Telecommunications: Long-Term Strategic Vision Would Help Ensure Targeting of E-rate Funds to Highest-Priority Uses
Released: 2009-04-27T00:00:00

Letter

Background

The Telecommunications Act of 1996 sets forth the nation’s goals for providing affordable telecommunications services to consumers nationwide, particularly to populations such as individuals living in rural, isolated, or high-cost areas, or those with low incomes; schools and libraries; and rural health care facilities. The act instructed FCC to establish a universal service support mechanism to ensure that eligible schools and libraries have affordable access to and use of certain telecommunications services for educational purposes. In addition, Congress authorized FCC to “establish competitively neutral rules to enhance, to the extent technically feasible and economically reasonable, access to advanced telecommunications and information services for all public and nonprofit elementary and secondary school classrooms . . . and libraries. . . .” Based on this direction, and following the recommendations of the Federal-State Joint Board on Universal Service, FCC established the Schools and Libraries Universal Service Support Mechanism, commonly referred to as the E-rate program. FCC designated USAC to carry out the day-to-day activities of the program, which is funded from statutorily mandated payments to the Universal Service Fund. FCC oversees USAC and the program through rule-making proceedings, enforcement actions, audits of participants, and reviews of funding decision appeals from participants. FCC also reviews USAC’s procedures, including its process for reviewing applications for funding; meets frequently with USAC staff; and provides guidance letters to USAC. A memorandum of understanding between FCC and USAC, first executed in June 2007 and updated in September 2008, as well as FCC orders and rules, set forth the roles and responsibilities of the two parties in the management, oversight, and administration of the program.

The E-rate program provides schools, school districts, libraries, and consortia with discounts on telecommunications services, Internet access, and data transmission wiring and components used for educational purposes—that is, activities that are integral, immediate, or proximate to the education of students or to the provision of services to library patrons, such as activities that occur on library or school property. Based on indicators of need, eligible schools and libraries qualify for a discount of 20 percent to 90 percent on the cost of services and must show that they can pay for the undiscounted portion of services. Indicators of need include the percentage of students eligible for free or reduced-price lunches through the National School Lunch Program and whether the entity is located in a rural area. Table 1 shows the discount percentages entities are eligible for based on these indicators. Eligible entities may apply annually for program support.

Based on the broad direction in the act, FCC defined two general types of services that are eligible for E-rate discounts: Priority 1 services, which include telecommunications services, such as local, long-distance, and wireless (e.g., cellular) telephone services, as well as data links (e.g., T-1 lines) and Internet access services, such as Web hosting and e-mail services—all of which receive priority for funding under FCC’s rules; and Priority 2 services, which include cabling, components, routers, switches, and network servers that are necessary to transport information to individual classrooms, public rooms in a library, or eligible administrative areas, as well as basic maintenance of internal connections, such as the repair and upkeep of eligible hardware and basic technical support.

Lists of specific eligible services, including the conditions under which they are eligible, are updated annually by USAC, finalized by FCC after a public comment period, and posted on USAC’s Web site. Items ineligible for E-rate discounts include, among other things, end-user products and services such as Internet content, Web site content maintenance fees, end- user personal computers, and end-user software.

All eligible and properly completed requests for Priority 1 services are funded up to the available amount of funding. Priority 2 services, herein referred to as internal connections, are funded with what remains after commitments have been made for all approved requests for Priority 1 services in a given year. Requests for internal connections services are prioritized by the discount level of the applicant, with funding going first to applicants with the highest discount level—90 percent—and then to applicants at each descending discount level until the funding is exhausted; in 2007, for example, internal connections funding was provided to applicants with discount levels down to 81 percent. Because of this prioritization, available funding may be exhausted before all eligible and properly completed requests for internal connections are funded. According to FCC, the rules of priority equitably provide the greatest assurance of support to schools and libraries with the greatest level of economic disadvantage. The rules ensure that all applicants filing during a time period specified by USAC receive at least some support in the event that the amounts requested for support exceed the total support available in a funding year.

The steps applicants must carry out to obtain program support—including the application, review, invoicing, and reimbursement processes—are illustrated in figure 1. This figure is followed by a more detailed description of each of these steps.

Prior to submitting an application for E-rate support, an applicant must complete several steps, including the following: Prepare a technology plan. The applicant conducts a technology assessment and develops a technology plan to ensure that any services it obtains will be used effectively and that it can provide for the nondiscounted portion of services as well as for the goods or services that are ineligible for E-rate funding.

Open competitive bidding. The applicant identifies products and services needed to implement its technology plan and submits a form to USAC describing the desired products and services. USAC posts completed forms on its Web site so that service providers can view and consider bidding on these requests. To participate in the E-rate program, service providers must obtain identification numbers from USAC and certify compliance with program rules in each year that they provide services under the program.

Select a service provider and enter into a service agreement. At least 28 days after the applicant’s description of requested services is posted to USAC’s Web site, an applicant may enter into an agreement with a provider of eligible services.

After completing these steps, the applicant submits its application for program support to USAC. USAC accepts applications during a filing window, the exact dates for which change somewhat each year but are generally from November to Feburary. The information the applicant provides on this form, includes, but is not limited to, the following: the discount percentage to which the applicant is entitled, calculated using a worksheet provided on the application; detailed information about each requested service or product and its cost—some services have both eligible and ineligible components, in which case the applicant must calculate the portion of the service eligible for an E-rate discount, a process referred to as cost allocation; and certifications that, among other things, the applicant has adequately budgeted for the undiscounted portion of services, as well as related ineligible services—such as computers, training, software, and electrical capacity—needed to make effective use of the services ordered.

USAC reviews requests for funding to determine whether applicants have properly complied with program rules and requirements; this process is known as the program integrity assurance (PIA) review. Reviewers may ask applicants to submit additional information, such as verification of a contract award date or enrollment and income data for newly constructed schools. Some applications undergo “selective” reviews, which require more detailed documentation that the applicant has complied with the rules. Applicants are chosen for selective review based on defined criteria to test compliance with specific FCC rules. Additionally, applicants that fail selective review in a given year must go through selective review the following year.

Based on the outcome of the application review, USAC issues funding commitment decision letters stating how much funding the applicant may receive based on eligible services provided within the funding year deadlines. Funding commitments are conditional upon applicants meeting additional requirements as described later. Funding commitments may be for the full amount requested or less than the amount requested, or funding may be denied entirely for reasons such as competitive bidding violations or requests for ineligible services. Funding requests for Priority 2 services may also be denied if the applicant’s discount percentage falls below the annual discount percentage threshold for internal connections.

After eligible services have been delivered, service providers or applicants submit invoices to USAC to request reimbursement for the discounted portion of services. Before seeking reimbursement for the discounted portion of services from USAC, applicants must confirm (1) that the services are planned to be or are being provided; (2) approval of their technology plans by a state or other authorized body, if required; and (3) compliance with the Children’s Internet Protection Act (CIPA) and the Neighborhood Children’s Internet Protection Act, if required. Under these acts, if required, schools and libraries receiving support for Internet access, internal connections, or basic maintenance must certify that they have in place certain Internet safety policies and technology protection measures. Funding requests for telecommunications services do not require certification of CIPA compliance. Service providers may apply the discount rate to the applicant’s bill before sending it to the applicant, in which case the applicant pays only the nondiscounted portion and the service provider invoices USAC directly to obtain reimbursement. Alternatively, applicants may pay for services in full and submit a form to USAC to request reimbursement. Regardless of which invoicing method is used, USAC reviews the invoices and disburses payments for universal service support to service providers; under the latter method, service providers remit the discounted amount to the applicant. To ensure compliance with FCC rules, both USAC and FCC’s Office of Inspector General periodically select a sample of participants to audit and conduct site visits of beneficiaries.

