[House Prints 109-E]
[From the U.S. Government Publishing Office]
109th Congress Committee
COMMITTEE PRINT
1st Session Print 109-E
_______________________________________________________________________
WASTE, FRAUD, AND ABUSE CONCERNS WITH THE E-RATE PROGRAM
__________
A STAFF REPORT
ADOPTED BY THE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON ENERGY AND COMMERCE
U.S. HOUSE OF REPRESENTATIVES
109th CONGRESS
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
November 2005
U.S. GOVERNMENT PRINTING OFFICE
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COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
RALPH M. HALL, Texas JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida Ranking Member
Vice Chairman HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia BART GORDON, Tennessee
BARBARA CUBIN, Wyoming BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
HEATHER WILSON, New Mexico BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING, ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman GENE GREEN, Texas
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey JAY INSLEE, Washington
MIKE ROGERS, Michigan TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee
Bud Albright, Staff Director
David Cavicke, Deputy Staff Director and General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Oversight and Investigations
ED WHITFIELD, Kentucky, Chairman
CLIFF STEARNS, Florida BART STUPAK, Michigan
CHARLES W. ``CHIP'' PICKERING, Ranking Member
Mississippi DIANA DeGETTE, Colorado
CHARLES F. BASS, New Hampshire JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon JAY INSLEE, Washington
MIKE FERGUSON, New Jersey TAMMY BALDWIN, Wisconsin
MICHAEL C. BURGESS, Texas HENRY A. WAXMAN, California
MARSHA BLACKBURN, Tennessee JOHN D. DINGELL, Michigan,
JOE BARTON, Texas, (Ex Officio)
(Ex Officio)
(ii)
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Letter of Transmittal
U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON ENERGY AND COMMERCE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
November 2, 2005
To the Members of the Committee on Energy and Commerce:
It is our pleasure to forward to you for your information
the bipartisan report entitled ``Waste, Fraud, and Abuse
Concerns in the E-rate Program,'' unanimously adopted by the
Subcommittee on Oversight and Investigations on October 18,
2005. This report details the Subcommittee's two-year
investigation of the E-rate program, which is the Universal
Service funding mechanism that subsidizes the provision of
advanced telecommunications services for schools and libraries.
The Subcommittee's investigation revealed a well-
intentioned program that nevertheless has suffered from poor
implementation from the very start. These structural weaknesses
made it particularly susceptible to waste, fraud, and abuse--
specific cases of which were examined during four Subcommittee
hearings on the E-rate program. To be sure, Congress shares
some responsibility for the program's flaws because the program
is founded on a very general statutory basis. Looking forward,
more time should be devoted to crafting the legislative
framework of this program to ensure it achieves the goals that
we want it to achieve.
It is clear to us, as we consider the work laid out in this
report, that many E-rate program weaknesses must be addressed
legislatively to avoid waste and misuse. In light of this, we
are transmitting this report to the full Energy and Commerce
Committee, and commend it particularly to our colleagues on the
Telecommunications and Internet Subcommittee, so that our work
can assist the Committee in crafting the appropriate
legislative proposals. The report provides a bipartisan list of
findings, and a set of eleven principles that should help guide
our deliberations over program reform. We appreciate your
giving it your careful consideration.
Sincerely,
Ed Whitfield, Chairman
Bart Stupak, Ranking Member
Subcommittee on Oversight and Investigations
(iii)
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C O N T E N T S
__________
Page
I. Introduction and Overview................................. 1
Key Findings................................................. 1
Recommendations.............................................. 3
II. Background............................................... 5
The E-rate Program........................................... 5
The Subcommittee Investigation............................... 8
III. Case Studies and other work of the Investigation........ 10
A. E-rate and the Puerto Rico Department of Education........ 10
Findings from PRDOE-focused hearing and related investigation 13
B. San Francisco Unified School District's E-rate Experience,
and NEC BNS................................................ 19
Findings from NEC-focused hearings and related investigation. 22
C. The Denial of $500 million in applicant requests
associated with IBM........................................ 24
Findings from IBM-focused hearing and related investigation.. 26
D. E-rate related investigation of Chicago Public Schools.... 31
Findings from Chicago Public Schools related investigation... 34
E. E-rate related investigation of Atlanta Public Schools.... 38
F. GAO Work Requested by the Committee....................... 41
GAO Recommendations.......................................... 46
(iv)
WASTE, FRAUD, AND ABUSE CONCERNS WITH
THE E-RATE PROGRAM
Bipartisan Staff Report for the Use of
The Committee on Energy and Commerce
October 18, 2005
I. INTRODUCTION AND OVERVIEW
In 1996, Congress mandated that schools and libraries
receive discounted telecommunications services through the
newly codified Universal Service Fund. In turn, the Federal
Communications Commission (FCC) proceeded to implement that
mandate, commonly known today as the E-rate program, through a
private non-profit corporation known as the Universal Service
Administrative Company (USAC). Within USAC, the Schools and
Libraries Division (SLD) is responsible for the daily
administration of the E-rate program. Between 1998 and the
present time, USAC has ``committed'' over $15 billion and
disbursed over $10 billion, to discount the costs of eligible
telecommunications projects for schools and libraries
throughout the country.
While E-rate has arguably benefited the nation's children,
the program falls far short as an example of efficiency,
effectiveness, or integrity. In fact, the Subcommittee on
Oversight and Investigations' in-depth examination of the E-
rate program uncovered serious instances of waste, fraud, and
abuse. This work highlighted instances in which all program
participants--the FCC, USAC, schools, and vendors--have
neglected their respective obligations and responsibilities
under the program's rules.
Key Findings
The Subcommittee's investigation developed along several
directions, culminating in three public ``case study'' style
hearings and the compilation of significant additional
information regarding the E-rate programs at Chicago Public
Schools and Atlanta Public Schools. Further information was
developed, at the direction of the Subcommittee, through a
comprehensive review by the Government Accountability Office
(GAO), which was reviewed in a fourth public hearing on the E-
rate program. Key findings from the Subcommittee investigation
include:
The FCC crafted an ambitious multi-billion-dollar funding
program, utilizing an ``unusual'' organizational
structure, and then never conducted a comprehensive
assessment to determine which federal requirements,
policies, and practices apply to the E-rate program, to
USAC, or to the Universal Service Fund itself.
Although more than $15 billion has been ``committed'' by the
E-rate program during the past 8 years, the FCC did not
develop performance goals and measures that could be
utilized to assess the specific impact of the funds and
to improve the management of the program.
The FCC's three key oversight mechanisms for the E-rate
program--rulemaking procedures, beneficiary audits, and
reviews of USAC decisions (i.e., appeals decisions)--
are not sufficient to manage the program.
Over the course of three program years, more than $100
million in E-rate funds were provided to one large
school district after it certified that its E-rate
funded network would be operational and put to
educational use, when, in fact, it was never made
operational or put to any significant educational use.
The FCC's failure to help resolve the above school district's
enormous mismanagement and planning problems
contributed to the waste of E-rate funds, and reflects
the underlying deficiencies of the FCC's program
management and oversight.
Currently, the E-rate program does not require beneficiaries
of large sums of E-rate funds to comply with standard
federal oversight and accounting requirements, such as
the Single Audit Act.
Some school districts have acquired goods and services
through the E-rate program without using a formal
bidding process, contrary to both the program's rules
and local regulations, even though those districts
might have otherwise followed the E-rate Form 470
application process.
A fundamental weakness in the program involves technology
planning. Some school districts have received E-rate
related goods and services without an adequate
technology plan. More broadly, E-rate's current
technology plan requirements provide no meaningful
protection from ``gold-plating'' (procurement of
technology goods and services far beyond reasonable
school district needs and resources).
The FCC Inspector General (IG) cannot provide adequate
assurance that the program is sufficiently protected
against waste, fraud, and abuse. Furthermore, the FCC
Wireline Competition Bureau (WCB) does not know the
magnitude of potential fraud.
The FCC IG faces several obstacles in implementing effective
independent oversight of the program, including
insufficient resources to conduct audits and provide
audit support to law enforcement investigations.
The certifications contained on E-rate program application
documents apparently have little effect in deterring
some school officials and some vendors from taking
advantage of the program's weaknesses. In one case
examined by the Subcommittee, school officials and
several employees of service providers forged documents
and signatures as part of a conspiracy to defraud the
E-rate program.
Weak E-rate program competition requirements and inadequate
oversight allowed a group of vendors to completely
manipulate the competitive process for E-rate program
goods and services, without USAC detecting the fraud.
Weaknesses in the E-rate program application process and
related certifications permitted non-competitive
procurement of E-rate program goods and services around
the country in Funding Years 2001 and 2002. The flawed
application process resulted in the waste of millions
of dollars in one school district in Funding Year 2001,
and almost led to the waste of tens of millions more
among 21 other large school districts in Funding Year
2002. Today, the FCC continues to allow anti-
competitive or insufficiently competitive procurement
practices, due to remaining weaknesses in the
application process.
The FCC only recently established guidelines for debarment of
vendors and applicants, but set standards of program
abuse too high, requiring first a civil judgment or
criminal conviction against the participant before a
suspension may occur and debarment can be considered.
The E-rate program's ambiguous rules and procedures, and
extensive delay in the distribution of funding, create
significant confusion among applicants and vendors.
This confusion and delay tends to increase program
waste.
E-rate program fund disbursements generally go directly to
vendors, rather than being disbursed through the
program applicants (the schools and libraries), which
lessens applicants' control over work performed and
diffuses responsibility and accountability for program
integrity; although this structure stems from the FCC's
interpretation of the underlying statutory language, it
nevertheless makes oversight and enforcement more
difficult.
In sum, the Subcommittee's investigative work reveals a
well-intentioned program that nonetheless is extremely
vulnerable to waste, fraud, and abuse, is poorly managed by the
FCC, and completely lacks tangible measures of either
effectiveness or impact. This bipartisan staff report
recommends certain principles that should guide any effort to
improve the E-rate program. These principles are substantially
based upon the results of the Subcommittee's investigation and
staff opinion that effective improvements may likely require
significant legislative reform.
Recommendations:
Based upon the results of the E-rate program investigation,
staff identified several overarching principles that should
guide program reform:
1) The FCC and USAC must conduct more rigorous oversight. To
accomplish the necessary rigorous oversight and strong
program auditing, the FCC and USAC require adequate
personnel resources.
2) The E-rate program must have concrete and achievable goals
and measures of effectiveness, so that Congress can
assess the specific impact and value of program
spending. Among a number of key issues, Congress should
consider: (a) whether the FCC is the proper agency to
manage and oversee the E-rate program; (b) whether the
largely arbitrary $2.25 billion annual price tag is
appropriately set; (c) whether control and management
of this large sum is appropriately delegated to a non-
governmental entity; and, (d) the extent to which E-
rate program discounts should cover technological
infrastructure and related services, i.e., whether the
program covers too much, or should expand to subsidize
key technology components that are not currently
eligible, such as computers, software, and teacher
training.
3) In the interest of ensuring the maximum return on E-rate
program funds, the E-rate program must have a mechanism
to ensure that ``gold-plating'' is minimized. That is,
schools should request and receive only what they
genuinely will put to effective use, and technology
plans should not be an empty exercise. The FCC and USAC
should develop a mechanism to verify that applicants'
requests match legitimate education-technology needs;
this will require revising the technology planning
process and requirements.
Among other things, complete and approved E-rate program
technology planning documents should be the required
first step before posting a Form 470. These planning
documents cannot be broad-brush, but rather need to:
(a) account for the current state of the supporting
physical infrastructure at each school for which
funding is requested; (b) specify exactly how the
technology will be implemented in support of the
curriculum, including details of the necessary level of
teacher training and the school district's plan for
providing such training; and (c) include the district's
specific budget commitments for infrastructure,
training, and maintenance, as well as the computers and
other complementary equipment required to make use of
the E-rate program funded internal connections being
requested.
4) Reform should incorporate the GAO's recent recommendations
for the FCC, including that the FCC: (a)
comprehensively determine which federal accountability
requirements apply to E-rate; (b) establish meaningful
E-rate program performance goals and measures; and (c)
take steps to reduce its backlog of appeals. The FCC
must take these necessary and reasonable actions in
order to begin to address the problems identified by
this Subcommittee, the FCC IG, and the GAO. In
addition, Congress should consider directing the GAO to
continue its examination of the E-rate program,
focusing on the issues relating to the complexities
posed by the FCC's organizational relationship with
USAC and provide guidance to Congress and the FCC on
the questions that flow from this organizational
structure.
5) The E-rate program requires an organizational structure that
encourages greater accountability of all program
participants--including vendors, consultants, schools,
USAC, and the FCC Wireline Competition Bureau.
6) The FCC must acquire, and promptly provide to Congress, some
tangible measure of the extent and scope of program
waste, fraud, and abuse, i.e., statistically
significant auditing must be undertaken immediately and
accomplished before the end of this Congress. The
necessary resources should be made available to ensure
an appropriate number of beneficiary audits can be
performed to make an accurate assessment of program
waste, fraud, and abuse.
7) School districts should hold a greater ``stake'' in their
applications for E-rate program discounts. This may be
accomplished in a number of ways, including several
possibilities that were suggested during the
Subcommittee's hearings, such as: (a) requiring higher
co-payments by the school districts; (b) drafting
certifications for vendors and school officials that
include tougher criminal penalties; (c) restructuring
the program into a reimbursement paradigm (i.e., direct
reimbursement to schools and libraries); or (d)
conducting verification and inspection of E-rate
program related work before discounts are paid out.
There are likely other creative options to achieve this
goal, as well.
8) The E-rate program requires stronger ``built-in''
disincentives to waste, fraud, and abuse (as opposed to
the external disincentives of FCC IG auditing or
Justice Department criminal prosecution), including
such options as mandatory audits, civil penalties for
rule violations, and more flexible provisions for
program debarment.
9) The program needs a much more robust competitive bidding
structure than it currently possesses, in order to
ensure that E-rate program funds support the highest
per-dollar value possible. Achieving this goal is not
simply a matter of mandating that price should be
considered the primary factor. Congress should consider
whether an adequate competitive bidding environment
could be better assured by incorporating relevant
portions of the Federal Acquisition Regulations (FAR)
to the E-rate program's rules and regulations.
10) The FCC and USAC should act immediately to specify that,
for all ``Priority II'' (internal connections)
applications exceeding a reasonable threshold, a
portion of the district's approved funding must be set
aside for an independent audit of the total funds
committed. Further, USAC must be provided with a copy
of all audit results within 30 days of audit completion
and within one year of the expenditure.
11) The GAO should examine the potential for (and scope of any)
waste, fraud, and abuse in the E-rate program's funding
of ``Priority I'' services (telecommunications and
Internet access fees).
II. BACKGROUND
The E-rate Program. Under the Telecommunications Act of
1996 (P.L. 104-104) (the Act), Congress codified a longstanding
policy commitment to ensure ``universal service'' in the
provision of telecommunications services, and expanded that
policy to cover schools and libraries. Specifically, to
``assure that no one is barred from benefiting from the power
of the information age,'' 1 Congress mandated that
elementary and secondary schools, and libraries, be offered
discounted access to telecommunications services for
educational purposes, including ``advanced'' telecommunications
services.
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\1\ See Telecommunications Act of 1996, Conference Report, U.S.
House of Representatives (Report 104-458) at 132-33.
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Consequently, the FCC, which is responsible for
implementing universal service policy, established the Schools
and Libraries Universal Support Mechanism--more popularly known
as the E-rate program. In late 1997, the program began
preparations for providing discounts to eligible schools and
libraries for fiscal year 2 1998. The E-rate program
is funded through the Universal Service Fund (USF, or, the
Fund), which is supported by a ``Universal Service Fee''
charged to telecommunications providers--and which is usually
passed on to consumers' phone bills.3 USAC
administers the Fund under the direction of the FCC. USAC is a
non-profit corporation and wholly-owned subsidiary of the
National Exchange Carrier Association (NECA), whose members are
comprised of about 900 ``local'' telephone
companies.4 In 2004, USAC disbursed approximately
$5.7 billion in support of four ``universal support
mechanisms'': $3.5 billion for the ``high cost'' program, $760
million for the ``low-income'' program, $21.7 million for the
``rural health care'' program, and $1.4 billion for the E-rate
program.
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\2\ An E-rate program fiscal year is referred to herein as a
``Funding Year.'' Generally, a given E-rate Funding Year runs from July
1st of one calendar year to June 30th or September 30th of the next
calendar year, depending on the category of goods or services funded.
\3\ At the time of this report, the fee assessed on rate-payers'
phone bill amounts to 10% of the total long distance calling costs.
\4\ The genesis of the organizational structure and relationship of
USAC, NECA, and the FCC, and the resulting concerns, are explained in
more detail infra, pages 46-47, and also in the GAO Report prepared for
the Committee.
