<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:21486.wais]
S. Hrg. 109-39
S. 241, PERMANENTLY EXEMPTING THE
UNIVERSAL SERVICE FUND FROM PORTIONS OF THE ANTI-DEFICIENCY ACT
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
APRIL 11, 2005
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana Chairman
TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West
KAY BAILEY HUTCHISON, Texas Virginia
OLYMPIA J. SNOWE, Maine JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada BARBARA BOXER, California
GEORGE ALLEN, Virginia BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire MARIA CANTWELL, Washington
JIM DeMint, South Carolina FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana E. BENJAMIN NELSON, Nebraska
MARK PRYOR, Arkansas
Lisa J. Sutherland, Republican Staff Director
Christine Drager Kurth, Republican Deputy Staff Director
David Russell, Republican Chief Counsel
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Samuel E. Whitehorn, Democratic Deputy Staff Director and General
Counsel
Lila Harper Helms, Democratic Policy Director
C O N T E N T S
----------
Page
Hearing held on April 11, 2005................................... 1
Statement of Senator Inouye...................................... 2
Prepared statement........................................... 2
Statement of Senator Nelson...................................... 45
Statement of Senator Pryor....................................... 53
Statement of Senator Rockefeller................................. 2
Prepared statement........................................... 2
Statement of Senator Snowe....................................... 43
Statement of Senator Stevens..................................... 1
Statement of Senator Sununu...................................... 51
Witnesses
Abshire, Sheryl, District Administrative Coordinator of
Technology, Calcasieu Parish Public Schools.................... 30
Prepared statement........................................... 32
Dalton, Patricia A., Managing Director, Physical Infrastructure
Issues, U.S. Government Accountability Office.................. 12
Prepared statement........................................... 14
Hamlen, Steve, President and CEO, United Utilities, Inc.......... 36
Prepared statement........................................... 37
Schlick, Austin C., Acting General Counsel, Federal
Communications Commission; accompanied by Lisa Gelb, Deputy
Chief, FCC's Wireline Competition Bureau....................... 4
Prepared statement........................................... 6
Talbott, Brian L., Ph.D., Chairman of the Board, Universal
Service Administrative Company................................. 7
Prepared statement........................................... 9
S. 241, PERMANENTLY EXEMPTING THE
UNIVERSAL SERVICE FUND FROM
PORTIONS OF THE ANTI-DEFICIENCY ACT
----------
MONDAY, APRIL 11, 2005
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 2:05 p.m. in room
SR-253, Russell Senate Office Building, Hon. Ted Stevens,
Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Good afternoon. We appreciate it if the
witnesses could come forward. We are going to convene this
hearing to examine Senate Bill 241, it's a bill to permanently
exempt the Universal Service Fund from the Antideficiency Act.
At the end of last season, Congress had to move quickly to
pass a temporary 1-year exemption from the ADA to prevent
further disruption to the E-rate program. And given that we
only passed a temporary exemption last year, our Committee must
now look at how we can permanently fix this problem.
The witnesses are Austin Schlick, Acting General Counsel
for the FCC, Lisa Gelb, for the FCC, Brian Talbott, Chairman of
the Board of the Universal Service Administrative Company,
Patricia Dalton, Managing Director of Physical Infrastructure
Issues for the GAO, Sheryl Abshire, District Administrative
Coordinator for Technology of, how do you say it, Calcasieu?
Ms. Abshire. Calcasieu.
Senator Stevens. Steve Hamlen, President and CEO, United
Utilities.
I should announce to you that in consideration of the
supplemental appropriations bill that contains the Defense
portion, primarily it's a Defense matter and when they call us,
we are going to have to go, so we hope that we can move along
quickly and get your statements.
And we would ask you to summarize them if possible in the
short period of time and we will print the full written
statement into the record without objection and it would be our
hope that we can discuss the issues that you will present to us
as quickly as possible with our apologies due to the problems
of that supplemental appropriations bill. Senator Inouye.
STATEMENT OF HON. DANIEL K. INOUYE,
U.S. SENATOR FROM HAWAII
Senator Inouye. That's right, Mr. Chairman. I thank you for
convening this hearing, and I'm also very pleased to advise you
that I have co-sponsored this measure with you, Senators
Rockefeller and Snowe. And I request that my full statement be
part of the record.
[The prepared statement of Senator Inouye follows:]
Prepared Statement of Hon. Daniel K. Inouye,
U.S. Senator from Hawaii
Mr. Chairman, I want to thank you for holding this hearing to
examine the need to exempt the Universal Service Fund from certain
accounting provisions of the Antideficiency Act. I am pleased to
cosponsor S. 241 with you, Senators Snowe and Rockefeller, and many
others on this Committee.
Schools, libraries and rural health care providers in all of our
states rely on funding from the USF annually. My state of Hawaii alone
has received over $27 million from the E-rate and Rural Health Care
programs since they were created under the Telecommunications Act of
1996.
However, everyone on this Committee remembers very well the events
of last year. While lawyers and policy makers in Washington argued
about accounting rules and antideficiency requirements, schools,
libraries and rural health care providers across the country were faced
with the dilemma of shutting down or delaying deployment of innovative
educational and medical services because of unreliable funding. For
many people in the affected communities, losing access to these
services would have meant losing opportunities to change, enrich, and
improve their lives. With your leadership Mr. Chairman, a temporary fix
was enacted during the closing days of session last Congress, but we
must act now to ensure that future disruptions to these critical
programs do not occur.
I want to be clear. Congress must act to ensure that schools,
libraries, and rural health care providers continue to receive this
funding in a timely and predictable manner. I believe that enacting a
permanent solution must be one of our highest priorites this session.
Technology is transforming how we receive and share information,
and in turn, it is empowering people to change their lives and the life
of their communities. Access to the Internet is the encyclopedia of the
twenty-first century, and I, for one, will not allow our young people
to lose that access.
I am pleased to hear from the panel of witnesses before us on the
Universal Service Fund and the issues relating to the Antideficiency
Act. However, it seems that we are missing a critical perspective at
the table--the Office of Management and Budget, which has raised
concerns with this legislation. We would like to have a full record and
I am disappointed that OMB is depriving us of their important
perspective on this matter.
Mr. Chairman, this is a very serious matter and we must work hard
to find a solution. I commit to working with you and our colleagues to
move this legislation through the Congress. Thank you.
Senator Stevens. Senator Rockefeller?
STATEMENT OF THE HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
Senator Rockefeller. The same request, Mr. Chairman.
[The prepared statement of Senator Rockefeller follows:]
Prepared Statement of Hon. John D. Rockefeller IV,
U.S. Senator from West Virginia
Mr. Chairman, I deeply appreciate your cooperation in scheduling
this hearing on the applicability of the Anti-deficiency Act to the
Universal Service Fund. I would also like to thank you and Senator
Inouye for your co-sponsorship of S. 241, Senator Snowe's and my bill
to make permanent the exemption of Universal Service from the Anti-
deficiency Act. Our bill has bipartisan support with 29 cosponsors.
I would note that this Committee has asked the Office of Management
and Budget to appear to discuss their objections to this important
legislation--they have declined to appear. I would also note that OMB
has consistently refused to put in writing any objections they have.
I find it highly inappropriate to have the Administration object to
a bill without the courtesy of telling me why. I am deeply disappointed
by the Administration's actions in this manner. OMB was the driver of
many of the issues we are facing here today, and it is more than
appropriate that they should be testifying to their thoughts on
addressing these issues.
The telecommunications, education, library, rural health, and
consumer communities have also expressed strong support for this bill.
It is my understanding that the Committee will soon mark-up this bill
and I hope that we will be able to keep an accelerated schedule to
adopt this bill. We need to act soon if to avoid the confusion and
problems we experienced last year on Universal Service, particularly E-
rate and rural health care.
Last year, the Office and Management and Budget and the Federal
Communications Commission imposed accounting changes on the Universal
Service Administrative Corporation (USAC)--the non-profit that
administers the Universal Service Fund--resulting in the Anti-
deficiency Act applying to the USF.
Because of these accounting changes, two of the four universal
service programs were suspended for several months, creating enormous
difficulties for thousands of schools and rural health care providers
across the country. Some schools were forced to shut down their
internet because they could not get funding from the E-rate programs.
Because of our actions, we avoided a massive disruption in the
operations of our nation's small rural telecommunications firms who are
dependent on universal service funding to make sure they can connect
their consumers to our nation's telecommunications network.
On the last day of our session and do to the considerable efforts
of Senator Stevens and Senator Burns, we secured an agreement on a
telecommunications package that included a one-year exemption of the
Anti-deficiency Act for all of Universal Service. Today's hearing will
focus on S. 241, legislation to make the exemption permanent.
Our legislation does nothing more than allow the Universal Service
Fund to continue operating as it has since 1998. The benefits of this
bill include:
(1) Avoiding a massive funding disruption to schools,
libraries, and health providers this summer;
(2) Preventing excessive spikes in the line-items on consumer
phone bills; and
(3) Providing financial stability our small telecommunications
firms need.
We all know that we need to thoroughly debate and decide on a more
comprehensive approach to telecommunication policy, including financing
of the Universal Service Fund. In my view, this will take time. This
bill is unrelated to broader questions of the policies we must adopt to
the Universal Service Fund in light of the telecommunications changes
that have occurred in the last decade. The Anti-deficiency Act is an
arcane budget policy we can address independently of other universal
service fund issues.
We all know that telecommunications has changed dramatically since
enactment of the 1996 Act, and this Committee will examine what changes
we need to make to that law. I know that Senator Stevens and Snowe and
the other Members of this Committee are deeply aware of the fundamental
importance of the four component Universal Service Funds--the High Cost
Fund, the Low-Income Fund, the E-rate, and the Rural Health Fund. In
1996, we agreed in our historic conference report that:
``. . . Universal service is an evolving level of
telecommunications services that the Commission shall establish
periodically under this section . . . the definition of the services
that are supported by Federal universal service support mechanisms
shall consider the extent to which such telecommunications services are
essential to education, public health or public safety . . .''
I still strongly believe in the principles of Universal Service,
and I am confident that we can forge consensus among the
telecommunications industry on ways to fulfill these continuing
obligations are part of ongoing telecommunications reform.
But knowing the power and importance of telecommunications in our
economy we cannot let our rural areas, our low-income families, our
school and libraries, or our rural health clinics be left out and
isolated. These institutions cannot afford to have their universal
service funding disrupted. We should enact our Anti-deficiency
exemption as an interim step to safe guard all aspects of Universal
Service.
Again, I would like to thank the Committee's Co-Chairman--Senators
Stevens and Inouye for all of their assistance with this legislation.
Senator Stevens. Without objection, all statements are
printed in the record, including those Senators that come in,
if they wish to insert them. Let us start first with the Acting
General Counsel of the FCC.
STATEMENT OF AUSTIN C. SCHLICK, ACTING GENERAL
COUNSEL, FEDERAL COMMUNICATIONS COMMISSION;
ACCOMPANIED BY LISA GELB, DEPUTY CHIEF, FCC's WIRELINE
COMPETITION BUREAU
Mr. Schlick. Good afternoon. My name is Austin Schlick. I'm
the Acting General Counsel for the Federal Communications
Commission. Thank you for this opportunity to appear before you
to discuss S. 241 and application of the Antideficiency Act to
the Universal Service Fund. Appearing with me this afternoon is
Lisa Gelb, Deputy Chief of the FCC's Wireline Competition
Bureau. Ms. Gelb will address any questions you may have for
the Commission about operational aspects of the Universal
Service Fund.
The Antideficiency Act prohibits government expenditures
and obligations in excess of the amounts available in an
appropriation, fund or apportionment. The central purpose of
the Antideficiency Act is to prevent Federal agencies from
incurring obligations that would require them to receive
additional appropriations from Congress.
The Universal Service Fund is funded by industry
contributions, not Congressional appropriations. Nevertheless,
the Antideficiency Act applies to the Universal Service Fund
because the fund is recognized by OMB, CBO, and GAO as a
permanent indefinite appropriation. In September 2004, the FCC
concluded the Fund was operating in violation of the
Antideficiency Act.
The events that led the agency to that conclusion began in
October 2003 when the Commission adopted a rule requiring USAC
to account for the financial transactions of the Universal
Service Fund in accordance with government accounting
principles for Federal agencies, known as GovGAAP, beginning
with fiscal year 2005. The decision to require USAC to adhere
to GovGAAP for transactions of the Fund was based on the need
to bring the FCC into compliance with statutory and OMB
requirements for financial reporting.
The transition to GovGAAP standards highlighted new
accounting issues in the E-rate and rural health care programs.
In those programs, USAC issues a funding commitment decision
letter that notifies program applicants which specific services
will be funded under the program and the amount of funding that
will be provided.
In the process of implementing GovGAAP, the question arose
whether commitment letters issued by USAC constitute
obligations for purposes of applying the Antideficiency Act. In
addition, OMB informally advised the Commission and USAC the
USF moneys that were invested in Federal securities might not
be considered available reserves that could be used to offset
obligations under the Antideficiency Act.
In August of 2004, USAC suspended issuance of all
commitment letters in the E-rate and rural healthcare programs
until those questions were answered.
In September of 2004, the Commission's Office of General
Counsel concluded that the USAC commitment letters do
constitute recordable obligations for purposes of applying the
Antideficiency Act and USAC's non-Federal investments could not
be treated as available funds.
Both OMB and GAO have since rendered opinions agreeing with
the FCC's application of the Antideficiency Act.
On September 27, 2004, the FCC's managing director and
chief of the FCC's Wireline Competition Bureau directed USAC to
liquidate its non-Federal investments in order to have
sufficient cash on hand to comply with the Antideficiency Act.
The deficiency was cured as of September 30th, 2004.