Requests for E-rate Funding Consistently Exceed the Cap, and Increased Commitments for Priority 1 Services, Combined with Significant Undisbursed Funds, Limit Funding for Priority 2 Services

Each year from 1998 through 2007, the amount of funding applicants requested exceeded the amount available, but the amounts requested have generally declined since 2002, with most of the decline driven by fewer requests for Priority 2 services—the wiring and components needed for data transmission. Although requests for Priority 1 services—that is, telecommunications and Internet access—have remained roughly level since 2002, commitments have increased, at least in part, because applicants received a greater proportion of the funds they requested. The increasing amounts committed for Priority 1 services has the effect of decreasing the amounts available for Priority 2 services, which are funded only after all eligible Priority 1 services requests are satisfied. Regarding disbursements, a significant proportion of committed funds are not paid out to beneficiaries. Funding that is not disbursed in the year for which it was committed is carried over to the next funding year and made available for new commitments, but undisbursed funding is still problematic because it prevents some applicants from receiving funding in a given year.

Requests Consistently Outweigh Available Funding

From 1998 through 2007, applicants requested a total of about $41 billion in E-rate funding—174 percent of the $23.4 billion in program funding available during that time. Further, in each of these years, the amounts requested exceeded the amounts available. However, the amounts requested have generally declined since 2002. Figure 2 shows the annual funding levels and the amount of E-rate funding requested for Priority 1 services and Priority 2 services for each year from 1998 through 2007.

Since 2002, the number of applicants and the amounts requested for Priority 1 services have been stable. As figure 3 shows, the number of applicants for telecommunications services has been generally stable since 1998, and the number of applicants for Internet access, after showing an increase the first few years of the program, has been roughly level since 2002. From 2002 through 2007, the amounts requested for Priority 1 services have also been relatively stable.

In contrast, the number of applicants and amounts requested for Priority 2 services have declined for the past several years, accounting for most of the decline in the overall amount of funding requested. The amount of funding requested for Priority 2 services declined 50 percent from 2002 through 2007. (See fig. 4.) The ratio of funding requested for Priority 2 services to that requested for Priority 1 services has also shifted significantly. From 1998 through 2002, funding for Priority 2 services was sought at a rate of 2.3 to 1 over funding for Priority 1 services, while from 2003 through 2007, this ratio was 1.4 to 1.

The following factors may help explain the decrease in requests for Priority 2 services (internal connections).

In 1999, the second funding year, Priority 2 requests were funded down to the 20 percent discount level, which means that all eligible requests could be funded. As a result, according to USAC, many entities with lower discounts applied the following years, hoping that the Priority 2 cutoff point would be similarly low; this is consistent with the dramatic increase in the number of applicants and amount requested in 2000. But the cutoff point in the following 3 years was in the 80 percent range, and, as a result, according to USAC officials, there was a gradual drop- off in Priority 2 requests from entities with lower discounts. According to FCC, entities with low discount levels stopped applying for Priority 2 funding because they knew that their requests would not receive funding.

A second factor is an FCC rule implemented in 2005 that limited applicants’ receipt of Priority 2 funding to 2 out of every 5 years, reducing the number of applicants for these services in a given year. FCC adopted this rule in order to make funding for internal connections available to more eligible schools and libraries on a regular basis.

The emphasis on Priority 1 services is likely to continue, according to our analysis of survey responses on future information technology goals. We asked respondents about a number of goals related to telephone and Internet connectivity and equipment needed to make use of such connectivity; items in the survey included both those eligible for E-rate discounts and those not eligible. Our analysis of responses to this question shows that participants are somewhat more focused on goals related to maintaining existing information technology services than on those related to adding new capabilities. For instance, we estimate that providing telephone services is a goal for 96 percent of participants and providing access to the Internet is a goal for 91 percent to 94 percent of participants; in contrast, installing or upgrading wiring and components needed for Internet or network access is a goal for 73 percent to 74 percent of participants. Similarly, when we asked what participants’ highest-priority information technology goals were, the E-rate-eligible expenses cited most often were providing (1) telephone services, (2) additional bandwidth to locations already equipped with Internet access, and (3) Internet access for student or library patron use. According to our analysis of survey responses, the highest-priority goal of participants is increasing the number of or replacing existing computers for student or library patron use but the E-rate program does not cover either.

While the E-rate program’s statutory purpose is to help schools and libraries obtain advanced telecommunication services, it is not clear whether the growing emphasis on Priority 1 services and the corresponding decline in emphasis on Priority 2 services represent the most efficient and effective use of the program resources. As the Office of Management and Budget (OMB) noted in a 2005 assessment of the E- rate program, given the increase in schools’ and libraries’ level of Internet connectivity, it is no longer clear that the program serves an existing need. Similarly, it is difficult to determine whether the program’s funding structure—including the priority rules and the discount matrix, which contributes to the trends in funding—is the best way to distribute funding in a manner consistent with the program’s intent. As we discuss below, FCC does not have specific, outcome-oriented performance goals or long- term goals for the program, and therefore the agency does not have a basis on which to determine whether the growing emphasis on Priority 1 services is appropriate. FCC’s rule-making proceeding on universal service reform, which is discussed in more detail in the following section, has been ongoing since 2005, but FCC has not made a determination—either as part of this proceeding or otherwise—as to what changes, if any, should be made to the overall structure of the program to better achieve the goals of the act.

Increased Commitments for Priority 1 Services Leave Less Funding for Priority 2 Services

Similar to the trend in funding requests, funding commitments also show a growing emphasis on Priority 1 services. During the first years of the program, more funding was committed for Priority 2 services than for Priority 1 services, but this trend reversed in 2004 and continued through 2007, as figure 5 shows. Although commitments for Priority 2 services increased in 2007, they were outweighed by commitments for Priority 1 services by 64 percent.

From 1999 through 2007, the amounts committed annually for telecommunications services increased each year for a total increase of 79 percent, and the amounts committed annually for Internet access nearly doubled. The increase in amounts committed for Priority 1 services is a result of individual applicants receiving a greater proportion of the funding they request, and not a result of an increasing number of requests because, as noted earlier, the number of requests for these services has not been growing at a substantial rate. As figure 6 shows, the proportion of requested funding that applicants receive as a commitment has been increasing, with about half of applicants receiving 75 percent or more of the amount they requested in 2000 and almost 80 percent of applicants receiving 75 percent or more in 2007.

In addition to the proportion of dollars committed in each of these service categories, the proportion of participants that receive commitments in these categories is important, particularly when considering whether funds are being targeted appropriately. Based on our survey, we estimate that 99 percent of participants have used E-rate to pay for telephone services, and around 75 percent have used E-rate to pay for access to the Internet, whereas 36 percent to 38 percent of participants have used E-rate to install or upgrade wired internal connections and 20 percent to 24 percent have used it to install or upgrade wireless internal connections. USAC stated that it is likely that the lower usage levels for internal connections are due to the inherent limitations that the funding cap places on access to Priority 2 funding.