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The E-rate program provides funding to service providers
(telecommunications vendors) to support discounts for schools
and libraries in three service categories: telecommunications,
Internet access, and ``internal connections'' (i.e., the
cabling and network infrastructure necessary for multiple users
within schools to access the Internet). The discounts range
from 20% to 90% of the costs of eligible products and services,
depending on both the rate of participation in the National
School Lunch Program and the urban/rural status of the school
or school district. USAC publishes a comprehensive and annually
updated list of goods and services that are eligible for E-rate
program discounts.
As of October 2005, USAC collected and approved for
disbursement roughly $15 billion since the program's start.
Approximately $10 billion of that amount has actually been
disbursed to E-rate program service providers. The amount of
funding available each year for the E-rate program is capped at
$2.25 billion. However, current rules permit unused fund
balances to be rolled over to following years. Thus, $2.4
billion was available for funding commitments in 2004. Each
year, requests from nearly 40,000 applicants for E-rate program
funds far exceed the available funding. (Approximately $4.3
billion in requests were submitted in 2004.) Because of the
limited funds, program rules prioritize discount commitments
first by type of service and then by discount level of the
applicant. Under program rules, all eligible applicants receive
support for so-called ``Priority I'' services--that is,
telecommunications and Internet access fees. Only applicants
qualifying for very high discounts (typically at 80% and
higher) receive the remaining support for internal connections,
or ``Priority II'' services, which account for the largest
amount of applicant funding requests.
USAC develops and implements procedures, under the
supervision of the FCC, to administer the E-rate program in
accordance with the program rules.5 Essentially, for
an eligible applicant to receive funding it must choose
services that it intends to use effectively for educational
purposes, and must do so through a competitive bidding process
(to ensure cost effectiveness). Applicants must also certify
that they have the resources--including a budget, computers,
teacher training, and infrastructure--necessary to make
effective use of the products and services for which they
request discounts. Put another way, applicants are required to
``do their homework'' before applying for funds. Schools
accomplish this by developing technology plans, which are meant
to set forth in detail how the applicant intends to use the
technologies and how it plans to integrate technology into its
curriculum.-- Applicants also must bear the costs for any
necessary initial planning for the implementation of E-rate
program products and services, such as design of technology
architecture, determination of project scope, and evaluation of
the products and services needed.
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\5\ See Code of Federal Regulations (CFR), Title 47, Part 54, 1
et. seq.
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After determining the products and services for which they
will seek E-rate program discounts, the applicants file--for
posting on USAC's Web site--an FCC ``Form 470.'' Applicants
must supply information on this basic form with sufficient
specificity for potential bidders to formulate bids for
eligible E-rate program products and services. According to the
statute, E-rate program discounts must be provided to eligible
applicants who make a ``bona fide request'' for products and
services for educational purposes. Through its May 8, 1997
Universal Service Order, the FCC attempted to implement this
requirement by mandating that applicants (i.e., the school or
school district): 6 ``(1) conduct internal
assessments of the components necessary to use effectively the
discounted services they order, (2) submit a complete
description of the services they seek so that it may be posted
for competing service providers to evaluate, and (3) certify to
[sic] certain criteria under penalty of perjury.'' 7
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\6\ This report's references to schools and school systems apply to
libraries as well.
\7\ See Federal-State Board on Universal Service, CC Docket No. 96-
45, Report and Order, FCC 97-157, 570.
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Since the program's inception, the integrity of this E-rate
program application process has relied (almost exclusively)
upon applicants to (1) certify that they possess the necessary
resources and plans to use the products and services for which
they request E-rate program subsidies, and (2) choose the most
cost-effective products and services through a competitive
bidding process for those products and services. When
applicants subsequently select the most cost-effective bid or
bids, price must be the primary factor considered. After
winning vendors are chosen from the pool of bidders, the--
applicant requests funding from USAC for specific products and
services on an FCC ``Form 471.''
After the applicant files a Form 471, having its own set of
mandatory certifications, USAC evaluates the request and then
makes a funding commitment to the applicant, adjusting the
request if necessary or rejecting the request outright if it
fails to conform to the program's rules. E-rate program funds
are disbursed by USAC's Schools and Libraries Division (SLD)
directly to service providers, based upon invoices submitted by
the service provider and a certification submitted by the
applicant that installation of the products and services has or
is about to commence, or has been completed. Applicants submit
their ``co-payment'' for the E-rate program goods and services
directly to the service providers.
While disbursing funds, USAC also conducts invoice review,
special investigations, and site visits when circumstances
warrant. Finally, USAC draws on both its internal audit staff
and independent auditors (in consultation with the FCC and the
FCC IG) to gather further information regarding program
integrity and to identify waste, fraud, or abuse of the
disbursed funds.
Since the program's inception, however, serious questions
concerning the ability of these administrative processes to
effectively tackle the risks of waste, fraud, and abuse have
been repeatedly raised--despite some continuing efforts to
improve program oversight and management by both the FCC and
USAC. These questions highlight fundamental weaknesses in the
program's application and review processes, as well as in the
overall structure and direction of the program.
The Subcommittee Investigation. In January 2003, the
Subcommittee on Oversight and Investigations initiated its
investigation of the E-rate program to examine the potential
for waste, fraud, and abuse in the program. The investigation
was in part prompted by news reports of incidents in December
2002 that suggested serious problems of program waste, fraud,
and abuse. In particular, a New York City E-rate program vendor
was indicted on federal charges for defrauding the E-rate
program. Additionally, the FCC IG's October 31, 2002, semi-
annual report to Congress described a number of concerns with
the program, as well as the rise in law enforcement activity,
including the creation of a special Department of Justice (DOJ)
E-rate program task force. Further, the FCC IG criticized the
insufficient funding devoted to oversight and concluded that,
``until such time as resources and funding are available to
provide adequate oversight for the USF program, we are unable
to give the Chairman, Congress and the public an appropriate
level of assurance that the program is protected from fraud,
waste and abuse.''
At the outset, Committee staff interviewed FCC and USAC
officials, GAO staff, as well as some E-rate program vendors,
to identify the scope and nature of the issues affecting the E-
rate program. That initial work revealed that problems of
waste, fraud, and abuse have followed the E-rate program from
the beginning. For example, Committee staff learned that the
relatively small number of targeted audits of funding
beneficiaries over the first two years identified more than $10
million in inappropriate funding disbursements.
Also at this time, there were approximately 30 active
Federal and state investigations of either vendors or
recipients of E-rate program funds around the United States--
involving, in aggregate, more than $200 million of questionable
funding. Moreover, ongoing and ensuing work by the FCC IG, and
concerns raised by both the IG and the GAO, revealed an
inadequate system of E-rate program oversight. The IG had
estimated that the E-rate program, given the magnitude of its
yearly funding, may face up to $180 million in improper and
fraudulent disbursements annually, based upon a GAO analysis of
similar-sized programs. This also suggested that the emerging
evidence of fraud and abuse around the country might just be
the tip of an iceberg. Committee concerns on this front were
underscored by the absence of a statistically representative
audit of the full program. As a result, the Committee had
little reassurance that the efforts made by the FCC and USAC to
administer the E-rate program and to improve program oversight
and auditing were actually addressing the full extent of the
problems.
In light of this information, then-Chairman Tauzin and
then-Subcommittee Chairman Greenwood wrote the FCC and USAC on
March 13, 2003, requesting records relating to implementation,
oversight, and management of the E-rate program.8
Further review of preliminary information from vendors and
applicants participating in the program prompted the Committee
to seek information on the implementation of E-rate program
products and services at the school level. Data showed that the
largest potential for waste, fraud, and abuse resided with the
provision of ``internal connections'' (Priority II) products
and services. Accordingly, staff identified several internal
connections service providers whose participation in the
program was particularly large and active.9 On July
14, 2003, then-Chairman Tauzin and then-Subcommittee Chairman
Greenwood wrote to the five largest internal connections
vendors over the duration of the E-rate program (by funding
receipts), including the companies SBC Telecommunications and
IBM. Additionally, the Committee wrote to seven other vendors
that ranked among those with the largest rate of increase in
internal connections funding requests (over $30 million for any
given year), which included the company NEC Business Network
Solutions, among others.
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\8\ The requests to USAC, which fully cooperated in the document
production, were augmented by a subpoena on April 29, 2003 for certain
records that USAC could not initially provide due to confidentiality
concerns.
\9\ The investigation focused on waste, fraud, and abuse in
provision of Priority II funding; it did not examine the provision of
Priority I services to determine the extent, if any, of problems under
that category of funding. The FCC IG testified that his office has not
conducted enough work to draw a conclusion about problems in that
funding category, and acknowledged that waste, fraud, and abuse may
exist there as well.
---------------------------------------------------------------------------
Subsequent document productions and related interviews
focused the inquiry on certain topics that illuminated some of
the main problems plaguing the E-rate program. The staff
pursued several case studies that resulted in four public
hearings by the Oversight and Investigations Subcommittee, as
well as additional work that, while not directly addressed
during the hearings, provided further information that has
proven helpful in identifying major program issues.
In the course of this work, it is important to note, the
Committee staff observed instances of the E-rate program
working effectively. Such cases helped to underscore the
importance of identifying E-rate program weaknesses and
vulnerabilities, and of developing meaningful fixes to the
program.
An example of the E-rate program's potential can be found
on the southwest side of the City of Chicago, at the Nathaniel
Greene Elementary School (Greene School). Of the 803 students
in kindergarten through fifth grade at Greene, 88% are
Hispanic. For many, if not most, English is a second language.
Roughly 94% of the students are enrolled in the free or reduced
lunch program. Nonetheless, the combination of technology,
determined administrators, and a well-trained and dedicated
faculty is transforming the educational experience to a level
comparable with the best that suburban schools have to offer.
Not only are computers used effectively in the lab and the
library, but in each classroom as well. Even a brief visit
found kindergarten students spelling out words on their
computers, third grade students preparing PowerPoint
' presentations, fifth grade students forecasting
the weather, and a science fair that would impress any
elementary school teacher. Most important, the children were
truly engaged in the learning process and appeared to delight
in their assignments. The E-rate program has played a big role
in providing the opportunity for learning in this inner-city
community.10
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\10\ The Greene School's Web site can be found at http://
www.greene.cps.k12.il.us/
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The School District of Philadelphia presents another
positive example of the E-rate program's impact. When that
district began to participate in the E-rate program, much of
the school district's physical infrastructure was obsolete and
it had already completed a five-year plan to modernize
education-related technology. Instead of falling for vendor
temptation to ``gold-plate'' problem schools, Philadelphia
chose a slower and economically reasonable path to maximize the
efficient use of technology. The school district applied for E-
rate program funds only as the technology plan dictated, and it
never requested more than could be effectively integrated in
any given year.
School district officials used the E-rate program as a
complement, not as a crutch. Local funding sources were used to
upgrade the schools' electrical systems, buy computers, develop
software, and, in part, to install wireless networks and
construct a fiber-optic network. Philadelphia's plan emphasized
and funded training for teachers and students. School district
officials tied the installation of technology in each of the
schools to both professional development and specific
curriculum needs--hence, assuring productive and efficient use.
The school district refrained from installing expensive
technology simply because E-rate program funds were available.
Philadelphia's completion of an integrated and
comprehensive technology plan, effective teacher training, and
resistance to overstating its needs or procuring unnecessary
goods and services, all demonstrate the proper use of the E-
rate program.
III. CASE STUDIES AND OTHER WORK OF THE INVESTIGATION
The following section details the key facts of specific
case studies and their related hearings, followed by additional
information relating to those parts of the investigation
concerning E-rate program participation by Chicago Public
Schools and Atlanta Public Schools, and finally, a discussion
regarding the GAO's recent E-rate program report that was
requested by the Subcommittee.
A. E-rate and the Puerto Rico Department of Education (PRDOE)
In the case of Puerto Rico's experience with seeking E-rate
program discounts for its public schools, the situation
involved: (1) questionable planning and a clear failure by
administrators of the school district to make any use of E-rate
program funded infrastructure and ensure the integrity of the
investment of E-rate program funds; (2) questionable
implementation of and billing for E-rate program products and
services by the vendors, Puerto Rico Telephone Company (PRTC)
and Data Research Corporation (DRC); and, (3) a critical
failure on the part of USAC and especially the FCC to respond
effectively to the severity of a situation in which more than
$100 million of E-rate program funds had been spent, with
nothing significant to show for it. Thus, 50,000 students have
been graduating each year from the largest school system in the
country without having any of the broadband Internet access
(IA) that the program is intended to support.
PRDOE operates the entire public school system for the
Commonwealth of Puerto Rico, overseeing approximately 610,000
students and 1,540 schools. By number of school facilities, the
system is the largest in the United States (by comparison, the
New York City Board of Education administers 1,200 schools but
one million students, and ranks second). Additionally, Puerto
Rico is among the poorest school districts in the United
States, eligible for 90% E-rate program discounts district-
wide.
PRDOE applied for funding in each of the first six years of
the E-rate program--from 1998 to 2003--and has not applied for
funding since. In the first three years of the program--1998,
1999, and 2000--USAC committed and disbursed funds on behalf of
PRDOE to two service providers, PRTC and DRC. All told, USAC
disbursed $101.2 million during this period--with PRTC
receiving a total of $31.6 million for the supply of Internet
access and broadband (T1) service, and DRC receiving a total of
$69.6 million for a combination of internal connections
(totaling $58.6 million), Internet access, and T1 service fees.
PRDOE's E-rate program applications stated that the funding was
intended to support broadband service and the underlying
infrastructure to enable Internet access for all 1,540 schools.
A new governor of Puerto Rico, elected in November 2000,
appointed a new Secretary of Education, who assumed leadership
of PRDOE in January 2001. After assuming office, the new
administration continued the Funding Year's E-rate program
application process started by the departing administration.
Over the course of 2001, the new PRDOE administration
progressively learned through vendors, school personnel, and
site visits of chronic problems within the schools--in terms of
electrical infrastructure, security, inadequate teacher
training, and other facility problems. Most important, the fact
emerged that very few schools--and virtually no students--
actually had access to computers connected to the Internet.
In the spring of 2001 the Office of the Comptroller of
Puerto Rico reported its preliminary findings of an audit of
PRDOE's E-rate program to the FCC IG, noting concerns about
competitive bidding irregularities. The IG collected
information on PRDOE from USAC and proceeded to make a referral
to the U.S. Department of Justice (DOJ). (At the same time, the
DOJ was investigating broader corruption by the former
Secretary of Education, who later was indicted and convicted,
and is serving 12 years in federal prison.) In October 2001, an
Arthur Andersen audit conducted during the summer of 2000 was
released. The audit showed that PRDOE had failed to acquire
some 100,000 computers to be used by students to connect to the
E-rate program funded infrastructure. On December 5, 2001, USAC
wrote PRDOE requesting a report on questions generated by the
audit, stating that PRDOE's outstanding E-rate program
applications would not be processed or any more funds disbursed
until USAC received and evaluated the information. To date,
$102 million in requests (for Funding Years 2001, 2002, and
2003) still await USAC decisions.
PRDOE responded to USAC's inquiries on January 15, 2002,
with additional information about problems it had identified in
the management and planning of E-rate program related work done
by the previous administration, and also identified steps it
was taking to rectify the situation. Over the course of the
next year, PRDOE made presentations to USAC and FCC staff,
describing efforts to ensure resources were available and to
rectify problems identified in the workings of the network. By
January 30, 2003, PRDOE had petitioned the FCC to direct USAC
to process its applications.
In May 2003, the FCC issued a request for public comment on
PRDOE's petition for the continued processing of the
outstanding E-rate program funding requests. On November 14,
2003--two years after E-rate program funding was halted--the
FCC issued an order directing USAC to (1) process applications
for 2001 and 2002, except for DRC-related funding, but only
subsequent to an audit; and (2) investigate the use of E-rate
program funds during Funding Years 1998, 1999, and 2000, after
which the FCC would evaluate the results and determine
appropriate action. DRC-related funding was held due to
allegations of on-going investigations of DRC by authorities in
Puerto Rico and the United States.
In February 2003, following interviews with relevant
parties at PRDOE, PRTC, DRC, USAC, and the FCC, Committee staff
visited Puerto Rico to examine the infrastructure and high-
speed network that the E-rate program had funded, and to
determine the extent of the efforts by the current PRDOE
administration to put the system to effective use. During the
visit, Committee staff discovered nearly $23.5 million in E-
rate program funded equipment in a PRDOE warehouse, in
violation of program rules. The gear included about 73,000
``wireless cards'' that were to be used in PRDOE computers for
the wireless portion of PRDOE's network. The Committee staff
found the equipment shrink-wrapped and sitting on storage
pallets. Committee staff also observed that, in the schools
that they visited, there were very few, if any, computers
dedicated to utilizing the E-rate program funded network, and
especially the wireless half of the network. Staff also
observed substandard equipment installation, placement of
servers and switches near open windows, and little security for
protecting equipment from vandalism. Due in part to a grossly
inadequate number of computers available for utilization of the
system, a roughly $58 million high-speed computer network
remained virtually unused.