The FCC has also considered the application of the
Antideficiency Act to the high cost and low income support
mechanisms of the Universal Service Fund. In the high cost and
low income support programs there is no specific obligational
document equivalent to commitment letters in the E-rate
program.
Our tentative view is that obligations in these programs do
not occur until USAC signs an internal disbursement
authorization that determines the amounts each carrier should
be paid for telephone services provided during the prior month.
Assuming the Fund has adequate cash on hand to cover those
disbursement decisions, operation of high cost and low income
programs complies with the Antideficiency Act. Given the
importance of the issue, however, the Commission has sought
OMB's expert guidance.
Enactment of Public Law 108-494 in December 2004 permitted
the Fund, for 1 year, to incur obligations prior to receipt of
cash to cover those obligations. The obligations incurred
during the exemption period remain permanently exempt from the
Antideficiency Act. As a result, during 2005 USAC may issue
commitment letters in the E-rate program and rural health care
program without having to have cash on hand at that time to
cover the associated future disbursements.
Because the current exemption expires at the end of 2005,
the Commission is proceeding cautiously by protecting cash
reserves in the Fund that may be needed for Antideficiency Act
compliance in the future.
First, on December 22nd, 2004, the FCC staff directed USAC
not to shift funds out of the Federal investments that qualify
as available amounts under the Antideficiency Act without prior
approval. Second, on March 17th, 2005, the FCC staff directed
USAC not to issue commitment letters for the E-rate and rural
health care programs in amounts that exceed the annual
disbursement caps established by the FCC.
The determinations by the FCC, OMB and GAO that commitment
letters constitute recordable obligations mean that as of
January 1, 2006, the commitment letters may not be issued by
USAC unless there is sufficient cash on hand to cover the
obligations.
S. 241, however, would make permanent the Fund's current
exemption from the Antideficiency Act's restrictions on
obligations in excess of available resources.
Thank you for the opportunity to provide the Commission's
views on the impact of the Antideficiency Act on the Universal
Service Fund. Ms. Gelb and I will be happy to answer your
questions.
[The prepared statement of Mr. Schlick follows:]
Prepared Statement of Austin C. Schlick, Acting General Counsel,
Federal Communications Commission
Good afternoon, Mr. Chairman, Senator Inouye, and distinguished
Members of the Committee. Thank you for this opportunity to appear
before you to discuss S. 241 and application of the Antideficiency Act
to the Universal Service Fund (Fund). Appearing with me this afternoon
is Lisa Gelb, Deputy Chief of the FCC's Wireline Competition Bureau.
Ms. Gelb will address any questions you may have for the Commission
about operational aspects of the Universal Service program.
The Antideficiency Act prohibits government expenditures and
obligations in excess of the amounts available in an appropriation,
fund, or apportionment. The central purpose of the Antideficiency Act
is to prevent federal agencies from incurring obligations that would
require them to seek additional appropriations from Congress. The
Universal Service Fund is funded by industry contributions, not
congressional appropriations. Nevertheless, the Antideficiency Act
applies to the Universal Service Fund because the Fund is recognized by
the Office of Management and Budget (OMB), the Congressional Budget
Office, and the Government Accountability Office (GAO) as a permanent
indefinite appropriation. In September 2004, the FCC concluded that the
Fund was operating in violation of the Antideficiency Act.
The events that led the agency to that conclusion began in October
2003, when the Commission adopted a rule requiring the Universal
Service Administrative Company (USAC) to account for the financial
transactions of the Universal Service Fund in accordance with
government accounting principles for federal agencies, known as
GovGAAP, beginning with Fiscal Year 2005. The decision to require USAC
to adhere to GovGAAP for transactions of the Fund was based on the need
to bring the FCC into compliance with statutory and OMB requirements
for financial reporting for federal agencies and their programs.
The transition to GovGAAP standards highlighted new accounting
issues in the E-rate and rural health care programs. In those programs,
USAC issues a Funding Commitment Decision Letter that notifies program
applicants which specific services will be funded under the program and
the amount of funding that will be provided. In the process of
implementing GovGAAP, the question arose whether the Commitment Letters
issued by USAC constituted ``obligations'' for purposes of applying the
Antideficiency Act. In addition, OMB informally advised the Commission
and USAC that USF monies that were invested in non-federal securities,
as defined by OMB, might not be considered available reserves that
could be used to offset obligations under the Antideficiency Act.
In August 2004, USAC suspended issuance of all Commitment Letters
in the E-rate and rural healthcare programs until these questions were
answered. In September 2004, the Commission's Office of General Counsel
concluded that the USAC Commitment Letters do constitute recordable
obligations for purposes of applying the Antideficiency Act and USAC's
non-federal investments could not be treated as available funds. Both
OMB and GAO have since rendered opinions agreeing with the FCC General
Counsel's conclusion.
Based on those determinations, the Fund was being operated in
violation of the Antideficiency Act because Commitment Letters in the
E-rate and rural healthcare programs were issued at times when the Fund
did not have sufficient cash available to cover those new obligations.
On September 27, 2004, the FCC's Managing Director and the Chief of the
FCC's Wireline Competition Bureau directed USAC to liquidate its non-
federal investments in order to have sufficient cash on hand to comply
with the Antideficiency Act.
The Commission has transmitted a report of this Antideficiency Act
violation to the President and Congress, as required by statute. The
FCC reported that on the last business day before the FCC directed USAC
to liquidate its non-federal investments, the total outstanding program
obligations of the Fund exceeded available budgetary resources by $3.5
billion and exceeded OMB's initial FY 2004 apportionment for the Fund.
The deficiency was cured as of September 30, 2004.
The FCC has also considered the application of the Antideficiency
Act to the High Cost and Low Income support mechanisms of the Universal
Service Fund. In the High Cost and Low Income support programs, there
is no specific obligational document equivalent to the Commitment
Letters in the E-rate program. As a result, determining the time of
obligation is more complex. At this point our tentative view is that
obligations in these programs do not occur until USAC signs an internal
disbursement authorization that determines the amounts each carrier
should be paid for telephone services provided during the prior month.
Assuming the Fund has adequate cash on hand to cover those disbursement
decisions, operation of the High Cost and Low Income programs complies
with the Antideficiency Act. Given the importance of the issue,
however, the Commission has sought OMB's expert guidance.
The passage of the Universal Service Antideficiency Temporary
Suspension Act in December 2004 permitted the Fund, for one year, to
incur obligations prior to the receipt of cash to cover those
obligations without violating the Antideficiency Act. The obligations
incurred during the exemption period remain permanently exempt from the
Antideficiency Act. As a result, during 2005 USAC may issue Commitment
Letters in the E-rate program and the rural healthcare program without
having to have cash on hand at that time to cover the associated future
disbursements.
Because the current exemption expires at the end of 2005, the
Commission is proceeding cautiously by protecting cash reserves in the
Fund that may be needed for Antideficiency Act compliance in the
future. First, on December 22, 2004, the FCC staff directed USAC not to
shift funds out of federal investments that would qualify as available
amounts under the Antideficiency Act, without prior approval. Second,
on March 17, 2005, the FCC staff directed USAC not to issue Commitment
Letters for the E-rate and rural healthcare programs in amounts that
exceed the annual disbursement caps established by FCC rules.
The determinations by the FCC, OMB, and GAO that Commitment Letters
constitute recordable obligations mean that, as of January 1, 2006,
Commitment Letters may not be issued by USAC unless there is sufficient
cash on hand to cover the obligations. Further, if USF monies are
invested in non-federal securities, those funds will not be available
for obligation. S. 241, however, would make permanent the Fund's
current exemption from the Antideficiency Act's restrictions on
obligations in excess of available resources.
Thank you for the opportunity to provide the Commission's views on
the impact of the Antideficiency Act on the Universal Service Fund. Ms.
Gelb and I will be happy to answer your questions.
Senator Stevens. Ms. Gelb, do you have anything to add to
that statement?
Ms. Gelb. No, I don't, Senator.
Senator Stevens. Mr. Talbott.
STATEMENT OF BRIAN L. TALBOTT, Ph.D., CHAIRMAN OF THE BOARD,
UNIVERSAL SERVICE ADMINISTRATIVE COMPANY
Mr. Talbott. Good afternoon, my name is Brian Talbott,
Chairman of the Board of the Universal Service Administrative
Company. It is my privilege to be here today to speak to you
about USAC and its administration of the Universal Service
Fund.
The Fund provides approximately $6.5 billion annually to
support access to telecommunications and other services by
rural and low income consumers, schools, libraries, and rural
health care providers. On behalf of all of the USF
stakeholders, I would like to thank this Committee for its role
in the passage of the Universal Service Antideficiency
Temporary Suspension Act last September.
USAC is a not-for-profit corporation designated by the FCC
to administer the four universal service support mechanisms
created by the Telecommunications Act of 1996. I have served on
the board since USAC's creation in 1997, was elected chair in
January of this year.
From 1998 through 2004, USAC accounted for financial
transactions and funding in accordance with GAAP. Generally,
this approach was fully consistent with the FCC rules, and the
extensive audits resulted in no material findings from 1998
through 2003. In October 2003, the FCC ordered USAC to change
our accounting methodology from GAAP to Federal Government
accounting principles, GovGAAP.
At the time, the USAC board understood from FCC staff that
the transition to GovGAAP was necessitated by the fact that USF
funds were a component of the FCC's financial statements and
that this change would have no impact on the way USAC
administers its programs.
At the end of September 2004, late in the process of
transitioning to GovGAAP, the FCC directed USAC to treat E-rate
and rural health care under GovGAAP. This requirement
fundamentally changed the manner in which USAC had administered
the Fund since 1997.
At the same time, FCC staff after consulting with OMB staff
informed USAC for the first time that the Antideficiency Act
applied to our funds. FCC staff further informed USAC that
under GovGAAP, investments in government-backed mutual funds,
government agency securities and money market funds were also
considered obligations for government accounting purposes, and
had to be liquidated to ensure compliance with ADA.
USAC raised the question of whether high cost and low
income projections also constitute obligations and USAC has not
yet received an answer to that question. Application of ADA,
combined with the accounting determination and E-rate and rural
health care funding commitments constituting budgetary
obligations had a number of dramatic consequences.
USAC suspended new funding commitments for new funds
leaving schools, libraries and rural health care providers
without needed support.
USAC was required to move more than $3 billion in safe
government money market investments to Treasury securities
resulting in a 4.6 million dollar loss to the fund.
At the end of last year, Congress enacted the Universal
Service Temporary Suspension Act and this allowed USAC to
quickly resume its normal course of operations and begin
issuing funding commitments. Many of the consequences
experienced in 2004 could very well return upon expiration of
the statute.
The most serious occur if USAC is unable to make E-rate
commitments at the start of the school year. This significant
uncertainty for schools will adversely affect their planning
processes. Rural health care providers already strapped for
funds will have to wait even longer for funding required to
serve critical patient medical needs.
Because high cost support payments to rural telephone
companies constitute a significant portion of their revenues,
any suspension or delay in disbursements of funds may delay
network maintenance or improvements. To the extent that USF
investments are limited to Treasury securities, USAC's ability
to use safe investments with higher yields to offset increases
in the contribution factor will be severely limited. Investment
returns help keep the contribution factor as low as possible.
A decrease in income will increase the funding burden on
all Americans. If the ADA is permanently applied to the Fund
and high cost and low income projections are deemed to be
budgetary obligations, a significant increase in the
contribution factor could occur.
The application of GovGAAP and ADA does not enhance USAC or
the FCC's ability to address waste, fraud or abuse. USAC
strongly supports the application of effective accounting rules
for financial transactions. Accounting under GAAP between 1998
and 2004, however, did not create the problems USAC has
encountered under GovGAAP. USAC is committed to doing all it
can to prevent waste, fraud and abuse and get substantial
resources toward achieving that objective.
None of the extensive measures that USAC takes to prevent
waste, fraud and abuse are related to GovGAAP and the
application of ADA to the Fund.
Mr. Chairman, thank you for providing me with the
opportunity to address the Committee. USAC looks forward to
continuing our work with Congress and I would be happy to
respond to any questions you may have.
[The prepared statement of Mr. Talbott follows:]
Prepared Statement of Brian L. Talbott, Ph.D., Chairman of the Board,
Universal Service Administrative Company
Good afternoon, Mr. Chairman and Members of the Committee. My name
is Brian Talbott. I am the Chairman of the Board of Directors of the
Universal Service Administrative Company (USAC). It is my privilege to
be here today to speak with you about USAC and its administration of
the Universal Service Fund (USF). The USF provides approximately $6.5
billion annually to support access to telecommunications and other
services by rural and low-income consumers, schools, libraries and
rural health care providers. On behalf of all USF stakeholders, I would
like to thank this Committee for its role in the passage of the
Universal Service Antideficiency Temporary Suspension Act last
December. This Act provided much needed relief to schools, libraries,
and rural health care providers, as well as to the companies serving
them.
Overview
USAC is the not-for-profit corporation designated by the Federal
Communications Commission (FCC) to administer the High Cost, Low
Income, Rural Health Care, and Schools and Libraries (E-rate) universal
service support mechanisms created by the Telecommunications Act of
1996 and FCC regulations adopted pursuant to the Act. USAC is governed
by a Board of Directors, each of whom is appointed by the Chairman of
the FCC. I have served on the Board since USAC's creation in 1997 and
was elected Chairman in January 2005.