The increasing success of applicants requesting Priority 1 services has implications for the amount of funding available in future years for Priority 2 services and, accordingly, for how FCC manages the E-rate program and whether the program’s existing structure is still suitable to best meet the current technology needs of schools and libraries. From 2002 through 2007, requests for Priority 1 services averaged 69 percent of available funding; if a substantially higher proportion of such requests had been funded, a smaller percentage of funding would have been available for Priority 2 requests. As it was, from 1998 through 2007, after eligible requests for Priority 1 services were satisfied, only about one- third of all requests for Priority 2 services were able to be funded. Without clearly defined, long-term goals, as well as specific short-term goals, FCC lacks a basis for determining if allocating funding in this manner is appropriate.

A Substantial Amount of Committed Funding Is Not Disbursed

Of the $19.5 billion in E-rate funding committed to schools and libraries between 1998 and 2006, $5.0 billion—more than one-quarter—was not disbursed. Starting in 2003, funds that were not disbursed in a given year were carried forward to subsequent years to be available for commitment, thereby increasing the amount that could be committed beyond the $2.25 billion cap. The amount of committed funding not used includes $2.6 billion for Priority 1 services and $2.4 billion Priority 2 services. Figure 7 shows the percentage of committed funding that was disbursed in each service category each year from 1998 through 2006.

Underuse of committed funding is widespread among participants, but the proportion of participants using a higher percentage of the funds committed to them is rising. Thirty-five percent of participants in 2006 received disbursements for less than 75 percent of the funds that were committed to them, including 9 percent that did not receive any disbursement, but the percentage of participants receiving disbursements for 75 percent or more of their committed funds increased each year from 2001 to 2006 (see fig. 8). Similarly, the proportion of participants that did not receive any disbursement has been declining since 1999. Nonetheless, the overall disbursement rate has not increased because applicants that ultimately do not receive disbursements equal to their funding commitment are receiving relatively larger commitments.

For a number of reasons, participants may not use the full amount of their funding commitment:

Participants’ expenditures are less than the amounts applied for.

Applicants may overestimate costs for Priority 1 services, such as telephone bills and Internet access charges, to ensure sufficient funding for the year. Based on our survey, we found that lower-than- projected costs of Priority 1 services was a major reason for not using all committed funds for an estimated 54 percent of participants and a minor reason for an additional 20 percent of participants. State E-rate officials we met with noted that there is no disincentive to “aim high” in the amount of funding requested. Additionally, some of these officials told us that participants may have planned for Priority 2 services projects or upgrades, but changes in their circumstances resulted in project delays or cancellations. For example, in the time between applying for funding and receiving the commitment decision, the local funds needed for the project may no longer be available or the construction of a new school, including the installation of network wiring, could be delayed.

Participants do not seek reimbursement for the full amount of E-rate eligible expenses because of the complexity of paperwork and lack of staff expertise. According to state E-rate officials we spoke with, bills and invoices from service providers are complicated, and participants do not always identify all items eligible for reimbursement in part because it can be unclear which items are eligible and which are not, particularly for Priority 1 services. Moreover, participants are commonly dealing with multiple applications covering 2 or 3 funding years at once. This complexity makes billing even more complicated because it can be difficult to determine which year’s funding commitment is associated with which bill.

In addition, school and library staff responsible for E-rate administrative tasks face challenges associated with turnover and availability. Based on our survey, we estimate that about one-quarter of the individuals at schools and libraries responsible for E-rate-related tasks have 3 years or less experience with the E-rate program. Several state E-rate officials we met with said that when new employees take over for someone who has left, they may not know it is necessary to apply for reimbursements for the prior year’s commitments. These officials also noted that most individuals who are responsible for E-rate tasks have other primary job responsibilities, and E-rate is not their first priority.

USAC officials also identified a number of factors that can affect the timeliness with which disbursements are made: Priority 2 projects do not have to be completed within the funding year and are subject to a variety of automatic extensions for delivery of service, as well as extensions that can be requested by the applicant.

Larger funding requests may take USAC longer to review, which results in a later funding decision and later installation of the project by the applicant. Moreover, larger projects take longer for the applicant to complete than smaller projects.

Invoice reviews for larger projects may take longer for USAC to complete.

In some instances where heightened scrutiny on applications or law enforcement action is involved, disbursements may be held up for a period of time while the issues are resolved.

As a result of these conditions, according to FCC and USAC officials, earlier funding years have incrementally more funds disbursed than more recent years. Finally, USAC noted that some committed funds are also not disbursed because when a service provider or beneficiary submits invoices for payment, USAC may identify services or uses that are not eligible for reimbursement.

We reported in 2000 on the issue of undisbursed funds in the E-rate program, recommending that FCC take steps to identify factors affecting the rate at which funds are disbursed, and to address these factors. The following actions were taken in response to this recommendation: FCC and USAC agreed to commit funds above the $2.25 billion cap and used this approach between August 2001 and September 2004. FCC then determined that the Antideficiency Act applies to the Universal Service Fund. Once this determination was made, funding commitments were considered obligations for the purposes of the act, and therefore USAC could no longer commit funds above the cap without larger budgetary resources being made available.

In 2003, FCC amended its rules to allow unused funds from prior funding years to be carried forward on an annual basis and be available for commitment the next funding year; previously, these funds were used to reduce the amounts telecommunications companies were required to pay into the Universal Service Fund. FCC has carried forward funding several times since this change was made, including $650 million in June 2007 and $600 million in June 2008.

FCC implemented new policies to provide applicants with flexibilities that were intended to facilitate the use of funds, such as the ability to change service providers or modify the services originally requested.

FCC and USAC established new deadlines for notification of the receipt of services.

Additionally, FCC required USAC to file quarterly estimates of unused funds from prior funding years when it submits its projection of demand for E-rate funds for the upcoming quarter. According to FCC, the estimates are used solely to determine how much funding to carry over. Despite these changes, the proportion of disbursed funds is now lower, on average, than it was when we made the recommendation. The proportion of committed funds that were disbursed from 1998 through 2000 averaged 79 percent but averaged only 72 percent annually from 2001 through 2006 (see fig. 9).

Unused funding is problematic because it has the potential to reduce the number of participants that will receive commitments for Priority 2 services in a given year, even when unused funds are carried over to subsequent years. Because Priority 1 services always receive priority for funding, commitments for Priority 2 services may or may not be made, based on the level of commitments for first-priority services. Carrying over unused funds may result in more funding for Priority 2 services requests, but only if commitments for Priority 1 services remain stable or decline, neither of which is the current trend. Thus, some applicants for Priority 2 services, who would receive funding if aggregate requests and commitments were more consistent with actual disbursements, do not receive funding in the current environment.

We recently reported on the long-standing problem of unused funds in federal grant programs, and although the E-rate program is not technically a grant program, it has features in common with grant programs that make some degree of comparison appropriate. Our report noted that unused balances in expired grant accounts, which may be caused by poorly timed communications with grantees, are noteworthy because they can hinder the achievement of program objectives. We found that when agencies made concerted efforts to address the problem, they were able to decrease the amount of undisbursed funding in expired grant accounts.

