Telecommunications: Application of the Antideficiency Act and
Other Fiscal Controls to FCC's E-Rate Program (11-APR-05,
GAO-05-546T).
Since 1998, the Federal Communications Commission's (FCC) E-rate
program has committed more than $13 billion to help schools and
libraries acquire Internet and telecommunications services. As
steward of the program, FCC must ensure that participants use
E-rate funds appropriately and that there is managerial and
financial accountability surrounding the funds. This testimony is
based on GAO's February 2005 report GAO-05-151, which reviewed
(1) the effect of the current structure of the E-rate program on
FCC's management of the program, including the applicability of
the Antideficiency Act, (2) FCC's development and use of E-rate
performance goals and measures, and (3) the effectiveness of
FCC's program oversight mechanisms.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-546T
ACCNO: A21277
TITLE: Telecommunications: Application of the Antideficiency Act
and Other Fiscal Controls to FCC's E-Rate Program
DATE: 04/11/2005
SUBJECT: Accountability
Aid for education
Aid for libraries
Appropriated funds
Federal aid programs
Funds management
Internal controls
Internet
Libraries
Performance measures
Program evaluation
Program management
Schools
Telecommunication
FCC E-Rate Program
Universal Service Fund
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GAO-05-546T
United States Government Accountability Office
GAO Testimony
Before the Committee on Commerce,
Science, and Transportation,
U.S. Senate
For Release on Delivery
Expected at 2:00 p.m. EDT TELECOMMUNICATIONS
Monday, April 11, 2005
Application of the Antideficiency Act and Other Fiscal Controls to FCC's E-Rate
Program
Statement of Patricia A. Dalton, Managing Director Physical Infrastructure
Issues
GAO-05-546T
[IMG]
April 11, 2005
TELECOMMUNICATIONS
Application of the Antideficiency Act and Other Fiscal Controls to FCC's E-Rate
Program
What GAO Found
FCC established E-rate as a multibillion-dollar program operating under an
organizational structure unusual to the federal government, but never
conducted a comprehensive assessment to determine which federal
requirements, policies, and practices apply to the program, to the
Universal Service Administrative Company, and to the Universal Service
Fund itself. FCC has addressed these issues on a case-by-case basis, but
this has put FCC and the E-rate program in the position of reacting to
problems as they occur rather than setting up an organization and internal
controls designed to ensure compliance with applicable laws.
With regard to the Antideficiency Act, we agree with FCC's conclusions
that the Universal Service Fund is a permanent indefinite appropriation,
is subject to that act, and that the issuance of E-rate funding commitment
letters constitutes obligations for purposes of the act. We believe that
Congress should consider either granting the Universal Service Fund a
twoor three-year exemption from the Antideficiency Act or crafting a
limited exemption that would provide management flexibility. For example,
Congress could specify that FCC could use certain receivables or assets as
budgetary resources. These more limited solutions would allow time for the
National Academy of Public Administration to complete its study of the
Universal Service Fund program and report its findings to FCC. Congress
and FCC could then comprehensively assess, based on decisions concerning
the structure of the program, which federal requirements, policies, and
practices should apply to the fund and to any entities administering the
program. It could then be determined whether a permanent and complete
exemption from the Antideficiency Act is warranted.
FCC has not developed useful performance goals and measures for assessing
and managing the E-rate program. The goals established for fiscal years
2000 through 2002 focused on the percentage of public schools connected to
the Internet, but the data used to measure performance did not isolate the
impact of E-rate funding from other sources of funding, such as state and
local government. In its 2003 assessment of the program, OMB concluded
that there was no way to tell whether the program has resulted in the
costeffective deployment and use of advanced telecommunications services.
In response, FCC is working with OMB on developing new E-rate measures.
According to FCC officials, oversight of the program is primarily handled
through agency rulemaking procedures, beneficiary audits, and appeals
decisions. FCC's rulemakings, however, have often lacked specificity,
which has affected the recovery of funds for program violations. FCC has
also been slow to respond to beneficiary audit findings and make full use
of them to strengthen the program. In addition, the small number of these
audits completed to date do not provide a basis for accurately assessing
the level of fraud, waste, and abuse occurring in the program. According
to FCC officials, there is also a substantial backlog of E-rate appeals.
United States Government Accountability Office
Mr. Chairman, Mr. Co-Chairman, and Members of the Committee:
We are pleased to be here to discuss the results of our recently completed
review of the Federal Communications Commission's (FCC) universal service
program for schools and libraries and to discuss specifically the
applicability of the Antideficiency Act to the program. As you know, the
Telecommunications Act of 1996 expanded the concept of universal service
to include assistance to schools and libraries in acquiring
telecommunications and Internet services; the act charged FCC with
establishing the universal service discount mechanism for eligible schools
and libraries. The commission, in turn, created a large and ambitious
program that became commonly known as the "E-rate" program, and set the
annual funding cap for the program at $2.25 billion. FCC designated the
Universal Service Administrative Company (USAC), a private, not-forprofit
corporation established under FCC's rules, to carry out the day-today
operations of the E-rate program. FCC retains responsibility for
overseeing the program's operations and ensuring compliance with the
commission's rules.
Since 1998, the E-rate program has committed more than $13 billion in
funding to help schools and libraries across the nation acquire
telecommunications and Internet services. Eligible schools and libraries
can apply annually to receive support, which can be used for specific
eligible services and equipment such as telephone services, Internet
access services, and the installation of internal wiring and other related
items. Recently, however, allegations have been made that some E-rate
beneficiaries (schools and libraries) and service providers (e.g.,
telecommunications and network equipment companies) have fraudulently
obtained, wasted, or abused E-rate funding. In May 2004, for example, one
service provider involved in E-rate projects in several states pleaded
guilty to bid rigging and wire fraud and agreed to pay more than $20
million in criminal fines, civil payments, and restitution.
In February 2005, we issued a report on various aspects of the program.
Specifically, we evaluated (1) the effect of the current structure of the
Erate program on FCC's management of the program, (2) FCC's development
and use of performance goals and measures in managing the program, and (3)
the effectiveness of FCC's oversight mechanisms- rulemaking proceedings,
beneficiary audits, and reviews of USAC decisions (appeals)-in managing
the program.
Our testimony today is based on this report, which contains a fuller
discussion of the results of our review and recommendations for
improving FCC's management and oversight of the E-rate program.1 In
summary, we found the following:
o FCC established E-rate as a multibillion-dollar program operating under
an organizational structure unusual to the federal government, but never
conducted a comprehensive assessment to determine which federal
requirements, policies, and practices apply to the program, to the
Universal Service Administrative Company, and to the Universal Service
Fund itself. FCC has addressed these issues on a case-by-case basis, but
this has put FCC and the E-rate program in the position of reacting to
problems as they occur rather than setting up an organization and internal
controls designed to ensure compliance with applicable laws.
o With regard to the Antideficiency Act, we agree with FCC's conclusions
that the Universal Service Fund is a permanent indefinite appropriation,
is subject to that act, and that the issuance of E-rate funding commitment
letters constitutes obligations for purposes of the act. We believe that
Congress should consider either granting the Universal Service Fund a
two-or three-year exemption from the Antideficiency Act or crafting a
limited exemption that would provide management flexibility. For example,
Congress could specify that FCC could use certain receivables or assets as
budgetary resources. These more limited solutions would allow time for the
National Academy of Public Administration to complete its study of the
Universal Service Fund program and report its findings to FCC. Congress
and FCC could then comprehensively assess, based on decisions concerning
the structure of the program, which federal requirements, policies, and
practices should apply to the fund and to any entities administering the
program. It could then be determined whether a permanent and complete
exemption from the Antideficiency Act is warranted.
o FCC has not developed meaningful performance goals and measures for
assessing and managing the program. As a result, there is no way to tell
whether the program has resulted in the cost-effective deployment and use
of advanced telecommunications services for schools and libraries.
o FCC's program oversight mechanisms contain weaknesses that limit FCC's
management of the program and its ability to understand the scope of
waste, fraud, and abuse within the program. For example, FCC's
1Telecommunications: Greater Involvement Needed by FCC in the Management
and Oversight of the E-Rate Program, GAO-05-151 (Washington, D.C.: Feb. 9,
2005). The report is available on GAO's Web site at www.gao.gov.
rulemakings have often lacked specificity and have led to situations where
important USAC administrative procedures have been deemed unenforceable by
FCC. There is also a significant backlog of E-rate appeals that adds
uncertainty to the program and impacts beneficiaries.
FCC has taken some important steps, particularly in recent months, to
address some of the areas of concern discussed in our report.
