The E-rate program provides eligible schools, school districts, libraries, and consortia with discounts on telecommunications services, Internet access, and data transmission wiring and components used for educational purposes. The program is funded through statutorily mandated payments into the Universal Service Fund by companies that provide interstate and international telecommunications services. Many ir of these companies, in turn, pass on their contribution costs to the subscribers through a line item on subscribers’ telephone bills. FCC capped funding for E-rate at $2.25 billion per year, and program funds are used to cover the program’s administrative costs, including the administrative services performed by USAC and Solix. Eligible schools and libraries may apply annually for program support and will qualify for a discount of 20 to 90 percent on the cost of eligible services, based on indicators of need. Based on the broad direction in the Telecommunications Act of 1996, FCC defined two general types of services that are eligible for E-rate discounts: Priority 1 services 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 first priority for the available funds under FCC’s rules. Priority 2 services include the 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. USAC annually updates a list of specific, eligible products and services and the conditions under which they are eligible. The list is 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. FCC delegated to USAC the day-to-day administration of the E-rate program, subject to FCC rules and under FCC oversight. USAC has, in turn, subcontracted certain key aspects of E-rate program operations to Solix. The primary responsibilities of Solix staff include reviewing applications and processing invoices for reimbursement. About 20,000 schools and libraries applied for E-rate support in 2009, although Solix processes about 40,000 applications per funding year because schools and libraries can submit multiple applications in a single funding year (e.g., an applicant can submit separate applications for Priority 1 and Priority 2 services). The process for participating in the E-rate program, which is lengthy and complicated, is summarized in the following four main steps: 1. The applicant submits to USAC a description of the services for which the applicant is requesting a discount so that service providers (i.e., telecommunications companies or equipment providers) can bid through open competition. The applicant must also confirm that it has developed an approved technology plan that provides details on how it intends to integrate technology into its educational goals and curricula, as well as how it will pay for the costs of acquiring and maintaining the technology. 2. Once the service description has been available to potential bidders for 28 days, the applicant selects the most cost-effective service provider from the bids received and submits a Form 471 (Description of Services Ordered and Certification) application for the discounted service, which is processed by Solix. The applicant then calculates its discount level, certifies that it is an eligible entity, and certifies that it will abide by applicable laws and regulations. 3. Solix reviews the application and issues a funding commitment decision letter to the applicant and selected service provider. The decision letter indicates whether the application has been approved or denied. 4. If approved, the applicant—now a beneficiary—must confirm that services have started or have been delivered. After the service provider has submitted a bill, either the beneficiary or the service provider submits a reimbursement request form for Solix to process. The beneficiary or service provider can then be compensated from the Universal Service Fund for the discounted portion of the services. See appendix II for an overview of the E-rate program application, invoice, and reimbursement processes. A memorandum of understanding (MOU) between FCC and USAC assigns USAC the responsibility for implementing effective internal controls over the operation of the E-rate program. Through the MOU, FCC directed USAC to implement an internal control structure for the E-rate program that is consistent with the standards and guidance contained in the Office of Management and Budget’s (OMB) Circular No. A-123, Management’s Responsibility for Internal Control, including a methodology for assessing, documenting, and reporting on internal controls. In February 2008, USAC engaged an independent public accounting firm to assist in establishing a formal internal control review program. USAC placed responsibility for implementing this program under the direction of a senior manager of internal controls, a position it created in late 2008. USAC also created a Senior Management Council to support the implementation of the program. Under the MOU, USAC is also responsible for periodically reporting on its internal control activities to FCC’s Office of Managing Director and Office of Inspector General. FCC also directed USAC to implement a comprehensive audit program to (1) ensure that Universal Service Fund monies are used for their intended purposes; (2) ensure that all Universal Service Fund contributors make the appropriate contributions in accordance with FCC rules; and (3) detect and deter potential waste, fraud, and abuse. To ensure compliance with FCC rules, USAC has periodically selected beneficiaries to audit. USAC also has conducted audits that were used to develop statistical estimates of error rates under the Improper Payments Information Act of 2002 (IPIA). From 2001 through 2006, USAC and other auditors conducted approximately 350 audits of E-rate program beneficiaries as part of the oversight of the E-rate program. Since 2006, USAC has conducted approximately 760 audits for both oversight and IPIA purposes. USAC is responsible for responding to the results of findings from audits of program beneficiaries, including recommendations to recover funds that may have been improperly disbursed to beneficiaries. We have produced a number of E-rate reports since the program was implemented in 1998, some of which addressed internal controls. In 2000, we reported that the application and invoice review procedures needed strengthening and made recommendations to improve internal control processes. In response to our recommendations and the findings of other parties that have reviewed USAC’s processes, such as the FCC Inspector General, USAC has implemented a number of internal controls. In 2005, we reported that FCC had been slow to address problems raised by audit findings and had not made full use of the audit findings as a means to understand and resolve problems within the program. During the course of our work, in 2004, FCC concluded that a standardized, uniform process for resolving audit findings was necessary and directed USAC to submit to FCC a proposal for resolving all audit findings and recommendations. FCC also instructed USAC to specify deadlines in its proposals “to ensure audit findings are resolved in a timely manner.” USAC submitted its Proposed Audit Resolution Plan to FCC in October 2004. Although FCC has not formally approved the plan, since 2004 it has periodically issued directives and guidance to USAC to clarify aspects of the plan’s design and implementation. A number of our reports have also found that the E-rate program lacks performance goals and measures, and we have recommended that FCC define annual, outcome-oriented performance goals for the program that are linked to its overarching goal of providing services to schools and libraries. While FCC has undertaken various efforts to address this recommendation, it has not yet established meaningful goals and performance measures for the E-rate program. In our 2009 E-rate report, we found that some nonparticipating schools and libraries elected not to apply to the program because they considered the process to be too burdensome (e.g., too complex, time-consuming, or resource-intensive). We also found that a substantial amount of funding was denied because applicants did not correctly carry out application procedures. In March 2010, an FCC task force released a National Broadband Plan that acknowledges the complexity inherent in the E-rate program and recommends, among other things, that FCC streamline the application process. For example, the National Broadband Plan notes that E-rate’s procedural complexities can sometimes result in applicant mistakes and unnecessary administrative costs as well as deter eligible entities from applying. In the National Broadband Plan, the task force suggests that FCC can ease the burden on applicants for Priority 1 services that enter into multiyear contracts, and that applications for small amounts could be streamlined with a simplified application similar to the “1040EZ” form the Internal Revenue Service makes available to qualifying taxpayers. In May 2010, as part of its efforts to begin implementing the vision of the National Broadband Plan, FCC released a Notice of Proposed Rulemaking (NPRM) to solicit comments about potential changes to the E-rate program. FCC stated in the NPRM that it is time to reexamine what is working well in the current program and what can be improved On September 23, 2010, FCC adopted an order (the order had not yet been released at the time our report was issued) in response to the May 2010 NPRM. According to FCC’s press release, the order improves the ability of schools and libraries to connect to the Internet in the most cost-effective way, allows schools to provide Internet access to the local community after school hours, indexes the E-rate funding cap to inflation, and streamlines the E-rate application process. .