The E-rate Application Process Poses Difficulties for Some Entities, Which FCC and USAC Are Taking Steps to Address

The overall participation rate among E-rate-eligible entities is about 63 percent, with public schools participating at a substantially higher rate than private schools and libraries, based on 2005 data. We found that a key circumstance influencing nonparticipation was the burdensome nature of program participation. Among eligible entities that do participate in the program, our survey results show that program participation is generally viewed as becoming easier but that several program requirements are still difficult to complete, particularly those related to the application for funding. Moreover, we found that a substantial amount of funding is denied because applicants do not correctly carry out application procedures. In recent years, FCC and USAC have made changes intended to ease the process of participation for eligible schools and libraries, but the primary focus of FCC remains the prevention and detection of waste, fraud, and abuse in the program.

Participation in E-rate Program Highest among Public Schools in 2005, but Obstacles Exist for Other Entities

The participation rate among all types of E-rate-eligible entities is about 63 percent, based on 2005 data. Public schools—which, at more than 100,000, constitute the largest group of eligible entities—have an overall participation rate of 83 percent, but different types of public schools participate at different rates. Magnet schools participate at a higher than average rate (90 percent), and charter schools, vocational schools, and special education schools all participate at lower than average rates (37 percent, 52 percent, 41 percent, respectively). Private schools have a participation rate of 13 percent, and library systems and library branches participate at a rate of 51 percent and 31 percent, respectively. Figure 10 provides the number of participants and participation rates for public and private schools and library branches and systems.

In terms of characteristics, we found that participating public schools have a higher proportion of students eligible for the national school lunch program, averaging 45 percent, compared with nonparticipating public schools’ average of 36 percent. Participating private schools have more students per teacher (14.1) than nonparticipating private schools (11), but this ratio for public schools—16—is the same regardless of E-rate participation. Participating libraries tend to have more resources than those that do not participate. For example, on average, participating library systems have 18 full-time, paid staff members and operating revenues of $1.28 million, compared with nonparticipants’ average staff size of 11 and operating revenue of $816,000. Participating library systems also have larger service area populations, averaging about 37,000, than nonparticipating library systems, which average just under 26,000. GAO-09-254SP, an electronic supplement to this report, provides additional details on the differences between participating and nonparticipating groups.

Through our analysis of responses from survey respondents who had not participated in the program every year, our interviews with a selection of nonparticipating schools and libraries, and information obtained from beneficiary stakeholder groups, we identified a number of circumstances that influence nonparticipation. These circumstances may not be applicable for all entities that do not participate, but they provide some insight into issues that some nonparticipants are facing, particularly the following: Burdensome nature of program participation. Among the six nonparticipants we spoke with and the comments we received from survey respondents, the predominant reason for nonparticipation was that the application process is too complex, takes too much time, or requires too many resources. Four of the six nonparticipants we spoke with—two libraries and two public schools—cited the difficult or cumbersome nature of the application process as a reason for not participating. Among 28 survey respondents who responded to an open-ended question on reasons for nonparticipation, 5 stated that the program is too complicated or difficult or that their staff did not have enough time for the required tasks; another 4 stated that the amount of time required to participate in the program was not worth the return. Another 5 respondents said they intended to apply for funding but missed an application deadline. Additionally, a 2007 survey of public libraries by the American Library Association (ALA) estimated that 38 percent of libraries did not participate in E-rate because the application process is too complicated.

Internet filtering requirements. Public libraries may be reluctant to participate in E-rate because of the requirement that recipients of Internet access or Priority 2 funding install Internet content filters in accordance with the Children’s Internet Protection Act. Both of the nonparticipating libraries we spoke with cited this as a reason for nonparticipation, and ALA, based on responses to its survey, estimates that 34 percent of libraries do not apply for E-rate because of this requirement. One library official we spoke with said that Internet filters inhibit access to free and open communication. Additionally, according to this official, if adult users want to access blocked information, library workers have to take the time to manually turn filters off and then back on, which creates an administrative burden.

Inability to prove discount percentage. As discussed previously, the primary mechanism participants use for calculating their discount rate is student eligibility for the National School Lunch Program. However, some private schools do not participate in this program and therefore use an alternative FCC-approved method, such as surveying families of children who attend the school to determine the family’s income. One nonparticipating private school we spoke with said it had been unable to collect this information because families may consider the information personal or sensitive and be reluctant to provide it. According to USAC officials, without this information, applicants are entitled to receive the lowest discount rate under the program—20 percent. Representatives of the National Association of Independent Schools also noted the inability to prove discount percentages as one of the main reasons why private schools do not participate in E-rate.

FCC has been aware for some years that a portion of eligible entities do not participate in the E-rate program. For example, in conducting research for our December 2000 report on the E-rate program, we learned from FCC officials that they had finalized a new performance plan for the E-rate program that included tactical goals for increasing participation by urban low-income school districts and rural school districts, as well as rural libraries and libraries serving small areas, all of which had below-average participation rates. During our 2005 review of the E-rate program, when we asked FCC officials about the plan, we were told that it had not been implemented and that none of the FCC staff currently working on E-rate were familiar with the plan.

Most recently, FCC, in its 2007 report and order on the Universal Service Fund, directed USAC to contact a sample of the economically disadvantaged schools and libraries that have not participated in the E- rate program, determine why these schools and libraries do not participate, and assist them, if necessary, at the beginning of the application process. Although USAC has stepped up its outreach efforts, it has not taken steps specifically to target and assist nonparticipants.

Participants’ Views of E-rate Requirements and USAC’s Data on Applicant Errors Highlight Difficulties

Among the schools and libraries that received E-rate funding, we found that many believe program participation has generally gotten easier, rather than harder. We asked survey respondents whether they found participating in the E-rate program easier, more difficult, or about the same as in 2005. Of those who had been participating in the program since that time, we estimate that 15 percent find the program more difficult, with the remaining respondents evenly split between finding the program easier and finding it to be about the same. (See fig. 11.)

While relatively few participants believe that the program has become more difficult, some aspects of the program pose difficulties for participants. When we asked survey respondents about the ease or difficulty of specific aspects of program participation, we identified nine program elements that one-third or more of participants consider to be very or somewhat difficult, as shown in figure 12.

Several of the program elements identified by participants as difficult relate to the application process, including preparing the technology plan and allocating costs by use or location. Notably, a program element found to be among the most difficult was the overall process of preparing the application for funding. The question we asked on the overall process encompassed such elements as determining the eligibility of products and services and complying with competitive bidding requirements.

Participating in the selective review process was found to be difficult by 39 percent of the participants who had experience with this process. Additionally, of participants who had knowledge or experience with preparing appeals of funding decisions, 53 percent found this aspect of the program to be difficult, making it the most difficult element, according to our survey responses.

A number of survey respondents provided comments indicating that although individual program elements may not be overly difficult or time consuming, having such a large number of requirements to fulfill causes difficulty. Comments included the following: “ very complex, lots of steps, lots of time lines to keep track of. A very labor intensive process.” “I can’t stress enough the amount of time that it takes to do E-rate work. It is not just the applications, but the work-load required for the reviews has been very high.” “E-rate has been making the process simpler and easier to file the past few years. It is still a very exhausting process to ensure everything has been done correctly. It seems no matter what precautions you take, errors still exist.”

Also illustrative of the extent to which applicants have difficulty navigating program rules is the rate of funding denials due to applicant error. Each year, applicant errors account for the denial of a substantial amount of E-rate funding. Of the approximately $33 billion in funding that was requested between 1998 and 2007 but that did not result in a funding commitment, about 23 percent was denied because applicants did not correctly carry out application procedures. However, the proportion of funding denied due to applicant error declined from 31 percent in 2002 to 4 percent in 2007.