Application of Government Accounting Principles (GovGAAP) to the USF
From 1998 through 2004, USAC, pursuant to FCC regulations,
accounted for the financial transactions of the USF in accordance with
Generally Accepted Accounting Principles (GAAP). The extensive annual
audits conducted under strict FCC oversight as required by Part 54 of
the FCC's rules resulted in no material findings from 1998 through
2003. The 2004 audit has not yet been completed.
In October 2003, the FCC ordered USAC to change the USF accounting
methodology from GAAP to Federal Government accounting principles, or
GovGAAP. The FCC stated that the purpose of moving the USF to GovGAAP
was ``to ensure that the Commission can maintain its obligations under
federal financial management and reporting statutes and directives of
the Office of Management and Budget (OMB)'' because the USF is a
component of the FCC's financial statement. At the time, the USAC Board
understood from FCC staff that the transition to GovGAAP would have no
impact on the manner in which USAC administers the programs themselves.
Throughout the last quarter of 2003 and during 2004, USAC undertook
the necessary steps to train our financial staff in and conform our
systems to GovGAAP in order to meet the October 1, 2004 implementation
deadline. As USAC worked with FCC staff to transition to GovGAAP, USAC
staff raised the question whether GovGAAP should be interpreted to
mandate treating commitment letters USAC sends to beneficiaries in the
E-rate and Rural Health Care programs as ``obligations'' for purposes
of government accounting. USAC staff raised a similar question as to
the treatment of the projections USAC files with the FCC regarding High
Cost and Low Income program payments.
In late September 2004, USAC received the answer to one of these
questions. FCC staff directed USAC to treat the E-rate and Rural Health
Care commitment letters as government obligations. This new requirement
fundamentally changed the manner in which USAC had administered the USF
since 1997 in accordance with the Telecommunications Act of 1996, FCC
regulations, close FCC oversight, and substantial audit review. With
regard to the High Cost and Low Income program projections, USAC was
informed that a request had been made to OMB for an opinion concerning
whether those projections are government obligations as well. We have
not received an answer to that question.
Impact of the Antideficiency Act on the USF
During the process of transitioning to GovGAAP, USAC was verbally
informed by FCC staff that the USF might be subject to the Federal
Antideficiency Act (ADA). In late September 2004, FCC staff, after
consulting with OMB, informed USAC for the first time that the ADA
applied to the USF. At the same time, FCC staff informed USAC that
under GovGAAP, USF investments in government-backed mutual funds,
government agency securities, and money market funds were also
considered ``obligations'' for government accounting purposes and had
to be liquidated to ensure compliance with the ADA.
Application of the ADA to the USF, combined with the accounting
determination that E-rate and Rural Health Care funding commitments
constitute budgetary obligations, had a number of dramatic
consequences:
<bullet> Between August and November 2004, USAC suspended new funding
commitments in the E-rate and Rural Health Care programs,
leaving schools, libraries and rural health care providers
without needed support.
<bullet> Suspension of issuing commitments resulted in delays in
making the most effective use of services. For example, in one
case in Alaska, while the school district's service provider
continued to provide service under a multi-year contract
despite the lack of a commitment from USAC, the school board
became anxious that the amount of debt accumulating could lead
to bankruptcy. The district began to plan for the abrogation of
its contract and to turn off the services when it received a
commitment in January. In another case, a library would not
allow a service provider to proceed to install internal
connections without a commitment from USAC because the library
viewed the discounted share as an unfunded liability for which
the city could be sued.
<bullet> The late determination that the ADA applied to the USF
required USAC to move more than $3 billion in safe government-
backed money market investments to Treasury securities,
resulting in a $4.6 million loss.
Reapplication of the ADA to the USF will result in significant
uncertainty and instability to the detriment of the USF and its many
stakeholders. I will provide a few examples here:
<bullet> USAC makes commitments to schools for each school year under
FCC rules. If USAC is unable to make commitments before the
start of the school year, the significant uncertainty for the
schools will adversely affect their planning processes and
achievement of educational goals.
<bullet> Rural health care providers already strapped for funds will
have to wait even longer for funding required to serve critical
patient medical needs.
<bullet> Because High Cost support payments to rural telephone
companies in many cases constitute a significant portion of
their revenues, any suspension or delay in disbursement of
funds will disrupt their revenue flow and may delay network
maintenance and improvements.
<bullet> To the extent that USF investments are limited to Treasury
securities, USAC's ability to use safe investments with higher
yields to offset increases in the contribution factor will be
severely limited.
<bullet> If the ADA is permanently applied to the USF, and High Cost
and Low Income projections are deemed to be budgetary
obligations, a significant increase in the contribution factor
could occur.
<bullet> USAC will be required to keep separate accounts for monies
collected, committed and disbursed in 2005 for years to come if
a permanent exemption is not forthcoming. This increases
administrative costs and complexity. Because USAC's
administrative costs come from the USF, increasing
administrative costs in turn increases the burden on those who
contribute to the USF.
Although USAC was able to make some limited E-rate commitments in
November and December 2004, as the end of the year approached, USAC was
holding back on issuing some $500 million in commitments due to a lack
of unobligated monies as defined by GovGAAP and the application of the
ADA to the USF. Then, at the end of last year, Congress enacted the
Universal Service Antideficiency Temporary Suspension Act. This allowed
USAC to quickly resume its normal course of operations and continue
issuing funding commitments in the E-rate and Rural Health Care
Programs. I would like to thank all of you for your leadership in that
effort. The temporary exemption, which allows the USF to incur
obligations for a limited period without regard to the ADA or the
apportionment limitations otherwise imposed on the expenditure of
federal appropriations, offers the USF some administrative relief for
2005. Many of the deleterious consequences experienced in late 2004,
however, could very well return upon expiration of the statute.
Consequently, without a permanent exemption, there will be significant
uncertainty as to how the universal service programs will operate in
the future, which could lead to instability in the programs. We know
that the unanticipated consequences of the changes mandated by GovGAAP
and the application of the ADA to the USF created serious
administrative issues that harmed the programs without evident
benefits. USAC recognizes the need for appropriate mechanisms to ensure
effective oversight of USF programs. Just as imposition of the ADA
created damaging uncertainty in the administration of the USF programs,
however, the rolling application of additional federal statutes and
regulations to the USF and its administrative structure, without
careful consideration of their need and their impact on the programs,
could lead to similar difficulties.
Effect of the Application of the ADA on USF Investments
The design of the universal service programs requires USAC to
maintain a significant USF balance. Since its inception, USAC has
managed the USF prudently, investing funds on hand in different safe
vehicles, including government-backed mutual funds, government agency
securities, and money market funds, all of which--despite their proven
safety and high liquidity--are now considered budgetary obligations
under GovGAAP. OMB rules mandate that in order for funds to be
considered ``unobligated'' such funds must be invested only in United
States Treasury securities or in cash.
If the ADA applies to the USF as of January 1, 2006, USAC's ability
to invest the USF in a manner that safely optimizes interest income
will be severely curtailed, because investments in essentially anything
other than cash and direct Treasury or federal agency instruments--no
matter how safe or liquid--are considered ``obligations'' for purposes
of GovGAAP accounting. At best, USAC might be able to invest a very
small amount of the funds in accounts that would be considered
obligated. Right now, all USF investments are in cash accounts or
Treasury instruments.
In three days last year, at the direction of FCC staff, USAC sold
approximately $3 billion in safe investments and placed those funds in
cash and Treasury instruments, resulting in a $4.6 million loss. This
reallocation of the USF investment portfolio resulted in an immediate
20 percent decrease in investment returns. That is, fourth quarter 2004
interest income was $9.7 million, compared to $12 million in interest
income in the third quarter of 2004. Because investment returns help
keep the contribution factor as low as possible, a decrease in interest
income will increase the funding burden on all Americans.
The Transition to GovGAAP and Application of the ADA to the USF Have No
Impact On USAC's Ability to Deter, Prevent, and Detect Waste,
Fraud, and Abuse and Are Not Required to Limit USF Expenditures
Not only has the application of GovGAAP and the ADA to the USF
created instability in the E-rate program, these measures do not
enhance USAC's or the FCC's ability to address waste, fraud, or abuse
of the USF. They are simply rules governing the accounting treatment of
the USF. USAC strongly supports the application of effective accounting
rules to the financial transactions of the USF. Accounting under GAAP
between 1998 and 2004 did not have the effect of creating the
collection and disbursement problems USAC has encountered under
GovGAAP.
USAC is committed to doing all it can to prevent waste, fraud, and
abuse in the universal service support mechanisms and devotes
substantial resources toward achieving that objective. Since it began
administering the USF, USAC has denied millions of dollars in funding
requests from ineligible entities and entities seeking ineligible
services. None of the measures that USAC takes to prevent waste, fraud,
and abuse--extensive data validation procedures, close scrutiny of
invoices, and beneficiary audits, to name just a few examples--are
related to GovGAAP or the application of the ADA to the USF.
There may be some concern regarding whether application of the ADA
to the USF is necessary to contain USF spending. The answer is no.
There are extensive statutory and regulatory constraints on the USF and
no issues regarding USF spending in excess of applicable laws have been
raised. These constraints are unaffected by the ADA. Application of the
ADA could, however, create unpredictability and uncertainty regarding
the timing and amount of USF payments that beneficiaries could expect
to receive.
Conclusion
Mr. Chairman, thank you for providing me with the opportunity to
address the Committee. On behalf of all of the many USF stakeholders, I
again applaud the Congress for passage of the Universal Service
Antideficiency Temporary Suspension Act last December, and USAC
welcomes your consideration of a permanent ADA exemption for the
reasons I have discussed. USAC looks forward to continuing to work with
Congress and I would be happy to respond to any questions you may have.
Senator Stevens. Thank you very much.
Ms. Dalton. For the information of the Senators that have
come and joined us, we have already agreed to put the
statements in the record if you have any statements. Ms.
Dalton.
STATEMENT OF PATRICIA A. DALTON, MANAGING DIRECTOR, PHYSICAL
INFRASTRUCTURE ISSUES, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE
Ms. Dalton. Thank you, Mr. Chairman, Members of the
Committee. I appreciate the opportunity to come before you
today to discuss the applicability of the Antideficiency Act to
the federal E-rate program, which provides schools and
libraries across the country with funding for
telecommunications and Internet services. GAO recently released
a report which examined the FCC's management and oversight of
the E-rate program. This afternoon, I will briefly summarize
our findings with regard to the FCC's application of various
fiscal controls to the E-rate program--specifically, the
Antideficiency Act.
Appropriated funds are subject to a variety of statutory
provisions, including the Antideficiency Act, which is the
cornerstone of Congressional efforts to provide funds control
for executive branch expenditures. The Act's primary purpose is
to prevent the obligation or expenditure of funds in excess of
amounts available in an appropriation or in advance of the
appropriation of funds unless authorized by law. Thus the
Antideficiency Act is a key statute for financial management
and for protecting funds from fraud, waste and abuse.
In 2000, the FCC concluded that the Universal Service Fund
constitutes a permanent indefinite appropriation--that is,
funding appropriated or authorized by law to be collected and
available for specified purposes without further congressional
action. We agree with the FCC's determination.
In deciding that the Fund is a permanent indefinite
appropriation, the FCC set in motion a chain of events
involving the applicability of the Antideficiency Act which
led, at one point, to the suspension of E-rate funding
commitments to schools and libraries, and which culminated in
action by Congress in December 2004 to grant the Universal
Service Fund a temporary exemption from the Antideficiency Act.
As detailed in our report, we agree with the FCC that,
absent a statutory exemption, the Universal Service Fund is
subject to the Antideficiency Act and the E-rate program's
commitment decision letters constitute obligations for purposes
of the Act. Additional issues, however, remain to be resolved
by the FCC. These issues include whether other actions taken in
the Universal Service program constitute obligations and the
timing of and amounts of obligations that must be reported.
As we point out in our report, the laws encompassing fiscal
and accountability controls are not applied in isolation;
rather, they are part of a framework that addresses issues of
financial management and general management of Federal agencies
and programs. Our report is critical of the FCC for addressing
the applicability of statutes to the program on a case-by-case
basis, as issues have arisen. This has put the FCC and the E-
rate program in a position of reacting to problems as they
occur--as happened with the Antideficiency Act--rather than
setting up an organization and internal controls designed to
ensure compliance with applicable laws.
Since we released our report, the FCC has contracted with
NAPA, the National Academy of Public Administration, 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 towards addressing the
concerns outlined in our report.
Because it is unknown at this time what changes to
universal service, if any, may result from the NAPA study, and
because we believe that a comprehensive assessment is needed to
examine which Federal requirements, procedures and practices
should apply to this program, it is our opinion that a
permanent exemption from the Antideficiency Act should not be
granted at this time. Instead, other options should be
considered.
One option would be for Congress to grant the Universal
Service Fund a 2- or 3-year exemption from the Act. This option
would allow time for NAPA to complete its study, report its
findings to the FCC, and for Congress and the FCC to consider
whether structural changes to the universal service program are
called for. A comprehensive assessment should then be made to
determine, based on the decisions concerning the structure of
the program, which Federal requirements, policies and
practices--including the Antideficiency Act--should apply to
the Universal Service Fund and to any entities administering
the program. It could at that time be determined whether a
permanent and complete exemption from the Antideficiency Act is
warranted.
Alternatively, crafting a limited exemption to the
Antideficiency Act or other financial management requirements
may be more appropriate. Based on what was learned in 2004, a
limited exemption would recognize the program's unique
financial structure and provide flexibility in managing the
program. For example, Congress could specify that the FCC can
use certain receivables or assets as budgetary resources. It
also could define how or when an obligation is recognized. Such
an approach would target specific issues within the unique
operation of the Fund and yet leave important financial
controls in place.
Thank you, Mr. Chairman. This concludes my opening
statement. I'd be happy to respond to any questions.
[The prepared statement of Ms. Dalton follows:]
Prepared Statement of Patricia A. Dalton, Managing Director, Physical
Infrastructure Issues, U.S. 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's)
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-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 February 2005, we issued a report on 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 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:
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\1\ Telecommunications: Greater Involvement Needed by FCC in the
Management and Oversight of the E-rate Program, GAO-05-151 (Washington,
DC: Feb. 9, 2005). The report is available on GAO's Web site at
www.gao.gov.