Nevertheless, we believe that FCC has not done enough to proactively
manage and provide a framework of government accountability for the
multibillion-dollar E-rate program. To address the management and
oversight problems we have identified, we recommended in our report that
the Chairman of FCC: (1) conduct and document a comprehensive assessment
to determine whether all necessary government accountability requirements,
policies, and practices have been applied and are fully in place to
protect the E-rate program and universal service funding; (2) establish
meaningful performance goals and measures for the E-rate program; and (3)
develop a strategy for reducing the E-rate program's appeals backlog,
including that adequate staffing resources are devoted to E-rate appeals.
Background �
The concept of "universal service" has traditionally meant providing
residential telephone subscribers with nationwide access to basic
telephone services at reasonable rates. The Telecommunications Act of 1996
broadened the scope of universal service to include, among other things,
support for schools and libraries. The act instructed the commission to
establish a universal service support mechanism to ensure that eligible
schools and libraries have affordable access to and use of certain
telecommunications services for educational purposes.2 In addition,
Congress authorized FCC to "establish competitively neutral rules to
enhance, to the extent technically feasible and economically reasonable,
access to advanced telecommunications and information services for all
public and nonprofit elementary and secondary school classrooms . . . and
libraries. . . ."3 Based on this direction, and following the
recommendations of a Federal-State Joint Board on Universal Service,4
247 U.S.C. S: 254(h)(1)(B).
347 U.S.C. S: 254(h)(2).
4The Federal-State Joint Board on Universal Service was established in
March 1996 to make recommendations to implement the universal service
provisions of the Telecommunications Act of 1996. The board is composed of
FCC commissioners, state utility commissioners, and a consumer advocate
representative.
FCC established the schools and libraries universal service mechanism that
is commonly referred to as the E-rate program. The program is funded
through statutorily mandated payments by companies that provide interstate
telecommunications services.5 Many of these companies, in turn, pass their
contribution costs on to their subscribers through a line item on
subscribers' phone bills.6 FCC capped funding for the E-rate program at
$2.25 billion per year, although funding requests by schools and libraries
can greatly exceed the cap. For example, schools and libraries requested
more than $4.2 billion in E-rate funding for the 2004 funding year.
In 1998, FCC appointed USAC as the program's permanent administrator,
although FCC retains responsibility for overseeing the program's
operations and ensuring compliance with the commission's rules.7 In
response to congressional conference committee direction,8 FCC has
specified that USAC "may not make policy, interpret unclear provisions of
the statute or rules, or interpret the intent of Congress."9 USAC is
responsible for carrying out the program's day-to-day operations, such as
maintaining a Web site that contains program information and application
procedures; answering inquiries from schools and libraries; processing and
reviewing applications; making funding commitment decisions and
5These companies include providers of local and long distance telephone
services, wireless telephone services, paging services, and pay phone
services. 47 C.F.R. S: 54.706. Along with the E-rate program, other
universal service programs under the Universal Service Fund are the High
Cost program, the Low Income program, and the Rural Health Care program.
The High Cost program assists customers living in high-cost, rural, or
remote areas through financial support to telephone companies, thereby
lowering rates for local and long distance service. The Low Income program
assists qualifying low-income consumers through discounted installation
and monthly telephone services and free toll limitation service. The Rural
Health Care program assists health care providers located in rural areas
through discounts for telecommunications services. These four programs are
sometimes collectively referred to as the Universal Service Fund program.
For more information on the various universal service programs, see GAO,
Telecommunications: Federal and State Universal Service Programs and
Challenges to Funding, GAO-02-187 (Washington, D.C.: Feb. 4, 2002).
6The line item is called various things by various companies, such as the
"federal universal service fee" or the "universal connectivity fee." Some
companies do not separate out universal service costs as a line item, but
instead just build it into their overall costs. Either way, consumers
ultimately pay for the various universal service programs, including
E-rate.
7USAC was established at the direction of FCC and operates under FCC's
rules and policies.
8See S.1768, 105th Cong., S: 2004(b)(2)(A) (1998).
947 C.F.R. S: 54.702(c).
FCC Established an Unusual Program Structure without Comprehensively
Addressing the Applicability of Governmental Standards and Fiscal Controls
issuing funding commitment letters; and collecting, managing, investing,
and disbursing E-rate funds. FCC permits-and in fact relies on-USAC to
establish administrative procedures that program participants are required
to follow as they work through the application and funding process.
Under the E-rate program, eligible schools, libraries, and consortia that
include eligible schools and libraries10 may receive discounts for
eligible services. Eligible schools and libraries may apply annually to
receive Erate support. The program places schools and libraries into
various discount categories, based on indicators of need, so that the
school or library pays a percentage of the cost for the service and the
E-rate program funds the remainder. E-rate discounts range from 20 percent
to 90 percent. USAC reviews all of the applications and related forms and
issues funding commitment decision letters. Generally, it is the service
provider that seeks reimbursement from USAC for the discounted portion of
the service rather than the school or library.11
FCC established an unusual structure for the E-rate program but has never
conducted a comprehensive assessment of which federal requirements,
policies, and practices apply to the program, to USAC, or to the Universal
Service Fund itself. FCC only recently began to address a few of these
issues.
The Telecommunications Act of 1996 neither specified how FCC was to
administer universal service to schools and libraries nor prescribed the
structure and legal parameters of the universal service mechanisms to be
created. The Telecommunications Act required FCC to consider the
recommendations of the Federal-State Joint Board on Universal Service and
then to develop specific, predictable, and equitable support mechanisms.
Using the broad language of the act, FCC crafted an
10Eligibility of schools and libraries is defined at 47 U.S.C. S: 254.
Generally, educational institutions that meet the definition of "schools"
in the Elementary and Secondary Education Act of 1965 are eligible to
participate, as are libraries that are eligible to receive assistance from
a state's library administrative agency under the Library Services and
Technology Act. Examples of entities not eligible for support are home
school programs, private vocational programs, and institutions of higher
education. In addition, neither private schools with endowments of more
than $50 million nor libraries whose budgets are part of a school's budget
are eligible to participate. 20 U.S.C. S: 9122.
11The school or library could also pay the service provider in full and
then seek reimbursement from USAC for the discount portion.
ambitious program for schools and libraries-roughly analogous to a grant
program-and gave the program a $2.25 billion annual funding cap. To carry
out the day-to-day activities of the E-rate program, FCC relied on a
structure it had used for other universal service programs in the past-a
not-for-profit corporation established at FCC's direction that would
operate under FCC oversight. However, the structure of the E-rate program
is unusual in several respects compared with other federal programs:
o FCC appointed USAC as the permanent administrator of the Universal
Service Fund,12 and FCC's Chairman has final approval over USAC's Board of
Directors. USAC is responsible for administering the program under FCC
orders, rules, and directives. However, USAC is not part of FCC or any
other government entity; it is not a government corporation established by
Congress; and no contract or memorandum of understanding exists between
FCC and USAC for the administration of the E-rate program. Thus, USAC
operates and disburses funds under less explicit federal ties than many
other federal programs.
o Questions as to whether the monies in the Universal Service Fund
should be treated as federal funds have troubled the program from the
start. Even though the fund has been listed in the budget of the United
States and, since fiscal year 2004, has been subject to an annual
apportionment from OMB, the monies are maintained outside of Treasury
accounts by USAC and some of the monies have been invested.13 The United
States Treasury implements the statutory controls and restrictions
involving the proper collection and deposit of appropriated funds,
including the financial accounting and reporting of all receipts and
disbursements, the
12USAC was appointed the permanent administrator subject to a review after
one year by FCC to determine that the universal service programs were
being administered in an efficient, effective, and competitively neutral
manner. 47 C.F.R. S: 54.701(a). This review was never conducted.
13The Universal Service Fund is included in the federal budget as a
special fund. OMB concluded that the Fund does not constitute public money
subject to the Miscellaneous Receipts Statute, 31 U.S.C. S: 3302, and
therefore can be maintained outside the Treasury by a nongovernmental
manager. Letter from Mr. Robert G. Damus, OMB General Counsel to Mr.
Christopher Wright, FCC General Counsel, dated April 28, 2000.
security of appropriated funds, and agencies' responsibilities for those
funds.14
As explained below, appropriated funds are subject, unless specifically
exempted by law, to a variety of statutory controls and restrictions.
These controls and restrictions, among other things, limit the purposes
for which federal funds can be used and provide a scheme of accountability
for federal monies. Key requirements are in Title 31 of the United States
Code and the appropriate Treasury regulations,15 which govern fiscal
activities relating to the management, collection, and distribution of
public money.
Since the inception of the E-rate program, FCC has struggled with
identifying the nature of the Universal Service Fund and the managerial,
fiscal, and accountability requirements that apply to the fund. FCC's
Office of Inspector General first looked at the Universal Service Fund in
1999 as part of its audit of the commission's fiscal year 1999 financial
statement because FCC had determined that the Universal Service Fund was a
component of FCC for financial reporting purposes. During that audit, the
FCC IG questioned commission staff regarding the nature of the fund and,
specifically, whether it was subject to the statutory and regulatory
requirements for federal funds. In the next year's audit, the FCC IG noted
that the commission could not ensure that Universal Service Fund
activities were in compliance with all laws and regulations because the
issue of which laws and regulations were applicable to the fund was still
unresolved at the end of the audit.