FCC’s Office of Inspector General has examined participant noncompliance with program rules and, in 2008, reported that such noncompliance puts the E-rate program at risk of significant improper payments. The Inspector General audited funding requests from 260 E- rate participants that received funding in 2007 and found that two of the most frequently identified types of noncompliance resulting in improper payments were disregarding FCC program rules and inadequate documentation USAC noted that in the cases of noncompliance attributable to lack of documentation, there may not be actual noncompliance with the requirements.

A number of resources exist to help participants successfully complete program requirements, both through USAC and through other sources. We asked survey respondents about the usefulness of a number of these resources, as shown in figure 13. The resource most frequently cited as useful was paid consultants, with an estimated 79 percent of respondents who expressed an opinion viewing this resource as very or extremely useful. We also found, however, that the use of a consultant had little impact on the reported ease or difficulty of completing required program elements. Other resources found to be most useful were state E-rate coordinators (67 percent), USAC’s help desk (61 percent), and USAC’s training seminars (57 percent). Notably, for two of the resources applicants found most useful—USAC’s help desk and state E-rate coordinators—a substantial percentage of participants—25 percent and 31 percent respectively—responded “do not know/do not use,” indicating that sufficient outreach may not have been made to inform applicants of these resources.

FCC and USAC Have Taken Steps to Ease the Process for E-rate Applicants and Continue to Consider Program Improvements

In recent years, FCC and USAC have made changes intended to ease the process of participation for eligible schools and libraries, including the following: In response to FCC’s finding that a significant number of applications for E-rate funding were being denied for administrative, clerical, or procedural errors, FCC adopted the Bishop Perry order in May 2006, which stated that USAC must provide all E-rate applicants with an opportunity to cure clerical errors and errors related to FCC rules and orders in their applications. FCC and USAC officials told us that the increased outreach between application reviewers and applicants that the order directed has made a substantial difference in the rate of funding denials.

USAC has increased beneficiary education and outreach efforts by, for example, increasing the number and location of training sessions it provides each fall. USAC officials also told us that they intend to increase the number of staff members dedicated to applicant outreach.

USAC has increased the number of program elements that can be completed online and has revamped the templates that application reviewers use to communicate with applicants to make them easier for individuals without technical backgrounds to understand.

FCC issued a Notice of Proposed Rulemaking (NPRM) in 2005 to broadly examine many aspects of the Universal Service Fund, including the E-rate program. Although this proceeding has been continuing for well more than 3 years, some matters remain open, including ways to improve the administration of the application process for E-rate funding. It is unclear when FCC will take final action on these matters. We reviewed comments submitted in response to the NPRM’s request for possible program improvements to determine what improvements were most commonly suggested and why. We then included questions in our survey to obtain participants’ views on whether they favor or oppose these improvements. Figure 14 shows the changes that were strongly or somewhat favored by more than half of participants. The improvements most favored by participants—each was favored by more than four out of five participants—are as follows: Enable applicants to go online to update their applications, make service substitutions, correct service provider identification numbers, change providers, and cancel or reduce funding.

Streamline the application for Priority 1 services.

Allow the use of a multiyear application for Priority 1 services.

Establish set dates for submitting the application form.

FCC continues to consider comprehensive Universal Service Fund (USF) reform proposals raised in, or in response to, the 2005 NPRM, including ways to simplify the E-rate program; additionally, FCC issued a notice of inquiry in September 2008 to obtain new and refined information from commenters on how to strengthen the management, administration, and oversight of USF programs. FCC officials told us in November 2008 that while they will consider commenters’ suggestions on streamlining the E- rate program, they cannot simplify the program if doing so would weaken internal controls aimed at preventing and detecting waste, fraud, and abuse. We agree that FCC should not simplify the program at the expense of a robust system of internal controls but continue to believe that FCC needs to take action to improve the program rather than simply continuing to gather data.

FCC Lacks Performance Goals for E-rate Program, and Recently Adopted Performance Measures Are Inadequate

FCC Has Made Efforts to ce Develop Performan s for Goals and Measure the E-rate Program, but Has Not Been Su essful cc

Since our first recom mendation in 1998 that,cordance with the Government Perform in ac (GPRA), FCC esta ance and Results Act of 1993 performance goals and measures for the E-rate program, FCC has taken steps in this direction but still has not successfully met this fundamental requirement of resu on lts-o our past findings related omme measures, our rec riented managemen t. Tabl to the E-rate program’s p o ndations, and FCC’s resp e 2 provides details erformance goals and nses.

The Performance Measures That FCC Adopted for the E-rate Program Lack Key Characteristics of Successful Performance Measures

In its August 2007 order, FCC adopted two types of performance measures for the E-rate program—one for Internet connectivity and the other for application processing. This order required that USAC measure, and report to FCC annually, data from program participants on broadband connections provided to program participants, including the numbe hese buildings served by broadband services and the bandwidth of t services. According to FCC, the collection of these data—once analyzed collectively—will allow the agency to determine how the E-rate program can better meet the needs of applicants. With respect to performance measures for application processing, the order required that USAC collect and annually report to FCC, performance data on a number of specific output measures, including the number of applicants served and the discount rate they received, and average dollar amount awarded perfunding request number. A memorandum of understanding between FC and USAC also requires USAC to report to FCC on performance data relative to funding applications. Subsequent to the 2007 order, FC determined that the performance measuremen part, as one element of a performance-based evaluation and compensation program for USAC’s executives. FCC officials told us that these data would also be used to publicly demonstrate USAC’s performance in implementing the E-rate program. t data would be used, in In addition to the performance measurements specific to the E-rate program, the 2007 order sets forth performance measures applicable to th administration of the Universal Service Fund programs, including the accuracy of billing and disbursements, administrative costs, and the amount of improper payments that are recovered, among other th memorandum of understanding further describes the data USAC is to collect related to these administrative performance measures and additionally describes service quality performance measures.

While FCC’s efforts to develop performance measures have the potential to eventually produce better information than is currently available E-rate program’s performance, these measures fall short when compare with the key characteristics of successful performance measures. In pas our pert work, we have found that agencies that are successful in measuring addformance strive to establish measures that demonstrate results, infress important aspects of program performance, and provide usefulormation for decision making. Following is a discussion of these characteristics and the extent to which FCC has fulfilled them in developing measures for E-rate performance.

Measures should be tied to goals and demonstrate the degree to which the desired results are achieved. These program goals should in turn be linked to the overall agency goals. However, the measures that FCC has adopted are not based on such linkage because the agency does not currently have performance goals for the E-rate program. By establishing performance measures before establishing the specific goals it seeks to achieve through the E-rate program, FCC may waste valuable time and resources collecting the wrong data and, consequently, not develop the most appropriate measures for results.

