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Testimony:

Before the Subcommittee on Oversight and Investigations, Committee on 
Energy and Commerce, House of Representatives:

United States Government Accountability Office:

GAO:

For Release on Delivery Expected at 2:00 p.m. EST:

Wednesday, March 16, 2005:

Telecommunications: 

Concerns Regarding the Structure and FCC's Management of the E-Rate 
Program:

Statement of Mark L. Goldstein, Director: 
Physical Infrastructure Issues:

GAO-05-439T:

GAO Highlights:

Highlights of GAO-05-439T, a testimony before the Subcommittee on 
Oversight and Investigations, Committee on Energy and Commerce, House 
of Representatives: 

Why GAO Did This Study:

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.  Recently, 
allegations of fraud, waste, and abuse by some E-rate program 
participants have come to light.  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, (2) FCC’s development and use of E-
rate performance goals and measures, and (3) the effectiveness of FCC’s 
program oversight mechanisms.

What GAO Found:

FCC established the E-rate program using an organizational structure 
unusual to the government without conducting a comprehensive assessment 
to determine which federal requirements, policies, and practices apply 
to it.  The E-rate program is administered by a private, not-for-profit 
corporation with no contract or memorandum of understanding with FCC, 
and program funds are maintained outside of the U.S. Treasury, raising 
issues related to the collection, deposit, obligation, and disbursement 
of the funding.  While FCC recently concluded that the Universal 
Service Fund constitutes an appropriation and is subject to the 
Antideficiency Act, this raises further issues concerning the 
applicability of other fiscal control and accountability statutes.  
These issues need to be explored and resolved comprehensively to ensure 
that appropriate governmental accountability standards are fully in 
place to help protect the program and the fund from fraud, waste, and 
abuse.

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.  A key 
unanswered question, therefore, is the extent to which increases in 
connectivity can be attributed to E-rate.  In addition, goals for 
improving E-rate program management have not been a feature of FCC’s 
performance plans.  In its 2003 assessment of the program, OMB noted 
that FCC discontinued E-rate performance measures after fiscal year 
2002 and 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.  In response to 
OMB’s concerns, FCC is currently working on developing new E-rate goals.

FCC’s oversight mechanisms contain weaknesses that limit FCC’s 
management of the program and its ability to understand the scope of 
any fraud, waste, and abuse within the program.  According to FCC 
officials, oversight of the program is primarily handled through agency 
rulemaking procedures, beneficiary audits, and appeals decisions.  
FCC’s rulemakings have often lacked specificity and led to a 
distinction between FCC’s rules and the procedures put in place by the 
program administrator—a distinction that has affected the recovery of 
funds for program violations.  While audits of E-rate beneficiaries 
have been conducted, FCC has been slow to respond to audit findings and 
make full use of them to strengthen the program.  In addition, the 
small number of audits completed to date do not provide a basis for 
accurately assessing the level of fraud, waste, and abuse occurring in 
the program, although the program administrator is working to address 
this issue.  According to FCC officials, there is also a substantial 
backlog of E-rate appeals due in part to a shortage of staff and staff 
turnover.  Because appeal decisions establish precedent, this slowness 
adds uncertainty to the program.  

What GAO Recommends:

In its report, GAO recommends that FCC (1) comprehensively determine 
which federal accountability requirements apply to E-rate; (2) 
establish meaningful E-rate performance goals and measures; and (3) 
take steps to reduce its backlog of appeals.  In response, FCC stated 
that it does not concur with (1) because it maintains it has done this 
on a case-by-case basis.  GAO continues to believe that major issues 
remain unresolved.  FCC concurs with (2) and (3), noting that it is 
already taking steps on these issues.

www.gao.gov/cgi-bin/getrpt?GAO-05-439T.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Mark L. Goldstein at 
(202) 512-2834 or goldsteinm@gao.gov.