FCC officials told us that the commission has substantially resolved the
IG's concerns through recent orders, including FCC's 2003 order that USAC
begin preparing Universal Service Fund financial statements consistent
with generally accepted accounting principles for federal agencies
(GovGAAP) and keep the fund in accordance with the United States
Government Standard General Ledger. While it is true that these steps and
other FCC determinations discussed below should provide greater
protections for universal service funding, FCC has addressed only
14See 31 U.S.C. S:S: 331, 3301-3305 and the Treasury Financial Manual,
vol. I, which instructs federal agencies in areas of central accounting
and reporting, disbursing, deposit regulations, and other fiscal matters
necessary for the financial accounting and reporting of all receipts and
disbursements of the federal government.
15As set forth in part 31 of the Code of Federal Regulations or the
Treasury Financial Manual.
FCC's Decision on the Antideficiency Act Should Be Addressed in a Broader
Context
a few of the issues that need to be resolved. In fact, staff from the
FCC's IG's office told us that they do not believe the commission's
GovGAAP order adequately addressed their concerns because the order did
not comprehensively detail which fiscal requirements apply to the
Universal Service Fund and which do not.
FCC has made some determinations concerning the status of the Universal
Service Fund and the fiscal controls that apply. For example, FCC has
concluded that the Universal Service Fund is a permanent indefinite
appropriation subject to the Antideficiency Act and that its issuance of
funding commitment letters constitutes recordable obligations for purposes
of the act. We agree with FCC's determinations on these issues, as
explained in detail in appendix I. However, FCC's conclusions concerning
the status of the Universal Service Fund raise further issues relating to
the collection, deposit, obligation, and disbursement of those
funds-issues that FCC needs to explore and resolve comprehensively rather
than in an ad hoc fashion as problems arise.
Status of funds as appropriated funds. In assessing the financial
statement reporting requirements for FCC components in 2000, FCC concluded
that the Universal Service Fund constitutes a permanent indefinite
appropriation (i.e., funding appropriated or authorized by law to be
collected and available for specified purposes without further
congressional action). We agree with FCC's conclusion. Typically, Congress
will use language of appropriation, such as that found in annual
appropriations acts, to identify a fund or account as an appropriation and
to authorize an agency to enter into obligations and make disbursements
out of available funds. Congress, however, appropriates funds in a variety
of ways other than in regular appropriations acts. Thus, a statute that
contains a specific direction to pay and a designation of funds to be used
constitutes an appropriation.16 In these statutes, Congress (1) authorizes
the collection of fees and their deposit into a particular fund, and (2)
makes the fund available for expenditure for a specified purpose without
further action by Congress. This authority to obligate or expend
collections without further congressional action constitutes a continuing
appropriation or a permanent appropriation of the collections.17 Because
1663 Comp. Gen. 331 (1984); 13 Comp. Gen. 77 (1933).
17E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (D.C. Cir. 1965),
cert. denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 262 (1990); 73 Comp.
Gen. 321 (1994).
the Universal Service Fund's current authority stems from a statutorily
authorized collection of fees from telecommunications carriers and the
expenditure of those fees for a specified purpose (that is, the various
types of universal service), it meets both elements of the definition of a
permanent appropriation.
Decision regarding the Antideficiency Act. As noted above, in October
2003, FCC ordered USAC to prepare financial statements for the Universal
Service Fund, as a component of FCC, consistent with GovGAAP, which FCC
and USAC had not previously applied to the fund. In February 2004, staff
from USAC realized during contractor-provided training on GovGAAP
procedures that the commitment letters sent to beneficiaries (notifying
them whether or not their funding is approved and in what amount) might be
viewed as "obligations" of appropriated funds.18 If so, and if FCC also
found the Antideficiency Act-which does not allow an agency or program to
make obligations in excess of available budgetary resources-to be
applicable to the E-rate program, then USAC would need to dramatically
increase the program's cash-on-hand and lessen the program's investments19
to provide budgetary authority sufficient to satisfy the Antideficiency
Act. As a result, USAC suspended funding commitments in August 2004 while
waiting for a commission decision on how to proceed. At the end of
September 2004-facing the end of the fiscal year-FCC decided that
commitment letters were obligations, that the Antideficiency Act did apply
to the program, and that USAC would need to immediately liquidate some of
its investments to come into compliance with the Antideficiency Act.
According to USAC officials, the liquidations cost the fund approximately
$4.6 million in immediate losses and could potentially result in millions
in foregone annual interest income.
FCC was slow to recognize and address the issue of the applicability of
the Antideficiency Act, resulting in the abrupt decision to suspend
funding commitment decision letters and liquidate investments. In response
to these events, in December 2004, Congress passed a bill granting the
Universal Service Fund a one-year exemption from the Antideficiency
18An "obligation" is an action that creates a legal liability or definite
commitment on the part of the government to make a disbursement at some
later date.
19According to USAC, the Universal Service Fund was invested in a variety
of securities, including cash and cash equivalents, government and
government-backed securities, and high-grade commercial paper. USAC
generally did not seek the approval of the commission on particular
investments, although investments were made with FCC knowledge and
oversight through formal audits and informal meetings and review.
20
Act. Nevertheless, FCC's conclusion on this issue was correct: Absent a
statutory exemption, the Universal Service Fund is subject to the
Antideficiency Act, and its funding commitment decision letters constitute
obligations for purposes of the act.
The Antideficiency Act applies to "official[s] or employee[s] of the
United States Government . . . mak[ing] or authorizing an expenditure or
obligation . . . from an appropriation or fund." 31 U.S.C. S: 1341(a). As
discussed above, the Universal Service Fund is an "appropriation or fund."
Even though USAC-a private entity whose employees are not federal officers
or employees-is the administrator of the program and the entity that
obligates and disburses money from the fund, application of the act is not
negated. This is because, as recognized by FCC, it, and not USAC, is the
entity that is legally responsible for the management and oversight of the
E-rate program and because FCC's employees are federal officers and
employees of the United States subject to the Antideficiency Act. Thus,
the Universal Service Fund will again be subject to the Antideficiency Act
when the one-year statutory exemption expires, unless action is taken to
extend or make permanent the exemption.
An important issue that arises from the application of the Antideficiency
Act to the Universal Service Fund is what actions constitute obligations
chargeable against the fund. Under the Antideficiency Act, an agency may
not incur an obligation in excess of the amount available to it in an
appropriation or fund. Thus, proper recording of obligations with respect
to the timing and amount of such obligations permits compliance with the
Antideficiency Act by ensuring that agencies have adequate budget
authority to cover all of their obligations. Our decisions have defined an
"obligation" as a commitment creating a legal liability of the government,
including a "legal duty . . . which could mature into a liability by
virtue of actions on the part of the other party beyond the control of the
United States. . . ."21
With respect to the Universal Service Fund, the funding commitment
decision letter provides the school or library with the authority to
obtain services from a provider with the commitment that the school or
library
20Universal Service Antideficiency Temporary Suspension Act, Pub. L. No.
108-494, S: 302, 118 Stat. 3986 (2004). The law exempts universal service
monies from the Antideficiency Act until December 31, 2005.
21See B-300480, April 9, 2003.
will receive a discount and the service provider will be paid for the
discounted portion with E-rate funding. Although the school or library
could decide not to seek the services or the discount, so long as the
funding commitment decision letter remains valid and outstanding, USAC and
FCC no longer control the Universal Service Fund's liability; it is
dependent on the actions taken by the school or library. Consequently, we
agree with FCC that a recordable obligation is incurred at the time of
issuance of the funding commitment decision letter indicating approval of
the applicant's discount.
Additional issues that remain to be resolved by FCC include whether other
actions taken in the Universal Service Fund program constitute obligations
and the timing and amounts of obligations that must be recorded. For
example, this includes the projections and data submissions by USAC to FCC
and by participants in the High Cost and Low Income support mechanisms to
USAC. FCC has indicated that it is considering this issue and consulting
with the Office of Management and Budget. FCC should also identify any
other actions that may constitute recordable obligations and ensure that
those are properly recorded.