Measures should address important aspects of program performan For each program goal, a few performance measures should be selected that cover key performance dimensions and take different priorities into account. For example, limiting measures to core program activities enables managers and other stakeholders to as accomplishments, make decisions, realign processes, and assign accountability without having an excess of data that could obscure rather than clarify performance issues. Also, performance measures should cover key governmentwide priorities—such as quality, timeliness, and customer satisfaction. The two types of performance measures that FCC adopted appear to address certain key performancece. dimensions—particularly because the connectivity measure centers onthe program’s statutory goal of providing eligible schools and librari es with access to advanced telecommunications services, and, by selecting just two types of measures, there are fewer chances of obscuring the most important performance issues. The measures a appear to take into account such priorities as timeliness and customer satisfaction. However, again, without first setting specific performance goals for the E-rate program, FCC cannot be sure it has adopted the most appropriate performance measures.

Measures should provide useful information for decision making. Performance measures should provide managers with timely, action- oriented information in a format that helps them make decisions that improve program performance. According to FCC officials, the application-processing data that FCC is currently requiring USAC to collect will be used in making compensation decisions for USAC executives, and it will also be available in USAC’s annual report to provide the general public with information on E-rate’s performance in this regard. However, the application-processing data are output, not outcome, oriented, and the intended uses of the data do not include such program-management activities as allocating resources or adopting new program approaches if needed. The limited use of these data, combined with the absence of specific program goals, raises concern about the effectiveness of these performance measures.

Conclusions

In the Telecommunications Act of 1996, Congress said that access to advanced telecommunications for schools and libraries was one of the principles for the preservation and advancement of universal service. In managing the E-rate program, FCC has been guided by how well the program meets the broad, overarching goal of universal service, rather than strategic goals specific to the E-rate program. After 12 years of program operations and committing more than $20 billion in funding awards, FCC has not developed adequate performance goals and measures for the E-rate program. Because we have repeatedly identified the lack of adequate performance goals and measures as a weakness in the E-rate program, we reiterate our 2005 recommendation that FCC define annual, outcome-oriented performance goals for the E-rate program that are linked to the overarching goal of providing universal service. Moreover, we have identified several trends that raise questions about the direction of the program. Is it in the national interest, in an increasingly broadband- oriented world, that a substantial and growing portion of commitments is for telecommunications services such as local and cellular telephone service? Does the program’s high participation rate among public schools, but lower participation rate among private schools and libraries, lead to an acceptable distribution of E-rate funding among eligible entities? Without a strategic vision for the program, and accompanying performance goals and measures, it is difficult for FCC to make informed decisions about the future of the program and more effectively target available funding.

Additionally, we have previously identified the program’s low disbursement rate as an area of concern. In response to a previous recommendation, FCC took steps to increase the disbursement rate. However, we found that the disbursement rate has not increased and a substantial amount of committed funding is not disbursed. In the current E-rate environment, where requests for funding consistently exceed the annual funding cap, many applicants seeking support for Priority 2 services are denied funding, yet a significant amount of funding committed to applicants is not disbursed. If applications and commitments more closely tracked disbursements—that is, if the disbursement rate were higher—some applicants who were denied funding might have received funding for internal connection projects. Moreover, in light of the nation’s current fiscal constraints, it is appropriate to make the most effective possible use of available E-rate funding by minimizing the amounts of committed funds that are not disbursed.

Recommendations for Executive Action

To better provide a foundation for effective management of the E-rate program and to ensure that program funds are used efficiently and in a manner to support desired program outcomes, we recommend that the Federal Communications Commission take the following two actions: Review the purpose and structure of the E-rate program and prepare a report to the appropriate congressional committees identifying FCC’s strategic vision for the program; this report should include the program’s long-term goals, whether the vision can be achieved using the existing program structure (e.g., the priority rules and discount matrix), and whether legislative or regulatory changes are necessary.

Provide information in its annual performance plan on the amount of undisbursed funding associated with commitments that have expired and why these funds were not disbursed, and the actions taken to reduce the amount of undisbursed funding and the outcomes associated with these actions.

Agency Comments and Our Evaluation

We provided a draft of this report to FCC and USAC for their review and comment. FCC and USAC provided technical comments that we incorporated, where appropriate.

In its comments, FCC reiterated the status of its performance goals and measures, as well as the disbursement rate. In particular, FCC noted that it identified goals for the E-rate program when it first adopted the program and recently requested comment on establishing new goals. Further, FCC noted that its performance measures do, or will, meet the three characteristics of successful measures that we identified. We acknowledge the efforts FCC has made to date and recognize the successes of the E-rate program that FCC identified in its letter. However, these efforts are not consistent with successful performance goals and measures. For example, agencies should establish explicit performance goals and measures, use intermediate goals and measures to illustrate progress, and identify projected target levels of performance for multiyear goals. Establishing effective performance goals and measures will help FCC guide the E-rate program. Finally, FCC noted that it has taken action to address the disbursement rate and that our analysis may inaccurately portray a decrease in the disbursement rate since disbursements typically occur over several years and therefore the disbursement rate in the first few years after commitments are made will be lower than in later years. We agree that the disbursement rate in the first few years could be lower than in later years. However, the disbursement rate for every funding year (including 2001 through 2004) remains less than the rate in 2000, when we made our initial recommendation on this issue. Thus, we modified the text to note that the disbursement rate remains low but is not necessarily decreasing. FCC’s full comments and our responses appear in appendix II.

In its comments, USAC noted that it stands ready to work with FCC in developing and reporting additional performance goals and measures. USAC also noted that it is aware of committed funds going unused but that funding years 2005, 2006, and 2007 remain open, implying that the disbursement rate could increase. It further noted that the gap between commitments and disbursements is attributable more to the structure of the program than to USAC’s administration of the program. We agree that the disbursement rate associated with commitments made in 2005 through 2007 may increase, but, as mentioned above, the disbursement rate for every funding year remains less than the rate in 2000, when we made our initial recommendation. Lastly, USAC noted that it intends to evaluate the participant survey data to determine whether it can devise strategies to improve program participation. USAC’s full comments and our responses appear in appendix III.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Chairman of the Federal Communications Commission, and the Chairman of the Universal Service Administrative Company. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at (202) 512-2834 or goldsteinm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to address the following questions: (1) What are key trends in the demand for and use of E-rate funding and what are the implications of these trends? (2) To what extent do eligible entities apply for E-rate funds, how well do applicants navigate the E-rate program’s requirements, and what steps is the Federal Communications Commission (FCC) taking to facilitate program participation? (3) What are FCC’s performance goals and measures for the E-rate program, and how do they compare to key characteristics of successful goals and measures?

The following sections describe the various procedures we undertook to answer these objectives. In addition, we conducted the following background research that helped inform each of our reporting objectives. We reviewed prior GAO reports on E-rate, FCC’s Universal Service Monitoring Reports on the E-rate program, and documentation from FCC and the Universal Service Administrative Company (USAC) on the structure and operation of the E-rate program. We interviewed officials from FCC’s Office of Managing Director, Office of Inspector General, and Wireline Competition Bureau to identify actions undertaken to address previously identified problems and plans to address issues of concern in the program; and officials from USAC’s Schools and Libraries Division, Office of General Counsel, and Office of Finance to collect information on program operations and USAC’s actions to implement prior FCC orders on E-rate. We also interviewed representatives of E-rate stakeholder groups, including the U.S. Bureau of Indian Education, the Council of Great City Schools, the National Association of Independent Schools, the American Library Association, the Education and Library Networks Coalition, the State E-rate Coordinators Alliance, and the E-rate Service Provider Association, as well as individual school districts, libraries, and telecommunications companies.