<bullet> 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
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compliance with applicable laws.
<bullet> 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.
<bullet> 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.
<bullet> 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. 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\ 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.
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\2\ 47 U.S.C. Sec. 254(h)(1)(B).
\3\ 47 U.S.C. Sec. 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 CFR. Sec. 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, DC: Feb. 4, 2002).
\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.
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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 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.
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\7\ USAC was established at the direction of FCC and operates under
FCC's rules and policies.
\8\ See S.1768, 105th Cong., Sec. 2004(b)(2)(A) (1998).
\9\ 47 CFR Sec. 54.702(c).
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Under the E-rate program, eligible schools, libraries, and
consortia that include eligible schools and libraries \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. \11\
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\10\ Eligibility of schools and libraries is defined at 47 U.S.C.
Sec. 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. Sec. 9122.
\11\ The school or library could also pay the service provider in
full and then seek reimbursement from USAC for the discount portion.
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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 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
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:
<bullet> 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.
\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 CFR Sec. 54.701(a). This review was
never conducted.
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<bullet> 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 security of appropriated funds,
and agencies' responsibilities for those funds. \14\
\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.
Sec. 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. Sec. Sec. 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.
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.
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\15\ As set forth in part 31 of the Code of Federal Regulations or
the Treasury Financial Manual.
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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 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's Decision on the Antideficiency Act Should Be Addressed in a
Broader Context
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 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.
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\16\ 63 Comp. Gen. 331 (1984); 13 Comp. Gen. 77 (1933).
\17\ E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (DC Cir.
1965), cert. denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 262
(1990); 73 Comp. Gen. 321 (1994).
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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 investments \19\ 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.
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\18\ 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.
\19\ 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.
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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 Act. \20\ 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.
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\20\ Universal Service Antideficiency Temporary Suspension Act,
Pub. L. No. 108-494, Sec. 302, 118 Stat. 3986 (2004). The law exempts
universal service monies from the Antideficiency Act until December 31,
2005.
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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. Sec. 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\
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\21\ See B-300480, April 9, 2003.
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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 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. Sec. 3302, which requires that
money received for the use of the United States be deposited in the
Treasury unless otherwise authorized by law. \22\ 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\
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\22\ 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.
\23\ For 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
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.
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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
activities \25\ 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.
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\24\ See 31 U.S.C. Sec. Sec. 3321, 3322, 3325, and the Treasury
Financial Manual.
\25\ 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.'' 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.
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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, 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.
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. \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\
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\26\ 47 U.S.C. Sec. 254(h)(2)(A).
\27\ 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, DC:
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, DC: July 16, 1998), pp. 15-16.
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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
schools' Internet access has been a result of the E-rate program, as
opposed to other sources of federal, state, local, and private funding?
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\28\ See NCES, Internet Access in U.S. Public Schools and
Classrooms: 1994-2002, NCES-2004-011 (Washington, DC; October 2003).
This was the most recent update available at the time of our review.
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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. \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.
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\29\ 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.
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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 (two
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 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.
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\30\ 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.
\31\ See FCC, Office of the Inspector General Semiannual Report to
Congress, October 1, 2003-March 31, 2004 (Washington, DC; May 3, 2004).
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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.
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\32\ GAO/AIMD-00-21.3.1.
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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\
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\33\ FCC, Fifth Report and Order, In the Matter of Schools and
Libraries Universal Service Support Mechanism, FCC-04-190 (Washington,
DC; Aug. 13, 2004), para. 74.
\34\ Comments were due January 5, 2005; reply comments were due
January 20, 2005.
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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.
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\35\ FCC 04-190, para. 75.
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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.
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\36\ 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.''
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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\
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\37\ 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.
\38\ 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.
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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 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 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.
This concludes my prepared statement. I would be pleased to respond
to any questions that you or other Members of the Committee may have.
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.
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\1\ See 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.
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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 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, Sec. 254, 110 Stat. 56 (1996)
(classified at 47 U.S.C. Sec. 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. Sec. 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., Sec. 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 administrator of the universal service mechanisms. \2\
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 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-to-day 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.
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\2\ In 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.
Sec. 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.
\3\ The term ``E-rate'' evolved from some individuals referring to
the program as the ``Education'' rate.
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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. E-rate 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.
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\4\ USAC could reduce the amount requested if the school or library
has included ineligible services in its application or has calculated
its discount category incorrectly.
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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. Sec. 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.
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\5\ Congress 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. Sec. 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.
Sec. 701(2)(C) (appropriations include ``other authority making amounts
available for obligation or expenditure'').
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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 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
(DC 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. Sec. 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. Sec. 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'').
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\6\ 59 Comp. Gen. 215 (1980).
\7\ B-228777, Aug. 26, 1988.
\8\ B-204078.2, May 6, 1988 and B-257525, Nov. 30, 1994.
\9\ B-193573, Jan. 8, 1979; B-193573, Dec. 19, 1979; B-217578, Oct.
16, 1986.
\10\ 63 Comp. Gen. 285 (1984).
\11\ B-191761, Sept. 22, 1978.
\12\ B-193573, Dec. 19, 1979.
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Like the above examples, USF's current authority stems from a
statutorily authorized collection of fees from telecommunication
carriers, and 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.
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\13\ The 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, 426-428 (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.
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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\
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\14\ The 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.
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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; B-228777, 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 Act
\15\ has been termed ``the cornerstone of congressional efforts to bind
the executive branch of 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. Sec. 1341(a)(1). FCC has determined
that the Antideficiency Act applies to USF, and as explained below, we
agree with FCC's conclusion.
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\15\ 31 U.S.C. Sec. Sec. 1341, 1342 and 1517.
\16\ Hopkins & Nutt, The Anti-deficiency Act (Revised Statutes
3679) and Funding Federal Contracts: An Analysis, 80 Mil. L. Rev. 51,
56 (1978).
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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. Sec. 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\
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\17\ Under FCC's rules, USAC is prohibited from making policy,
interpreting unclear provisions of the statute or rules, or
interpreting the intent of Congress. 47 CFR Sec. 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.
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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 the Antideficiency Act); B-135075-O.M., Feb.
14, 1975 (Inter-American Foundation). The Antideficiency Act applies to
permanent appropriations such as revolving funds \18\ and special
funds. 72 Comp. Gen. 59 (1992) (Corps of Engineers Civil Works
Revolving Fund subject to the Antideficiency Act); B-120480, Sep. 6,
1967, B-247348, June 22, 1992, and B-260606, July 25, 1997 (GPO
revolving funds subject to Antideficiency Act); 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).
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\18\ Revolving 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).
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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. Sec. 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).
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\19\ Legal liability for obligational accounting and to comply with
the Antideficiency Act and the Recording Statute, 31 U.S.C. Sec. 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.
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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 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.
Senator Stevens. Thank you very much.
Ms. Abshire.
STATEMENT OF SHERYL ABSHIRE, DISTRICT
ADMINISTRATIVE COORDINATOR OF TECHNOLOGY, CALCASIEU PARISH
PUBLIC SCHOOLS
Ms. Abshire. Thank you, Mr. Chairman and Members of the
Committee. It is a great honor to be asked to testify in
support of universal service and the E-rate program. I'm also
here to urge you to support S. 241, a bill that would ensure
that universal service and E-rate discounts continue to flow to
telephone customers, schools and libraries.
My name is Sheryl Abshire and I am the District
Administrative Coordinator of Technology for Calcasieu Parish
Public Schools in Lake Charles, Louisiana. Currently, I'm board
chair of the Consortium for School Networking, CoSN, a non-
profit education technology association that promotes the use
of information technologies and the Internet to improve K
through 12 education. I'm also representing the Education and
Libraries Network Coalition, an E-rate advocacy organization
that's comprised of every major public and private school
organization and the American Library Association.
CoSN and EdLiNC were greatly dismayed by the E-rate's
program shutdown last year as a result of the application of
the Antideficiency Act. We strongly supported Congress'
temporary exemption from that Act for universal service and E-
rate. And I'm here today to urge Congress to pass S. 241 and
prevent a replay of last year's devastating funding disruption.
The E-rate has had an extraordinary nationwide impact on
education in its 7 years of existence. It has improved schools'
public classroom connections to the Internet from 14 percent in
1998 to 93 percent as of 2003. It has allowed students in rural
and isolated areas to take online courses in subjects not
available in their schools. It has also permitted teachers to
take online accreditation courses to become highly qualified as
required by No Child Left Behind.
Let me now say a few words about what the E-rate has done
for my school district in Lake Charles, Louisiana. The
Calcasieu Parish Public Schools educates over 32,000 students
and employs more than 5,000 people. We are the sixth largest
school district in the state and the largest employer in the
parish.
Thirty-six percent of our student population is from
minority groups and 53 percent of our students are eligible for
the Federal free and reduced price lunch program. We qualified
for a 72 percent E-rate discount. Before E-rate, our
connectivity primarily consisted of dialup connections and the
technology program consisted of random trainings to teachers in
how to use computers.
Today, however, all this has changed. We now have over
11,000 computers connected to our network and at any given
moment over 6,000 of them are accessing the network. Each day
our students, our teachers, and our administrators make more
than three million web page or network object requests and send
and receive over 30,000 e-mail messages and transmit an
astounding 14.5 gigabytes of data. Last fall, our school system
was recognized as one of the most digitally advanced in the
country by the Center for Digital Education and the National
School Boards Association.
How did all this occur in such a short period of time? The
answer is simply E-rate. Over the E-rate's first 7 years, the
Calcasieu Parish schools have received just over $4 million in
E-rate discounts. We have used this money for infrastructure
upgrades that will support 100 megabit connections to every
desktop of every computer in our district. E-rate discounts
also support our telephone service, cellular phones and
installation and upgrade of our high speed network to all 59 of
our schools in our compressed video services. I believe that we
have made good use of our E-rate support.
Each year we have paid careful heed to our district's needs
and we only sought E-rate discounts in accordance with
documented needs. We have never attempted to maximize our E-
rate discounts nor have we overbought technology. We understand
that E-rate is a finite and precious resource particularly
because it has a hard cap of 2.25 billion per year.
We also know that our technology infrastructure is useless
without ample instruction on how to use it and integrate it
into the curriculum. We provide extensive professional
development for teachers and administrators before we apply any
type of technology. But the real proof of the E-rate is in its
impact on students.
A prime example is the story of John F. Kennedy Elementary.
It's a school where 95 percent of the students participate in a
free lunch program. Thirty-seven percent of its student scored
below basic in reading and 75 percent scored below basic in
math. We used E-rate discounts to connect every classroom to
the Internet, then we used Title I dollars to purchase
computers for every classroom and established after school
programs at Kennedy that targeted online technology resources
to specific documented student needs.
The results have been outstanding. Recent test scores
indicate only 16 percent of these students are now below basic
in reading and only 21 percent scored below basic in math. In
response, the U.S. Department of Education awarded Kennedy
Elementary the Title I distinguished school award for closing
the achievement gap among all groups in the school.
I'm convinced that E-rate played a significant role in this
situation. All this leads me to implore you to make sure the
program remains smooth, running and vibrant. The Universal
Service Administrative Company shut down of the program for 3
months last year was a major catastrophe for my district. We
were delayed in implementing our infrastructure, a delay in
implementing a library resource center and what a tragedy for
our teachers and students to be ready, willing and able to make
use of their resources only to be denied because of an
accounting issue.
In sum, E-rate has been a blessing for my district. This
propelled us from the technology backwater to a nationally
recognized district in 6 years. It placed distance learning,
professional development and resources at the fingertips of
everyone, and it's helped us to make significant progress.
Please help to us continue our work by preventing any
unnecessary disruptions to the programs.
I want to thank Senators Snowe and Rockefeller for
introducing the bill, Chairman Stevens and Ranking Member
Inouye for signing on as original co-sponsors, and all of the
Senators who have co-sponsored it. Thank you for this hearing
today, Chairman Stevens, for giving me an opportunity to share
my views on Universal Service and E-rate and I would be pleased
to take any questions.
[The prepared statement of Ms. Abshire follows:]
Prepared Statement of Sheryl Abshire, District Administrative
Coordinator of Technology, Calcasieu Parish Public Schools
Thank you, Mr. Chairman and Members of the Committee. It is a great
honor to be asked to testify before you today in support of a program
that I care for deeply--universal service and, especially, the E-rate
program--and in favor of S. 241, a bill that would ensure that
universal service and E-rate support continue to flow uninterrupted to
deserving telephone consumers, schools and libraries.
My name is Sheryl Abshire and I have been the District
Administrative Coordinator of Technology for Calcasieu Parish Public
Schools in Lake Charles, Louisiana for the past 7 years. I have been an
educator for more than 30 years, serving variously as a school
principal, K-5 teacher, a library/media specialist, a classroom
teacher, and an adjunct college professor. I have substantial
experience with the integration of education technology into the
classroom, including working with the International Society for
Technology in Education to compile technology standards for teachers,
students, and most recently school administrators.
Currently, I hold the Board Chair of the Consortium for School
Networking--or CoSN, a non-profit education technology association that
promotes the use of information technologies and the Internet to
improve K-12 education. CoSN has long been a champion of the E-rate
program and views it as essential to attaining the high goals of the No
Child Left Behind Act and preparing our students for today's
competitive, high-tech oriented job market.
CoSN was greatly dismayed by the E-rate program's shutdown last
year as a result of the application of the Antideficiency Act to the E-
rate program. We strongly supported the ultimately successful efforts
to gain a temporary exemption from a key provision of that Act for all
of universal service, including the E-rate. I come before you today to
urge that last year's temporary exemption to the Antideficiency Act be
made permanent and to state my support and that of the Consortium for
School Networking for S. 241, a bill that would do just that.