While we agree with FCC's determinations that the Universal Service Fund
is a permanent appropriation subject to the Antideficiency Act and that
its funding commitment decision letters constitute recordable obligations
of the Universal Service Fund (see app. I), there are several significant
fiscal law issues that remain unresolved. We believe that where FCC has
determined that fiscal controls and policies do not apply, the commission
should reconsider these determinations in light of the status of universal
service monies as federal funds. For example, in view of its determination
that the fund constitutes an appropriation, FCC needs to reconsider the
applicability of the Miscellaneous Receipts Statue, 31 U.S.C. S: 3302,
which requires that money received for the use of the United States be
deposited
22
in the Treasury unless otherwise authorized by law. FCC also needs to
assess the applicability of other fiscal control and accountability
statutes (e.g., the Single Audit Act and the Cash Management Improvement
Act).23
22Because OMB and FCC had believed the funds were not public monies "for
the use of the United States" under the Miscellaneous Receipts Statute,
neither OMB nor FCC viewed the Universal Service Fund as subject to that
statute.
23For example, in October 2003, when the FCC ordered USAC to comply with
GovGAAP, it
noted that the Universal Service Fund was subject to the Debt Collection
Improvement Act of 1996. In that same order, FCC stated that "the funds
may be subject to a number of
Another major issue that remains to be resolved involves the extent to
which FCC has delegated some functions for the E-rate program to USAC. For
example, are the disbursement policies and practices for the E-rate
program consistent with statutory and regulatory requirements for the
disbursement of public funds?24 Are some of the functions carried out by
USAC, even though they have been characterized as administrative or
ministerial, arguably inherently governmental activities25 that must be
performed by government personnel? Resolving these issues in a
comprehensive fashion, rather than continuing to rely on reactive,
case-bycase determinations, is key to ensuring that FCC establishes the
proper foundation of government accountability standards and safeguards
for the E-rate program and the Universal Service Fund.
We are encouraged that FCC recently announced that it has contracted with
the National Academy of Public Administration (NAPA) for NAPA to study the
administration of the Universal Service Fund. NAPA will review the current
status of the Universal Service Fund program as well as other similar
governmental and quasi-governmental programs. Among other things, NAPA is
to examine the pros and cons of continuing with the program's current
structure or switching to an alternative model. NAPA is also to identify
specific ways to improve the oversight and operation of the program, as
well as any legislative or rule changes that would be needed to implement
its recommendations. In addition, the review will identify internal
controls in typical federal grant or subsidy programs that are not present
in the Universal Service Fund program and determine whether the manner in
which other analogous programs handle the holding,
federal financial and reporting statutes" (emphasis added) and "relevant
portions of the Federal Financial Management Improvement Act of 1996," but
did not specify which specific statutes or the relevant portions or
further analyze their applicability. FCC officials also told us that it
was uncertain whether procurement requirements such as the Federal
Acquisition Regulation (FAR) applied to arrangements between FCC and USAC,
but they recommended that those requirements be followed as a matter of
policy.
24See 31 U.S.C. S:S: 3321, 3322, 3325, and the Treasury Financial Manual.
25See OMB Circular A-76, May 29, 2003, which defines an inherently
governmental activity as requiring "the exercise of substantial discretion
in applying government authority and/or in making decisions for the
government." OMB Cir. A-76, Attachment A. Inherently governmental
activities include the establishment of procedures and processes related
to the oversight of monetary transactions or entitlements. OMB Circular
A-76 further states that "[e]xerting ultimate control over the
acquisition, use or disposition of United States government property . . .
including establishing policies or procedures for the collection, control,
or disbursement of appropriated and other federal funds" involves an
inherently governmental activity.
investment, and monitoring of program funds offers models for improving
the operation of the Universal Service Fund.
We believe that NAPA's study will go a long way toward addressing the
concerns outlined in our report, and we look forward to seeing the results
of NAPA's efforts. Given this important ongoing study and the unresolved
issues mentioned previously, Congress may wish to consider deferring a
decision on permanently exempting the Universal Service Fund from the
Antideficiency Act at this time and instead consider either granting the
fund a two-or three-year exemption from the Antideficiency Act or crafting
a limited exemption that would provide management flexibility. For
example, Congress could specify that FCC could use certain receivables or
assets as budgetary resources. These more limited solutions would allow
time for the National Academy of Public Administration to complete its
study of the Universal Service Fund program and report its findings to
FCC. Congress and FCC could then comprehensively assess, based on
decisions concerning the structure of the program, which federal
requirements, policies, and practices should apply to the fund and to any
entities administering the program. It could then be determined whether a
permanent and complete exemption from the Antideficiency Act is warranted.
Although $13 billion in E-rate funding has been committed to beneficiaries
during the past 7 years, FCC did not develop useful performance goals and
measures to assess the specific impact of these funds on schools' and
libraries' Internet access and to improve the management of the program,
despite a recommendation by us in 1998 to do so. At the time of our
current review, FCC staff was considering, but had not yet finalized, new
E-rate goals and measures in response to OMB's concerns about this
deficiency in a 2003 OMB assessment of the program.
One of the management tasks facing FCC is to establish strategic goals for
the E-rate program, as well as annual goals linked to them. The
Telecommunications Act of 1996 did not include specific goals for
supporting schools and libraries, but instead used general language
directing FCC to establish competitively neutral rules for enhancing
access to advanced telecommunications and information services for all
public and nonprofit private elementary and secondary school classrooms
FCC Did Not Develop Useful Performance Goals and Measures for Assessing and
Managing the E-Rate Program
and libraries.26 As the agency accountable for the E-rate program, FCC is
responsible under the Government Performance and Results Act of 1993
(Results Act) for establishing the program's long-term strategic goals and
annual goals, measuring its own performance in meeting these goals, and
reporting publicly on how well it is doing.27
For fiscal years 2000 through 2002, FCC's goals focused on achieving
certain percentage levels of Internet connectivity during a given fiscal
year for schools, public school instructional classrooms, and libraries.
However, the data that FCC used to report on its progress was limited to
public schools (thereby excluding two other major groups of
beneficiaries-private schools and libraries) and did not isolate the
impact of E-rate funding from other sources of funding, such as state and
local government. This is a significant measurement problem because, over
the years, the demand for internal connections funding by applicants has
exceeded the E-rate funds available for this purpose by billions of
dollars. Unsuccessful applicants had to rely on other sources of support
to meet their internal connection needs. Even with these E-rate funding
limitations, there has been significant growth in Internet access for
public schools since the program issued its first funding commitments in
late 1998. At the time, according to data from the Department of
Education's National Center for Educational Statistics (NCES), 89 percent
of all public schools and 51 percent of public school instructional
classrooms already had Internet access. By 2002, 99 percent of public
schools and 92 percent of public school instructional classrooms had
Internet access.28 Yet although billions of dollars in E-rate funds have
been committed since 1998, adequate program data was not developed to
answer a fundamental performance question: How much of the increase since
1998 in public
2647 U.S.C. S: 254(h)(2)(A).
27For additional details on the Results Act and its requirements, see GAO,
Executive Guide: Effectively Implementing the Government Performance and
Results Act, GAO/GGD-96-118 (Washington, D.C.: June 1996). GAO first noted
the lack of clear and specific E-rate performance goals and measures in
its July 1998 testimony before the Senate Committee on Commerce, Science,
and Transportation. See GAO, Schools and Libraries Corporation: Actions
Needed to Strengthen Program Integrity Operations before Committing Funds,
GAO/T-RCED-98-243 (Washington, D.C.: July 16, 1998), pp. 15
16.
28See NCES, Internet Access in U.S. Public Schools and Classrooms:
1994-2002, NCES2004-011 (Washington, D.C.; October 2003). This was the
most recent update available at the time of our review.
schools' Internet access has been a result of the E-rate program, as
opposed to other sources of federal, state, local, and private funding?
Performance goals and measures are used not only to assess a program's
impact but also to develop strategies for resolving mission-critical
management problems. However, management-oriented goals have not been a
feature of FCC's performance plans, despite long-standing concerns about
the program's effectiveness in key areas. For example, two such
goals-related to assessing how well the program's competitive bidding
process was working and increasing program participation by lowincome and
rural school districts and rural libraries-were planned but not carried
forward.
FCC did not include any E-rate goals for fiscal years 2003 and 2004 in its
recent annual performance reports. The failure to measure effectively the
program's impact on public and private schools and libraries over the past
7 years undercuts one of the fundamental purposes of the Results Act: to
have federal agencies adopt a fact-based, businesslike framework for
program management and accountability. The problem is not just a lack of
data for accurately characterizing program results in terms of increasing
Internet access. Other basic questions about the E-rate program also
become more difficult to address, such as the program's efficiency and
cost-effectiveness in supporting the telecommunications needs of schools
and libraries. For example, a review of the program by OMB in 2003
concluded that there was no way to tell whether the program has resulted
in the cost-effective deployment and use of advanced telecommunications
services for schools and libraries.29 OMB also noted that there was little
oversight to ensure that the program beneficiaries were using the funding
appropriately and effectively. In response to these concerns, FCC staff
have been working on developing new performance goals and measures for the
E-rate program and plan to finalize them and seek OMB approval in fiscal
year 2005.