Further, USAC paid $43 million for T1 service and Internet
access fees, but because of the very small number of computers
and the inadequate training of teachers very few school
children ever benefited educationally from the learning
resources broadband Internet access made available by paying
these fees. At the time of the staff visit, Puerto Rico's
school children who could access the Internet did so via 56K
dial-up modems--staff learned that broadband service had been
terminated after July 2003 because, according to school
district officials, USAC had not yet released more funding or
processed outstanding E-rate program applications for such
services.
On June 17, 2004, the Subcommittee on Oversight and
Investigations held the first of three hearings entitled:
``Problems with the E-rate Program: Waste, Fraud, and Abuse
Concerns in the Wiring of Our Nation's Schools to the
Internet.'' The hearing examined: (1) the factors surrounding
the evident failure of PRDOE to make effective use of more than
$100 million of E-rate program funding from 1998 through 2001;
(2) the role played by the school district's two principal E-
rate program service providers, PRTC and DRC; and (3) the
actions taken by USAC and the FCC to identify and resolve the
school district's problems, and what such actions demonstrated
regarding oversight of the E-rate program generally.
The hearing provided a case study of the E-rate program and
the substantial waste of more than $100 million in one large
school district, and highlighted programmatic weaknesses--in
the application process, the certification process, technology
planning, auditing, implementation of goods and services,
resolution of problems by USAC and the FCC, and overall program
guidance by the FCC.
Findings from the PRDOE-focused hearing and related investigation:
Over the course of three years, more than $100 million in
funds were provided after PRDOE certified that its E-rate
program funded network would be operational and put to
educational use, when, in fact, it was never made operational
or put to any significant educational use.
In the most egregious sign of this waste, funds were paid
to vendors when the school district certified that key wireless
components of the network infrastructure were installed and
operational, when installation of those components had actually
never occurred.
The Committee staff discovery of $23.5 million of unused
and unopened wireless cards in a PRDOE warehouse, which had
been invoiced as delivered and installed, represents one of the
most flagrant examples of the failure to deliver or make use of
goods and services purchased through the E-rate program. (The
investigation identified similar patterns of failure in other
school districts as well, some of which are discussed below.)
This failure signals an underlying weakness of the E-rate
program; that is, the difficulty to ensure that E-rate program
funded goods and services are put to effective educational use.
It also underscores a weakness in USAC's reliance on
certifications in lieu of independent verification. Until staff
made the discovery, neither the FCC nor USAC knew of the
warehoused equipment, although school district officials were
fully aware of the circumstances. Moreover, these officials
seemed unaware that the situation amounted to a major program
rule violation.
Puerto Rico's Comptroller testified that insufficient
planning and oversight by PRDOE contributed to the
nonfunctional network. Limited inspections by both the
Comptroller and an outside consultant for the school district
revealed inadequate facilities and security for equipment.
Documents also revealed extensive problems, either due to
equipment malfunctions or the lack of technical training, for
the school district to maintain consistent connectivity to the
Internet. The District neglected to provide training resources
for teachers during the time of funding, further limiting the
ability to make effective educational use of the E-rate program
funds.
Puerto Rico's deficiencies in resources, training,
infrastructure maintenance, and equipment installation also
underscore the weakness in applicant certifications. Puerto
Rico had certified, as required by the E-rate program on every
application, that it possessed the resources necessary to make
effective use of the goods and services it was seeking. Yet
this was clearly not the case, and the program's money was
wasted. Given the annual number of E-rate program applications,
independent verification of all requests may be prohibitively
expensive; however, the situation in Puerto Rico underscores
the critical need to ensure the penalties behind false
certifications are sufficiently strong to effectively deter
wasteful or fraudulent requests.
Over two years, and for more than 700 schools, a monthly
fee of up to $1,500 per school was charged for T1 lines that
were essentially not being utilized.
The failure to provide adequate internal connections
infrastructure, sufficient computers for student access, and
teacher training did not stop the E-rate program from paying
for broadband service and Internet access. Hearing testimony
and documents indicate that approximately $43 million was
disbursed for either T1 lines or Internet access fees before
the district's follow-on applications were placed on hold in
December 2001. PRTC continued to provide broadband service for
the portion of the district's schools under its contract (760
schools at a monthly rate of $1,500 per school), irrespective
of whether any schools were actively using the lines or had
fully functioning internal networks. In the vast majority of
cases, according to documents, testimony, and staff interviews,
the networks were not utilized, but PRTC maintained that it was
contractually obligated to provide the service. In the
meantime, PRDOE neglected to alert USAC that E-rate program
funds were supporting unused services. The E-rate program
cannot mandate how often or how much a beneficiary actually
uses the delivered goods and services; but the circumstances in
Puerto Rico nonetheless reveal a weakness with regard to
ensuring that the delivered goods and services are in fact used
by students.
The FCC did not help resolve PRDOE's enormous funding
management and planning problems, and therefore contributed to
both the waste of E-rate program funds and the failure of the
program there. This shows one symptom of the underlying problem
of the FCC's poor program management and oversight.
The FCC and USAC squandered valuable time by delaying any
intervention in Puerto Rico, thus effectively prolonging the
school district's E-rate program problems. Throughout 2002,
according to documents in the record, PRDOE continued
infrastructure upgrades and informed the FCC and USAC regarding
its progress, to ensure that resources would be available to
put the E-rate funded internal connections to effective use.
PRDOE reported spending approximately $136 million in facility
upgrades, computer and infrastructure purchases, and training.
In the course of meetings with USAC, the district stressed the
urgent need for releasing the E-rate program funds in order to
continue development of the network. During its October 1, 2002
presentation, Puerto Rico requested that USAC act upon its
Funding Year 2001 and 2002 requests--again citing its work to
ensure resources would be available, and the urgency of making
the E-rate program funded internal connections available to the
school system.
At the same time, according to the record and staff
interviews, USAC and the FCC's Office of General Counsel, in
coordination with staff at the FCC's Wireline Competition
Bureau (WCB), prepared a plan to allow USAC to resume
processing Puerto Rico's 2001 and 2002 applications, provided
that the district made certain certifications. The FCC examined
the U.S. Department of Education's prior work in Puerto Rico
when developing the plan. The FCC's General Counsel outlined to
the DOJ its intentions to process Puerto Rico's funding
requests, and asked the DOJ to respond with objections within
fourteen days. The FCC letter explained that absent any
objections, it would ``go forward with the process of reviewing
and granting, subject to conditions, PRDOE's application for
funding years 3 and 4 [sic, years 4 and 5 were at issue].'' The
FCC's self-described ``work-out'' conditions required PRDOE to
enter a binding agreement to take various steps to establish
compliance and demonstrate the ability to use the funds,
including hiring an independent auditor at PRDOE's expense. The
DOJ did not respond to the FCC. Subsequently, however, the FCC
requested on January 30, 2003, that Puerto Rico submit a
petition for the release of the funds. Initially, the FCC
planned to process the district's petition as a unique case,
without public notice. Puerto Rico's attorney told Committee
staff that the FCC made no indication that the petition would
be posted for public comment.
In May 2003, however, the FCC decided that Puerto Rico's
request should obtain public comment. According to Committee
staff interviews with the FCC, the WCB decided that the
district's funding request provided an opportunity for the
agency to develop a broader policy concerning waste, fraud, and
abuse in the E-rate program. Thus, the FCC abandoned its
``work-out plan,'' and instead noticed the Puerto Rico petition
on May 16, 2003 for public comment. On November 25, 2003--two
years after USAC initially postponed further funding for Puerto
Rico--the FCC issued an order instructing USAC to: (1) process
funds for 2001 and 2002 (excluding any funding related to the
vendor DRC), but only after USAC conducted an audit; and (2)
investigate Puerto Rico's use of E-rate funds during Funding
Years 1998, 1999, and 2000, following which the FCC would
evaluate the results and determine any appropriate action.
Notably, the FCC order did not contain the procedures
detailed in the fall 2002 ``work-out plan.'' Much of the
lengthy consultation and negotiation between the FCC and the
district was abandoned in favor of a more arms-length approach.
By contrast, with regard to Puerto Rico's use of fiscally
unrelated federal education funds, the U.S. Department of
Education (USDOE) has worked actively and closely with the
district to resolve major financial control issues that arose
under the Single Audit Act. The FCC's decision regarding Puerto
Rico will likely delay resolution until well into 2005.
The E-rate program does not presently require compliance
with standard federal oversight requirements, such as the
Single Audit Act.
Important information regarding a given school district's
management and use of federal funds is not collected as a
matter of practice. From the program's inception, there has
been much confusion surrounding the legal status of E-rate
program funds, and the consequent statutory financial oversight
and accounting activities that should result from that legal
status. One example of this is the Single Audit Act of 1984, 31
U.S.C. 7501 et. seq., which sets forth certain auditing
requirements for ``non-Federal entities'' that ``expend''
federal funds exceeding a specified amount 11 in a
given fiscal year. The single audit of all federal funds
received by a non-Federal entity must be conducted by an
independent auditor, in accordance with generally accepted
government auditing standards. The single audit is then
submitted to the OMB's Federal Audit Clearinghouse, from which
the OMB prepares and submits an annual report to Congress
regarding all such audits.
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\11\ Currently, the threshold is set at $500,000, as determined
biannually by the Office of Management and Budget. This sum is the
aggregate of all Federal awards in a given fiscal year.
---------------------------------------------------------------------------
In Puerto Rico, the Arthur Anderson ``beneficiary'' audit
of the school district's E-rate program projects--commissioned
by USAC--did not identify the fiscal situation described by
USDOE documents contained in the record. The documents, not
directly related to the E-rate program, noted that ``large
scale fiscal and accountability problems' in the district had
existed for a number of years ``and appear to be continuing.''
12
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\12\ See E-rate Hearing, June 17, 2004, Committee on Energy and
Commerce, Serial No. 108-92 (hereinafter referred to as Hearing, Part
1) at 160. According to the FCC IG and USAC, current E-rate beneficiary
audits require that auditors examine Single Audit findings, if they
exist, to see if the findings affect E-rate program funding management;
this requirement was not instituted until 2002. In May 2002, the USDOE
had designated Puerto Rico a ``high risk grantee.'' The USDOE made this
determination based upon information gathered through the Single Audit
Act--the USDOE tabulated literally 300 findings that were unresolved
and extended as far back as the mid-1990s. (The USDOE disburses roughly
$1 billion annually to Puerto Rico through various programs.) As a
result, the USDOE requested periodic progress reports from Puerto Rico
as a precondition to receiving further education funding. While the
findings did not directly address the E-rate program, they questioned
financial controls and oversight by the school district that clearly
might also impact the management and use of E-rate program resources.
Based upon continued accountability concerns, the USDOE established
``special conditions'' in August 2002, and began its own ``work-out''
plan with PRDOE.
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The Puerto Rico Department of Education acquired goods
and services through the E-rate program without using a formal
bidding process, contrary to both the program's rules and the
Commonwealth's regulations, and even though the district
otherwise followed the E-rate program's Form 470 application
process.
According to Puerto Rico's Comptroller, the district did
not adhere to formal bid procurement procedures in awarding E-
rate program contracts during Funding Years 1998 and 1999.
Further, the Commonwealth's Office of Management and Budget
failed to approve the E-rate program contracts in accordance
with established rules. E-rate program rules require applicants
to follow state and local bidding requirements, as well as the
E-rate program's competitive bidding requirements. The
Comptroller's audit findings showed that Puerto Rico had not
done so. In contrast, USAC's outside auditor, Arthur Andersen,
did not identify the irregular procedures. For example, Arthur
Andersen reported that the Form 470 was filed properly and
noted ``we ascertained through discussion with PRDOE management
that they had established appropriate procedures to evaluate
and select the most cost-effective bidder based on the
responses to their 470 posting. PRDOE management also indicated
that all bids received were appropriately evaluated in
accordance with state and local requirements.'' 13
Arthur Anderson evidently did not verify the district's
assertions. Puerto Rico's broader problems, as identified by
the Comptroller and the USDOE, show the limited utility of the
Form 470 and Form 471 as the basis for competitive procurement
and obtaining E-rate program funds.14
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\13\ See Hearing, Part 1 at 233.
\14\ Arthur Andersen's failure on this front raises questions of
the quality of the auditors' work. The FCC IG expressed such concerns
in a memo to the FCC Chairman, criticizing both Andersen's work and
USAC's acceptance of this work. See Hearing, Part 1 at 184 et. seq.
---------------------------------------------------------------------------
PRDOE acquired E-rate program related goods and services
without an adequate technology plan. More broadly, the E-rate
program's current technology plan requirements provide no
meaningful protection from gold-plating (over-procurement of
goods and services, beyond the needs and resources of the
school district).
Under E-rate program rules, an applicant must certify that
it has a technology plan that has been endorsed by its state,
USAC, or an ``independent entity'' approved by the
FCC.15 According to the FCC, this requirement
ensures: (1) that schools and libraries prepare ``specific
plans for using [E-rate program funded] technologies, both over
the near term and into the future, and how they plan to
integrate the use of these technologies into their curriculum''
and (2) that the technology plans ``are based on the reasonable
needs and resources of the applicant and are consistent with
the goals of the program.'' 16
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\15\ See 47 CFR 54.508(d).
\16\ See FCC Order 97-157, 573-74.
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Puerto Rico's then-Secretary of Education testified that no
E-rate program related documentation, including the required
technology plan, was located when his administration assumed
office, suggesting that the prior administration, which was
largely responsible for ordering the E-rate program goods and
services, did not have an approved plan. USAC relied on Puerto
Rico's certifications on the program's forms and did not review
a technology plan, according to testimony.17
Moreover, whether or not a technology plan existed and was
approved, testimony, documents, and staff interviews all
indicate that the E-rate program's technology-plan requirements
have no real effect on what applicants actually request from
the program. In short, the technology planning requirements, as
shown by the excessive purchases in Puerto Rico and in other
districts, are not effective and do not serve the intended
purpose.
---------------------------------------------------------------------------
\17\ See Hearing, Part 1 at 108-09. However, the Arthur Andersen
audit reported reviewing a technology plan.
---------------------------------------------------------------------------
Although USAC implementing procedures specify criteria that
applicants must include in their technology plans, these
criteria are not enforceable or necessarily effective in
guarding against gold-plating. As the hearing showed, plan
``approvers'' have no incentive to carefully monitor the
substance and specificity of a technology plan, and USAC does
not regularly refer to the plans when assessing applications.
Moreover, the FCC did not codify the criteria that technology
plans should cover until its August 2004 Fifth Report and
Order, and even so, other weaknesses in technology planning
still remain (infra, pages 31-32).
The FCC IG cannot provide adequate assurance that the
program is sufficiently protected against waste, fraud, and
abuse. Furthermore, the FCC's Wireline Competition Bureau does
not know the magnitude of potential fraud.
According to hearing testimony and staff interviews, to
date no statistically representative audit of the E-rate
program has been completed to determine the extent of waste,
fraud, and abuse. Without this critical information, the IG
testified that he could not assure that the program could be
protected against waste, fraud, and abuse. The deputy chief of
the WCB also testified that the magnitude of potential fraud
was unknown. (See GAO discussion below.)
Further, the FCC IG testified that those audits that have
been conducted and reviewed by his office raise several
questions about the program's weaknesses. For example,
according to an IG review of 135 E-rate program ``beneficiary
audits,'' only 65 beneficiaries (schools and school districts)
were determined to be compliant with program rules, 22 were
determined to be ``generally'' compliant but with some problems
identified, and 48 were not compliant and evidenced significant
problems.18 Moreover, compliance with the rules does
not necessarily mean the absence of audit ``findings''
questioning the integrity of the application process. In short,
the type and magnitude of the problems found by this small
number of audits suggests the need for a more thorough and
systemic review of the universe of applicants.
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\18\ See ``Hearing on Problems with the E-rate Program: GAO Review
of FCC Management and Oversight,'' March 16, 2005, Committee on Energy
and Commerce, Serial No. 109-7, at 30.
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The FCC IG faces several obstacles in implementing
effective independent oversight of the program. The IG
testified that he lacks sufficient resources to conduct audits
and provide audit support to law enforcement investigations.
The FCC IG testified that his office would need
approximately $12 million to hire the contractors to conduct
approximately 240 audits, as well as to hire additional FCC
staff to review the work. This would provide, according to the
testimony, a statistically valid sample to enable the FCC IG to
draw conclusions concerning the scope and nature of problems in
the program.
Under the program's current structure, the FCC cannot use
funds from the USF to accomplish this oversight work. Congress
would need to provide express statutory language authorizing
the FCC or FCC IG to use E-rate program funds for audits and
oversight of the E-rate program, or otherwise appropriate money
for this purpose.