I am also here representing the Education and Libraries Networks
Coalition--or EdLiNC, an E-rate advocacy organization that is comprised
of every major public and private school organization, including CoSN,
and the American Library Association. EdLiNC has advocated in support
of the E-rate program since its inception and continues to this day to
work to address E-rate implementation issues before Congress and the
FCC.
I am attaching as part of my testimony today a letter (Exhibit A),
signed by nineteen EdLiNC member organizations, that details the
extraordinary impact that the E-rate has had nationwide, particularly
its success in improving public school classroom connections to the
Internet from 14 percent in 1998, when the E-rate first rolled-out, to
93 percent as of 2003. The letter also outlines how the E-rate has been
instrumental in improving education by affording students in rural and
isolated areas the opportunity to take online courses in subjects not
available in their schools. It has also permitted teachers to take
online accreditation courses that help them attain the ``highly
qualified'' status required by the No Child Left Behind Act. In order
to continue this good work, EdLiNC urges--as do CoSN and I--that
Congress pass S. 241 and prevent a replay of last year's devastating
funding disruption.
While I have spoken of the tremendous national impact of the E-
rate, please allow me to say a few words about all that the E-rate has
done for my school district in Lake Charles, Louisiana. Calcasieu
Parish Public Schools educates over 32,000 students and employs more
than 5,000 people. We are the sixth largest school district in the
state and the largest employer in the parish. Thirty-six percent of our
student population is from a minority group and 53 percent of all
Calcasieu Parish students are eligible for the federal free-and-reduced
price lunch program. Based on this last figure, Calcasieu Parish Public
Schools qualified this year for a 72 percent E-rate discount rate.
When the E-rate began over 7 years ago, our connectivity consisted
of a few dial-up connections in our school libraries, and our
technology professional development program consisted of random
trainings to teach teachers just how to turn on the computers and,
occasionally, how to use a specific program with a student.
Today, this has all changed. We now have over 11,000 computers
connected to our network and, at any given moment, over 6,000 of them
are accessing the network. Each day, our students, teachers and
administrators make more than 3 million web page or network object
requests, send or receive over 30,000 e-mail messages, and transmit
14.5 gigabytes of data. Last fall, the Center for Digital Education and
National School Boards Association recognized us as one of the most
digitally advanced large district school boards in the country.
How did all of this occur in such a short period of time? The
answer is the E-rate.
Calcasieu Parish Public Schools has applied for E-rate discounts in
each of the program's first 7 years, receiving to date just over $4
million. A sizable chunk of this money has gone to support a currently
ongoing infrastructure upgrade that, when completed, will support 100
megabit connections to all 11,000 desktops attached to our network. The
vast majority of these funds have been used to support plain old
telephone service, cellular phone service, the installation and upgrade
of a high-speed network to all of our 59 schools, and the bandwidth
used by our compressed video services.
I believe that we have made wise use of our E-rate support. Each
year, we have paid careful heed to our district's technology needs and
its financial capabilities, as laid out in our collaboratively
developed technology plan, and have only sought E-rate discounts in
accordance with documented needs. We have never attempted to ``maximize
our E-rate discounts,'' nor have we ``over-bought'' technology or
network resources with E-rate support. At Calcasieu Parish Public
Schools we understand that the E-rate is a finite and precious
resource, particularly since it has a hard annual cap of $2.25 billion
per year.
We also know, though, that our technology infrastructure is useless
without ample instruction on how to use it and integrate it into the
curriculum. For that reason, no technology has been deployed in our
district without intensive professional development for teachers and
administrators. We provide intensive professional development courses
annually to over 300 teachers and over 300 pre-service teacher
candidates, rotating that training to different grade levels each year.
Additionally, all teachers in our district actively participate in
instructional technology training through online and face-to-face
workshops and in-service trainings. These professional development
efforts have paid-off with our recent national recognition for
innovative use of online professional development using the Blackboard
platform.
The real proof of the value of Calcasieu's and the E-rate's
investment in technological infrastructure, however, is its impact on
our students. The formal mission of my department is to ``Advance
Quality Education with Technology.'' The E-rate is helping us
accomplish this goal.
A prime example from Calcasieu Parish of which I am particularly
proud is John F. Kennedy Elementary. A few years ago, Kennedy
Elementary, a high poverty school where 95 percent of its students
participate in the federal lunch program, was a failing school.
Starting in 1998, we used E-rate discounts to connect all of its
classrooms to the Internet and strategically leveraged Title I dollars
to purchase computers for each classroom. The district then established
after school programs at Kennedy that targeted online technology
resources to specific student needs that we identified through multiple
assessment analyses.
The results have been outstanding. Last year, Kennedy Elementary
was recognized as one of the leading schools in the State of Louisiana
for closing the achievement gap among all groups in the school,
performing above the state average in all school performance categories
and successfully meeting AYP--Annual Yearly Progress as defined by
NCLB. The U.S. Department of Education awarded Kennedy Elementary the
Distinguished Schools Award for ``outstanding achievement and progress
towards the goal that all students achieve the state standards of
academic excellence.'' I am convinced that E-rate played a significant
role in this achievement by delivering the online educational resources
that helped spur these incredible gains.
All of this leads me to implore you to make sure that the program
remains not just in operation but smooth running and vibrant. The
Universal Service Administrative Company shutdown of the program for
three months last year was a major catastrophe for our district.
Overall, it set back our infrastructure upgrade anywhere from six
months to a year. This inability to complete our upgrade, in turn,
caused extensive delays in fully implementing a new student information
system and data warehouse, both of which are critical to improving
instruction. The upgrade delay also caused us to eliminate our plans to
launch bandwidth intensive video streaming resources in order to assure
we had sufficient bandwidth to manage the district's day-to-day network
functions, such as basic Internet access, e-mail, and attendance and
grading systems. Finally, the upgrade delays caused by the shutdown
derailed a long-planned upgrade of our library resources, which would
have established a fully automated district-wide online resource
center. What a tragedy for our teachers and students to be ready,
willing and able to make use of all of these fantastic new resources
and to have to stand idle because of an E-rate accounting issue!
Without the passage of a permanent exemption to the Antideficiency
Act, we fear another shutdown for the E-rate at the end of this year
and even longer delays in building-out our network and providing the
learning opportunities that are essential for today's students.
In sum, the E-rate has been a blessing for my district, propelling
it from a technological backwater to a nationally recognized technology
model in six short years. Our students, teachers, library/media
specialists and administrators have all benefited greatly from the
distance learning courses, online professional development, and the
wealth of Web-based material that the E-rate has put at their
fingertips. We continue to make significant progress academically in
our schools, which, in no small measure, is helped by the E-rate.
Please help us continue our work by preventing any unnecessary
disruptions to the program. Please pass S. 241.
I want to thank Senators Snowe and Rockefeller for introducing this
bill, Chairman Stevens and Ranking Member Inouye for signing-on as
original cosponsors, and all of the Senators who have added their
support to this most important legislation. In particular, I want to
thank Senator Stevens for holding this hearing today and giving me an
opportunity to share my views on universal service and, most
particularly, the E-rate. I would be pleased to take any questions that
you have.
Exhibit A
(EdLiNC) Education and Library Networks Coalition
April 11, 2005
United States Senate
Washington, DC 20510
Dear Senator:
The Education and Libraries Networks Coalition (EdLiNC) greatly
appreciates the Senate Commerce, Science and Transportation Committee
holding today's hearing on S. 241, critical legislation which would
permanently exempt the Universal Service Fund from a particular
provision of the Antideficiency Act. EdLiNC is an organization that was
formed by the leading public and private education organizations and
the American Library Association to support the passage and
implementation of the E-rate program as part of the Telecommunications
Act of 1996. We commend Senators Snowe and Rockefeller, Chairman
Stevens and Ranking Member Inouye, as well as over twenty members of
the Senate for co-sponsoring this important bill that would effectively
ensure that E-rate funds continue to flow to schools and libraries.
Without prompt Congressional passage of S. 241, we fear that all
universal service programs face the prospect of significant and
possibly protracted funding disbursement interruptions when the current
temporary exemption to the ADA expires in December. EdLiNC fervently
hopes that today's hearing will help speed the passage of S. 241 by the
Senate and spur the House of Representatives to take similarly quick
action on this legislation. At the conclusion of the 108th Congress,
the Senate unanimously approved the existing one-year exemption. This
exemption expires at the end of this calendar year and would thereby
threaten the continued flow of vital E-rate funds to schools and
libraries.
Since it commenced operation in 1998, the E-rate, which provides
deep discounts to public and private schools and public libraries for
telecommunications services, Internet access and internal connections,
has played a leading role in connecting schools and libraries to the
Internet. In 1998, only 14 percent of public school instructional
classrooms were connected to the net; as of 2003, classroom Internet
access stands at 93 percent. Nearly all public library outlets are now
able to offer Internet access to their patrons. Private schools have
benefited substantially, as well, with 88.4 percent of Catholic schools
providing student Internet access. The E-rate's continuing importance
to schools and libraries is easily observable by the fact that, in each
funding year, requests for E-rate discounts vastly exceed the $2.25
billion available annually. These funds are essential if schools and
libraries are to remain connected to the Internet, the information
super highway.
Beyond these impressive figures, though, the E-rate is essential to
schools and libraries for the educational and employment opportunities
that it helps provide. A 2003 report commissioned by EdLiNC, entitled
E-rate: A Vision of Opportunity and Innovation, found the following
about the program:
<bullet> The E-rate is an important tool for economic empowerment in
underserved communities.
<bullet> The E-rate is beginning to bring new learning opportunities
to special education students.
<bullet> The E-rate is transforming education in rural America.
<bullet> The E-rate is helping schools improve student achievement
and comply with the No Child Left Behind Act.
<bullet> Schools and libraries are devoting significant resources and
exercising great care in completing E-rate applications.
The story of two of the communities profiled in the 2003 report,
the Kuspuk and Kuskokwim School Districts in Southwestern Alaska,
provides an excellent illustration of the incomparable value of the E-
rate program. Although both of these remote, largely Eskimo and Native
American villages are only accessible by single engine plane,
snowmobile or boat, their students now enjoy the same online resources
as their peers around the country thanks to the E-rate program. Because
of E-rate supported connectivity, Kuspuk's teachers are able to
exchange lesson plans with their counterparts in other locations and
Kuskokwim's students are able to overcome the lack of certified math
teachers in their area by taking online courses in math, algebra and
geometry. As Kuspuk School District Superintendent Kim Langton
summarized: ``E-rate funds are critical to the school and to the
community; without E-rate funds we would be hamstrung educationally.''
S. 241 will ensure that E-rate discounts continue to reach these
schools and others like them uninterrupted. Last year, the program was
suspended for three months, during which time thousands of applications
from schools and libraries languished in the offices of the E-rate's
administrator. This de facto shutdown of the program occurred because
the FCC determined that a particular ADA provision, which bars federal
agencies from obligating funds without adequate cash on-hand to cover
those obligations, applied to the E-rate and the program's
administrator realized that it had insufficient cash in its accounts to
cover E-rate funding commitment decision letters. At the same time,
concerns were expressed that the universal service high cost fund's
projections system might also fall within the ambit of the ADA,
potentially causing a shutdown of that program. Fortunately, the 108th
Congress passed and the President signed legislation to exempt for
twelve months all of universal service from that ADA provision, thereby
allowing E-rate discounts to flow again.
However, we are drawing ever closer to another potential crisis for
the E-rate and universal service when the ADA exemption expires in
December. Without passage of S. 241, the FCC would face the Hobson's
choice of either shutting down the E-rate and/or other universal
service programs (rural healthcare, high cost telephone service, and
low-income telephone service) for a period of time, thus depriving
needed E-rate discounts to deserving public and private schools and
libraries, or raising the universal service collection rates
dramatically, thereby virtually imposing major telephone rate hikes for
consumers. Therefore, we urge you to preclude the FCC from making
either of these bad choices and pass S. 241 to permanently exempt
universal service from this single provision of the Antideficiency Act.
We thank you for your attention to this very critical issue, and
urge you to support S. 241.
Sincerely,
American Association of School Administrators
American Federation of Teachers
American Library Association
Association of Educational Service Agencies
Consortium for School Networking
Council of Chief State School Officers
International Society for Technology in Education
National Association of Elementary School Principals
National Association of Independent Schools
National Association of Secondary School Principals
National Association of State Boards of Education
National Catholic Educational Association
National Education Association
National Education Knowledge Industry Association
National PTA
National Rural Education Advocacy Coalition
National School Boards Association
Organizations Concerned About Rural Education
United States Conference of Catholic Bishops
Senator Stevens. Thank you very much. Next witness is Steve
Hamlen, who is the President and CEO of United Utilities, Inc.,
which is in my state in an area ranging from the Bristol Bay
all the way over to Canada. I'm pleased you could take the time
to come down, Steve.
STATEMENT OF STEVE HAMLEN, PRESIDENT AND CEO, UNITED UTILITIES,
INC.
Mr. Hamlen. Thank you, Mr. Chairman, Senator Inouye and
Members of the Committee. I'm Steve Hamlen, CEO of United
Utilities. We are headquartered in Anchorage, Alaska.
I appreciate the opportunity to appear before you today
both in my capacity as CEO of United Utilities as well as on
behalf of the United States Telecom Association in support of
Senate Bill 241.
Mr. Chairman, I know you are very familiar with my company.
I would for the benefit of the rest of the Committee like to
take a moment to tell everyone about United and why Universal
Service support is so critical to my customers and company.