[End of section]

Mr. Chairman and Members of the Subcommittee:

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. As you know, the 
Telecommunications Act of 1996 expanded the concept of universal 
service to include assistance to schools and libraries in acquiring 
telecommunications and Internet services; the act charged FCC with 
establishing the universal service discount mechanism for eligible 
schools and libraries. The commission, in turn, created a large and 
ambitious program that became commonly known as the "E-rate" program, 
and set the annual funding cap for the program at $2.25 billion. FCC 
designated the Universal Service Administrative Company (USAC), a 
private, not-for-profit corporation established under FCC's rules, to 
carry out the day-to-day operations of the E-rate program. FCC retains 
responsibility for overseeing the program's operations and ensuring 
compliance with the commission's rules.

Since 1998, the E-rate program has committed more than $13 billion in 
funding to help schools and libraries across the nation acquire 
telecommunications and Internet services. Eligible schools and 
libraries can apply annually to receive support, which can be used for 
specific eligible services and equipment such as telephone services, 
Internet access services, and the installation of internal wiring and 
other related items. Recently, however, allegations have been made that 
some E-rate beneficiaries (schools and libraries) and service providers 
(e.g., telecommunications and network equipment companies) have 
fraudulently obtained, wasted, or abused E-rate funding. In May 2004, 
for example, one service provider involved in E-rate projects in 
several states pleaded guilty to bid rigging and wire fraud and agreed 
to pay more than $20 million in criminal fines, civil payments, and 
restitution.

In light of ongoing concerns about the E-rate program, we were asked to 
review various aspects of the program. Specifically, we evaluated (1) 
the effect of the current structure of the E-rate program on FCC's 
management of the program, (2) FCC's development and use of performance 
goals and measures in managing the program, and (3) the effectiveness 
of FCC's oversight mechanisms--rulemaking proceedings, beneficiary 
audits, and reviews of USAC decisions (appeals)--in managing the 
program.

Our testimony is based on a report, being released today, containing 
the results of our review and recommendations for improving FCC's 
management and oversight of the E-rate program.[Footnote 1] In summary, 
we found the following:

* FCC established E-rate as a multibillion-dollar program operating 
under an organizational structure unusual to the federal government, 
but never conducted a comprehensive assessment to determine which 
federal requirements, policies, and practices apply to the program, to 
USAC, and to the Universal Service Fund itself. As a result, FCC has 
struggled with determining which fiscal and accountability requirements 
apply to the E-rate program. We believe that issues exist concerning 
the applicability of certain statutes and the extent to which FCC has 
delegated certain functions for the E-rate program to USAC--issues that 
FCC needs to explore and resolve.

* FCC has not developed meaningful performance goals and measures for 
assessing and managing the program. As a result, there is no way to 
tell whether the program has resulted in the cost-effective deployment 
and use of advanced telecommunications services for schools and 
libraries.

* FCC's program oversight mechanisms contain weaknesses that limit 
FCC's management of the program and its ability to understand the scope 
of waste, fraud, and abuse within the program. For example, FCC's 
rulemakings have often lacked specificity and have led to situations 
where important USAC administrative procedures have been deemed 
unenforceable by FCC. There is also a significant backlog of E-rate 
appeals that adds uncertainty to the program and impacts beneficiaries.

FCC has taken some important steps, particularly in recent months, to 
address some of the areas of concern discussed in our report. 
Nevertheless, we believe that FCC has not done enough to proactively 
manage and provide a framework of government accountability for the 
multibillion-dollar E-rate program.

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.[Footnote 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. . . ."[Footnote 3] Based on this direction, and following 
the recommendations of a Federal-State Joint Board on Universal 
Service,[Footnote 4] 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.[Footnote 
5] Many of these companies, in turn, pass their contribution costs on 
to their subscribers through a line item on subscribers' phone 
bills.[Footnote 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.[Footnote 7] In response to congressional conference committee 
direction,[Footnote 8] FCC has specified that USAC "may not make 
policy, interpret unclear provisions of the statute or rules, or 
interpret the intent of Congress."[Footnote 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 issuing 
funding commitment letters; and collecting, managing, investing, and 
disbursing E-rate funds. FCC permits--and in fact relies on--USAC to 
establish administrative procedures that program participants are 
required to follow as they work through the application and funding 
process.