It should be noted that at the time of this report's
completion, the FCC IG and USAC are in the final stages of
signing three-way contracts with outside audit firms to conduct
statistically valid audits of all USF funding mechanisms. This
would amount to an estimated 700 audits across the funding
mechanisms and would likely provide sufficient statistical
confidence to make determinations about the scope of waste,
fraud, and abuse both in the E-rate program and Universal
Service funding in general.19
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\19\ See Request for Proposals for Audit Services in Support of
Oversight Program for the Universal Service Fund, USAC.
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B. San Francisco Unified School District's E-rate Experience, and NEC
BNS
On July 22, 2004, the Subcommittee held the second of three
hearings entitled ``Problems with the E-rate Program: Waste,
Fraud, and Abuse Concerns in the Wiring of Our Nation's Schools
to the Internet.'' The Subcommittee considered the
circumstances surrounding bid-rigging, inflated pricing, and
the filing of false statements during the application process
for E-rate program funding by San Francisco Unified School
District (SFUSD). During Funding Year 2000, the competitive
bidding process for SFUSD's E-rate program projects was
completely corrupted, and the self-certification process
failed. The Subcommittee also examined why USAC approved more
than $48 million for a plainly fraudulent application, and how
the school district superintendent, Dr. Arlene Ackerman, and
others thwarted the scheme.
SFUSD has about 60,000 students enrolled in approximately
116 schools. During the first two years of the E-rate program,
Funding Years 1998 and 1999, SFUSD applied for $3.5 million and
$6.8 million respectively. By contrast, in Funding Year 2000,
SFUSD submitted several E-rate program applications totaling
$112 million. Of that total amount, two of the applications
sought $106 million in internal connections discounts through
two vendors--InterTel, Inc. ($23 million) and NEC BNS ($83
million).
During the applications' processing, USAC conducted its
routine program integrity assurance (PIA) review. USAC also
performed a ``selective review'' of the applications because of
the magnitude of funds being requested. Subsequently, in
September 2000, USAC committed $48.68 million to SFUSD for the
products and services to be provided by NEC BNS and InterTel.
While USAC approved this funding commitment, it neglected to
perform the requisite due diligence despite finding certain
irregularities in the SFUSD application, such as altered
district budget documents.
Shortly after Dr. Ackerman assumed leadership of SFUSD in
August of 2000, she determined that there was something unusual
about the school district's pending E-rate program
applications, turned down the funding, and alerted the FBI. In
April, 2001 Ms. Ackerman also requested that the San Francisco
City Attorney investigate certain SFUSD employees, including
Mr. Desmond McQuoid, who were involved with the suspect E-rate
program applications. The City Attorney ultimately uncovered a
nation-wide scheme to defraud the E-rate program, and filed a
lawsuit under the False Claims Act against NEC BNS, VNCI,
InterTel, and other parties involved with SFUSD's E-rate
program application.
On May 27, 2004, NEC BNS pleaded guilty to federal
antitrust violations under Section 1 of the Sherman Act, and to
wire fraud. As part of the plea agreement, NEC BNS agreed to
pay $20.7 million in fines and restitution. According to both
the plea agreement and the testimony provided by San Francisco
officials before the Subcommittee, NEC BNS, VNCI, and InterTel
established an agreement to circumvent competition for E-rate
program projects by rigging the bidding process, submitting
fraudulent bids, and predetermining who would win. Afterwards,
the co-conspirators would submit Form 471s that grossly
inflated the cost of the work (for example, SFUSD's Form 471
was inflated by roughly $26 million), forging signatures and
falsifying documents when necessary. Between December 1999 and
March 2001, the co-conspirators used the bid-rigging scheme at
several schools across the country. On December 8, 2004, the
Justice Department announced that InterTel also pleaded guilty
to similar federal antitrust violations under Section 1 of the
Sherman Act, and to wire fraud. InterTel's agreement included
fines and restitution totaling $8.7 million.20
---------------------------------------------------------------------------
\20\ On April 7, 2005, VNCI, Judy Green, Allan Green, George
Marchelos, and others were charged in a 22-count indictment with wire
fraud, conspiracy, and various federal antitrust violations related to
E-rate programs in more than 20 schools or school districts throughout
the country. See United States v. Video Network Communications, Inc.
(N.D. Cal.).
---------------------------------------------------------------------------
For the July 22nd hearing, the Subcommittee subpoenaed four
witnesses who had been invited but declined to voluntarily
attend and testify. The individuals included: Mr. Thomas J.
Burger, the President and CEO of NEC BNS; Mr. William Holman,
the former Senior Vice President of Sales for NEC BNS; Mr.
George Marchelos, a former E-rate consultant and VNCI employee;
and Ms. Judy Green, also a former E-rate consultant and VNCI
employee. While Ms. Green successfully evaded service by U.S.
Marshals, the other subpoenaed witnesses appeared at the
hearing and all of them invoked their Fifth Amendment rights
against self-incrimination.
On September 22, 2004, the first part of the Subcommittee's
third E-rate hearing continued the examination of the NEC BNS-
related bid-rigging conspiracy. Testimony focused on other
school districts that, unlike San Francisco, actually received
E-rate program funded products and services through the
conspiracy. The Subcommittee considered issues including: E-
rate program funding of ineligible goods and services; vendors'
inappropriate use of ``in-kind'' donations to schools; school
districts' obligations and responsibilities under program
rules, including the mandatory requirement that schools
contribute a co-payment to the cost of E-rate program projects;
and, the role played by certain consultants in the conspiracy,
as well as the role played by consultants in the E-rate program
more broadly.
Again, four witnesses who were invited to the hearing
declined to attend and testify voluntarily, and the
Subcommittee subsequently compelled their appearance through
subpoenas. The individuals included: Ms. Judy Green, former E-
rate consultant and VNCI employee; Dr. Emma Epps,
Superintendent of Ecorse Public School District; Dr. Douglas
Benit, the former facilities director for Ecorse Public School
District; and Mr. Quentin Lawson, the Executive Director of the
National Alliance of Black School Educators (NABSE). At the
hearing, Ms. Green and Mr. Lawson invoked their Fifth Amendment
rights and declined to testify. Additionally, Mr. Carl Muscari,
the President and CEO of VNCI, appeared voluntarily, but also
chose to invoke the Fifth Amendment at the hearing.
Testimony at the September 22nd hearing showed that both
the Ecorse Public School District, in Michigan, and the Jasper
County School District, in South Carolina, failed to pay their
required co-payment to NEC BNS for the cost of their respective
projects. NEC BNS and VNCI ``waived'' the school districts' co-
payments, despite clear FCC and USAC guidance that this was
prohibited. Instead, the inflated funding requests on the Form
471s were used to cover the schools' obligations. Additionally,
both school districts' superintendents admitted that their
schools received substantial in-kind donations of clearly
ineligible goods and services. In the case of Ecorse, the
Subcommittee examined documents and received testimony from an
NEC BNS project manager that revealed that E-rate program funds
paid for the construction of an $800,000 ``TV production
studio'' at the district's high school. Testimony provided by
USAC's Schools and Libraries Division Vice President, George
McDonald, made clear that the TV studio and other in-kind
donations were ineligible for E-rate program discounts and
violated program rules. Neither the Ecorse nor Jasper County
school officials were able to explain or justify the violation
of the program's rules. Furthermore, in Ecorse, neither Dr.
Epps nor Dr. Benit provided credible testimony about the
funding of the TV studio or the school's failure to pay its co-
payment. Specifically, under questioning, neither school
official could credibly explain several documents that showed
Dr. Benit directing NEC BNS to allocate E-rate program funds to
pay for the studio, other ineligible goods and services, and,
implicitly, the school's mandatory co-payment.21
---------------------------------------------------------------------------
\21\ For a complete accounting of Ecorse's allocation of E-rate
funds, see E-rate Hearing, September 22, 2004, Committee on Energy and
Commerce, Serial No. 108-124 (hereinafter referred to as Hearing, Part
3) at 54-77. See also id. at 67 (Dr. Benit was not able to locate
documents that supported his assertion that Ecorse School District paid
NEC BNS its co-payment for the E-rate project).
---------------------------------------------------------------------------
Finally, the September 22nd hearing examined the
involvement of NABSE in the E-rate program, and its association
with NEC BNS, VNCI, and other parties. For example, testimony
showed that NABSE had an apparent contractual arrangement to
provide potential E-rate program project leads to NEC BNS and
VNCI through its large membership of school superintendents.
Further, for every funded E-rate program project resulting from
a NABSE lead, NABSE was slated to receive what amounted to a
1.5% revenue return on all business related to the E-rate
program. Despite Mr. Lawson's refusal to testify, a ten-minute
NABSE E-rate program marketing video and documents entered into
the record showed very active participation by NABSE officials
in attempting to steer E-rate program related business to NEC
BNS and VNCI.22 In fact, statements in the video and
documents claim that NABSE's E-rate ``team'' had helped nine
school districts receive a total of roughly $81 million in
program discounts. The hearing showed that while NABSE held
itself out to its members as simply being interested in
ensuring that poor school districts were able to take full
advantage of E-rate program funding, the organization actually
held a financial stake in the process. USAC's George McDonald
testified that any E-rate program funds that USAC determines
actually went to NABSE inappropriately are subject to recovery
actions. (To date, no attempts at recovery have been
undertaken.)
---------------------------------------------------------------------------
\22\ The NABSE video also refers to IBM as a member of the NABSE E-
rate ``team,'' but the investigation did not find evidence of IBM
actually receiving business from NABSE efforts, and IBM officials
testified that they had no knowledge of any such relationship.
---------------------------------------------------------------------------
Findings from the NEC-focused hearings and related investigation:
USAC failed to reject the fraudulent SFUSD E-rate program
applications, despite the fact that its employees identified
several red flags and discrepancies, perhaps most notably among
them an altered school district budget document.
During the hearing, USAC Vice President George McDonald
could not adequately explain why the forged budget document did
not halt the program's application approval process for San
Francisco. Mr. McDonald did note that the application
reviewer's notes were not placed into a computer system, and
that, at the time, ``novel'' issues were passed on to
supervisors orally. Mr. McDonald did say that USAC has improved
its review process since that time, compiling reviewers'
observations in a database, and conducting quality assurance
reviews of the reviewers. Mr. McDonald stated that he believed
that today's reviewers would have been more diligent in
investigating the budget forgery and notifying supervisors, and
that USAC's approval would have been withheld. However, the
hearing showed that Members remain concerned about ``rubber-
stamping'' of applications and inadequate scrutiny of the
details and reasonableness of very large funding requests.
The certifications contained on E-rate program
application documents had little effect in deterring certain
San Francisco school officials or the employees of NEC BNS,
InterTel, or VNCI from forging documents and signatures and
attempting to defraud the E-rate program.
The certifications contained in E-rate program forms have
failed to deter abuse by predatory vendors or irresponsible
school officials. In December 2002, the FCC IG, in consultation
with the Justice Department, provided the WCB with a series of
recommendations to strengthen certifications, but, according to
testimony and staff interviews with the Inspector General, the
recommendations were largely ignored for more than 18 months.
Only in 2004--six years into the program--did the FCC begin to
propose changes in the certifications. Further, the FCC has not
been comprehensive in its approach to strengthening the
certifications. For example, the FCC's Chief of the WCB, Mr.
William Maher, testified that the FCC was not considering
requiring ``certificates of independent pricing,'' even though
the Justice Department had suggested it, and Mr. Maher
testified that he thought such a certificate would be a ``great
idea.'' In the end, the hearing illustrated the weakness of
certifications, to date, and the reticence of the FCC to
promulgate certifications containing stronger criminal
sanctions for acts of fraud and abuse, and greater deterrents
to program predators--despite the sound advice provided by the
Justice Department and endorsed by the FCC's IG.23
---------------------------------------------------------------------------
\23\ See Hearing, Part 2, Tab 130.
---------------------------------------------------------------------------
Employees of NEC BNS and VNCI completely manipulated the
competitive process for E-rate program goods and services, and
USAC did not discover the fraud.
The hearing also illustrated some of the weaknesses
contained in the E-rate program's competitive bidding
requirements. The program's competitive bidding requirements
should ensure the maximum value received by the applicant for
the price paid, and reduce the risk of fraud and abuse. The
Justice Department's certification memorandum also made
suggestions regarding improving the competitive bidding
environment.24 In answering questions at the hearing
regarding those suggestions, Mr. Maher testified that
establishing competitive bidding standards to ensure reasonable
pricing, such as requiring a minimum number of bidders, posed
``a difficult policy issue'' with which the FCC was
``grappling.'' However, the WCB Chief could not answer how he
thought an adequate competitive bidding process could be
assured. Currently, one of the primary rules regarding
competition simply requires a waiting period of 28 days between
posting a Form 470 and entering into a contract. Program rules
provide little guidance regarding exactly how E-rate program
applicants should ensure competition, except to the extent that
state and local procurement standards must be followed.
---------------------------------------------------------------------------
\24\ Id.
---------------------------------------------------------------------------
The E-rate program recently gained the option of
debarring abusive vendors and applicants, but the rule
established by the FCC is very limited in scope.
Only since April 2003 has the program had access to the
tool of debarment for purposes of deterring waste, fraud, and
abuse, but the thresholds of conduct that trigger the
``suspension and debarment'' process are set too high.
According to the E-rate program's rules, an E-rate program
participant may be barred from participating in the program for
three years, but only upon a finding of criminal or civil
liability. Debarment could be an effective tool for both
holding program abusers accountable, and for deterring future
abuse. However, the current rule does not address abusive or
wasteful behavior that falls short of criminal or civil
liability. For debarment to have a legitimate deterrent effect,
and given that criminal or civil litigation may take several
years to reach a judgment, the FCC's debarment standards should
be more flexible, so that when an E-rate program participant
considers abusing the program or intentionally exploiting
program loopholes, it must also consider that the FCC has the
power to address the participant's abusive actions.
According to testimony, staff interviews, and criminal
plea agreements to date, USAC and the FCC have dedicated
insufficient attention and oversight to the activities of
program consultants such as Judy Green, George Marchelos, VNCI,
and NABSE.
USAC and the FCC have not done enough to ensure that
consultants play a fair and independent role in school
districts' E-rate programs, that they have no financial stake
in the outcome of the competitive bidding process, and that the
E-rate program is not billed for those consulting services that
are ineligible for E-rate funding. Testimony and documents from
the NEC BNS-related hearings demonstrate how these
``consultants'' either worked with willing and cooperative
school officials to defraud the program, or used their greater
knowledge of the program (or, in the case of NABSE, used its
position of trust) to take advantage of overly-reliant school
district personnel. According to testimony, documents, and the
NABSE marketing video, employees of NEC BNS and VNCI in many
cases had broad authority over decisions that should have been
made by school officials. In other instances, such as in San
Francisco, school district officials were extensively involved
in the fraudulent procurements; in Ecorse, Michigan, school
district officials were directly involved in highly
questionable procurements. Further, the hearings examined
documents showing a financial arrangement that NABSE had
established with preferred vendors, such as NEC BNS and
VNCI.25 However, staff found no information
indicating that either the vendors or NABSE ever disclosed
these contractual arrangements to NABSE's member school
districts.
---------------------------------------------------------------------------
\25\ Documents in the record only show payments made by VNCI to
NABSE. While the letter purporting to establish an E-rate program
partnership agreement was also signed by an IBM employee--Mr. Don
Parker, a Customer Services Executive for IBM Global Services--who also
appears in the NABSE E-rate program marketing video, the Subcommittee
has no other evidence showing IBM's actual involvement with NABSE's E-
rate ``Team.'' IBM representatives testified, and a subsequent IBM
letter submitted for the record declares (Hearing, Part 3, at 761-62),
that Mr. Parker was not authorized to enter into any E-rate program
teaming agreement with NABSE, and that IBM was not aware of the NABSE
E-rate program video that suggests IBM's partnership with NABSE.
Further, IBM's letter states that it has never made payments to NABSE
in exchange for E-rate business referrals.
---------------------------------------------------------------------------
C. The Denial of $500 million in applicant requests associated with IBM
During E-rate program Funding Year 2002, USAC rejected
program funding requests from 21 school districts totaling
approximately $517 million, due to a distinct pattern of
program rule violations. In particular, USAC identified a
pattern of procurement that violated the program's competitive
bidding requirements. With minor variations, each school
district engaged in a type of procurement that, according to
the FCC, in affirming USAC's decision, ``effectively eliminates
competitive bidding for the products and services eligible for
discounts under the [E-rate] support mechanism.''
Notwithstanding the FCC's decision that the school districts
violated E-rate program rules, the FCC permitted the rejected
applicants who submitted appeals to resubmit their E-rate
program applications for 2002 in accordance with proper
procedures. The FCC reasoned that allowing reapplications would
be in ``the public interest.'' 26
---------------------------------------------------------------------------
\26\ See the FCC ``Ysleta'' Order, FCC Order 03-313, December 8,
2003.