United receives Universal Service Funds for eligible
services provided to schools, libraries, health care providers
and residents of rural Alaska. We serve a population of
approximately 25,000 in 60 communities. United's communities
are accessible only by air and water and our service area is
approximately 150,000 square miles. That's comparable to the
size of the states of New York, Pennsylvania and Ohio.
English, science and algebra classes are now being offered
by distance learning networks and rural communities where it's
not been economical or feasible for school districts to provide
a full-time instructor. Village health plans are now being
assisted by doctors located miles away. Children, teachers and
health care professionals are gaining access by the Internet to
vast amounts of information and low-income households have
access to basic telephone service at affordable rates. Clearly
the E-rate and health care Universal Service programs have
improved the quality of health care and education.
All of us at USTA are well aware of the crucial role played
by you and Senator Burns on the last night of the 108th
Congress to temporarily resolve the crisis of applying the ADA
to USAC. We deeply appreciate the ongoing efforts of Senators
Snowe and Rockefeller.
Today the agenda is on securing a strong and viable future
for Universal Service. We believe that USAC's permanent
exemption from the requirements of the Antideficiency Act is
essential and that this exemption should be permanently
codified this year. The imposition of ADA on USAC will
undermine the delivery of telenetworking services to Alaskan
communities.
In Alaska, we face unique challenges in building
communications infrastructure. When the barge leaves Seattle in
the spring, we need to have our materials on board. Most rural
communities get only two barges a year. Some of them get only
one. Barge deliveries do not go past September. Air
transportation is costly and subject to weather and some items
like towers and buildings which weigh several tons can only be
barged.
Without Universal Service support, it will not be possible
for carriers like United to maintain and build infrastructures
in our rural communities. The application of the ADA to USAC
will introduce uncertainty and raise havoc by disrupting
funding to program participants.
USAC will be faced, as it was last fall, with having to
suspend funding applications, the processing of new
applications will need to be delayed. Contribution factors, the
assessment that is placed on interstate revenues to fund
Universal Service will need to skyrocket in order to prefund
requests. As the ADA compliance issue emerged last year, USAC
informed us that in order to ensure adequate funding going
forward in the first quarter of 2005, USF contribution factor
might need to be increased by almost 50 percent.
Mr. Chairman, Universal Service ensures that networks are
viable in rural areas and that the networks are continuously
upgraded and maintained--networks that reach into every
community and provide real time communications across rural and
urban America and across the globe.
Consequently, it is critical that the continued viability
of Universal Service not be threatened by applying the ADA to
USAC. Mr. Chairman and Members of the Committee, I appreciate
the opportunity to address you today. It is critical that the
current 1-year suspension of the ADA from application to USAC
be made permanent by legislation this year. Thank you for the
opportunity to present testimony. I'm available to answer any
questions.
[The prepared statement of Mr. Hamlen follows:]
Prepared Statement of Steve Hamlen, President and CEO, United
Utilities, Inc.
Mr. Chairman, Senator Inouye and Members of the Committee, I am
Steve Hamlen, President and CEO of United Utilities, Inc. (United),
headquartered in Anchorage, Alaska. I appreciate the opportunity to
appear before you today, both in my capacity as CEO of United
Utilities, as well as on behalf of the United States Telecom
Association (USTA), in support of making the Universal Service
Administrative Corporation (USAC) permanently exempt from the
requirements of the Anti-deficiency Act.
Mr. Chairman, while I know you are very familiar with my company, I
would, for the benefit of the rest of the Committee, like to take a
moment to tell everyone about United and why universal service support
is so critical both to my company and our customers.
United, an Alaskan native-owned telecommunications carrier,
receives Universal Service funds for eligible services provided to
schools, libraries, health care providers, and residents in rural
Alaska. United serves a population of approximately 25,000 residing in
60 communities. These communities are primarily inhabited by Native
Americans, many of whom live a subsistence lifestyle. United's
communities are accessible only by air and water and this service area
is approximately 150,000 square miles--comparable to the size of New
York, Pennsylvania and Ohio. English, Science, and Algebra classes are
now being offered via distance learning networks in rural communities
where it has not been economical, or feasible, for school districts to
provide a full time instructor. Village Health Clinic aides are now
being assisted by doctors located miles away. Children, teachers, and
health care professionals are gaining access via the Internet to vast
amounts of information. And low income households and those living in
high cost areas have access to basic telephone service at affordable
rates. Clearly, the E-rate, Rural Health Care and other universal
service programs are improving the quality of life for those living in
the communities United serves.
USTA is the premier trade association representing service
providers and suppliers of the telecom industry. USTA's 1,200 member
companies offer a wide range of services, including local exchange,
long distance, wireless, Internet, Internet Protocol video and
telephony, and cable television service. Our membership ranges from the
smallest rural telephone companies to some of the largest corporations
in America. All of us in USTA are well aware of the crucial role played
by you and Senator Burns on the last night of the 108th Congress to
temporarily resolve the crisis of applying the ADA to USAC. Of course,
we also deeply appreciate the ongoing efforts of Senators Snowe and
Rockefeller. Their tireless work during the past decade is deeply
appreciated by our members--and our customers.
We are an organization where the agenda is set by and for the
membership. Today that agenda centers on securing a strong and viable
future for universal service. We believe USAC's permanent exemption
from the requirements of the Antideficiency Act is consistent with our
call for securing a strong viable future for Universal Service and
freeing our companies from government micromanagement. It is imperative
that this exemption be permanently codified this year. The imposition
of the Antideficiency Act on USAC threatens the very survival of rural
telephony, the availability of Internet and distance learning services
to schools and libraries, the availability of telemedicine for health
care, and exemplifies the need for comprehensive legislation.
Given the rugged terrain and conditions in rural Alaska, United
would not be able to provide these services at an affordable rate
without universal service support. Universal service support allows
companies like United to provide basic and advanced telecommunications
services to all Americans, whether they are in cities such as Anchorage
or in the most rural parts of Alaska. That is why it is so important
that the Universal Service system continue to be viable and that
threats to the system, such as the unnecessary application of the
Antideficiency Act to USAC, be eliminated.
The application of the Antideficiency Act to USAC will lead to
overall higher consumer phone bills for all customers and dramatic
increases in the phone bills of rural America. It threatens affordable
service in high cost areas as well as the viability of the Lifeline and
Link-Up Programs which provide reduced phone rates for low income
families.
As you are aware, due to actions by the Federal Communications
Commission to comply with government accounting rules and the
Antideficiency Act, last year USAC was forced to radically change the
timing of its funds distribution. Under the government accounting
rules, before USAC is permitted to ``obligate'' funds, it must have
those funds on hand. Commitment letters to recipients of the schools
and libraries and rural health care programs are considered
``obligations'' and therefore subject to the application of these new
standards. These programs are designed to provide Internet access,
Distance Learning, and often telecommunications capabilities to our
nation's schools and libraries. In addition, the program helps to
develop a robust communications network to allow rural health care
providers to properly diagnose and treat patients in rural America. As
a result of the FCC's actions, USAC suspended new funding commitments
in the E-rate and Rural Health Care programs in August 2004.
Mr. Chairman, as you know, the Universal Service program is funded
through an assessment, based on a ``contribution factor,'' on the
amount of interstate revenues received by telephone companies. The
assessment is then placed on customers' telephone bills. Consequently,
a significant increase in the contribution factor results in a
significant increase in every telephone customer's monthly phone bill.
As the ADA compliance issue emerged last year, USAC informed us that in
order to ensure adequate funding going forward, the first quarter 2005
USF Contribution Factor might need to be increased by almost fifty
percent.
There is a strong indication that, if the Antideficiency Act
exemption is not made permanent, the same ``obligation'' restrictions
placed on funds for recipients of schools, library and rural health
care programs would also be placed on high cost and low income support.
This would lead to a disruption of universal service support to rural
phone companies and a potential interruption in affordable telephone
service to rural customers. Further, the ``contribution factor'' would
again have to be significantly raised, possibly to over 20 percent,
resulting in further significant increases to consumers' bills.
Mr. Chairman, Universal Service helps to make sure that networks
are viable in rural areas, and that the networks are continuously
upgraded and maintained. Networks that reach into every community
provide Internet service, distance learning, e-mail, dial tone and
real-time communications across rural and urban America and across the
globe. Universal Service ensures that networks will be available across
the country to provide affordable access to the new communications
services which all Americans expect. In fact, given the importance of
communications to bringing technology and economic growth to rural
America, Universal Service may be more important today than at any
other point in our nation's history, as we transition from an
industrial to an information society. Consequently, it is critical that
the continued viability of universal service not be threatened either
by the applications of the Antideficiency Act to USAC or by any of the
other challenges facing the Universal Service system today.
Mr. Chairman and Members of the Committee, I appreciate the
opportunity to address you on the specific issue of the Antideficiency
Act. The FCC's application of the Antideficiency Act to USAC threatens
the Universal Service system and a permanent exemption is warranted. It
is critical that the current one-year suspension of the ADA from
application to USAC be made permanent by legislation this year.
We support passage of S. 241. While it's April and we believe the
Congress can develop and pass legislation that provides us with a
secure Universal Service program as well as a regulatory regime that
creates a level playing field for all telecom providers, we understand
the Committee wants to move this legislation forward. This is
especially important should unforeseen circumstances slow down efforts
toward comprehensive reform.
Thank you for the opportunity to present testimony; I am available
to answer any questions.
Senator Stevens. Thank you very much, Steve. Just a little
bit of history so we can go back on this one. When Senator
Inouye and I came to the Senate, he was here first, all our
states advertisements about communications said that these
rates do not apply in Alaska or Hawaii.
So the rate--I do not know what was the rate paid in Hawaii
at that time--but my allowance gave me the right to so many
minutes of telephone calls to Alaska at the rate of $5 a
minute. We saw the development of long distance rate averaging
pools in the southern 48, which is what we call the continental
48. And my colleague and I joined together to ask Congress to
approve a resolution requesting the telephone industry to
integrate rates so that it included Alaska and Hawaii.
That process started voluntarily by the industry and the
Universal Service Fund began there. That was a Fund totally
organized by the industry, collected by the industry and
expended by the industry. Before the 1996 Act, the FCC at one
time decided that they ought to take over the management of
this Fund. And I objected to that and called the GAO and asked
them to investigate the matter, and they did decree that that
Fund was not subject to FCC control because it was totally an
industry Fund, collected voluntarily and administrated by the
industry.
Senators Snowe and Rockefeller in connection with the 1996
Act decided to mandate that that Fund should go to, and be
allocated in addition to just bringing long distance service to
rural America, particularly to the offshore states, but to, and
I think wisely the two of us joined Senators Snowe and
Rockefeller in this, to mandate the concepts of serving
schools, libraries and health facilities. Following that, the
FCC in its own judgment decided to mandate the creation of this
corporation which Mr. Talbott is now the chairman of.
That's the best example I know of an agency trying to pull
itself up by its bootstraps and then choking off the subject of
its jurisdiction. This has been the result of the determination
that the 1996 Act mandated the creation of that corporation,
which it did not. Now we are faced, and we were faced last year
with the problem of what to do about the FCC decisions
confirmed by the GAO, and I think urged by the OMB, to increase
Federal control of this money.
The money collected is capped by a decision, I believe of
the FCC. Well, you have heard the testimony here and I think
there is absolutely no question that the Snowe-Rockefeller
amendment has brought about a substantial change in America. It
made available to rural schools and rural communities the
benefits that telemedicine, tele-education and teleconferencing
have brought. It has brought communities together although they
are stretched out over 250,000 square miles. That is a
community in Alaska, all working together to provide the
services that are mandated by the Snowe-Rockefeller amendment.
We are faced with a real problem. And I appreciate for
myself the suggestion that we take some type of time to try and
figure out what is a solution. The 2-years I don't think is
long enough, however, Ms. Dalton. I think if Congress takes a
lot longer than that to make up its mind and we have seen that
in connection with our problem with the National Wildlife
Refuge, 25 years still have not made up its mind.
As far as I'm concerned, we need more time than 2 years.
I'm not sure that we can get a solution right now. I'm not sure
that we really have the ability to decide how to deal with
these other laws which are not within the jurisdiction of this
Committee. The only thing we have got the right to do is
suspend the application of those laws for a while until we get
the other legislative committees to work with us and agree with
us that we need to find a solution to how to manage this money.
From my point of view, Mr. Talbott has mentioned one of the
real serious problems and that it has wisely invested in this
fund in the past. It has leveraged collections they have made
so they really have appreciated considerably in terms of the
amount of money that's available to carry out the services that
they are mandated to do.
That leveraging factor is lost under the decisions that
have been made by the FCC, GAO and the OMB. I have a couple of
questions to ask and let me say to my colleagues, Senator
Inouye and I must go manage the Defense portion of the
supplemental bill at 3 o'clock, so we intend to ask our
questions and then leave.
And I hope Senator Snowe, if you will be able to stay and
Senator Rockefeller stay and conduct the hearing for us for the
Committee. I consider this to be one of the major issues before
this Committee in terms of communications this year. The
solution may be temporary, but it's going to be very important
somehow to find a way to not lose the capabilities that have
been brought to rural America and to our two offshore states by
the Snowe-Rockefeller Amendment. I apologize for that long
monologue.
I have a few rather quick questions. One is what is the
current balance of this Fund and how much is offset by the
funding commitment decision letters that you have issued?
Mr. Talbott. It's about $3 billion in the Fund. Let me
check my notes. But it's over $2 billion that's currently
committed.
Senator Stevens. So unless we do something by the time we
hit the fall, we are going to be in trouble?
Mr. Talbott. Correct.
Senator Stevens. Is it true that there are overcommitments
to the program and how does that come about and why?
Mr. Talbott. A couple of things happened. The process that
the school districts, libraries go through takes some time.
