from the  Antideficiency Act at this time and instead consider either granting the  fund a two- or three-year exemption from the Antideficiency Act or  crafting a limited exemption that would provide management flexibility.  For example, Congress could specify that FCC could use certain  receivables or assets as budgetary resources. These more limited solutions  would allow time for the National Academy of Public Administration to  complete its study of the Universal Service Fund program and report its  findings to FCC. Congress and FCC could then comprehensively assess,  based on decisions concerning the structure of the program, which federal  requirements, policies, and practices  should apply to the fund and to any  entities administering the program. It could then be determined whether a  permanent and complete exemption from the Antideficiency Act is  warranted.
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.
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.
This concludes my prepared statement. I would be pleased to respond to  any questions that you or other Members of the Committee 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.
section_title: Appendix I: 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.
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 the 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 Services 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.
What Is the Universal Service Fund?
The precise phrasing of the questions regarding the nature of USF has  varied over the years, including asking whether they are federal funds,  appropriated funds, or public funds and, if so, for what purposes?  While  the various fiscal statutes may use these different terms to describe the  status of funds, we think the fundamental issue is what statutory controls  involving the collection, deposit, obligation, and disbursement of funds  apply to USF.  As explained below, funds that are appropriated funds are  subject, unless specifically exempted by law, to a variety of statutory  provisions providing a scheme of funds controls.  See B-257525, Nov. 30,  1994; 63 Comp. Gen. 31 (1983); 35 Comp. Gen. 436 (1956); B-204078.2, May  6, 1988.  On the other hand, funds that are not appropriated funds are not  subject to such controls unless the law specifically applies such controls.   Thus, we believe the initial question is whether USF funds are  appropriated funds.
FCC has concluded that USF constitutes a permanent indefinite  appropriation.  We agree with FCC’s conclusion.  Typical language of  appropriation identifies a fund or account as an appropriation and  authorizes an agency to enter into obligations and make disbursements  out of available funds.  For example, Congress utilizes such language in  the annual appropriations acts.  See 1 U.S.C. § 105 (requiring regular  annual appropriations acts to bear the title “An Act making   appropriations. . .”).  Congress, however, appropriates funds in a variety of  ways other than in regular annual appropriation acts.  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 telecommunication 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.
Does the Antideficiency Act Apply to USF?
Appropriated funds are subject to a variety of statutory controls and  restrictions.  These controls and restrictions, among other things, limit the  purposes for which they may be used and provide a scheme of funds  control.  See e.g., 63 Comp. Gen. 110 (1983); B-257525, Nov. 30, 1994; 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.
Do the Funding Commitment Decision Letters Issued to Schools  and Libraries Constitute Obligations?
An important issue that arises from the application of the Antideficiency  Act to USF is what actions constitute obligations chargeable against the  fund.  Understanding the concept of an obligation and properly recording  obligations are important because an obligation serves as the basis for the  scheme of funds control that Congress envisioned when it enacted fiscal  laws such as the Antideficiency Act.  B-300480, Apr. 9, 2003.  For USF’s  schools and libraries program, one of the main questions is whether the  funding commitment decision letters issued to schools and libraries are  properly regarded as obligations.  FCC has determined that funding  commitment decision letters constitute obligations.  And again, as  explained below, we agree with FCC’s determination.
Under the Antideficiency Act, an agency may not incur an obligation in  excess of the amount available to it in an appropriation or fund.  31 U.S.C.  § 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.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.