---------------------------------------------------------------------------
Although the Funding Year 2002 ``boilerplate'' applications
were noticed and denied by USAC, the identical bidding
procedure had actually succeeded during the prior E-rate
program Funding Year 2001, in El Paso Independent School
District (EPISD), Texas. This urban school district--the 7th
largest district in Texas, with 86 schools and approximately
62,000 students--had participated in every year of the E-rate
program. During the first three years, USAC approved $2.6
million, $6.4 million, and $1.4 million, respectively, in
program funding for El Paso. However, in Funding Year 2001,
after EPISD selected IBM as a ``Strategic Technology Solutions
Provider'' to integrate technology (including E-rate program
funded technology) throughout the District, El Paso's E-rate
program funding request swelled to more than $65 million.
IBM has participated as an E-rate program vendor since the
very start in 1998, and is the largest single recipient of the
program's ``internal connections'' funding. Over the course of
the program, IBM has received more than $832 million for E-rate
related work. In Funding Year 2002, IBM was associated with
more than $1 billion of E-rate program funding requests--almost
double the value from the previous year.
In El Paso, after the school district approved IBM as its
``technology integrator,'' IBM provided El Paso with E-rate
program ``statements of work'' for particular products and
services, as well as the associated documents for the
district's E-rate program application. These materials were
prepared through Alpha Telecommunications (Alpha), IBM's E-rate
program consultant. Without adequate analysis 27 or
price competition for the products and services, El Paso
submitted the documents provided by IBM as the basis of its E-
rate program application. With IBM serving as El Paso's primary
program vendor, USAC approved $65.7 million in E-rate program
funds in October 2001 for 52 schools. EPISD eventually spent
$57 million of this amount, and also paid its $6 million co-
payment.
---------------------------------------------------------------------------
\27\ See Hearing, Part 3, at 136.
---------------------------------------------------------------------------
After USAC approved El Paso's E-rate program request, IBM
aggressively marketed its ``systems integrator'' concept and
promoted its work in El Paso as an example of how IBM could
maximize E-rate program funds for other districts across the
country, focusing primarily on IBM's ``West'' sales region.
Documents in the record show that IBM supplied templates for
school districts to use in making their requests for proposals,
both for a strategic technology partner and for the E-rate
program related services. IBM's marketing and the boilerplate
E-rate program documents ultimately led to 21 school districts
selecting IBM to coordinate their E-rate projects. Those 21
contracts involved the previously mentioned $517 million in
funding requests for Funding Year 2002, which USAC began to
review in the spring of 2002.
Meanwhile, in January 2002, USAC received an anonymous
whistleblower letter that complained about IBM's role in El
Paso and which prompted USAC to scrutinize the procurement
process more closely. At that time, there was no indication on
EPISD's funding request that it had engaged IBM as a strategic
partner. USAC's investigation expanded to several other
districts in 2002, and directly led to the denials for funding.
USAC's investigation also determined that funds had been
disbursed for ineligible services performed by IBM and its
subcontractors.
Of the 21 districts that were denied funding by USAC, nine
districts (totaling $268 million in funds), appealed to the
FCC. Additionally, IBM submitted its own appeals on behalf of
eight of the districts. In December 2003, the FCC upheld USAC's
decision regarding eight of the nine districts, but allowed
them to re-submit applications for the funding year. The FCC
sided with the remaining appellant--Winston-Salem School
District, involving $16.7 million--determining that Winston-
Salem did not exhibit the same pattern that had triggered the
other rejections.
In light of the numerous applicants and the magnitude of E-
rate program funds involved, the Committee staff focused
extensively on the facts and circumstances surrounding these
IBM-related applications. Staff conducted interviews with
school officials at districts that were denied funding, and
particularly focused on the circumstances at the El Paso
Independent School District. Committee staff conducted a site
visit to EPISD in August 2003.
On September 22, 2004, the Subcommittee's third hearing
addressed information regarding the roles of the FCC, USAC,
IBM, Alpha Telecommunications, and several school districts
that worked with IBM in 2001 and 2002. The hearing examined the
integrity of the E-rate program application process generally,
and in particular, in the context of the IBM-related
applications. The hearing also considered the specific
circumstances leading up to and surrounding the denial of the
Funding Year 2002 applications.
The hearing presented a case study regarding the roles of
vendors and of school districts in the E-rate program
application process, and the propensity of schools and vendors
to ``gold-plate'' the technology of the schools, far exceeding
any reasonable educational technology needs. The hearing
considered: 1) how IBM ``captured'' the E-rate program planning
and procurement process at the schools by encouraging school
districts to adopt the concept of a ``strategic integrator,''
and how this placed IBM in a conflicted advisor/vendor
situation; 2) how vendors can ``bundle'' millions of dollars of
ineligible goods and services, in effect removing them from
USAC scrutiny; and 3) how weaknesses in the program were
exploited by a large technology industry icon--as well as by
school districts that were encouraged by the prospect of
essentially paying only ten cents on the dollar for technology
goods and services and of avoiding the difficult task of
adequately planning for the integration of infrastructure,
peripheral equipment, and teacher training with the technology
purchased by E-rate program dollars.
Findings from the IBM-focused hearing and related investigation:
Weaknesses in the E-rate program application process,
including applicant certifications, allowed non-competitive
procurement of E-rate related goods and services. The flawed
application process resulted in the extravagant and wasteful E-
rate program funding in EPISD in Funding Year 2001, and nearly
resulted in the waste of at least tens of millions of dollars
more, among 21 other large school districts in Funding Year
2002. Today, the FCC still allows anti-competitive or
insufficiently competitive procurement practices. The program
remains plagued with weaknesses in the application process,
including vague or ambiguous rules regarding the requirements
for competition.
Competitive bidding for particular products and services
sought by the applicants is fundamental to cost-effective
procurement of goods and services. The program's minimal
competition requirements and weak certifications do not ensure
such price competition. Consequently, the program is highly
susceptible to funding expensive, ineligible, and inappropriate
products and services.
The case in point is the El Paso Independent School
District (and the attempts to mimic that paradigm around the
country). Essentially, El Paso lacked any meaningful price
competition for the goods and services requested by the
District through the program. IBM was selected by the applicant
in a two-step process that enabled the company to be the only
service provider ``at the table'' when details of the goods and
services were placed on the E-rate program application. In this
instance, IBM made the most significant decisions regarding
what services to request. As school district officials
testified, district personnel had little time to review the
application before it was submitted to USAC and relied ``too
heavily'' upon IBM.28 In fact, IBM crafted portions
of the E-rate project ``statements of work'' without even
consulting with EPISD staff.
---------------------------------------------------------------------------
\28\ See Hearing, Part 3, at 135.
---------------------------------------------------------------------------
Whatever oversight the El Paso school district exerted
before the E-rate program forms were signed and certified, the
documents and testimony (as well as the templates used by IBM
around the country) show that the service provider was guiding
decision-making. This raises questions about the integrity of
certifications that school officials must make. IBM and its
consultant Alpha were able to bundle ineligible goods and
services at excessive rates. For example, IBM did not specify
in its invoices ineligible consulting services (i.e., Alpha's
assistance in determining school discount eligibility and in
preparing application forms and subsequent responses to USAC
queries), which cost the E-rate program more than $4 million
for El Paso alone. Alpha charged 7% for each E-rate program
funded statement of work that it helped to prepare. This fee
was actually rolled into the statements of work's final price
tags.29 USAC explained that these services were
ineligible for E-rate program funding. That is, if the school
district had sought the services provided by Alpha separately,
the E-rate program would not have covered the cost. Had similar
IBM-associated applications for Funding Year 2002 been
approved, the program would have paid out an even larger sum
for these ineligible consulting services. Further, the
consulting fees amount to just one part of more than $20
million in wasteful E-rate program spending in El Paso.
---------------------------------------------------------------------------
\29\ In a truly competitive bidding process, this additional 7%
``fee'' would have likely made IBM less competitive in each of its
bids.
---------------------------------------------------------------------------
Fortunately, USAC was able to identify the anti-competitive
practices and deny the ``technology integrator'' pattern of
applications in 2002. Subsequently, the FCC and USAC did
clarify rules and procedures regarding price competition in the
aftermath of these denials. However, underlying problems in the
process still remain. The FCC IG testified that IBM-related
applications highlight the IG's concern about weaknesses in the
rules governing competition for E-rate projects. One
fundamental weakness in this regard is the reliance on the Form
470 as the basis of competition. The FCC IG testified that the
current E-rate program competitive process is based upon the
faulty assumption that by posting a Form 470 on USAC's Web site
for 28 days--as the current rules require--healthy and rigorous
competition will occur. The FCC IG further testified that its
audits indicate that this ``frequently does not happen.''
Simply put, the Form 470 is too general for vendors to discern
project parameters and build robust, highly competitive bids
that meet the schools' needs, and therefore frequently fails to
generate the level of competition envisioned for the program.
The hearing testimony demonstrated that school officials often
fail to carry out their obligations to the competitive
process--for example, neglecting to provide interested vendors
with answers to questions about a given RFP.30
---------------------------------------------------------------------------
\30\ See Hearing, Part 3, at155-57.
---------------------------------------------------------------------------
Additional testimony illustrated that school districts
often already have vendors in mind when they post the Form
470s, or otherwise fail to respond to legitimate vendor
inquiries. This weakness provides some vendors with an
opportunity to insert themselves, inappropriately, into a
school's planning process. As one witness testified, service
providers ``prey upon applicants that have no knowledge of the
program but are told this service provider can get them money
for computers.'' 31 Testimony and documents suggest
that vendors have improperly sought advance commitments from
school officials. For example, documents in the record showed
IBM seeking ``verbal commits'' during the posting of RFPs and
the Form 470. USAC testified that if the verbal commit occurred
before the posting of the Form 470, that it would violate E-
rate program rules.32
---------------------------------------------------------------------------
\31\ Id.
\32\ Id. at 46.
---------------------------------------------------------------------------
Additionally, certifications made by school officials on
applications may not be sufficiently strong to deter false
claims and statements, and ultimately prevent waste, fraud, or
abuse. The FCC IG testified that reliance on beneficiary
``self-certification'' is a serious vulnerability because the
program uses these signatures as a primary bulwark against
improper funding requests. Without an ability to police these
certifications and punish false statements, this flaw opens an
avenue for waste and abuse. There have been no false statement
charges asserted in the criminal indictments, to date, or that
are being pursued by ongoing federal investigations, as
reported by the FCC IG.33 The FCC IG testified that
the FCC waited until September 2004 to begin to address some of
the Justice Department's December 2002 recommendations
regarding the certifications.
---------------------------------------------------------------------------
\33\ Id.
---------------------------------------------------------------------------
El Paso and other school districts involved in the IBM-
related ``strategic integrator'' applications demonstrate that
the current E-rate program application approval process cannot
either prevent ``gold-plating,'' which far exceeds the
reasonable needs of a school district, or ensure the cost-
effective delivery of E-rate program goods and services. In
fact, the program's current structure may actually encourage
gold-plating.
The Subcommittee's work unearthed a number of vivid
examples of wasteful and excessive spending. For example, the
El Paso application persuaded USAC to fund a $27 million,
state-of-the-art network maintenance support center for 53 of
the district's poorest schools to keep the network ``up and
running.'' 34 As troubling, the $27 million
maintenance center only operated for three months before the
funding year ended. Even though IBM billed USAC and the
district for the full $27 million, most of the funds were
dedicated to the design and set up of the maintenance center.
Further, the set-up costs involved included ineligible
inventory surveys, high-level design and planning, and leasing
and construction of an off-site call center.35 In
the end, the help desk possessed so much capacity that IBM
sales staff considered using it to support other school
districts.36
---------------------------------------------------------------------------
\34\ Id. at 246.
\35\ Documents in hearing record reveal funding for maintenance
support covered more than ``basic maintenance.'' See Id. at 478-79,
556-57, 561-65.
\36\ Email subject line ``TSO Support Multiple ISD,'' from Milota
to Diaz et. al, of IBM, July 18, 2002. (This document is stored at the
Committee on Energy and Commerce.)
---------------------------------------------------------------------------
At the hearing, EPISD's superintendent testified that the
district did not get its money's worth from the partnership
with IBM. Moreover, documents show that the maintenance system
placed an enormous burden on the district's resources,
prompting El Paso to redirect some of its staff to assist with
the help desk. For all the 2001 E-rate project's promise, the
district technology director became concerned that the district
had ``bit off more than it could chew,'' and documents and
testimony show that he had difficulty articulating the value of
the maintenance center to the school board.37 When
USAC rejected the district's E-rate program application for
Funding Year 2002, IBM removed the associated-equipment and
closed the center--to the surprise of the school district--and
left the school to manage on its own, on roughly a $2 million
annual technical maintenance budget--or about 7% of the IBM
maintenance support funding.38 It should be noted
that no technical assistance relating to the problems with
computers, printers, or other non-E-rate program equipment were
eligible under this maintenance support. Most technical
problems with E-rate program eligible equipment should have
been provided for under the standard warranties that IBM and
other equipment vendors provide purchasers. It is no
exaggeration to claim that virtually the entire $27 million
maintenance operation was ineligible.
---------------------------------------------------------------------------
\37\ See Hearing, Part 3 at 560, 570.
\38\ IBM testified that its maintenance costs were high because the
District was moving from essentially no maintenance infrastructure to
the set up of ``a large, complex system.'' Actual maintenance and
``help desk'' support represented only a portion of the total costs.
See Id. at 260, 261.
---------------------------------------------------------------------------
Another example of waste may be found in the failure to
prevent excessive and redundant acquisition of E-rate program
goods and services. In El Paso, the scope of work was drafted
by IBM to include all 86 schools in the district, not the 53
that were eligible for funding. Yet the district made no change
in the scope of work applied for, and thus received funding for
an additional 33 schools. In the Dallas Independent School
District (DISD), IBM planned and priced the E-rate program
related work for all of the district's 245
schools.39 Documents and testimony indicate that, as
a result, the initial request to USAC for $216 million for the
district's 155 eligible schools was excessive. The Dallas
School District official responsible for the project testified
that when he reviewed the application, he was able to cut about
$86 million in duplicative products, services, and support.
Overly duplicative applications were also part of the broader
pattern of applications associated with IBM in Funding Year
2002. Documents in the record indicate that IBM recommended
(and drafted into its statements of work for each applicant)
``stand-alone'' E-rate projects that had maintenance and other
installation services actually built into the cost, in the
event that other maintenance projects were rejected. This
approach led to large, redundant requests that inflated the
cost.
---------------------------------------------------------------------------
\39\ Id. at 617.
---------------------------------------------------------------------------
E-rate program technology plan requirements and resource
requirements for school districts insufficiently guard against
waste, fraud, and abuse.
EPISD maintained that the $27 million maintenance operation
and $30 million worth of other E-rate program related work was
consistent with the district's technology plan. However, that
technology plan--as is generally the case for E-rate program
technology plans--was insufficient to prevent waste, fraud, and
abuse. In fact, the initial $70 million in funding requests was
made under the technology plan used by the EPISD the previous
three years, when the school district received E-rate program
funds averaging $3.4 million per year. The plan provided no
meaningful measures to ensure that the goods and services
purchased were reasonably connected to the school district's
needs and abilities. Significantly, USAC's guidance on
technology plans notes that ``it is only necessary that the
approved plan include a sufficient level of information to
justify and validate the purpose of a Universal Service Program
request. However, it does not have to include the specific
details and information called for on FCC Forms 470, 471, and
486 [request to commence invoicing].'' 40 Moreover,
USAC does not review plans as part of its normal application
review process. The FCC in its August 2004 Fifth Report and
Order declined recommendations to require such review, ``for
administrative efficiency.'' Given weaknesses in content and
timing of plan preparation--the FCC only ``expects,'' not
requires, that plans are prepared prior to posting a Form 470.
41
---------------------------------------------------------------------------
\40\ See USAC technology plan guidelines at
www.sl.universalservice.org
\41\ See FCC Fifth Report and Order and Order, August 2004, 56,
62.
---------------------------------------------------------------------------
The program does not ensure that schools and teachers
have chosen goods and services they actually need.
Despite spending more than $60 million in E-rate program
funds, as well as its own money, for services and upgrades to
its telecommunications infrastructure, El Paso was actually
reducing its focus on integrating technology into the
classroom. In the first three years of the program, the
District's head of instructional technology, Ms. Sharon Foster,
coordinated E-rate program applications. When Ms. Foster
departed, E-rate program management was completely shifted to
the technology department, which, by all available information
to the Subcommittee, neglected to coordinate with the
instructional needs of teachers. Indeed, during an August 2003
site visit, Subcommittee staff learned that in the year leading
up to and following installation of the Funding Year 2001
project, El Paso effectively eliminated eight to ten ``Campus
Technology Coordinators.'' In short, the district eliminated a
key element for coordinating training and curricula needs with
the E-rate program application for goods and services.