Under the E-rate program, eligible schools, libraries, and consortia 
that include eligible schools and libraries[Footnote 10] may receive 
discounts for eligible services. Eligible schools and libraries may 
apply annually to receive E-rate support. The program places schools 
and libraries into various discount categories, based on indicators of 
need, so that the school or library pays a percentage of the cost for 
the service and the E-rate program funds the remainder. E-rate 
discounts range from 20 percent to 90 percent. USAC reviews all of the 
applications and related forms and issues funding commitment decision 
letters. Generally, it is the service provider that seeks reimbursement 
from USAC for the discounted portion of the service rather than the 
school or library.[Footnote 11]

FCC Established an Unusual Program Structure without Comprehensively 
Addressing the Applicability of Governmental Standards and Fiscal 
Controls:

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 recently began to address a 
few of these issues, concluding that as a permanent indefinite 
appropriation, the Universal Service Fund is subject to the 
Antideficiency Act and that USAC's issuance of commitment letters 
constitutes obligations for purposes of the act. 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.

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. To carry out the day-to-day activities of the E-rate 
program, FCC relied on a structure it had used for other universal 
service programs in the past--a not-for-profit corporation established 
at FCC's direction that would operate under FCC oversight. However, the 
structure of the E-rate program is unusual in several respects compared 
with other federal programs:

* FCC appointed USAC as the permanent administrator of the Universal 
Service Fund,[Footnote 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.

* 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 the Office of Management and Budget (OMB), the 
monies are maintained outside of Treasury accounts by USAC and some of 
the monies have been invested.[Footnote 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 
security of appropriated funds, and agencies' responsibilities for 
those funds.[Footnote 14]

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. In the past, FCC's Inspector General (IG) has 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 unresolved. During 
our review, 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.[Footnote 15] While it 
is true that these steps and other FCC determinations should provide 
greater protections for universal service funding, FCC has addressed 
only a few of the issues that need to be resolved. In fact, staff from 
the FCC's IG's office told us that they do not believe the commission's 
GovGAAP order adequately addressed their concerns because the order did 
not comprehensively detail which fiscal requirements apply to the 
Universal Service Fund and which do not.

FCC maintains that it has undertaken a timely and extensive analysis of 
the significant legal issues associated with the status of the 
Universal Service Fund and has generally done so on a case-by-case 
basis. We recognize that FCC has engaged in internal deliberations and 
external consultations and analysis of a number of statutes. However, 
we do not believe that this was done in a timely manner or that it is 
appropriate to do this on a case-by-case basis, which puts FCC and the 
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.

As you know, Mr. Chairman, a problem with this ad hoc approach was 
dramatically illustrated with regard to the applicability of the 
Antideficiency Act to the Universal Service Fund. 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 their funding is approved and in what amount) might be 
viewed as "obligations" of appropriated funds.[Footnote 16] If so 
viewed, and if FCC also found the Antideficiency Act--which does not 
allow an agency or program to make obligations in excess of available 
budgetary resources--to be applicable to the E-rate program, then USAC 
would need to dramatically increase the program's cash-on-hand and 
lessen the program's investments[Footnote 17] 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. In response to 
these events, in December 2004, Congress passed a bill granting the 
Universal Service Fund a one-year exemption from the Antideficiency 
Act.[Footnote 18]

As we explain more fully in our report, Mr. Chairman, 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. However, 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 
Statute, 31 U.S.C. § 3302, which requires that money received for the 
use of the United States be deposited in the Treasury unless otherwise 
authorized by law.[Footnote 19] 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).[Footnote 20]

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?[Footnote 21] Are some of the functions 
carried out by USAC, even though they have been characterized as 
administrative or ministerial, arguably inherently governmental 
activities[Footnote 22] that must be performed by government personnel? 
Resolving these issues in a comprehensive fashion, rather than 
continuing to rely on reactive, case-by-case determinations, is key to 
ensuring that FCC establishes the proper foundation of government 
accountability standards and safeguards for the E-rate program and the 
Universal Service Fund. We are encouraged that FCC just announced that 
it has contracted with the National Academy of Public Administration 
(NAPA) for NAPA to study and explore alternative models to the current 
organizational and governance structure of the Universal Service Fund 
program. We believe this 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.