Analysis of E-rate Program Data

To determine trends in the demand for and use of E-rate funding, we obtained data from the Streamlined Tracking and Application Review System (STARS), which is used to process applications for funding and track information collected during the application review process. When analyzing and reporting on the data we took the limitations on how data can be manipulated and retrieved from STARS into consideration since this system was designed to process applications and not to be a data retrieval system. We assessed the reliability of the data by questioning officials about controls on access to the system and data back-up procedures; additionally, we reviewed the data sets provided to us for obvious errors and inconsistencies. Based on this assessment, we determined that the data were sufficiently reliable to describe broad trends in the demand for and use of E-rate funding.

We obtained the following data—including annual and cumulative figures—for funding years 1998 through 2007:the number and characteristics of applicants, including their entity type, discount level, and location; dollar amounts of funding requests, commitments, denials, and disbursements, by service category; dollar amounts of individual funding requests, commitments, and disbursements, for each applicant for each funding year; and reasons accounting for funding requests not being granted, by dollar amount and by service category.

In order to provide these data, USAC’s subcontractor, Solix, performed queries on the system and provided the resulting reports to us between April 2008 and December 2008. Data from the STARS system can change on a daily basis as USAC processes applications for funding and reimbursement, applicants request adjustments to requested or committed amounts, and other actions are taken. As a result, the data we obtained and reported on reflect the amounts at the time that Solix produced the data and may be somewhat different if we were to perform the same analyses with data produced at a later date.

For the purposes of analyzing and reporting on the amounts of funding for telecommunications services, Internet access, and internal connections that were requested, committed, and disbursed, we collapsed the six service categories in USAC’s database into three categories, as shown in table 3.

Survey of E-rate Beneficiaries

To obtain information on how well E-rate beneficiaries navigate the program’s requirements and procedures, the extent to which they use funds committed to them, and their views on how to improve the program, we conducted a Web-based survey of schools and libraries that participate in the E-rate program (see GAO-09-254SP). To develop the survey questionnaire, we reviewed existing studies about the program, including previous and ongoing GAO work, and interviewed stakeholder groups knowledgeable about the program and issues of concern to beneficiaries. We designed draft questionnaires in close collaboration with a GAO social science survey specialist. We conducted pretests with eight E-rate participants representing different types of applicants—schools, school districts, and libraries—and from rural and urban areas, to help further refine our questions, develop new questions, and clarify any ambiguous portions of the survey. We conducted these pretests in person and by telephone.

We drew our survey sample from Form 471 applications for funding year 2006 that received a commitment greater than zero dollars. For each such application, we obtained data from USAC that included the following: billed entity number (a USAC-assigned, unique identifier assigned to each applicant); entity type; whether the entity is located in an urban, rural, or mixed area; the amount of funds committed for Priority 1 services; and the amount of funds committed for internal connections. Based on these data, we created three stratification variables: Entity type. The four categories of entities eligible to apply for funding are school districts, schools, libraries, and educational consortia.

Educational consortia—which can be made up of any combination of schools, school districts, and libraries—constituted less than 2.5 percent of the applications in the data set we received and were treated as out of scope for this survey. The remaining three entity types were therefore used for our first stratification variable.

Urban/rural status. Applicants must report whether they are located in a rural or urban area because this information is used to determine their discount level. Three percent of the applications were for entities located in a mixed urban-rural area; we excluded this category of applications as out of scope for this survey. The remaining cases were divided between urban and rural for our second stratification variable.

Priority level of funding. The third stratification variable was the priority level for the funding commitments made for each application. To control the funding priority in our sample, we divided the applications into those associated with beneficiaries that requested (1) only Priority 1 services funding, (2) only internal connections funding, and (3) both. We combined funding priority categories (2) and (3) for analysis of survey results.

Analysis of the application data that we received revealed that many beneficiaries filed more than one application with USAC for funding year 2006 and received funding commitments for these requests. As a result, since our sample design was based on applications and not entities, some entities had more than one application selected. We sent these entities only one survey and weighted their responses accordingly.

The number of applications in each of our sample strata and the sample size are shown in table 4.

We used a proportional allocation to assign sample units to strata with an adjustment for strata that had small populations. If the proportional allocation was less than 20, we used either the total number of applications in the stratum if it was less than 20 or set the sample allocation at 20. The stratum sample sizes for our survey were determined to provide a 4 percent overall precision for an attribute measure at the 95 percent level of confidence.

Our goal was to survey individuals who were responsible for completing E-rate-related tasks—such as preparing forms and responding to information requests—for each sampled entity. Our data set included the name and contact information for the individual listed as the contact on Form 471; we sent these individuals the survey. Because some entities employ a consultant to fill out their application and others use a regional or state official who is responsible for multiple entities’ applications, our sample included different entities that shared the same contact person. We contacted these individuals to identify an alternate entity-specific contact to receive the survey. If no such alternate could be found, the original contact was sent one survey for each sample entity. We contacted such individuals to make arrangements for them to fill out the questions that pertained to all applications only once, then separately obtained the application-specific information for each of their surveys. A total of 697 individuals received questionnaires for our sample of 722 Form 471 E-rate applications. The results from our sample are weighted to reflect the population of beneficiaries that use the E-rate program.

We launched our Web-based survey on April 21, 2008, and closed the survey to responses on June 18, 2008. Log-in information was e-mailed to all sampled participants. We sent up to three follow-up e-mail messages to nonrespondents over the next 4 weeks. We then contacted by telephone those who had not completed the questionnaire. We received responses for 543 questionnaires, for an overall response rate of 78 percent.

Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 4 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn.

In addition to sampling errors, the practical difficulties of conducting any survey may introduce nonsampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents, or the types of people who do not respond can introduce unwanted variability into the survey results. We included steps in both the data collection and data analysis stages to minimize such nonsampling errors. As indicated above, we collaborated with a GAO social science survey specialist to design draft questionnaires, and versions of the questionnaire were pretested with eight members of the surveyed population. In addition, we provided a draft of the questionnaire to FCC and USAC for their review and comment. From these pretests and reviews, we made revisions as necessary. We examined the survey results and performed computer analyses to identify inconsistencies and other indications of error. A second, independent analyst checked the accuracy of all computer analyses.

E-rate Participation Analysis

To determine the percentage of eligible entities that participate in the E- rate program and the characteristics of program participants and nonparticipants, we performed a matching analysis using data from the Department of Education and USAC. We obtained three databases from the U.S. Department of Education’s National Center for Education Statistics (NCES): Common Core of Data (CCD). CCD is a program of NCES that annually collects data about all public schools, public school districts, and state education agencies in the United States. We used the most recent complete data set for individual public schools, which was for the 2005-2006 school year.

Private School Universe Survey (PSS). The target population for PSS consists of all private schools in the United States that meet the NCES definition of private schools. Data from the 2005-2006 school year were used.

Public Libraries Survey (PLS). PLS is designed as a universe survey and provides a national census of public libraries and their public service outlets, as well as data on these entities. Data from 2005 were used.

We assessed the reliability of these data sets by (1) reviewing NCES’s technical and methodological reports on these studies and (2) examining the data for obvious inconsistencies. We determined that the data were sufficiently reliable to use as sources of summary statistics about program participants and nonparticipants.