Technology prices if we look at it across the board come down.
The cost for technology has come down, so there is a gap in the
technology that schools are putting in, what they have
requested and then they make those adjustments as they move
forward because the vendors will give those adjustments to the
users. And that's part of the problem.
Senator Stevens. Is it true that the more you commit, the
more is scored against this bill?
Mr. Talbott. I don't understand the question, sir. Maybe
FCC--the scoring is affected by overcommitments, right?
Mr. Schlick. I hesitate to speak specifically to scoring,
but in terms of the obligations, yes, the commitment letters
constitute the obligations and therefore it's the issuance of
the commitment letter that is counted rather than the eventual
disbursement which occurs sometime later.
Senator Stevens. Let me ask this of the FCC. Is there a way
to change the commitment letters to avoid the accounting
problems we find that have been outlined here?
Mr. Schlick. That is an option that's been considered.
Senator Stevens. Can it be done without legislation?
Mr. Schlick. Yes. Those letters are issued by USAC under
the FCC's direction, and they could be modified.
Senator Stevens. That would take the Commission's
concurrence, would it not, to change the rule?
Mr. Schlick. Yes. It's one of the functions of USAC under
our supervision. Yes.
Senator Stevens. That would be subject to a series of
hearings and procedures under the FCC. In other words, it will
take time if we opted to go that direction, it will take time.
Ms. Gelb, how long will that normally take to have a real
change by the FCC?
Mr. Schlick. Mr. Chairman, that's not in the Commission's
rules now. It would be a matter of consultation between USAC
and the agency's staff.
Senator Stevens. Would it involve a public process to
determine how the rule was issued by the FCC?
Mr. Schlick. Mr. Chairman, right now the USAC commitment
letters are not enshrined in the rules.
Senator Stevens. The accounting change I'm suggesting,
wouldn't that take a rule?
Mr. Schlick. The accounting change, yes. The application of
GovGAAP, which is the accounting rule that in October of 2003
the Commission extended to USAC, that would require a change of
FCC rules. But it's important to note, Mr. Chairman, that the
accounting procedure is one that identifies the timing of the
obligations, not the rule that USAC must have cash on hand.
Senator Stevens. I'm talking about Ms. Dalton's problem, if
we need a temporary fix, how long do we really need if we
decided to go that route?
Mr. Schlick. That rule change will not affect the
Antideficiency Act problem, Mr. Chairman, because the
Antideficiency Act problem is one that is statutory. The
GovGAAP procedures are a tool that identifies the time
obligations are incurred, but there is nothing that the
Commission could do.
Senator Stevens. Avoid any accounting problem but not solve
the issues that I'm discussing, right?
Mr. Schlick. That is correct, Mr. Chairman.
Senator Stevens. Mr. Hamlen, in terms of this as it affects
our state, what would be the impact on your total operation if
the exemption is allowed to expire and Congress does not act?
Mr. Hamlen. Well, first of all, our customers, school
districts, rural health care providers would all be impacted.
The impact on our company would be severe. Our ability to
continue to deliver the services would be undermined and our
ability to build out new infrastructure would also be
undermined. In fact, if that were to happen, we would probably
within a year have to go out of business.
Senator Stevens. Last comment. By virtue of the investments
you've made in the past, Mr. Talbott, investments of the
surpluses as occurred temporarily, has that been a factor in
acting to keep the contribution level as low as possible?
Mr. Talbott. Yes, it has.
Senator Stevens. It's up to about 11 percent now, is it
not?
Mr. Talbott. That is correct.
Senator Stevens. And technically paid by long distance
carriers primarily.
Mr. Talbott. Right.
Senator Stevens. Senator Inouye.
Senator Inouye. Thank you, Mr. Chairman, for reviewing the
history of this controversy as we approach this moment. In my
review, I note that one cannot help but conclude that the most
influential agency guiding policy decision making is OMB. We
invited OMB to be with us today but they are not available. But
I note that the FCC and GAO have all communicated with OMB.
What have they been telling you? Can you share it with us?
Mr. Schlick. Senator Inouye, the important communication
for purposes of the E-rate program was the consultation that we
had back in September of 2004, and then into the fall. And that
was the expression of OMB's view that, first, the Universal
Service Fund is an appropriation to which the Antideficiency
Act would apply.
And second, that the obligation letters, the commitment
letters that USAC issues, are obligations that have to be
counted under the Antideficiency Act. We have also requested an
opinion from OMB concerning the high cost and low income
programs under the USF and we are working with them to obtain
that. It's our tentative view that those programs are being
operated today in accordance with the obligations of the
Antideficiency Act, and that the resumption of the application
of the Act to those programs would not cause change in the
operation of the programs.
Senator Inouye. What was the decision of OMB in 2000?
Mr. Schlick. In 2000, OMB determined that the Miscellaneous
Receipts Act, which is the statute which requires that public
moneys for the use of the United States be deposited in the
Treasury, does not apply to the Universal Service Fund and that
is a view under which we have been operating.
Senator Inouye. Mr. Talbott?
Mr. Talbott. Yes. The question comes down, my point to the
commitment letters that we issue versus the high cost, low
income where we do not issue the letters, but we certainly post
it to the website. That's hard for me to differentiate when a
company sees on the website what they will receive, but that's
not a commitment. So I think there is an obligation from our
vantage point.
Senator Stevens. The money is still not in the Treasury, is
it?
Mr. Schlick. No. Mr. Chairman, no. The money is still
maintained outside the Treasury.
Senator Inouye. Ms. Dalton?
Ms. Dalton. Senator, we were simply asked to review what
the decisions were by OMB as well as the FCC to see if we
concurred, which we did with their reasoning that the
Antideficiency Act did apply in this particular situation.
Senator Stevens. Does Congress take direction from the OMB?
Ms. Dalton. No. It does not, Senator.
Senator Inouye. Do we have any late message from OMB?
Mr. Schlick. Not that I'm aware of.
Senator Stevens. Again, my regrets to all of you. I ask
Senator Snowe and Senator Rockefeller at this time to take over
this matter. And it will be my hope that we can find a way to
get this matter on the first agenda possible.
STATEMENT OF HON. OLYMPIA J. SNOWE,
U.S. SENATOR FROM MAINE
Senator Snowe. Thank you, Mr. Chairman. I also want to
thank the co-chair as well for giving so much support and
having this hearing here today that emphatically I think
indicates the support of this Committee toward resolving this
issue and I truly appreciate it. Senator Rockefeller.
Senator Rockefeller. They have already left. I wanted to
duly thank on behalf of--I know Senator Snowe and myself, the
Chairman and the Vice Chairman I guess, for their support of
this legislation. I also note not only the absence of OMB but
the refusal of OMB to put down in writing to us and as far as I
can tell, to any of you, other than perhaps a couple of verbal
things several years ago their views, even though they are
responsible for a good deal of what has happened here. Mr.
Talbott, a couple questions for you, sir.
You're Chairman of USAC?
Mr. Talbott. Yes.
Senator Rockefeller. And without an exemption of the
Antideficiency Act this year, what would you say you need to
recommend to the FCC for the first quarter of 2006 to fully
fund all four of the Universal Service Fund programs, that will
be the E-rate, the high cost, the low income, and rural health
care?
Mr. Talbott. Well, if we did not have the passage of the
Act--let me back up. The commitment letters that were addressed
earlier, we have a softer commitment letter that was one thing
that was suggested this past year. But what we found out when
the auditors started looking at it, the school district started
looking at it, it did not hold water. We either have to raise
the contribution factor up significantly which is an impact on
everybody or we have got to figure out a way to fund it. And
that way would be to shut down for X amount of time so we can
build the Fund up.
Senator Rockefeller. Ms. Abshire and Mr. Hamlen, both of
your testimony I thought were absolutely superb, but that's no
surprise. But would that not also then increase the hesitancy
of those particularly rural schools and areas because of the
inconsistency being shown by Congress in funding this program?
That when you shut things off and turn them on and shut them
off and turn them on, people begin to walk away from it just a
bit, don't they?
Ms. Abshire. Yes, sir. I think the key is the constant flow
of funds that those of us in districts can count on and use to
plan. We have had a lot of education and technology funding
plans and budgeting and we have tried to be wise and build
plans that take us into the future and leverage resources in a
very strategic nature. And when we have issued this start and
stop, it really disrupts all of the planning processes and
makes people reluctant to be engaged, in addition to the
educational disruption that occurs.
Senator Rockefeller. Mr. Hamlen, you don't need to answer
because you answered most eloquently when you said you'd have
to shut your business down in about a year and a half?
Mr. Hamlen. That is correct, Senator. I would like to add
one more item. Many of our school districts in rural Alaska
receive 90 percent subsidy and the cost of providing service to
these remote schools is very high. And you'll note that some of
them could, if we have these disruptions and they continue to
try and receive service and they become liable for the full
bill, could be forced into bankruptcy. So that that would be an
added concern.
Senator Rockefeller. Thank you. I'm going to try and ask a
couple of questions quickly before Olympia red lights me. Mr.
Talbott, I'll go back to you, sir. Were there any costs that
you are aware of in complying with the FCC guidance last fall?
Are there any ongoing costs of compliance with the FCC?
Mr. Talbott. Yes, the cost to implement GovGAAP, we lost
$4.6 million when we had to liquidate investments. We have
already put one million into training. It's going to cost us
millions more to complete that system overall and we have lost
$4.1 million per year in interest over this next year.
Senator Rockefeller. Senator Inouye touched on this, but I
want to do it again. I'm interested in an explanation as to why
hundreds of millions of dollars are now sitting in non-interest
bearing accounts, that are buried in a hole, rather than safely
earning interest for the purposes of America's school children.
Some of us here in Congress went through a lot of effort
late last year, and Senator Inouye indicated two of those
folks, to pass emergency legislation to end such wasteful
practices. This legislation granted the Universal Service Fund
a 1-year exemption from the Antideficiency Act expressly for
the purpose of permitting the FCC to act as a prudent steward
of these public resources while we all addressed a more
permanent solution.
I agree with Senator Inouye that a 2 or 3-year solution is
insufficient because of the nature of Congress and the nature
of the situation. The FCC, however, has done nothing to
prudently invest these funds, these non-interest bearing
account funds. And the delay is costing the public millions of
dollars in forgone interest every month, is that not the case?
Mr. Talbott. That is correct. And we are working within
USAC. In fact, next week the investment committee will be
working with the board and trying to make changes there, but we
have a letter that states that we are not to proceed with those
types of investments that you just described and we have to get
FCC to allow us to do that. It's a rule.
Senator Rockefeller. My final question is to you, Mr.
Schlick. What is the agency doing to restore the $550 million
that was undercollected for the E-rate program in 2004?
Ms. Gelb. At this time, we have not actively collected the
$550 million. In part, the 1-year ADA exemption permitted us to
not have to collect that immediately, so right now there is
incomplete collection of that amount.
Senator Rockefeller. I missed it. It was not collected?
Ms. Gelb. It has not been recollected.
Senator Rockefeller. It has not been recollected.
Ms. Gelb. Yes.
Senator Rockefeller. Thank you, Madam Chair.
Senator Snowe. Thank you, Senator Rockefeller.
Senator Nelson.
STATEMENT OF HON. E. BENJAMIN NELSON,
U.S. SENATOR FROM NEBRASKA
Senator Ben Nelson. Thank you, Madam Chairwoman. I must be
a little bit confused here. Mr. Schlick, did the FCC ask for an
opinion from OMB? I think you said no. So did OMB volunteer it
about the Antideficiency Act application to this Fund?
Mr. Schlick. Senator, the FCC did ask for such an opinion
and such an opinion has been provided. And it is the view of
OMB, as well as now later of GAO, that the Antideficiency Act
does apply.
Senator Ben Nelson. Now, is that standard practice on any
other funds that you collect other funds? Are you custodian of
any other funds that have to be collected and distributed?
Mr. Schlick. I don't know the answer to that question.
There is nothing closely analogous to USF. I don't know the
answer to that question.
Senator Ben Nelson. I'm a little confused, also, Ms. Gelb,
about what is the--you used two collections. You said one, has
been collected or it's collected again?
Mr. Schlick. That's the high cost and low income program
within the Universal Service Fund. The operation of those
programs within the Universal Service Fund is very different.
In the E-rate program, which is the one that had the
problem last fall, USAC issues commitment letters which say to
the recipients, this is what you will receive and how much
you'll receive. In the high cost and low income programs, USAC
does an initial projection quite far in advance of what the
expected revenue needs for the program will be, then services
are provided, then carriers pay into the Fund in their monthly
contributions. And some days after that, USAC authorizes
disbursements to the carriers.
So for two reasons, one being that there is no definite
commitment to issue funds that's equivalent to the E-rate
commitment letters, and also because the funding flows are
requiring carriers to put money into the Fund before USAC pays
out. For both of those reasons, we think that the high cost and
low income Fund is now being operated in compliance under the
Antideficiency Act. We did ask OMB for an opinion and we did
advise USAC of our views last September.
Senator Ben Nelson. But the other opinion that they gave
you that was referenced earlier, apparently an oral opinion,
not even a written opinion?
Mr. Schlick. On the high cost, low income we have not
received a written opinion from OMB. That is correct, Senator.
Senator Ben Nelson. Also, I'm a little concerned about the
lack of investment. Mr. Talbott, you said you have a letter and
the letter is from whom or from what agency?
Mr. Talbott. From the FCC, the Wireline Bureau.
Senator Ben Nelson. About not investing the money?
Mr. Talbott. No.
Senator Ben Nelson. Mr. Schlick, why would you tell them
not to invest the money. Usually there is very little, if any,
risk associated with it and I guess we did at one point invest
the money in the long term, and had to liquidate that lost
money because of the early liquidation. It seems to me that
somewhere along the line, we would figure out how to get it
straight.