FCC Did Not Develop Useful Performance Goals and Measures for Assessing 
and Managing the E-Rate Program:

Although $13 billion in E-rate funding has been committed to 
beneficiaries during the past 7 years, FCC did not develop useful 
performance goals and measures to assess the specific impact of these 
funds on schools' and libraries' Internet access and to improve the 
management of the program, despite a recommendation by us in 1998 to do 
so. At the time of our current review, FCC staff was considering, but 
had not yet finalized, new E-rate goals and measures in response to 
OMB's concerns about this deficiency in a 2003 OMB assessment of the 
program.

One of the management tasks facing FCC is to establish strategic goals 
for the E-rate program, as well as annual goals linked to them. The 
Telecommunications Act of 1996 did not include specific goals for 
supporting schools and libraries, but instead used general language 
directing FCC to establish competitively neutral rules for enhancing 
access to advanced telecommunications and information services for all 
public and nonprofit private elementary and secondary school classrooms 
and libraries.[Footnote 23] 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.[Footnote 24]

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.[Footnote 25] Yet although 
billions of dollars in E-rate funds have been committed since 1998, 
adequate program data was not developed to answer a fundamental 
performance question: How much of the increase since 1998 in public 
schools' Internet access has been a result of the E-rate program, as 
opposed to other sources of federal, state, local, and private funding?

Performance goals and measures are used not only to assess a program's 
impact but also to develop strategies for resolving mission-critical 
management problems. However, management-oriented goals have not been a 
feature of FCC's performance plans, despite long-standing concerns 
about the program's effectiveness in key areas. For example, two such 
goals--related to assessing how well the program's competitive bidding 
process was working and increasing program participation by low-income 
and rural school districts and rural libraries--were planned but not 
carried forward.

FCC did not include any E-rate goals for fiscal years 2003 and 2004 in 
its recent annual performance reports. The failure to measure 
effectively the program's impact on public and private schools and 
libraries over the past 7 years undercuts one of the fundamental 
purposes of the Results Act: to have federal agencies adopt a fact- 
based, businesslike framework for program management and 
accountability. The problem is not just a lack of data for accurately 
characterizing program results in terms of increasing Internet access. 
Other basic questions about the E-rate program also become more 
difficult to address, such as the program's efficiency and cost- 
effectiveness in supporting the telecommunications needs of schools and 
libraries. For example, a review of the program by OMB in 2003 
concluded that there was no way to tell whether the program has 
resulted in the cost-effective deployment and use of advanced 
telecommunications services for schools and libraries.[Footnote 26] 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.

FCC's Oversight Mechanisms Are Not Fully Effective in Managing the E- 
Rate Program:

FCC testified before Congress in June 2004 that it relies on three 
chief components in overseeing the E-rate program: rulemaking 
proceedings, beneficiary audits, and fact-specific adjudicatory 
decisions (i.e., appeals decisions). We found weaknesses with FCC's 
implementation of each of these mechanisms, limiting the effectiveness 
of FCC's oversight of the program and the enforcement of program 
procedures to guard against waste, fraud, and abuse of E-rate funding.

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.[Footnote 
27] In the FCC IG's May 2004 Semiannual Report, however, the IG 
observes that audit findings are not being addressed in a timely manner 
and that, as a result, timely action is not being taken to recover 
inappropriately disbursed funds.[Footnote 28] 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,[Footnote 29] 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."[Footnote 30] 
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.[Footnote 31]

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.[Footnote 32] 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.[Footnote 33] 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.