29OMB reviewed E-rate using its Program Assessment Rating Tool (PART),
which is a diagnostic tool intended to provide a consistent approach to
evaluating federal programs as part of the executive budget formulation
process.
FCC's Oversight FCC testified before Congress in June 2004 that it relies
on three chief
components in overseeing the E-rate program: rulemaking
proceedings,Mechanisms Are Not beneficiary audits, and fact-specific
adjudicatory decisions (i.e., appeals Fully Effective in decisions). We
found weaknesses with FCC's implementation of each of
these mechanisms, limiting the effectiveness of FCC's oversight of
theManaging the E-Rate program and the enforcement of program procedures
to guard against Program waste, fraud, and abuse of E-rate funding.
FCC's Rulemakings Have Led to Problems with USAC's Procedures and
Enforcement of Those Procedures
As part of its oversight of the E-rate program, FCC is responsible for
establishing new rules and policies for the program or making changes to
existing rules, as well as providing the detailed guidance that USAC
requires to effectively administer the program. FCC carries out this
responsibility through its rulemaking process. FCC's E-rate rulemakings,
however, have often been broadly worded and lacking specificity. Thus,
USAC has needed to craft the more detailed administrative procedures
necessary to implement the rules. However, in crafting administrative
procedures, USAC is strictly prohibited under FCC rules from making
policy, interpreting unclear provisions of the statute or rules, or
interpreting the intent of Congress. We were told by FCC and USAC
officials that USAC does not put procedures in place without some level of
FCC approval. We were also told that this approval is sometimes informal,
such as e-mail exchanges or telephone conversations between FCC and USAC
staff. This approval can come in more formal ways as well, such as when
the commission expressly endorses USAC operating procedures in commission
orders or codifies USAC procedures into FCC's rules. However, two problems
have arisen with USAC administrative procedures.
First, although USAC is prohibited under FCC rules from making policy,
some USAC procedures deal with more than just ministerial details and
arguably rise to the level of policy decisions. For example, in June 2004,
USAC was able to identify at least a dozen administrative procedures that,
if violated by the applicant, would lead to complete or partial denial of
the funding request even though there was no precisely corresponding FCC
rule. The critical nature of USAC's administrative procedures is further
illustrated by FCC's repeated codification of them throughout the history
of the program. FCC's codification of USAC procedures-after those
procedures have been put in place and applied to program participants-
raises concerns about whether these procedures are more than ministerial
and are, in fact, policy changes that should be coming from FCC in the
first place. Moreover, in its August 2004 order (in a section dealing with
the resolution of audit findings), the commission directs USAC to annually
"identify any USAC administrative procedures that should be codified in
our rules to facilitate program oversight." This process begs the question
of which entity is really establishing the rules of the E-rate program and
raises concerns about the depth of involvement by FCC staff with the
management of the program.
Second, even though USAC procedures are issued with some degree of FCC
approval, enforcement problems could arise when audits uncover violations
of USAC procedures by beneficiaries or service providers. The FCC IG has
expressed concern over situations where USAC administrative procedures
have not been formally codified because commission staff have stated that,
in such situations, there is generally no legal basis to recover funds
from applicants that failed to comply with the USAC procedures. In its
August 2004 order, the commission attempted to clarify the rules of the
program with relation to recovery of funds. However, even under the August
2004 order, the commission did not clearly address the treatment of
beneficiaries who violate a USAC administrative procedure that has not
been codified.
FCC Has Been Slow to Address Problems Raised by Audit Findings
FCC's use of beneficiary audits as an oversight mechanism has also had
weaknesses, although FCC and USAC are now working to address some of these
weaknesses. Since 2000, there have been 122 beneficiary audits conducted
by outside firms, 57 by USAC staff, and 14 by the FCC IG (2 of which were
performed under agreement with the Inspector General of the Department of
the Interior). Beneficiary audits are the most robust mechanism available
to the commission in the oversight of the E-rate program, yet FCC
generally has been slow to respond to audit findings and has not made full
use of the audit findings as a means to understand and resolve problems
within the program.
First, audit findings can indicate that a beneficiary or service provider
has violated existing E-rate program rules. In these cases, USAC or FCC
can seek recovery of E-rate funds, if justified.30 In the FCC IG's May
2004 Semiannual Report, however, the IG observes that audit findings are
not
30USAC, through its duties as administrator of the fund, initially seeks
recovery of erroneously disbursed funds. In addition, the commission
adopted rules in April 2003 to provide for suspension and debarment from
the program for persons convicted of criminal violations or held civilly
liable for certain acts arising from their E-rate participation.
Debarments would be for a period of three years unless circumstances
warrant a longer debarment period in order to protect the public interest.
being addressed in a timely manner and that, as a result, timely action is
not being taken to recover inappropriately disbursed funds.31 The IG notes
that in some cases the delay is caused by USAC and, in other cases, the
delay is caused because USAC is not receiving timely guidance from the
commission (USAC must seek guidance from the commission when an audit
finding is not a clear violation of an FCC rule or when policy questions
are raised). Regardless, the recovery of inappropriately disbursed funds
is important to the integrity of the program and needs to occur in a
timely fashion.
Second, under GAO's Standards for Internal Controls in the Federal
Government,32 agencies are responsible for promptly reviewing and
evaluating findings from audits, including taking action to correct a
deficiency or taking advantage of the opportunity for improvement. Thus,
if an audit shows a problem but no actual rule violation, FCC should be
examining why the problem arose and determining if a rule change is needed
to address the problem (or perhaps simply addressing the problem through a
clarification to applicant instructions or forms). FCC has been slow,
however, to use audit findings to make programmatic changes. For example,
several important audit findings from the 1998 program year were only
recently resolved by an FCC rulemaking in August 2004.
In its August 2004 order, the commission concluded that a standardized,
uniform process for resolving audit findings was necessary, and directed
USAC to submit to FCC a proposal for resolving audit findings. FCC also
instructed USAC to specify deadlines in its proposal "to ensure audit
findings are resolved in a timely manner."33 USAC submitted its Proposed
Audit Resolution Plan to FCC on October 28, 2004. The plan memorializes
much of the current audit process and provides deadlines for the various
stages of the audit process. FCC released the proposed audit plan for
public comment in December 2004.34
31See FCC, Office of the Inspector General Semiannual Report to Congress,
October 1, 2003-March 31, 2004 (Washington, D.C.; May 3, 2004).
32GAO/AIMD-00-21.3.1.
33FCC, Fifth Report and Order, In the Matter of Schools and Libraries
Universal Service Support Mechanism, FCC-04-190 (Washington, D.C.; Aug.
13, 2004), para. 74.
34Comments were due January 5, 2005; reply comments were due January 20,
2005.
In addition to the Proposed Audit Resolution Plan, the commission
instructed USAC to submit a report to FCC on a semiannual basis
summarizing the status of all outstanding audit findings. The commission
also stated that it expects USAC to identify for commission consideration
on at least an annual basis all audit findings raising management concerns
that are not addressed by existing FCC rules. Lastly, the commission took
the unusual step of providing a limited delegation to the Wireline
Competition Bureau (the bureau within FCC with the greatest share of the
responsibility for managing the E-rate program) to address audit findings
and to act on requests for waiver of rules warranting recovery of funds.35
These actions could help ensure, on a prospective basis, that audit
findings are more thoroughly and quickly addressed. However, much still
depends on timely action being taken by FCC, particularly if audit
findings suggest the need for a rulemaking.
In addition to problems with responding to audit findings, the audits
conducted to date have been of limited use because neither FCC nor USAC
have conducted an audit effort using a statistical approach that would
allow them to project the audit results to all E-rate beneficiaries. Thus,
at present, no one involved with the E-rate program has a basis for making
a definitive statement about the amount of waste, fraud, and abuse in the
program.36 Of the various groups of beneficiary audits conducted to date,
all were of insufficient size and design to analyze the amount of fraud or
waste in the program or the number of times that any particular problem
might be occurring programwide. At the time we concluded our review, FCC
and USAC were in the process of soliciting and reviewing responses to a
Request for Proposal for audit services to conduct additional beneficiary
audits.
35FCC 04-190, para. 75.
36In testimony before the House Subcommittee on Oversight and
Investigations of the Committee on Energy and Commerce in June 2004, FCC's
Inspector General submitted a prepared statement that said the "results of
audits that have been performed and the allegations under investigation
lead us to believe the program may be subject to unacceptably high risk of
fraud, waste and abuse." At the same hearing, the Chief of FCC's Office of
Strategic Planning and Policy Analysis and the Deputy Chief of FCC's
Wireline Competition Bureau submitted a prepared statement that said that
FCC had "enabled implementation of the [E-rate] statutory goals with a
minimum of fraud, waste, and abuse."