Consequently, high-quality gear and services were not being
fully utilized more than a year after the systems were
installed.
Hearing testimony by Ms. Foster also provided a broader
perspective to the issue. That is, absent a direct link to the
instructional needs of the students, school districts that have
been driven by vendor influence have ``asked for too much too
quickly and were not in the best position to fully support
technology projects for which funding was awarded.''
42 ``In short,'' she said, ``staff development, like
the funding for network and technology projects, must be on a
consistent, realistic, multi-year basis.'' 43 With
these weaknesses in technology planning and application
certifications the E-rate program lacks an effective and
reliable mechanism for ensuring that E-rate program funding
requests are driven by instructional need.
---------------------------------------------------------------------------
\42\ See Hearing, Part 3 at 154.
\43\ Id.
---------------------------------------------------------------------------
Unclear rules and program procedures and delays in
program funding generate confusion among applicants and
vendors, and are a source of waste.
Testimony by E-rate program vendors and school district
officials provided an important perspective regarding the E-
rate program's rules and operation. First, substantial
confusion regarding goods and services eligibility and the
interpretation of vague rules and procedures contributes to
waste and abuse. Notably, the FCC essentially acknowledged this
confusion in its ``Ysleta'' Order regarding Funding Year 2002.
Furthermore, the ambiguity of program rules also provides an
incentive to vendors and consultants to take advantage of
school districts that have either not necessarily planned for
the E-rate program adequately, or that are not equipped with
``technology-savvy'' staff.
Second, the structure of the E-rate program funding cycle,
with its very large time span between when an application is
submitted and when it is funded, does not efficiently fit into
the typical school district's budget and planning cycles--an
issue the Committee staff observed in many school districts.
This disconnect between typical school operations and the
program's funding process generates waste, because districts
must either scramble to spend the funds before the program's
implementation deadlines, or apply for E-rate program funds
before other resources have been budgeted and secured.
According to testimony, school districts that are burdened by
limited planning in the first place may struggle to manage the
overlapping phases of three E-rate program funding years that
may be occurring at any one time. This inherent program
confusion and delay contributes even more complexity to the
effective implementation, management, and oversight of the
program, from the perspective of the applicants, USAC or the
FCC.
D. E-rate Related Investigation of Chicago Public Schools
The Subcommittee's E-rate program oversight hearings were
largely focused on the programmatic flaws and concerns with the
program's ``front end'' application process. Significantly, our
work has determined that the E-rate program also encountered
problems during the ``implementation'' stage of the funding
process--that is, the period of time when E-rate program goods
and services are provided, and the funds actually are spent.
Subcommittee oversight of Chicago Public Schools' (CPS)
participation in the E-rate program, and CPS' relationship with
the school district's program manager, SBC Telecommunications
(SBC) 44, helped to illuminate some of the major
pitfalls of E-rate program implementation. In Chicago, the
school district created an environment that encouraged program
fund mismanagement by both the school and the primary E-rate
program contractor, SBC, and led to the improper stockpiling of
$8.5 million in internal connections equipment, much of which
included expensive electronic switches that never left
distribution warehouses.45
---------------------------------------------------------------------------
\44\ See Investigation Report by Mayer, Brown, Rowe & Maw LLP,
dated January 14, 2004 (Mayer Brown Report) at 21. (The Report is
stored at the Committee on Energy and Commerce).
\45\ Id. at 2 and 35.
---------------------------------------------------------------------------
CPS is one of the largest school districts in the country,
with nearly 600 schools and 435,000 students. CPS has received
over $236 million in E-rate program discounts since the
program's inception, and according to the district has spent
over $600 million of non-E-rate funds on infrastructure
improvements necessary to prepare the schools for the internal
connections funded by the E-rate program.46 Chicago
became one focal point of the investigation as a result of
Committee letters sent during July 2003 to 14 E-rate program
vendors, including several SBC operating units.
---------------------------------------------------------------------------
\46\ See Investigation Report by Hogan & Hartson LLP, dated August
16, 2004 (Hogan Report) at 1. (The Report is stored at the Committee on
Energy and Commerce.)
---------------------------------------------------------------------------
During the course of the Committee's work, staff visited
school districts across the country to observe first-hand how
the E-rate program was actually being implemented. Among the
site visits were two trips to Chicago, one in early December
2003 and the other in late August 2004, during both of which
staff conducted interviews of the relevant employees of SBC and
CPS. Staff had scheduled a December 11, 2003 site visit to
Chicago, and on December 9, 2003, SBC's Washington, D.C. office
contacted staff to alert the Committee regarding a then-current
stockpile of $5 million worth of E-rate program related
inventory sitting unused in three Chicago warehouses. Committee
staff later ascertained that SBC officials in Chicago had
knowledge of the stockpiled equipment at least since early
2001, when more than $8 million sat in inventory. There is no
evidence indicating that SBC's knowledge extended beyond the
Chicago office. Staff also determined that school district
officials were aware of the inventory at least as early as
April 2002. Staff further learned that SBC had been reimbursed
by USAC for this unused equipment.
Also in December 2003, SBC tasked the law firm Mayer,
Brown, Rowe & Maw LLP (``Mayer Brown'') to conduct an internal
investigation regarding the improper stockpiling and billing of
USAC for the equipment. On January 14, 2004, the Committee
issued a second letter to SBC requesting further details and
documentation of the E-rate program in Chicago, and
particularly the circumstances surrounding the equipment
stockpiling. In mid-January 2004, Mayer Brown completed its
investigation, and SBC provided a copy of the firm's report to
the Committee.47 The Mayer Brown Report concluded
that SBC had violated program rules and that the company was
required to return $8.8 million to the E-rate program. On
January 16, 2004, SBC submitted a payment of $8.8 million to
USAC. Subsequently, in late January 2004 the Committee
requested further documents and information from the school
district regarding its participation in the E-rate program, and
specifically regarding the inappropriate stockpiling. CPS hired
outside counsel, the law firm Hogan & Hartson LLP (``Hogan''),
which conducted an investigation and prepared a report of its
own. CPS provided the Committee a copy of the report on August
16, 2004.48
---------------------------------------------------------------------------
\47\ See Mayer Brown Report.
\48\ See Hogan Report.
---------------------------------------------------------------------------
During Funding Year 1999, USAC approved CPS' request for
$66 million for internal connections projects in July
1999.49 CPS awarded a contract for management of the
E-rate program project to SBC, which had specifically held
itself out to CPS as having an expertise in project
management.50 Due to a number of issues, including
inconsistent decisions by CPS administrators and poor planning,
as well as lengthy USAC funding-decision delays, CPS faced a
severe time crunch for fully implementing the $66 million
project before the funding year's deadline of September
2000.51 Consequently, CPS instituted a ``Fast
Track'' plan between June and September of 2000 to accomplish
basic Local Area Network (LAN) 52 construction in as
many schools as possible before the deadline.53 That
decision ultimately led SBC and its subcontractors to bulk
purchase and stockpile large quantities of internal connections
equipment, including several hundred Cisco
switches.54 SBC submitted invoices and was
reimbursed for this equipment, much of which had not been
installed, violating E-rate program rules.55
---------------------------------------------------------------------------
\49\ See Mayer Brown Report at 27.
\50\ See Hogan Report at 23. See also Mayer Brown Report at 21.
\51\ Id. at 27-32. See also Hogan Report at 31-38.
\52\ A LAN is generally defined as: ``A system that links together
electronic office equipment, such as computers, and forms a network
within an office or a building.'' (Webster's II New College Dictionary,
3rd Ed., Houghton Mifflin Co., 2005). An ``Ethernet'' is one example of
a LAN.
\53\ See Mayer Brown Report at 32-33.
\54\ Id. at 35-38.
\55\ Id. at 39. In general, after a school certifies to USAC on an
E-rate Form 486 that the applicant ``is receiving, is scheduled to
receive, or has received service'' from the vendor, USAC will reimburse
the vendor upon receipt of the vendor's invoices. Subsequently, the
vendor may submit a Form 474 (``service provider invoice''), informing
USAC the amount of E-rate program funds owed to the vendor for the work
performed. While the vendor indicates either the date it billed the
school district for the work or the date that it completed the E-rate
program related work, there is no requirement for the vendor to provide
detailed billing information or supporting documentation.
---------------------------------------------------------------------------
In April 2002, SBC and its major equipment supplier, Cisco,
prepared an E-rate program related work proposal for marketing
to Chicago Public Schools a ``refresh'' of the uninstalled
switches. SBC and Cisco described the warehoused switches to
CPS as being ``obsolete.'' 56 The SBC/Cisco switch
refresh required that the school district return the ``old''
unused switches for a minimal discount against the cost of the
new switches.57 Thus, CPS and the E-rate program
would essentially pay twice for equipment that had never been
installed into the school district's networks.58
Under E-rate program rules and procedures, USAC would have
simply approved the funding request for the new switches from
CPS--as long as the request form was correctly filled out,
submitted, and certified. At the time, USAC had no safeguards
to prevent this sort of ``refreshing'' of otherwise usable
equipment, or for detecting duplicative equipment requests.
---------------------------------------------------------------------------
\56\ See Mayer Brown Report at 44. According to staff interviews of
Cisco employees, however, the switches were far from obsolete, either
in terms of their usefulness or the last date for which service support
would be available.
\57\ Id. at 45.
\58\ Id.
---------------------------------------------------------------------------
In sum, the Chicago Public Schools case study highlights
management and implementation problems that may be encountered
when carrying out a very large and expensive E-rate program
internal connections project over multiple years. The extended
delay by USAC in making a funding commitment to Chicago Public
Schools led the school district to make key project decisions
that further compounded implementation issues. Furthermore, the
case study highlights the limitations of USAC to effectively
oversee the implementation of such complex projects.
Additionally, then-Chairman Tauzin and then-Subcommittee
Chairman Greenwood requested further documents and information
from SBC regarding its participation in the E-rate program in
other regions of the country. SBC responded to the Committee's
request, providing information to the Committee regarding: (1)
an SBC Connecticut sales employee who discussed with school
officials the possibility of inflating SBC's bid costs, so that
sufficient margin would be available to cover Bridgeport Public
School's co-payment; (2) SBC Ohio personnel who offered to
provide Cleveland Municipal Public School District an interest-
free loan to cover its co-payment, which the school rejected
after its attorneys determined that such a transaction would
violate E-rate program rules; and (3) an SBC refund to SLD of
$1.4 million in E-rate program funds from Funding Year 2003
that had been spent on ineligible services in New London,
Connecticut.59 In the Connecticut instance, SBC
later entered into a consent decree with the FCC in which SBC
made ``a voluntary contribution to the United States Treasury
in the amount of five hundred thousand dollars'' in addition to
the $1.4 million that it had refunded to the SLD.60
SBC also agreed to implement an extensive E-rate training and
compliance program for its employees, designate regional E-rate
program coordinators throughout the company, and create its own
internal E-rate program oversight structure.61
---------------------------------------------------------------------------
\59\ See Letter from SBC to the Committee on Energy and Commerce,
dated August 6, 2004. (The document is stored at the Committee on
Energy and Commerce.)
\60\ See FCC/SBC Consent Decree, adopted December 14, 2004.
\61\ Id.
---------------------------------------------------------------------------
Findings from the Chicago Public Schools related investigation:
The timing of the E-rate program application, review, and
approval process makes implementation of large internal
connections projects, such as at Chicago Public Schools,
particularly vulnerable to waste, fraud, and abuse.
Because of the very long delays in funding decisions by
USAC, CPS faced the dilemma of spending $66 million for Funding
Year 2000 in only a matter of months. (In fact, during the
course of the investigation, the Subcommittee frequently came
upon instances in which school officials and their vendors
found themselves with large sums of E-rate program funds being
approved late in the program funding cycle and very little time
to utilize those funds before the deadlines.) In late July
2000, the CPS Board and CEO directed Ms. Elaine Williams (the
head of the school district's Office of Technology Services),
against her recommendation to return unspent funds to USAC
62, to spend $54 million by September 30,
2000.63 This gave rise to the decision to implement
the Fast Track program, setting off a chain of events that led
to advance purchases of large amounts of equipment by SBC's
distributors, and ultimately to the stockpiled surplus. Indeed,
the SBC project management team in Chicago believed that the
lynch pin to completing the work and utilizing the funds by the
program deadline was materials procurement.64
---------------------------------------------------------------------------
\62\ It is not necessarily the case that CPS or any other school
district that did not spend the entire committed amount in a given
Funding Year would lose those funds. In the first instance, applicants
have the opportunity to submit a request for an extension of time to
complete the E-rate related project. Furthermore, USAC would likely
approve a new application, for the following Funding Year, to complete
the work that it had previously authorized.
\63\ See Mayer Brown Report at 34.
\64\ Id. at 35.
---------------------------------------------------------------------------
SBC and CPS agreed that bulk purchase of key materials,
including ``long-lead-time'' components, was indeed the
solution, and on July 20, 2000 CPS authorized SBC to make the
bulk purchases.65 Among other steps, SBC placed a
purchase order with each of its three distributors for a total
of $24.5 million, based upon a generic ``template design'' for
wiring all of the schools.66 SBC also placed a $3
million open purchase order with each distributor ``to cover
the materials needed for the Fast Track installations for both
E-rate Year 2 and Year 3 which . . . had an identical scope of
work and an overlapping three-month period.'' 67
According to one SBC program manager, contractors may have
deliberately ordered excess materials to prevent any
delays.68 Ultimately, the Mayer Brown investigation
determined that the initial Fast Track invoices were not based
on actual shipments to schools, but rather were `` `pre-bills'
for materials that were not yet shipped, but merely ordered or
to be ordered by the distributors.'' 69
---------------------------------------------------------------------------
\65\ Id. at 36.
\66\ Id.
\67\ Id.
\68\ Id.
\69\ Id. at 37.
---------------------------------------------------------------------------
Further procurement confusion grew from a three-month
overlap in E-rate program Funding Years 1999 and 2000, as well
as from the fact that the ``scope of work'' for CPS' LAN
project was identical for each year.70 According to
the Mayer Brown Report, this may have fostered ``a lack of
rigor among project personnel in failing to assure that all
work funded with E-rate Year 2 SLD dollars was completed by the
Year 2 implementation deadline, rather than being allowed to
spill over into E-rate Year 3, and beyond.'' 71
---------------------------------------------------------------------------
\70\ Id. at 32.
\71\ Id.
---------------------------------------------------------------------------
Building upon the unintended consequences, SBC's three
distributors purchased directly from the switch vendor, Cisco,
rather than through the program manager, SBC.72
Thus, ``SBC had to pay the standard, non-discounted prices for
the Cisco network equipment that its distributors had
purchased, rather than the 35% bulk-rate discounts that would
have been available on Cisco equipment had SBC ordered the
equipment directly from Cisco.'' 73 Indeed, at a
June, 2003 ``Inventory Issues Meeting'' between CPS and SBC,
the meeting minutes state:
---------------------------------------------------------------------------
\72\ SBC is one of Cisco's industry ``channel partners,'' and as
such Cisco extends a substantial discount to SBC on its equipment
purchases.
\73\ See Hogan Report at 40.
---------------------------------------------------------------------------
when CPS questioned why the amount paid for the
original Cisco equipment (switches) was so large
(approximately $4 million), SBC stated that they paid
full price for the Cisco materials. SBC could not
obtain a discount, as is customary, because they
ordered the Cisco Equipment from distributors. The
discount can only be obtained if the order is placed
directly through Cisco (material ordered directly from
Cisco is discounted at 35%). SBC stated that there was
not enough time to place the order directly with Cisco
because of the time constraint imposed by the September
30 deadline.74
---------------------------------------------------------------------------
\74\ See Mayer Brown Report at Tab 30, at 9.
---------------------------------------------------------------------------
Finally, with regard to the implementation phase of very
large E-rate program projects, there is no commensurate
oversight by the FCC or USAC after applications for funds are
approved for disbursement. As a case in point, USAC's Arthur
Anderson beneficiary audit of Funding Years 1999 and 2000 at
Chicago Public Schools completely failed to identify the $8.5
million in uninstalled inventory that USAC had funded. Instead,
the audit identified some other billing and invoice
discrepancies, which ultimately prompted CPS to hire its own
auditor, KPMG. KPMG resolved many of the problems identified by
Anderson, but also identified the deeper problems of program
management detailed above.
SBC and CPS failed to effectively plan, manage, and keep
accurate records, and failed to resolve problems in a timely
manner, which led to considerable waste.
The SBC project management team in Chicago failed to
understand the E-rate program's rules. According to the Mayer
Brown Report, ``[e]mployees involved with the CPS E-rate
Program had not received adequate training with respect to
contractor obligations in a federally-funded program. This lack
of training with respect to the unique obligations imposed
under such a program resulted in the employees inappropriately
relying on exchanges of e-mails with a federal agency for
interpretation of federal regulatory requirements . . .''
75
---------------------------------------------------------------------------
\75\ Id. at 3.