FCC Has Been Slow to Act on Some E-Rate Appeals:

Under FCC's rules, program participants can seek review of USAC's 
decisions,[Footnote 34] 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.[Footnote 35]

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.

In summary, Mr. Chairman, 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 
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.

Scope and Methodology:

We conducted our work from December 2003 through December 2004 in 
accordance with generally accepted government auditing standards. We 
interviewed officials from FCC's Wireline Competition Bureau, 
Enforcement Bureau, Office of General Counsel, Office of Managing 
Director, Office of Strategic Planning and Policy Analysis, and Office 
of Inspector General. We also interviewed officials from USAC. In 
addition, we interviewed officials from OMB and the Department of 
Education regarding performance goals and measures. OMB had conducted 
its own assessment of the E-rate program in 2003, which we also 
discussed with OMB officials. We reviewed and analyzed FCC, USAC, and 
OMB documents related to the management and oversight of the E-rate 
program. The information we gathered was sufficiently reliable for the 
purposes of our review. See our full report for a more detailed 
explanation of our scope and methodology.

Mr. Chairman, this concludes my prepared statement. I would be pleased 
to respond to any questions that you or other Members of the 
Subcommittee may have.

GAO Contact and Staff Acknowledgments:

For further information about this testimony, please contact me at 
(202) 512-2834. Edda Emmanuelli-Perez, John Finedore, Faye Morrison, 
and Mindi Weisenbloom also made key contributions to this statement.

FOOTNOTES

[1] Telecommunications: 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.

[2] 47 U.S.C. § 254(h)(1)(B).

[3] 47 U.S.C. § 254(h)(2).

[4] The 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.

[5] These companies include providers of local and long distance 
telephone services, wireless telephone services, paging services, and 
pay phone services. 47 C.F.R. § 54.706.

[6] The 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.

[7] USAC was established at the direction of FCC and operates under 
FCC's rules and policies.

[8] See S.1768, 105th Cong., § 2004(b)(2)(A) (1998).

[9] 47 C.F.R. § 54.702(c). 

[10] Eligibility of schools and libraries is defined at 47 U.S.C. § 
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. § 
9122.

[11] The school or library could also pay the service provider in full 
and then seek reimbursement from USAC for the discount portion.

[12] USAC 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. § 54.701(a). This review was never conducted. 


[13] The 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. § 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. 

[14] See 31 U.S.C. §§ 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. 

[15] See FCC, Order, In the Matter of Application of Generally Accepted 
Accounting Principles for Federal Agencies and Generally Accepted 
Government Auditing Standards to the Universal Service Fund, FCC 03-232 
(Washington, D.C.; Oct. 3, 2003).

[16] An "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.

[17] According 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. 

[18] Universal Service Antideficiency Temporary Suspension Act, Pub. L. 
No. 108-494, § 302, 118 Stat. 3986 (2004). The law exempts universal 
service monies from the Antideficiency Act until December 31, 2005.

[19] Because 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.

[20] For example, in October 2003, when 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 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 they were 
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.

[21] See 31 U.S.C. §§ 3321, 3322, 3325, and the Treasury Financial 
Manual.

[22] See 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."

[23] 47 U.S.C. § 254(h)(2)(A). 

[24] For 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.

[25] See NCES, Internet Access in U.S. Public Schools and Classrooms: 
1994-2002, NCES-2004-011 (Washington, D.C.; October 2003). This was the 
most recent update available at the time of our review.

[26] OMB 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. 

[27] USAC, 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. 

[28] See FCC, Office of the Inspector General Semiannual Report to 
Congress, October 1, 2003--March 31, 2004 (Washington, D.C.; May 3, 
2004).

[29] GAO/AIMD-00-21.3.1.

[30] FCC, 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.

[31] Comments were due January 5, 2005; reply comments were due January 
20, 2005.

[32] FCC 04-190, para. 75. 

[33] In 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." 

[34] Virtually 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.

[35] The 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.