FCC Has Been Slow to Act on Some E-Rate Appeals
Under FCC's rules, program participants can seek review of USAC's
decisions,37 although FCC's appeals process for the E-rate program has
been slow in some cases. Because appeals decisions are used as precedent,
this slowness adds uncertainty to the program and impacts beneficiaries.
FCC rules state that FCC is to decide appeals within 90 days, although FCC
can extend this period. At the time of our review there was a substantial
appeals backlog at FCC (i.e., appeals pending for longer than 90 days).
Out of 1,865 appeals to FCC from 1998 through the end of 2004,
approximately 527 appeals remain undecided, of which 458 (25 percent) are
backlog appeals.38
We were told by FCC officials that some of the backlog is due to staffing
issues. FCC officials said they do not have enough staff to handle appeals
in a timely manner. FCC officials also noted that there has been frequent
staff turnover within the E-rate program, which adds some delay to appeals
decisions because new staff necessarily take time to learn about the
program and the issues. Additionally, we were told that another factor
contributing to the backlog is that the appeals have become more
complicated as the program has matured. Lastly, some appeals may be tied
up if the issue is currently in the rulemaking process.
The appeals backlog is of particular concern given that the E-rate program
is a technology program. An applicant who appeals a funding denial and
works through the process to achieve a reversal and funding two years
later might have ultimately won funding for outdated technology. FCC
officials told us that they are working to resolve all backlogged E-rate
appeals by the end of calendar year 2005.
Summary In summary, we remain concerned that FCC has not done enough to
proactively manage and provide a framework of government accountability
for the multibillion-dollar E-rate program. Lack of clarity about what
accountability standards apply to the program causes confusion among
program participants and can lead to situations where
37Virtually all of the decisions made by FCC and USAC in their management
and administration of the E-rate program may be subject to petition for
reconsideration or appeal by beneficiaries. Moreover, schools and
libraries have the option of multiple appeal levels, including USAC, the
Wireline Competition Bureau, and the commission.
38The bulk of the appeals are to USAC, which received a total of 16,782
appeals from the beginning of the program through 2003. Of these,
646-roughly 4 percent-remained undecided as of September 20, 2004.
funding commitments are interrupted pending decisions about applicable
law, such as happened with the Antideficiency Act in the fall of 2004.
Ineffective performance goals and measures make it difficult to assess the
program's effectiveness and chart its future course. Weaknesses in
oversight and enforcement can lead to misuse of E-rate funding by program
participants that, in turn, deprives other schools and libraries whose
requests for support were denied due to funding limitations.
To address these management and oversight problems identified in our
review of the E-rate program, our report recommends that the Chairman of
FCC direct commission staff to (1) conduct and document a comprehensive
assessment to determine whether all necessary government accountability
requirements, policies, and practices have been applied and are fully in
place to protect the E-rate program and universal service funding; (2)
establish meaningful performance goals and measures for the E-rate
program; and (3) develop a strategy for reducing the E-rate program's
appeals backlog, including ensuring that adequate staffing resources are
devoted to E-rate appeals.
We provided a draft of our report to FCC for comment. FCC said that it
took a number of steps in 2004 to improve its management and oversight of
the program, and anticipates taking additional steps during the coming
year. FCC concurred with our recommendations on establishing performance
goals and measures and developing a strategy for reducing the backlog of
appeals. FCC did not concur with our recommendation that it conduct a
comprehensive assessment concerning the applicability of government
accountability requirements, policies, and practices. FCC maintains that
it has already done so on a case-by-case basis. As noted in our report,
however, we believe that major issues remain unresolved, such as the
implications of FCC's determination that the Universal Service Fund
constitutes an appropriation under the current structure of the E-rate
program and the extent to which FCC has delegated some program functions
to USAC.
Scope andWe conducted our work from December 2003 through December 2004 in
accordance with generally accepted government auditing standards. We
Methodology interviewed officials from FCC's Wireline Competition Bureau,
Enforcement Bureau, Office of General Counsel, Office of Managing
Director, Office of Strategic Planning and Policy Analysis, and Office of
Inspector General. We also interviewed officials from USAC. In addition,
we interviewed officials from OMB and the Department of Education
regarding performance goals and measures. OMB had conducted its own
assessment of the E-rate program in 2003, which we also discussed with OMB
officials. We reviewed and analyzed FCC, USAC, and OMB documents related
to the management and oversight of the E-rate program. The information we
gathered was sufficiently reliable for the purposes of our review. See our
full report for a more detailed explanation of our scope and methodology.
This concludes my prepared statement. I would be pleased to respond to any
questions that you or other Members of the Committee may have.
GAO Contact and For further information about this testimony, please
contact me at (202) 512-2834. Edda Emmanuelli-Perez, John Finedore, Faye
Morrison, andStaff Mindi Weisenbloom also made key contributions to this
statement.
Acknowledgments
Appendix I: Fiscal Law Issues Involving the Universal Service Fund
There have been questions from the start of the E-rate program regarding
the nature of the Universal Service Fund (USF) and the applicability of
managerial, fiscal, and financial accountability requirements to USF. FCC
has never clearly determined the nature of USF, and the Office of
Management and Budget (OMB), the Congressional Budget Office (CBO), and
GAO have at various times noted that USF has not been recognized or
treated as federal funds for several purposes.1 However, FCC has never
confronted or assessed these issues in a comprehensive fashion and has
only recently begun to address a few of these issues. In particular, FCC
has recently concluded that as a permanent indefinite appropriation, USF
is subject to the Antideficiency Act and its funding commitment decision
letters constitute obligations for purposes of the Antideficiency Act. As
explained below, we agree with FCC's determination. However, FCC's
conclusions concerning the status of USF raise further issues related to
the collection, deposit, obligation, and disbursement of those funds-
issues that FCC needs to explore and resolve.
Background
Universal service has been a basic goal of telecommunications regulation
since the 1950s, when FCC focused on increasing the availability of
reasonably priced, basic telephone service. See Texas Office of Public
Utility Counsel v. FCC, 183 F.3d 393, 405-406 (5th Cir., 1999), cert.
denied sub nom; Celpage Inc. v. FCC, 530 U.S. 1210 (2000). FCC has not
relied solely on market forces, but has used a combination of explicit and
implicit subsidies to achieve this goal. Id. Prior to 1983, FCC used the
regulation of AT&T's internal rate structure to garner funds to support
universal service. With the breakup of AT&T in 1983, FCC established a
Universal Service Fund administered by the National Exchange Carrier
1See GAO, Schools and Libraries Program: Application and Invoice Review
Procedures
Need Strengthening, GAO-01-105, 41. FCC's IG has also raised questions
regarding the nature of USF. FCC's IG first looked at USF in 1999 as part
of its audit of the commission's fiscal year 1999 financial statement.
During that audit, the FCC IG questioned commission staff regarding the
nature of the fund and, specifically, whether USF was subject to the
statutory and regulatory requirements for federal funds. In the next
year's audit, the FCC IG noted that the commission could not ensure that
USF activities were in compliance with all laws and regulations because
the issue of which laws and regulations were applicable to USF was still
unresolved at the end of the audit. In the FCC IG's reports on FCC's
financial statements from fiscal years 1999 to 2003, the IG consistently
recommended that FCC management formally define in writing the financial
management roles and responsibilities of FCC and USAC to avoid confusion
and misunderstanding.
Association (NECA). NECA is an association of incumbent local telephone
companies, also established at the direction of the FCC. Among other
things, NECA was to administer universal service through interstate access
tariffs and the revenue distribution process for the nation's local
telephone companies. At that time, NECA, a nongovernmental entity,
privately maintained the Universal Service Fund outside the U.S. Treasury.
Section 254 of the Telecommunications Act of 1996 codified the concept of
universal service and expanded it to include support for acquisition by
schools and libraries of telecommunications and Internet services. Pub. L.
No. 104-104, S: 254, 110 Stat. 56 (1996) (classified at 47 U.S.C. S: 254).
The act defines universal service, generally, as a level of
telecommunications services that FCC establishes periodically after taking
into account various considerations, including the extent to which
telecommunications services are essential to education, public health, and
public safety. 47 U.S.C. S: 254 (c)(1). The act also requires that "every
telecommunications carrier that provides interstate telecommunications
services shall contribute . . . to the specific, predictable, and
sufficient mechanisms" established by FCC "to preserve and advance
universal service." Id., S:254 (d). The act did not specify how FCC was to
administer the E-rate program, but required FCC, acting on the
recommendations of the Federal-State Joint Board, to define universal
service and develop specific, predictable, and equitable support
mechanisms.