---------------------------------------------------------------------------
SBC's account team lacked training regarding the issues
surrounding the receipt of federal funds.76 The SBC
``management team received no formal E-rate training, nor
training on regulatory compliance . . .'' and the individuals
in charge of that team ``had no prior experience in managing E-
rate projects or contracts involving federal funds.''
77 For example, SBC's ``program executive'' for the
Chicago E-rate project lacked any experience on federal
government contracts or E-rate program projects prior to her
leadership of the CPS LAN project.78
---------------------------------------------------------------------------
\76\ Id. at 26.
\77\ Id.
\78\ Id.
---------------------------------------------------------------------------
The Mayer Brown investigation found that ``at least by the
end of 2000, SBC personnel were aware of the general
requirement that materials be `delivered and installed' in the
E-rate year in which the materials were purchased.''
79 SBC's subcontractor, TeamWerks, when told in
writing by the SLD that it was against the rules to bill for
``work'' not installed by September 30, 2000, characterized
that guidance as ``quite ambiguous'' because the SLD had made
no reference to ``materials.'' 80 Ultimately, SBC
decided to roll forward the Funding Year 2000 inventory to
Funding Year 2001--despite its knowledge of the rules requiring
delivery and installation--based upon a tenuous distinction
between ``returned'' excess inventory and excess materials that
had never left warehouses.81 Further, SBC project
leaders were willing to rely on an old and vague e-mail message
from April 2001 to support their actions.82
---------------------------------------------------------------------------
\79\ Id. at 54.
\80\ Id. at 55.
\81\ Id. at 56.
\82\ Id. at 1-2. When KPMG first learned of the April 2001 e-mail
to the SLD, it described the question as ``misleading''--``apparently
because it used the words `some inventory' instead of disclosing the
amount.'' Id. at 48.
---------------------------------------------------------------------------
The school district also was responsible for the spate of
program management problems. In order to ensure sufficient
electrical power support for the LAN project, CPS undertook an
electrical service upgrade at the same time as the LAN
implementation.83 CPS chose to execute both projects
simultaneously, through a single contractor leading both
efforts--even though the electrical infrastructure upgrades
were not E-rate program eligible. As a result, ``the LAN
installation and power upgrade work contributed to a convoluted
organizational structure for the overall project.''
84 Furthermore, SBC did not report directly to the
school district. Instead, a consulting firm named Chicago
School Associates (CSA) was hired by the district to manage the
LAN installation and power upgrade general contractors,
including SBC, so SBC's project team reported to the Director
of Program Management at CSA.85
---------------------------------------------------------------------------
\83\ Id. at 28.
\84\ Id.
\85\ Id.
---------------------------------------------------------------------------
The school district made several other decisions that
hampered project planning and efficiency, including, among
others: 1) CPS had 250 schools that had separately applied for
Funding Year 1999 E-rate funds, and which were outside the
scope of the CPS-SBC agreement, but which still required E-rate
program work to be accomplished; 2) the LAN project was
initially supervised by the district's Capital Improvements
Department, not by the Office of Technology Services where the
knowledge of the E-rate program and the LAN project actually
resided; 3) the Capital Improvements Department generated its
own LAN designs for the schools, despite the lack of necessary
technical expertise, resulting in the majority of the designs
being rejected by SBC and its network architect; 4) CPS
required SBC to seek combined LAN/power upgrade bids from
subcontractors 86; 5) CPS failed to promptly issue
SBC a ``notice to proceed,'' further constraining the time
available to fully utilize E-rate program funds before the
funding deadline; 6) CPS delayed providing SBC specific school
assignments for E-rate program LAN work; and 7) CPS frequently
made revisions to the list of schools at which SBC needed to do
E-rate program work. These sorts of choices ultimately end up
costing a school district countless dollars in E-rate program
resources.
---------------------------------------------------------------------------
\86\ The Mayer Brown Report points out that because these combined
bids were screened for the lowest lump sum price, the district had no
guarantee that the E-rate program portion of a particular subcontract
was being awarded to the lowest bidder for those services. Id. at 29.
---------------------------------------------------------------------------
The E-rate program offers vendors a powerful incentive to
sell unnecessary or excessive gear, and to upgrade equipment
quickly.
According to the Mayer Brown Report, under the SBC-CPS LAN
Agreement, SBC agreed to contract directly with contractors to
perform the construction, installation and related services and
to be responsible for paying such subcontractors on a timely
basis. Generally, ``SBC would be compensated by adding a 9.5%
project management fee to the amounts it paid out to its
contractors.'' 87 Further, explains the Mayer Brown
Report, ``given the costly infrastructure that SBC had to put
in place to manage the project, SBC faced the risk of losing
money on the contract if CPS failed to authorize a level of
work sufficient to generate project management fees in excess
of SBC's costs. The structure of the contract's payment terms
created an economic incentive for SBC to encourage CPS to spend
the full amount of any Universal Service Fund award it received
from SLD.'' 88
---------------------------------------------------------------------------
\87\ See Mayer Brown Report at 21-22.
\88\ Id. at 22.
---------------------------------------------------------------------------
One additional result of this economic incentive was the
problematic ``refresh'' proposal, described above, involving
warehoused, new switches that Cisco and SBC described as
``obsolete.'' While the switches that CPS had purchased only
months before were no longer ``top of the line'' due to
technological advances, they were more than adequate for the
district's governing technology plan at the time. The
``obsolescence'' to which the vendors referred actually
described the fact that the equipment possessed a finite date
beyond which it would not be eligible for vendor maintenance.
Yet, the switches at issue in Chicago would not reach that
service life end date for another five years.
In the end, CPS bought new switches to replace ones that
had never been installed and which had only been purchased mere
months before vendors were proposing to replace them. This
replacement of uninstalled equipment ultimately led to
unnecessary costs for both the school district and for the E-
rate program. While the proposal included a small trade-in
rebate on the old switches, CPS would essentially be wasting
nearly $3.6 million.89
---------------------------------------------------------------------------
\89\ Id. at 45. While the full refresh plan was never carried out,
a smaller variation of the refresh went forward. Importantly, however,
SBC maintains that the SLD had not been billed for the purchase of the
new switches because CPS never approved the relevant invoices. Id. at
47.
---------------------------------------------------------------------------
E. E-rate Related Investigation of Atlanta Public Schools
In May 2004, a series of investigative reports by the
Atlanta Journal-Constitution (AJC) newspaper alleged widespread
waste, abuse, and mismanagement of more than $60 million in E-
rate program funds by officials at Atlanta Public Schools
(APS). Subsequently, in June 2004, the Committee began an
investigation and issued several letters to the district and
its primary vendors, requesting documents and information
regarding APS' E-rate program.90 The Committee's
letters focused on serious allegations that included the
improper stockpiling of more than $4.5 million in E-rate
program funded equipment, non-competitive bidding for E-rate
program work, installation of multiple $100,000 Cisco switches
in a single school, and other examples of ``gold-plating.''
91
---------------------------------------------------------------------------
\90\ See Committee Letter to Dr. Beverly L. Hall, Atlanta Public
Schools, dated June 8, 2004.
\91\ The Subcommittee concluded its investigation without
determining who was responsible for the decisions regarding the
installation of these expensive Cisco switches or other gold-plating in
Atlanta that wasted E-rate program funds. In Chicago, where Staff
conducted an extensive investigation of CPS' participation in the
program, Cisco was a prime motivator in the school district's decision
to install unnecessary switches, as explained, supra, at 35-36.
---------------------------------------------------------------------------
The Committee also sought details regarding BellSouth's
installation of an expensive high-capacity network ``backbone''
into the district's elementary schools, despite warnings to the
school board by APS' technology director at the time, that the
project expansion was unnecessary and proceeding too rapidly.
On December 19, 2004, a follow-on article by the AJC reported
that school district officials diverted about $5 million in E-
rate program funds, between 2000 and 2002, to cover the cost of
unauthorized or ineligible goods and services, including
consulting fees, plasma television monitors, cell phone bills,
and wireless Internet access for two of the district's football
stadiums.
APS is comprised of 95 schools and approximately 57,000
students, with 80 of those schools at the E-rate program's 90%
discount level. During the first four years of the E-rate
program, $81 million was committed to APS, of which
approximately $59 million has been disbursed. Additionally, a
state educational consortium (known as the Metropolitan
Regional Educational Service Agency, or MRESA) supplied an
estimated $8 million in E-rate program funded equipment to the
district during Funding Year 1999. Thus, the district has
received roughly $68 million in E-rate program funded products
and services. In Funding Year 2002, APS requested $71 million
from E-rate, but USAC denied that application because APS
submitted an E-rate program application that was associated
with the anti-competitive ``strategic technology partner''
application process involving IBM, as described earlier in this
report.
A case study of Atlanta Public Schools therefore provided
an opportunity to examine various dimensions of the
implementation of E-rate program funded goods and services.
Subcommittee staff recognized issues relating to competitive
bidding procedures and the awarding of E-rate program
contracts, ``gold plating'' schools with unnecessary
technology, ordering equipment that might never have been
installed, and funding of equipment that was not ordered. In
response to the Committee's letter, the school district
committed itself to providing answers to all of the Committee's
questions by conducting an internal investigation and
submitting a comprehensive report on its findings.92
As a preliminary answer to the requests for documents and
information, on September 23, 2004, APS provided an ``interim''
report 93 to the Committee, prepared by its outside
counsel, Greenberg Traurig, LLP (``Greenberg'').
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\92\ As staff commenced work regarding Atlanta, attempts were made
to interview several former school officials who were key decision-
makers in APS' E-rate program. Two former leaders of the school
district's technology department during the relevant time period
declined, through their respective attorneys, to be interviewed
regarding APS' participation in the E-rate program. Significantly, the
respective attorneys for the two technology department officials each
stated that, unless granted immunity, his client was likely to invoke
his Fifth Amendment rights if invited to testify at a Committee
hearing.
\93\ See Atlanta Public Schools E-rate Program Interim Report by
Greenberg Traurig, LLP, dated September 23, 2004 (Greenberg Interim
Report). (The Report is stored at the Committee on Energy and
Commerce.)
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Greenberg submitted an ``interim'' report because the
school district continued ``to review documents including
electronic data recovered during the investigation. Also, the
information contained in this report was not based upon a
complete audit.'' 94 Further, the interim report was
submitted without the benefit of adequate interviews of several
key school officials, and did not answer the Subcommittee's
Question No. 6, regarding the school district's competitive
bidding procedures, and Question No. 7(a), regarding any
circumstances in which ``the school did not receive the
products and services as specified on E-rate applications or
invoices.'' 95 Thus, the interim report failed to
answer critical questions about waste, fraud, and abuse in the
district's E-rate program.
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\94\ Id. at 1.
\95\ Id. at 6. See also id. at 116-17.
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In fact, Greenberg informed Subcommittee staff that APS
could not produce a complete report without further document
retrieval and review and that it would cost approximately
$80,000 to do so. Given the breadth and scope of E-rate program
waste, fraud, and abuse that the Subcommittee had already
uncovered and examined elsewhere, it was decided that requiring
the public school system to incur these additional costs was
not essential for the Subcommittee to complete its work. Thus,
before APS submitted a final and complete report, the
Subcommittee finished its two-year investigation and began the
work of assembling its findings to assist in laying the
groundwork for legislation to improve the program. In the
meantime, APS decided not to proceed with the additional work
and expense of its internal investigation in connection with
the Subcommittee's request.
Moreover, because the Subcommittee ended its E-rate program
investigation, having accumulated sufficient information
regarding the program and its weaknesses, staff did not
continue to further develop information regarding the
respective roles of the school district and its E-rate program
vendors in Atlanta. Because this information was not fully
developed, Subcommittee staff has chosen not to include a
``findings'' section within this report.
In February 2005, however, APS issued a press release on
its Internet website entitled ``National E-rate Investigations
Not Focused on APS,'' 96 in which it misrepresented
the outcome of the Subcommittee's work. The school district
declared that it had conducted an ``exhaustive probe'' and
provided the Subcommittee with a report and eight boxes of
documents. The document further stated that ``after reviewing
the files, Congress took no action against the APS,'' implying
that the Subcommittee gave APS a clean bill of health regarding
its participation in the E-rate program.97 As
previously mentioned, contrary to APS' representations, the
documents and interim report did not answer all the serious
questions regarding the school district's management of its E-
rate program. Additionally, the report incorrectly declared
that APS had ``no documentary evidence'' regarding an
allegation that vendors had improperly influenced the E-rate
program application process during Funding Year 2002. In fact,
the school district had e-mail documents that supported the
allegation and that at least called for further examination by
APS.98
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\96\ See http://www.atlanta.k12.ga.us/news/goodnews/doc/
022505SoutheastInvestigationOver.pdf
\97\ On May 6, 2005, the Atlanta Journal-Constitution reported that
in late April the Justice Department subpoenaed E-rate related records
from Atlanta Public Schools, for delivery to a federal grand jury by
May 24, 2005.
\98\ The report states that investigators could not locate any
documentary evidence supporting an allegation that an IBM
representative established a close relationship with Mr. Robert Beman,
the school district's former Chief Information Officer, and that IBM
used that relationship to ensure that it had a major role in preparing
APS' Funding Year 2002 E-rate application through its consultant Alpha
Telecommunications (``Alpha''). Specifically, an APS employee believed
that IBM and Alpha had persuaded Mr. Beman to permit Alpha to prepare
the E-rate forms, to ``assure that IBM received [follow-on] E-rate
funded contracts . . . in direct response to IBM's alleged
dissatisfaction about not being awarded APS E-rate funded contracts
during Funding Year [2001].'' See Greenberg Interim Report at 71-72.
According to the employee, Mr. Beman ``developed a close relationship
with IBM, and in particular with IBM's Atlanta representative, Portia
Lemons.'' Id. at 72. The employee believed that Mr. Beman was urged to
allow Alpha to prepare the E-rate forms, so that Alpha could ``ensure
that IBM would be awarded an E-rate funded contract.'' Id. The
Greenberg Interim Report stated that there was no evidence of such
communications with Alpha before the application's submission in
January 2002. However, Alpha produced e-mail documents to the
Subcommittee that show IBM's and Alpha's interaction with Mr. Beman
regarding the E-rate program and which support the APS employee's
account. APS' Funding Year 2002 application was denied because it was
part of the ``technology integrator'' pattern that was identified by
USAC as subverting the competitive bid process.
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F. GAO Work Requested by the Committee
The Subcommittee has examined various aspects of the E-rate
program and its impact in several school districts. Through
this work, a number of troubling failures and weaknesses were
identified, as outlined in this report. More broadly, the
failures in preventing waste, fraud, and abuse point to
problems in the program's structure and the FCC's management of
the E-rate program.
In recent years, several initiatives were established to
address issues of waste, fraud, and abuse in the E-rate
program. For example, USAC, with the support of FCC, convened a
14-member Task Force of program ``stakeholders''--comprised of
vendors, consultants, and school and library officials--to make
recommendations to reduce waste, fraud, and abuse and improve
program effectiveness. A number of its recommendations have
subsequently been addressed in procedural changes or in FCC
rulemaking.99 Since January 2002, the FCC has
conducted a series of program rulemakings to address a number
of issues relating to reducing waste, fraud, and abuse, such as
strengthening application certifications or bidding
requirements. While the Subcommittee considers these actions to
be positive steps, the effectiveness of any given program
change cannot be assessed until more information is collected
from audits and the FCC IG's investigations. While the E-rate
program has evolved, and certainly operates better in some ways
today than it did in 2001, that evolution has proceeded much
too slowly. Clearly, not all problems have been addressed by
these measures. Indeed, the pattern of problems and failures
involves more fundamental questions about the FCC's management.
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\99\ See USAC Memorandum to FCC, dated November 26, 2003. The
recommendations by the Task Force represented a broad consensus; i.e.
recommendations were supported by at least 10 Task Force members and
opposed by no more than two members. Thus, recommendations that might
have been viewed as affecting too much the interests of vendors (with
five representatives), would not have been reported.
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Thus, with an eye toward gathering further information and
gaining a better understanding of the FCC's stewardship of the
E-rate program, then-Chairman Tauzin and then-Subcommittee
Chairman Greenwood requested that the Government Accountability
Office (GAO) ``review the E-rate program's structure and
operations to determine whether federal funds are being used in
accordance with program rules, whether the funds are being used
effectively to achieve program goals, and whether the program
needs fundamental changes to ensure program goals are met.''
100 In response to the Committee's request, the GAO
set out to ``evaluate (1) the effect of the current structure
of the E-rate program on FCC's management of the program, (2)
FCC's development and use of performance goals and measures in
managing the program, and (3) the effectiveness of FCC's
oversight mechanisms--rulemaking proceedings, beneficiary
audits, and reviews of USAC decisions (appeals)--in managing
the program.'' 101
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\100\ See http://energycommerce.house.gov/108/Letters/12022003--
1142.htm
\101\ See ``Telecommunications: Greater Involvement Needed by FCC
in the Management and Oversight of the E-Rate Program,'' GAO-05-151,
Feb. 2005 at 3 (hereinafter referred to as the ``GAO Report'');
Available at http://www.gao.gov/new.items/d05151.pdf.