We also used data from USAC’s STARS system for the 2005 funding year. USAC provided us with data on each entity that was included on applications for the 2005 funding year. We received two files from USAC— one for schools and one for libraries—that included the entity’s name, NCES identification number, address, city, state, and ZIP code. The school file also included information on whether each school was public or private; we used this information to separate public from private schools. We assessed the reliability of the STARS data system as discussed previously. Additionally, we examined the data set that we obtained for matching purposes to identify inconsistencies or obvious errors. We found that some of the data fields were not fully completed. For example, there were a number of records with missing data, incomplete data, and incorrect NCES identification numbers. However, we concluded that the incomplete nature of some of the records did not significantly affect our intended purpose of identifying program participants, and we therefore determined that the data were sufficiently reliable.

We matched USAC’s public school data against CCD, USAC’s private school data against PSS, and USAC’s library data against the PLS from NCES. To identify which entities in the NCES data sets were E-rate participants, we used SAS, a statistical software application, to compare USAC records with NCES records, matching first on identification numbers, then on combinations of entity names, states, cities, ZIP codes and street addresses. When this procedure could find no exact match, we used an SAS function that measures asymmetric spelling distance between words (SPEDIS), to determine the likelihood that entity names from the two data sets did match and to generate possible pairs of matching entities. The possible matches for an entity were written to a spreadsheet, which we reviewed manually to select the best possible match. For both computerized and manual matches, we assessed a random sample of the matches to calculate error rates for the analysis. Based upon our sample results, we estimate the error rate for matching records between the USAC and the Department of Education’s databases as 1.7 percentage points. Unless otherwise noted, all of the percentage estimates cited in the report, which are based upon matching of entity records, have an overall error rate of 3.4 percentage points or less at the 95 percent level of confidence. Having identified whether each entity in the NCES data sets participated in the E-rate program, we then ran summary statistics on data fields of interest for the groups of participants and nonparticipants.

Nonparticipant Interviews

To better understand why eligible entities do not participate in the E-rate program, we obtained anecdotal, nongeneralizeable information through interviews with six nonparticipants. These entities included library systems, public school districts, and private schools and were located in both urban and rural areas. We identified nonparticipant interviewees by asking the State E-rate Coordinators Alliance for the names of schools that they knew did not participate and by searching in USAC’s online database of program participants for entities that were not listed has having applied for funding. We asked interviewees about their reasons for not participating in the E-rate program, potential future changes to the program that could result in their participaton, and sources of funding that they use to pay for information technology and telecommunications expenses.

Document Review and Interviews with FCC and USAC on Performance Goals and Measures

We reviewed the Telecommunications Act of 1996 to determine what the performance goals and measures for the E-rate program are and how the measures compare to key characteristics of successful performance measures. We then reviewed our past products and other literature on results-oriented management and effective practices for setting performance goals and measures. We compared this information to the program goals and measures that FCC set forth in agency documentation—including an order, proposed rulemaking, strategic plan, and performance and accountability reports. We also reviewed the Office of Management and Budget’s Program Assessment Rating Tool 2003 report on the E-rate program’s effectiveness and its 2007 update to this report. In addition, we interviewed officials from FCC’s Wireline Competition Bureau, Office of Managing Director, and Office of Inspector General, and officials from USAC to obtain their views on and plans to implement E- rate performance goals and measures.

We conducted this performance audit from July 2007 to March 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Comments from the Federal Communications Commission

The following are GAO’s comments on the Federal Communications Commission’s letter dated March 10, 2009.

GAO’s Comments

1. We acknowledge the efforts that FCC has made to develop performance goals; however, the goals FCC identified are not consistent with successful performance goals. For example, agencies should establish explicit performance goals and measures, use intermediate goals and measures to illustrate progress, and identify projected target levels of performance for multiyear goals. 2. We are not suggesting that the E-rate program may no longer serve an existing need; this was the conclusion of the Office of Management and Budget (OMB). Rather, we note that without performance goals, FCC does not have a basis on which to determine whether the growing emphasis on Priority 1 services is appropriate. We cite OMB’s conclusion to emphasize that effective performance goals would help FCC guide the E-rate program. 3. We agree that FCC’s performance measures address one characteristic of successful measures—measures should address important aspects of program performance. However, FCC’s measures do not currently meet the remaining two characteristics, as FCC noted that the measures “will be tied to goals” and “will provide useful information to decision-making.” 4. We agree that the disbursement rate for more-recent funding years may increase due to applicants seeking extensions, which can take time to resolve. As a result, we modified the report to note that the disbursement rate remains low but is not necessarily decreasing. However, the disbursement rate for every funding year, including 2001 through 2004, remains less than the rate in 2000 when we made our initial recommendation to address the low disbursement rate.

Appendix III: Comments from the Universal Service Administrative Company

The following are GAO’s comments on the Universal Service Administrative Company’s letter dated March 6, 2009.

GAO’s Comments

1. We agree that the disbursement rate for funding years 2005, 2006, and 2007 may increase as applicants receive delivery of services and submit invoices. However, the disbursement rate for every funding year, including 2001 through 2004, remains less than the rate in 2000, when we made our initial recommendation to address the low disbursement rate. 2. We are not suggesting that USAC’s administration of the E-rate program is a significant contributing factor to the low disbursement rate. Rather, we identify several factors that appear to contribute to the low disbursement rate, including the incentives inherent in the program. For example, we note that under current program rules, applicants have an incentive to overestimate costs for Priority 1 services. These and other factors that we identify in the report likely contribute to the low disbursement rate.

Appendix IV: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

In addition to the contact named above, Michael Clements and Faye Morrison, Assistant Directors; Eli Albagli; Carl Barden; Jennifer Clayborne; Elizabeth Curda; Abe Dymond; Elizabeth Eisenstadt; Michele Fejfar; Simon Galed; Heather Halliwell; Kristen Jones; Ying Long; John Mingus; Josh Ormond; Betty Ward-Zukerman; Mindi Weisenbloom; and Crystal Wesco made key contributions to this report.

Related GAO Products

Telecommunications: Greater Involvement Needed by FCC in the Management and Oversight of the E-Rate Program. GAO-05-151. Washington, D.C.: February 9, 2005.

Schools and Libraries Program: Update on E-rate Funding. GAO-01-672. Washington, D.C.: May 11, 2001.

Schools and Libraries Program: Update on State-Level Funding by Category of Service. GAO-01-673. Washington, D.C.: May 11, 2001.

Schools and Libraries Program: Application and Invoice Review Procedures Need Strengthening. GAO-01-105. Washington, D.C.: December 15, 2000.

Schools and Libraries Program: Actions Taken to Improve Operational Procedures Prior to Committing Funds. GAO/RCED-99-51. Washington, D.C.: March 5, 1999.

Telecommunications and Information Technology: Federal Programs That Can Be Used to Fund Technology for Schools and Libraries. GAO/T-HEHS-98-246. Washington, D.C.: September 16, 1998.

Schools and Libraries Corporation: Actions Needed to Strengthen Program Integrity Operations before Committing Funds. GAO/T-RCED-98-243. Washington, D.C.: July 16, 1998.

Telecommunications: Court Challenges to FCC’s Universal Service Order and Federal Support for Telecommunications for Schools and Libraries. GAO/RCED/OGC-98-172R. Washington, D.C.: May 7, 1998.

Telecommunications: FCC Lacked Authority to Create Corporations to Administer Universal Service Programs. GAO/T-RCED/OGC-98-84. Washington, D.C.: March 31, 1998.