FCC designated the Universal Services Administrative Company (USAC), a
nonprofit corporation that is a wholly owned subsidiary of NECA, as the
2
administrator of the universal service mechanisms. USAC administers the
program pursuant to FCC orders, rules, and directives. As part of its
duties, USAC collects the carriers' universal service contributions, which
constitute the Universal Service Fund, and deposits them to a private bank
account under USAC's control and in USAC's name. FCC has directed the use
of USF to, among other things, subsidize advanced telecommunications
services for schools and libraries in a program
2In 1998, we issued a legal opinion on the then-current structure of the
E-rate program where FCC directed the creation of the Schools and
Libraries Corporation to administer the universal service program. Under
the Government Corporation Control Act, an agency must have specific
statutory authority to establish a corporation. 31 U.S.C. S: 9102. We
concluded that FCC did not have authority to create a separate independent
corporation to administer the E-rate program. B-278820, Feb. 10, 1998.
Subsequently, FCC eliminated the Schools and Libraries Corporation as a
separate entity, and restructured the universal service program to its
present form.
commonly referred to as the E-rate program.3 Pursuant to the E-rate
program, eligible schools and libraries can apply annually to receive
support and can spend the funding on specific eligible services and
equipment, including telephone services, Internet access services, and the
installation of internal wiring and other related items. Generally, FCC
orders, rules, and directives, as well as procedures developed by USAC,
establish the program's criteria. USAC carries out the program's day-today
operations, such as answering inquiries from schools and libraries;
processing and reviewing applications; making funding commitment decisions
and issuing funding commitment decision letters; and collecting, managing,
investing, and disbursing E-rate funds.
Eligible schools and libraries may apply annually to receive E-rate
support. The program places schools and libraries into various discount
categories, based on indicators of need. As a result of the application of
the discount rate to the cost of the service, the school or library pays a
percentage of the cost for the service and the E-rate program covers the
remainder. Erate discounts range from 20 percent to 90 percent.
Once the school or library has complied with the program's requirements
and entered into agreements with vendors for eligible services, the school
or library must file a form with USAC noting the types and costs of the
services being contracted for, the vendors providing the services, and the
amount of discount being requested. USAC reviews the forms and issues
funding commitment decision letters.4 The funding commitment decision
letters notify the applicants of the decisions regarding their E-rate
discounts. These funding commitment decision letters also notify the
applicants that USAC will send the information on the approved E-rate
discounts to the providers so that "preparations can be made to begin
implementing . . . E-rate discount(s) upon the filing [by the applicant]
of . . . Form 486." The applicant files FCC Form 486 to notify USAC that
services have started and USAC can pay service provider invoices.
Generally, the service provider seeks reimbursement from USAC for the
discounted portion of the service, although the school or library also
could pay the service provider in full and then seek reimbursement from
USAC for the discount portion.
3The term "E-rate" evolved from some individuals referring to the program
as the "Education" rate.
4USAC could reduce the amount requested if the school or library has
included ineligible services in its application or has calculated its
discount category incorrectly.
What Is the Universal Service Fund?
The precise phrasing of the questions regarding the nature of USF has
varied over the years, including asking whether they are federal funds,
appropriated funds, or public funds and, if so, for what purposes? While
the various fiscal statutes may use these different terms to describe the
status of funds, we think the fundamental issue is what statutory controls
involving the collection, deposit, obligation, and disbursement of funds
apply to USF. As explained below, funds that are appropriated funds are
subject, unless specifically exempted by law, to a variety of statutory
provisions providing a scheme of funds controls. See B-257525, Nov. 30,
1994; 63 Comp. Gen. 31 (1983); 35 Comp. Gen. 436 (1956); B-204078.2, May
6, 1988. On the other hand, funds that are not appropriated funds are not
subject to such controls unless the law specifically applies such
controls. Thus, we believe the initial question is whether USF funds are
appropriated funds.
FCC has concluded that USF constitutes a permanent indefinite
appropriation. We agree with FCC's conclusion. Typical language of
appropriation identifies a fund or account as an appropriation and
authorizes an agency to enter into obligations and make disbursements out
of available funds. For example, Congress utilizes such language in the
annual appropriations acts. See 1 U.S.C. S: 105 (requiring regular annual
appropriations acts to bear the title "An Act making appropriations. .
."). Congress, however, appropriates funds in a variety of ways other than
in regular annual appropriation acts.5 Indeed, our decisions and those of
the courts so recognize.
Thus, a statute that contains a specific direction to pay, and a
designation of funds to be used, constitutes an appropriation. 63 Comp.
Gen. 331 (1984); 13 Comp. Gen. 77 (1933). In these statutes, Congress (1)
authorizes the collection of fees and their deposit into a particular
fund, and (2) makes the fund available for expenditure for a specified
purpose without further action by Congress. This authority to obligate or
expend
5Congress has recognized that an appropriation is a form of budget
authority that makes funds available to an agency to incur obligations and
make expenditures in a number of different statutes. For example, see 2
U.S.C. S: 622(2)(A)(i) (budget authority includes "provisions of law that
make funds available for obligation and expenditure . . . including the
authority to obligate and expend the proceeds of offsetting receipts and
collections") and 31 U.S.C. S: 701(2)(C) (appropriations include "other
authority making amounts available for obligation or expenditure").
collections without further congressional action constitutes a continuing
appropriation or a permanent appropriation of the collections. E.g.,
United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (D.C. Cir. 1965), cert.
denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 262 (1990); 73 Comp. Gen.
321 (1994). Our decisions are replete with examples of permanent
appropriations, such as revolving funds and various special deposit funds,
including mobile home inspection fees collected by the Secretary of
Housing and Urban Development,6 licensing revenues received by the
Commission on the Bicentennial,7 tolls and other receipts deposited in the
Panama Canal Revolving Fund,8 user fees collected by the Saint Lawrence
Seaway Development Corporation,9 user fees collected from tobacco
producers to provide tobacco inspection, certification and other
services,10 and user fees collected from firms using the Department of
Agriculture's meat grading services.11 It is not essential for Congress to
expressly designate a fund as an appropriation or to use literal language
of "appropriation," so long as Congress authorizes the expenditure of fees
or receipts collected and deposited to a specific account or fund.12 In
cases where Congress does not intend these types of collections or funds
to be considered "appropriated funds," it explicitly states that in law.
See e.g., 12 U.S.C. S: 244 (the Federal Reserve Board levies assessments
on its member banks to pay for its expenses and "funds derived from such
assessments shall not be construed to be government funds or appropriated
moneys"); 12 U.S.C. S: 1422b(c) (the Office of Federal Housing Enterprise
Oversight levies assessments upon the Federal Home Loan Banks and from
other sources to pay its expenses, but such funds "shall not be construed
to be government funds or appropriated monies, or subject to apportionment
for the purposes of chapter 15 of title 31, or any other authority").
Like the above examples, USF's current authority stems from a statutorily
authorized collection of fees from telecommunication carriers, and
659 Comp. Gen. 215 (1980). �7B-228777, Aug. 26, 1988.
�8B-204078.2, May 6, 1988 and B-257525, Nov. 30, 1994.
�9B-193573, Jan. 8, 1979; B-193573, Dec. 19, 1979; B-217578, Oct.
16, 1986. �1063 Comp. Gen. 285 (1984). �11B-191761, Sept.
22, 1978. �12B-193573, Dec. 19, 1979. �
expenditures for a specified purpose-that is, the various types of
universal service.13 Thus, USF meets both elements of the definition of a
permanent appropriation.
We recognize that prior to the passage of the Telecommunications Act of
1996, there existed an administratively sanctioned universal service fund.
With the Telecommunications Act of 1996, Congress specifically expanded
the contribution base of the fund, statutorily mandated contributions into
the fund, and designated the purposes for which the monies could be
expended. These congressional actions established USF in a manner that
meets the elements for a permanent appropriation and Congress did not
specify that USF should be considered anything other than an
appropriation.14
Does the Antideficiency Act Apply to USF?
Appropriated funds are subject to a variety of statutory controls and
restrictions. These controls and restrictions, among other things, limit
the purposes for which they may be used and provide a scheme of funds
control. See e.g., 63 Comp. Gen. 110 (1983); B-257525, Nov. 30, 1994;
B228777, Aug. 26, 1988; B-223857, Feb. 27, 1987; 35 Comp. Gen. 436 (1956).
A key component of this scheme of funds control is the Antideficiency Act.
B-223857, Feb. 27, 1987. The Antideficiency Act15 has been termed "the
cornerstone of congressional efforts to bind the executive branch of
13The United States Court of Appeals for the Fifth Circuit has recognized
the governmental character of the funds. Texas Office of Public Utility
Counsel v. FCC, 183 F.3d 393, 426428 (5th Cir., 1999), cert. denied sub
nom; Celpage Inc. v. FCC, 530 U.S. 1210 2212 (2000). The Fifth Circuit
held that USF funds are statutorily mandated special assessments
supporting a federal program mandated by Congress. FCC has also requested
that the Department of Justice recognize that USF are federal funds for
purposes of representing FCC and the United States in litigation involving
USF, such as the False Claims Act.