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The completed report, released at a Subcommittee E-rate
program hearing on March 16, 2005,102 raises serious
questions about the FCC's management and oversight. The report
finds an astounding degree of managerial neglect of the E-rate
program. Due to this neglect, Congress cannot confidently
assess either: a) the adequacy of the current program
structure, or b) whether the program is in fact achieving the
goals contemplated by Congress when it ``created'' the program
in 1996.
---------------------------------------------------------------------------
\102\ See ``Hearing on Problems with the E-rate Program: GAO Review
of FCC Management and Oversight,'' March 16, 2005, Committee on Energy
and Commerce, Serial No. 109-7.
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When Congress codified Universal Service in 1996, it
effectively changed the nature of the industry-managed
universal service support from an administratively sanctioned
process, to a statutorily authorized collection of funds for
universal service as determined by Congress. The GAO details
that this action caused the fund to become, essentially, a
permanent congressional appropriation. Consequently, a key
series of questions were--or should have been--brought to bear
on the structure of the fund, the structure of the various
``funding mechanisms,'' and the entities established to
administer the fund. It was incumbent upon the FCC, as the
agency responsible for the fund, to follow the direction of
Congress concerning universal service. Implicitly, the FCC had
broader obligations to Congress to ensure the fund's new
structure adhered to all the relevant statutes, including any
and all requirements concerning the treatment of appropriated
funds. This did not happen. As a result, the E-rate program
from the start has been hampered by lingering questions
concerning its organization and structure, as mentioned in
previous GAO reviews of the program.103 Furthermore,
``new'' questions continue to arise, many of which could have
been resolved early on in the program.104 The FCC's
failure to resolve these issues in a comprehensive fashion at
the outset has led to a number of problems that Congress must
now address. The GAO report's main findings, with a brief
Subcommittee staff commentary, include:
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\103\ See, e.g., GAO-02-187, February 2002; GAO-01-673, May 2001;
GAO-01-672, May 2001; GAO-01-105, December 2000; GAO/HEHS-99-133,
August 1999; RCED-99-51, March 1999; GAO/T-HEHS-98-246, September 1998;
T-RCED-98-243, July 1998; GAO/RCED/OGC-98-172R, May 1998; GAO/T-RCED/
OGC-98-84, March 1998.
\104\ For example, in later September and early October 2004, a
last-minute decision by the FCC regarding the Anti-Deficiency Act's
(ADA) effects on the E-rate program temporarily prevented USAC from
issuing commitment letters to E-rate program applicants, until Congress
passed a temporary exemption of the E-rate program from the ADA.
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The FCC crafted an ambitious, multi-billion-dollar
funding program, using an ``unusual'' organizational structure,
and then never conducted a comprehensive assessment to
determine which federal requirements, policies, and practices
apply to the program, to USAC, and to the Universal Service
Fund itself.
This circumstance requires the resolution of several
structural and fiscal questions to ensure program integrity in
the future. The GAO notes that USAC--a non-profit, private
entity--operates and disburses funds under a less explicit
federal affiliation than many other federal programs. For
example, USAC and the FCC share no contract or memorandum of
understanding for administering E-rate. Moreover, USAC is a
wholly owned subsidiary of another private entity--the National
Exchange Carriers Association (NECA). This relationship gives
rise to unanswered questions concerning: (a) the fact that a
non-governmental entity administers billions of dollars in
``federal funds''; and (b) the questionable and, by appearance,
potentially conflicted relationship of USAC and NECA--further,
while NECA is the sole shareholder of USAC, it is also a major
subcontractor for USAC that administers part of the
fund.105 The GAO report provides some details
regarding the current structure, established by the FCC in
November 1998 when it appointed USAC the ``permanent''
administrator of the program, in an effort to address legal
concerns raised by the GAO and Congress. Because questions
remained, the FCC made this appointment subject to a one-year
review. Significantly, and to some degree emblematic of other
promises made by the FCC regarding the program, that review was
never performed. Furthermore, the plan the FCC adopted to make
USAC the permanent administrator--drafted by the funding
administrators--recommended full divestiture of USAC from NECA.
In its 1998 Third Report and Order, the FCC pledged to review
the divestiture issue after one year, but, again, that review
never happened. At this point, resolution of these structural
issues may likely need Congress to provide specific statutory
guidance.106
---------------------------------------------------------------------------
\105\ See GAO Report at 70.
\106\ For example, Congressional guidance may be necessary
expressly to make USAC the permanent administrator, or to place the E-
rate program within the Executive Branch, or elsewhere. See Third
Report and Order, FCC 98-306, November 19, 1998.
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The nature of the USAC/FCC relationship exacerbates current
issues concerning the treatment and handling of E-rate program
funds. The GAO explains that questions about whether Universal
Service Funds should be treated as ``federal funds''--and thus
implicating all relevant federal statutes that protect taxpayer
interests--have plagued the program from the start. The FCC
failed at the start to determine clearly and comprehensively
the nature of the funds. Instead, the FCC took a case-by-case
approach to questions of fund status, and did so with some
delay. As the GAO notes, this ``put FCC and the program in the
position of reacting to problems as they occur rather setting
up an organization and internal controls designed to ensure
compliance with applicable laws.'' It also raises questions
about past FCC determinations. Given the piecemeal decision
making, the GAO states that ``where FCC has determined that
fiscal controls and policy do apply [to the USF], the
commission should reconsider these determinations in light of
the status of universal service monies as federal funds.''
107 While the FCC recently began to address some of
the issues surrounding the funds' status, it has been slow to
tackle the implications of their status.
---------------------------------------------------------------------------
\107\ See GAO Report at 66-68.
---------------------------------------------------------------------------
Indeed, the FCC's hesitation has caused unnecessary
disruptions and waste in E-rate program operations. For
example, on September 26, 2003--more than five years into the
E-rate program--the FCC mandated that USAC prepare USF
financial statements consistent with ``generally accepted
accounting principles for federal agencies' (GovGAPP). The FCC
expressly noted that this change could have broad implications
regarding compliance with a myriad of federal accounting
statutes, and therefore gave USAC one year to transition to
GovGAPP. But the FCC subsequently failed to review in a timely
manner the change's implications and provide the necessary
guidance to USAC. Ultimately, the FCC's delay led to USAC
suspending E-rate program commitments in August 2004 until the
FCC responded to USAC's query as to whether the Anti-Deficiency
Act applied to E-rate program funds. The FCC did not address
the issue until two weeks before the deadline for the GovGAPP
standards to take effect. As a result of the FCC's actions, the
USF lost approximately $4.6 million. Additionally, the delay
froze hundreds of millions of dollars in E-rate program
commitment decisions, thus postponing and disrupting the
planning at school districts around the nation. As this report
noted earlier, funding delays by the FCC and USAC conflict with
school districts' budgeting and planning cycles and thus
increase the risk of waste and abuse.
The GAO report confirms that Universal Service Funds should
be treated as federal funds, and that all applicable federal
statutes and requirements apply to the administration of the
USF, unless specifically exempted by Congress. What remains
unclear, however, is the extent to which such requirements will
affect USAC and the Fund. For example, how do relevant statutes
such as the Single Audit Act, the Cash Management Improvement
Act, and the Improper Payments Information Act of 2002 impact
E-rate program funds? Furthermore, absent a comprehensive
review and assessment, poorly founded decisions may be made
about Fund treatment, to the detriment of the
taxpayers.108
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\108\ A bill has been introduced in the Senate, S. 241, that
exempts the Universal Service Fund from the Anti-Deficiency Act. Absent
careful study, any exemptions from federal accounting statutes may be
premature and may do more harm than good.
---------------------------------------------------------------------------
Although USAC has committed more than $15 billion to E-
rate program applicants during the past 8 years, the FCC did
not develop performance goals and measures that could be used
to assess the specific impact of this spending and to improve
the management of the program.109
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\109\ According to USAC data, as of October 5, 2005, it has
committed over $15 billion and actually disbursed more than $10 billion
in E-rate program funds.
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The FCC, USAC, E-rate program participants, and observers
of the E-rate program have frequently noted that, since the
program began in 1998, the nation's schools have significantly
increased their rates of Internet access and connectivity. The
Department of Education's National Center for Education
Statistics are frequently cited--which report that, as of 2003,
100% of public schools and 93% of public school instructional
classrooms had Internet access, up from 89% and 51%,
respectively, in 1998.110 While this information may
be valuable to a broader assessment of the nation's
telecommunications and education policies, it does not provide
or represent a meaningful measure of the E-rate program's
impact. The GAO notes that ``although billions of dollars of E-
rate funds have been committed since 1998, adequate program
data was not developed to answer a fundamental performance
question: how much of the increase since 1998 in public
schools' Internet access has been a result of the E-rate
program, as opposed to other sources of federal, state, local,
and private funding?'' 111
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\110\ See ``Internet Access in U.S. Public Schools and Classrooms:
1994-2003,'' National Center for Education Statistics, February 2005 at
3-7, 18-23.
\111\ See GAO Report at 21-22.
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The failure to implement performance measures bears on a
number of aspects of the FCC's E-rate program management, in
addition to the fact that it ignores requirements of the
Government Performance Results Act of 1993. Perhaps most
troubling, Congress has little or no information about the
program's effectiveness; yet, more than $9 billion has been
spent. This does not mean that the program has not been
effective--the Subcommittee's investigation has observed
compelling examples of E-rate program funding being used to
improve classroom instruction and the coordination of effective
instruction. However, the FCC has squandered the opportunity to
quantify and assess--and ultimately, to improve--the program's
effectiveness and efficiency in a meaningful way. This is a
profound failure in the FCC's responsibility and accountability
to Congress, which in the end must answer to American taxpayers
about the value and direction of the E-rate program.
The failure to institute performance measures is
symptomatic of the broader management problems at the FCC
concerning the E-rate program. In the past, the FCC has
informed the GAO that it would implement performance goals and
plans for the E-rate program, but then failed to do so. For
example, in December 2000 the FCC told the GAO that it had
finalized a new performance plan to increase the rate of
program participation by low-income, urban schools. Yet, the
current GAO report notes that when it inquired in 2004 about
the plan, ``we were told that it had not been implemented and
that none of the FCC staff currently working on E-rate was
familiar with the plan.'' 112 Staff turnover, as
well as the size of the staff overseeing the USF,113
contributes to this lack of institutional follow-through and
the general ability to address program issues and policy
questions in a timely manner, see below. Instances such as this
undercut confidence in the FCC's promises to address these
issues and increase its attention to the program.
---------------------------------------------------------------------------
\112\ Id. at 23.
\113\ Id. at 57.
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The FCC's three key oversight mechanisms for the E-rate
program--rulemaking procedures, beneficiary audits, and reviews
of USAC decisions (appeals decisions)--are not fully effective
to manage the program.
This GAO finding highlights a number of observations and
problems identified by the Subcommittee during the course of
the investigation. However potentially effective these three
oversight mechanisms may be for a regulatory agency, the record
suggests that they fall short in effectively managing a large,
complicated, quasi-grant program like E-rate. These mechanisms
are even less effective because of the FCC's evident
inattention to the program.
The management and oversight issues identified by the GAO
include:
(1) The FCC is currently relying on USAC to identify which
procedures should be codified into rules, raising the question
of which ``entity is really establishing the rules of the
program and--concerns about the depth of involvement by FCC
staff with the management of the program.'' 114
---------------------------------------------------------------------------
\114\ Id. at 29.
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(2) The FCC has not fully addressed confusion and
enforcement issues arising from the distinction between USAC
``implementing procedures'' and the FCC's program rules. This
causes confusion regarding rule enforcement and the ability to
recover funds when USAC procedures are violated. The GAO notes,
for example, that, even under the FCC's August 2004 Fifth
Report and Order, which addressed some questions concerning
codifying procedures, ``the commission did not clearly address
the treatment of beneficiaries who violate a USAC
administrative procedure that has not been codified.'' The GAO
explains that this ``creates a potentially unfair situation
when the procedure is one that can lead to denial of an
application.'' That is, if a procedure violation is caught in
the application process, funding will be denied; if it is
caught later, in a beneficiary audit, no action to recover
funds can be taken.115
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\115\ Id. at 27-30.
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(3) The FCC resolves appeals too slowly, and has a very
large backlog of appeals--527 appeals were pending decisions at
the time the GAO completed its review. This adds uncertainty to
the program and leaves applicants in an E-rate program
``limbo,'' and raises the risk of both wasted funding
opportunities and wasteful spending. All of these examples
raise questions about the FCC's ability to handle the
additional burden of audit resolution that is expected to arise
from a new set of about 200 beneficiary audits planned for the
program. Resource demands are only likely to grow, and it is
not clear that the FCC will be able to keep up. In short, the
GAO concludes, the FCC simply has not done enough to manage and
provide a framework of government accountability for the multi-
billion-dollar E-rate program. The prospects for positive
progress in the future, given the FCC's past actions, staff
turnover, and neglect, are not encouraging.
GAO Recommendations: The GAO concluded that the problems it
identified signal that the FCC must take corrective action. The
GAO report recommended that the Chairman of the FCC direct the
agency to take the following actions:
1. Conduct and document a comprehensive assessment to determine
whether all necessary government accountability
requirements, policies, and practices have been applied
and are fully in place to protect the program and the
funding. The assessment should include, but not be
limited to: (a) the implications of the FCC's
determination that the Universal Service Fund amounts
to an ``appropriation'' by identifying the fiscal
controls that apply to the Universal Service Fund,
including the collection, deposit, obligation, and
disbursement of funds; and (b) an evaluation of the
legal authority for the organizational structure of the
E-rate program, including the relationship between the
FCC and USAC and their respective authorities and roles
in implementing the E-rate program.116
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\116\ In connection with the GAO work and Subcommittee inquiry, the
FCC announced in March 2005 that it had contracted with the National
Academy of Public Administration (NAPA) for NAPA to study and explore
alternative models to the current organizational and government
structure of the Universal Service program. The GAO testified before
the Subcommittee on March 16, 2005 that this study would go ``a long
way toward addressing the concerns'' on this issue outlined in its
report. However, at an April 26, 2005 House Appropriations Justice
State Subcommittee hearing, FCC Chairman Martin testified that the
study had been put on hold pending further review. On June 9, 2005 the
FCC issued a Notice of Proposed Rulemaking and Further Notice of
Proposed Rulemaking to initiate ``a broad inquiry into the management
and administration of the Universal Service Fund.'' Because of this
action, Chairman Martin cancelled the NAPA contract. Staff believes the
FCC's decisions on this front will demonstrate the depth of the
agency's seriousness in implementing the GAO's recommended reforms.
---------------------------------------------------------------------------
2. Establish performance goals and measures for the E-rate
program that are consistent with the Government
Performance and Results Act. The FCC should use the
resulting performance data to develop analyses of the
actual impact of E-rate program funding and to
determine areas for improved program operations.
3. Develop a strategy for reducing the E-rate program's
backlog, including ensuring that adequate staffing
resources are devoted to E-rate program appeals
resolution.
The staff concurs with these recommendations. They are
reasonable and necessary steps that the FCC must take to begin
resolving the problems identified both by this Subcommittee,
the FCC IG, and the GAO. Each of the recommendations addresses
the main findings in the GAO report. Further, as the GAO
recommends, the FCC should request of the Comptroller General
an advance decision, as applicable under 31 U.S.C 3529, on
matters relating to the complexities posed by the FCC's
arrangements with USAC and the questions that flow from these
arrangements.
Given the FCC's history of E-rate program management, as
identified by the GAO and this Subcommittee's investigation,
the FCC should produce for the Committee a report with relevant
findings and actions, addressing the GAO's recommendations. The
FCC's analysis should recognize the dynamic state of
technology, and offer an assessment of the extent that, given
the data that 100% of schools are reportedly connected to the
Internet, the emphasis of the E-rate program's non-Priority I
funding may well shift to upgrades and maintenance. Given the
current state of Internet connectivity, measurement and goals
matrices for assessing program progress that may have been
appropriate for 1998 may no longer be valid for 2006 and
beyond. The FCC should account for the current state of school
technology in its analyses.
The staff agrees with the GAO's view that any reassessment
of the program must consider the needs of the beneficiaries--
the schools and libraries across the country that use the E-
rate program to support their purchase of telecommunications
services. Efforts to protect the program from waste, fraud, and
abuse do not need to be mutually exclusive of a program that
does not excessively burden the participants. This may first
require an honest assessment of the program's goals and
operations. Additional assistance from the GAO to review and
assess crosscutting efforts by other Federal agencies to assist
schools and school districts is probably necessary to develop
an accurate picture of federal support of telecommunications in
education.