14The Senate passed a "sense of the Senate" provision that stated,
"Federal and State universal service contributions are administered by an
independent nonfederal entity and are not deposited into the federal
Treasury and therefore are not available for federal appropriations." See
section 614, H.R. 2267, as passed by the Senate (Oct. 1, 1997). However,
the purpose of that resolution was to respond to an attempt to withhold
USF payments as a means to balance the federal budget or achieve budget
savings. We understand section 614, H.R. 2267 intended to insulate USF
from budgetary pressures and not to express a view on the proper fiscal
treatment of USF. Our interpretation of USF as a permanent appropriation
is consistent with the intent that USF is only available for universal
service and could only be changed if Congress amended the law to permit
USF to be used for other purposes.
1531 U.S.C. S:S: 1341, 1342 and 1517.
government to the limits on expenditure of appropriated funds."16
Primarily, the purpose of the Antideficiency Act is to prevent the
obligation and expenditure of funds in excess of the amounts available in
an appropriation or in advance of the appropriation of funds. 31 U.S.C. S:
1341(a)(1). FCC has determined that the Antideficiency Act applies to USF,
and as explained below, we agree with FCC's conclusion.
The Antideficiency Act applies to "officer[s] or employee[s] of the United
States Government . . . mak[ing] or authoriz[ing] an expenditure or
obligation . . . from an appropriation or fund." 31 U.S.C. S: 1341(a). As
established above, USF is an "appropriation or fund." The fact that USAC,
a private entity whose employees are not federal officers or employees, is
the administrator of the E-rate program and obligates and disburses funds
from USF is not dispositive of the application of the Antideficiency Act.
This is because, as the FCC recognizes, it, not USAC, is the entity that
is legally responsible for the management and oversight of the E-rate
program and FCC's employees are federal officers and employees of the
United States subject to the Antideficiency Act.17
Where entities operate with funds that are regarded as appropriated funds,
such as some government corporations, they, too, are subject to the
Antideficiency Act. See e.g., B-223857, Feb. 27, 1987 (funds available to
Commodity Credit Corporation pursuant to borrowing authority are subject
to Antideficiency Act); B-135075-O.M., Feb. 14, 1975 (Inter-American
Foundation). The Antideficiency Act applies to permanent appropriations
such as revolving funds18 and special funds. 72 Comp. Gen. 59 (1992)
(Corps of Engineers Civil Works Revolving Fund subject to Antideficiency
Act); B-120480, Sep. 6, 1967, B-247348, June 22, 1992, and B260606, July
25, 1997 (GPO revolving funds subject to Antideficiency Act);
16Hopkins & Nutt, The Anti-Deficiency Act (Revised Statutes 3679) and
Funding Federal Contracts: An Analysis, 80 Mil. L. Rev. 51, 56 (1978).
17Under FCC's rules, USAC is prohibited from making policy, interpreting
unclear
provisions of the statute or rules, or interpreting the intent of
Congress. 47 C.F.R. S: 54.702(c). As addressed below, one of the issues
that remains to be resolved is whether USAC is authorized to take the
actions that obligate and disburse USF funds pursuant to FCC orders,
rules, and directives or whether FCC must implement additional steps to
ensure that obligations and disbursements are specifically authorized by
FCC officials and employees.
18Revolving funds are funds authorized by law to be credited with
collections and receipts from various sources that generally remain
available for continuing operations of the revolving fund without further
congressional action. See 72 Comp. Gen. 59 (1992).
71 Comp. Gen. 224 (1992) (special fund that receives fees, reimbursements,
and advances for services available to finance its operations is subject
to Antideficiency Act).
Where Congress intends for appropriated funds to be exempt from the
application of statutory controls on the use of appropriations, including
the Antideficiency Act, it does so expressly. See e.g., B-193573, Jan. 8,
1979; B-193573, Dec. 19, 1979; B-217578, Oct. 16, 1986 (Saint Lawrence
Seaway Development Corporation has express statutory authority to
determine the character and necessity of its obligations and is therefore
exempt from many of the restrictions on the use of appropriated funds that
would otherwise apply); B-197742, Aug. 1, 1986 (Price-Anderson Act
expressly exempts the Nuclear Regulatory Commission from Antideficiency
Act prohibition against obligations or expenditures in advance or in
excess of appropriations). There is no such exemption for FCC or USF from
the prohibitions of the Antideficiency Act. Thus, USF is subject to the
Antideficiency Act.
Do the Funding Commitment Decision Letters Issued to Schools and Libraries
Constitute Obligations?
An important issue that arises from the application of the Antideficiency
Act to USF is what actions constitute obligations chargeable against the
fund. Understanding the concept of an obligation and properly recording
obligations are important because an obligation serves as the basis for
the scheme of funds control that Congress envisioned when it enacted
fiscal laws such as the Antideficiency Act. B-300480, Apr. 9, 2003. For
USF's schools and libraries program, one of the main questions is whether
the funding commitment decision letters issued to schools and libraries
are properly regarded as obligations. FCC has determined that funding
commitment decision letters constitute obligations. And again, as
explained below, we agree with FCC's determination.
Under the Antideficiency Act, an agency may not incur an obligation in
excess of the amount available to it in an appropriation or fund. 31
U.S.C. S: 1341(a). Thus, proper recording of obligations with respect to
the timing and amount of such obligations permits compliance with the
Antideficiency Act by ensuring that agencies have adequate budget
authority to cover all of their obligations.19 B-300480, Apr. 9, 2003. We
have defined an "obligation" as a "definite commitment that creates a
legal liability of the government for the payment of goods and services
ordered or received." Id. A legal liability is generally any duty,
obligation or responsibility established by a statute, regulation, or
court decision, or where the agency has agreed to assume responsibility in
an interagency agreement, settlement agreement or similar legally binding
document. Id. citing to Black's Law Dictionary 925 (7th ed. 1999). The
definition of "obligation" also extends to "[a] legal duty on the part of
the United States which constitutes a legal liability or which could
mature into a legal liability by virtue of actions on the part of the
other party beyond the control of the United States. . . ." Id. citing to
42 Comp. Gen. 733 (1963); see also McDonnell Douglas Corp. v. United
States, 37 Fed. Cl. 295, 301 (1997).
The funding commitment decision letters provided to applicant schools and
libraries notify them of the decisions regarding their E-rate discounts.
In other words, it notifies them whether their funding is approved and in
what amounts. The funding commitment decision letters also notify schools
and libraries that the information on the approved E-rate discounts is
sent to the providers so that "preparations can be made to begin
implementing . . . E-rate discount(s) upon the filing [by applicants] of .
. . Form 486." The applicant files FCC Form 486 to notify USAC that
services have started and USAC can pay service provider invoices. At the
time a school or library receives a funding commitment decision letter,
the FCC has taken an action that accepts a "legal duty . . . which could
mature into a legal liability by virtue of actions on the part of the
grantee beyond the control of the United States." Id. citing 42 Comp. Gen.
733, 734 (1963). In this instance, the funding commitment decision letter
provides the school or library with the authority to obtain services from
a provider with the commitment that it will receive a discount and the
provider will be reimbursed for the discount provided. While the school or
library could decide not to seek the services or the discount, so long as
the funding commitment decision letter remains valid and outstanding, USAC
and FCC no longer control USF's liability; it is dependent on the actions
taken by
19Legal liability for obligational accounting and to comply with the
Antideficiency Act and the Recording Statute, 31 U.S.C. S: 1501 is
distinct from accounting liabilities and projections booked in its
proprietary accounting systems for financial statement purposes. For
proprietary accounting purposes, a liability is probable and measurable
future outflow or other sacrifice of resources as a result of past
transactions or events. See B-300480, Apr. 9, 2003, and FASAB Statement of
Federal Financial Accounting Standards Number 1.
the other party-that is, the school or library. In our view, a recordable
USF obligation is incurred at the time of issuance of the funding
commitment decision letter indicating approval of the applicant's
discount. Thus, these obligations should be recorded in the amounts
approved by the funding commitment decision letters. If at a later date, a
particular applicant uses an amount less than the maximum or rejects
funding, then the obligation amount can be adjusted or deobligated,
respectively.
Additional issues that remain to be resolved by FCC include whether other
actions taken in the universal service program constitute obligations and
the timing of and amounts of obligations that must be recorded. For
example, this includes the projections and data submissions by USAC to FCC
and by participants in the High Cost and Low Income Support Mechanisms to
USAC. FCC has indicated that it is considering this issue and consulting
with the Office of Management and Budget. FCC should also identify any
other actions that may constitute recordable obligations and ensure those
are properly recorded.
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