Mr. Schlick. Senator, it's not a situation of investment or
no investment. Under the Antideficiency Act and again under the
OMB guidance implementing that, which is something called
circular A-11, amounts that are in Federal Government
securities are treated as available cash for purposes of the
Antideficiency Act.
So when we issue a commitment letter if we have investments
in Federal securities or literally as cash, those may be used
to offset the commitment letter and therefore ensure compliance
with the Antideficiency Act. If the moneys are invested in
investments other than Federal securities, then the holding of
those investments is itself viewed as an obligation of the
government, so they may not be treated as available cash for
purposes of offsetting the commitment letters.
The result of this is that, because under the law as it now
stands on January 1, 2006 the Antideficiency Act will begin to
apply to the Fund, we have told USAC that unless they obtain
approval from us, they should not reallocate their portfolio
out of investments that can be considered cash for purposes of
offsetting obligations under the Antideficiency Act into non-
Federal investments that cannot have that status. And the
reason for doing that is to prevent the kind of shock that we
had last fall where there was not available cash in the Fund to
offset the commitment letters.
Senator Ben Nelson. So if this amendment passes, will we be
able to earn some money for the kids and people that are going
to receive the benefits in Louisiana, Alaska and hopefully
Nebraska, Arkansas and everywhere else?
Mr. Schlick. Yes, sir. I think it's a fair assumption that
the interest will increase.
Senator Ben Nelson. There was another question relating to
that. But I think I was trying to follow about you have not
decided about investments yet. Is this the same Fund or another
Fund that I'm not familiar with?
Ms. Gelb. Sorry, I wasn't clear. The question Senator
Rockefeller asked me was whether we had collected the $550
million that was not collected in 2004. In 2004 at the
beginning of 2004 we worked with the USAC, and USAC agreed that
there was substantial buildup of cash in the Universal Service
Fund. And rather than continue to collect the full amounts
needed in the contribution factor, that there would be a
reduction in contribution factor and some of the existing cash
surplus will be used instead.
This was--decision was made before the issue of the
Antideficiency Act arose. The question was whether we had since
collected that $550 million and the answer is no, we have not
at this time collected that $550 million that we did not
collect in 2004.
Senator Ben Nelson. I must be missing something here as
well. Why would that be that we have not collected it?
Ms. Gelb. I think largely because the 1-year exemption on
the Antideficiency Act gave the Fund flexibility to use
existing stores of cash to fund the program and we did not need
the full amount of cash on hand in order to make all of the
commitments.
Senator Ben Nelson. But if we did not pass the bill that I
think we are going to pass, and antideficiency did apply, is it
not possible that we would run out of money if we did not go
ahead and collect what we have not recollected or whatever it
is?
Ms. Gelb. Yes. I think that if the exemption to the
Antideficiency Act ends, then we would over time, I used the
word re-collect, but collect the $550 million that was not
collected previously in 2004.
Senator Ben Nelson. I'm not in favor of collecting a lot of
money to hold in storage, but I am a little perplexed that a
decision would be made not to collect what is due and owing
with the expectation that one way or the other it's going to
have to be paid out. Is this a decision the Commission made or
is it staff driven?
Ms. Gelb. It wasn't a decision that the Commission made. I
guess the answer to your question is that there are cash
reserves to pay out the funds. The issue arises when because
there is a lag between when the money is committed and when it
is disbursed, there will be money at that time necessary for
disbursement. So if the Antideficiency Act exemption were to
continue, what we would need would be the cash on hand at the
time of disbursement, not necessarily the cash on hand at the
time of commitment.
Senator Ben Nelson. Just one follow-up, Ms. Dalton. Did you
reference that in your GAO report by any chance as you looked
at this issue?
Ms. Dalton. I addressed it very briefly in my statement
here today. What we were talking about is looking at the
scenario that occurred in 2004 and the fact that the money
wasn't available under the definition under the Antideficiency
Act. However, Congress can specifically say that certain
resources are budgetary resources and are applicable under the
Antideficiency Act. For example, the investment funds could be
considered as budgetary resources.
Currently under the Act, without special authorization, the
money has to be in Treasury or in cash to be considered a
budgetary resource. However, Congress can in fact say very
specifically that certain investments or anticipated
investments in this particular case should be considered as
resources to balance out the commitments.
Senator Ben Nelson. But you still have to collect them?
Ms. Dalton. You do.
Senator Snowe. Thank you, Senator Nelson. At this point,
I'll take my turn with respect to questions. It truly is
confounding to understand exactly why we are confronting the
situation we are that really does have many consequences to the
programs at stake.
And certainly, it comes without explanation or rationale
from the Office of Management and Budget, and I certainly note
the absence of OMB here today which would certainly have been
helpful to have their perspective with respect to the impact of
the direct and net effect of their directive. With respect to
the E-rate program and the overall Universal Service Fund, Mr.
Talbott, let me begin with you.
Have you had direct conversations with OMB with respect to
the impact and the consequences of these actions prior to the
exemption that was passed by Congress?
Mr. Talbott. No.
Senator Snowe. Have you had any since?
Mr. Talbott. No. We have not.
Senator Snowe. So no explanation at all?
Mr. Talbott. No. We administer the program, the FCC would
communicate that to us I assume.
Senator Snowe. Mr. Schlick, have you?
Mr. Schlick. The Commission was consulting on these
problems with OMB in September of 2004 which was after USAC had
stopped issuing commitment letters. So OMB was very much aware
of the practical problem that we faced there and that's why we
went to OMB and asked urgently for guidance. So they were
aware.
Senator Snowe. They were aware. Did they have any explicit
explanations and responses to the problems that are associated
with the implementation of their directive? I mean, realistic
acknowledgment of the practical effect?
Mr. Schlick. I don't want to characterize their views, but
I think it's fair to say that they were, of course, aware of
the problem. They were viewing the issue as one of applying the
statute, the Antideficiency Act and precedents under it. As
were we. And that's what was guiding us in reaching the same
conclusion that GAO has now arrived at.
Senator Snowe. Were they aware of the ruling that was made
by OMB in 2000 with respect to these funds. It was totally
contrary to their view obviously. Were they aware of that
ruling?
Mr. Schlick. Yes, Senator. They were aware.
That of course arose under a different statute, the
Miscellaneous Receipts Act which involves deposits into the
Treasury rather than the Antideficiency Act.
Senator Snowe. And that a court ruling that indicated that
the USF funds were not a tax? They were not derived from tax
revenues.
Mr. Schlick. I believe----
Senator Snowe. It's not an appropriation.
Mr. Schlick. I believe those core decisions were part of
our discussions.
Senator Snowe. They were. And how did they recognize that?
How did they acknowledge the core decision?
Mr. Schlick. Again, Senator, it's my own view now. That's
really an issue that goes more toward the character of the Fund
under the Miscellaneous Receipts Act and the Antideficiency
Act. Under the Antideficiency Act, once OMB, GAO and CBO all
treated the Universal Service Fund as an appropriation, it was
that back in late 1990's that triggered the application of the
Act.
Senator Snowe. Well, obviously it is not an appropriation
in the final analysis. It is not. I mean, you know, you can
call it whatever you want--the reality is and that's the
frustration with the directive that has been imposed by OMB--is
not acknowledging the net practical effect of what has occurred
here. Already the loss of dollars is hard to understand. I
mean, obviously in withholding the commitments, and you have
had to redeem bonds, did you not, Mr. Talbott, which cost more
than $4 million to the Fund?
Mr. Talbott. As well as certainty to the program.
Senator Snowe. You cannot put the funds in an interest
bearing account, even a modest interest bearing account. You
cannot do that. And what is the explanation for that? Does
anybody have one? Mr. Schlick?
Mr. Schlick. Investments that are not Treasury securities.
So interest can be earned although it has to be a Federal
security. And the answer to that is that if you--under OMB
guidance, the circular A-11--if you're purchasing an investment
asset outside of the Treasury that's viewed as itself an
obligation of government funds.
Senator Rockefeller. Senator, I'm just stunned by that
answer. I apologize. No loss of your time, Madam Chairwoman,
but the OMB said that you could not do this because it could
not work out financially. I'm confused as to your
responsibilities and the FCC's and OMB's responsibilities.
Mr. Schlick. Certainly, Senator. OMB establishes executive
branch-wide guidelines and one of those guidelines is that
investments in non-Federal securities are, for purposes of the
Antideficiency Act, generally treated as an obligation----
Senator Rockefeller. Senator Nelson indicated they could be
in government securities.
Mr. Schlick. Yes. And my understanding is that a portion
are. But perhaps Dr. Talbott can correct me on that. My
understanding is that a portion right now are in government
securities earning interest.
Senator Rockefeller. Thank you.
Senator Snowe. Thank you, Senator Rockefeller. So what has
been the net cost so far as a result of this OMB directive? Is
it four million?
Mr. Talbott. We lost 4.6 million in the 3-day period when
we got the order to liquidate by the end of the Fund year--
because we were directed to do that on September 27th and of
course, October 1 is the new fiscal year. So we had to
liquidate. We lost 4.6 million there and then sequentially, we
have lost for each quarter significant dollars that we have
earned.
Senator Snowe. That you could have earned.
Mr. Talbott. Could have earned.
Senator Snowe. Have these issues been raised by OMB in the
subsequent time in which this legislation was passed? I mean,
have you raised this at all about the loss?
Mr. Schlick. No. I don't think we have. Under our direction
from last December to USAC, they are to come to us first with a
proposal to reallocate and this may be a good time to note that
there is no prohibition on investments outside of Federal
securities or cash. It's simply to protect ourselves against
the Antideficiency Act, we have to have enough that's treated
as cash there.
Senator Snowe. You have to have a portion of your portfolio
in cash?
Mr. Schlick. Enough to cover the commitment letters.
Senator Snowe. Well, maybe they should apply the ADA to
common sense because in the final analysis, I mean, it is not
only creating an uncertainty to a program that has worked
exceptionally well over time. Not to say it hasn't had
problems. Not to say that the FCC doesn't have the authority to
conduct audits which you are doing. Obviously there are issues,
but for someone to arbitrarily impose this dictate that has
created enormous consequences for the E-rate program and high
cost and low income, which if we do not address this issue for
the long term, a tremendous price and penalty will be imposed,
as I understand it, to gather a surcharge, 21 percent, will be
doubling?
Mr. Talbott. That is correct. USAC holds with maturities of
less than 90 days and we have one long-term U.S. Treasury note
that's being held. That is correct. It not only brings about
uncertainty but also--it increases the contribution factor.
Senator Snowe. It's going to double the surcharge in
addition to what it has already been raised--from 8.7 to 10.9
percent. So all combined, you know, it wreaks havoc on this
program. As a result of an arbitrary ruling without having the
ability to sort through what we can do to plan even in the long
term. I mean, that is the issue here is that it was summarily
imposed without any opportunity to respond, to react, to try to
address.
And so obviously, we have a temporary approach, but clearly
it needs to have a permanent exemption so we can address the
long term, address other issues regarding the Universal Service
Fund because we know that there is declining revenue from long
distance carriers and so on, there are a number of issues. But
this has clearly been an obstacle and impediment of a program
that has served this country well and schools and libraries as
we have heard from you, Ms. Abshire, as well.
We ought to look at the long term to figure it out. But to
have to respond in this fashion it clearly does not make any
sense. That's what I regret about it because we have to be able
to sit here and rationally work out solutions to problems. And
if somebody has a better idea on how to do it, fine.
But I think to simply impose this without recognizing--by
the way, numerous other agencies that are exempt from the
Antideficiency Act. It's not just the USF. There are other
agencies. Highway Trust Fund, U.S. Information Agency, National
Park Service, Fish and Wildlife Program, National Insurance
Development Program, probably many more. It's not as if this
has always applied and the uniqueness of this program should be
recognized. Everybody wants to live by good government
accounting principles obviously. So how can we solve the
problem to get to the same net result without imposing or
wreaking havoc on this valuable program.
Senator Sununu?
STATEMENT OF HON. JOHN E. SUNUNU,
U.S. SENATOR FROM NEW HAMPSHIRE
Senator Sununu. Thank you, Madam Chair. I have a decidedly
different view and I would like to begin by encouraging my
colleagues that if this bill passes, and I do hope it doesn't
pass, that they show the same enthusiasm for allowing Americans
to invest their payroll taxes in interest bearing private
accounts that we have shown here for investing schools' and
libraries' money in private interest bearing accounts.
My sense is, though, that that's not going to happen.
We'll find a reason for avoiding any kind of equivalency. I
do think exempting the program from accounting statutes as a
general premise is not sound policy. And when you have a
program that has had the problems of the schools and libraries,
I think that's particularly the case.
We have not, this is not a hearing about fraud,
mismanagement, overcharging, misapplication of funds within the
E-rate programs, overbuilding, gold plating some of these
investments. That's not what this hearing is about. But we all
know that these things have occurred in this program to a much
greater extent than I think anyone in this room would like to
see.
At this point in time, the fact that we are asking the
program to operate under this existing accounting standard and
that we are looking at Universal Service Fund reform, I think
creates an opportunity to address all of these programs as we
mark up a telecommunications bill. And I do not think we should
just exempt this in perpetuity so that the funding can continue
to come in and go out without the kind of oversight and
inspection that we would expect of a very large program like
this. It's $2.25 billion a year.
So I see this as an opportunity to force the issue to make
us look at not just the E-rate but all of Universal Service
Fund. In fact, we were told when this temporary extension was
passed at the end of last year that this was just the temporary
extension because we were going to look at all of these issues
in conjunction with the reform of the Universal Service Fund.
And here we are just 3 months later and suddenly, everyone has
forgotten about that commitment.
Second, we were told that the single most important reason
for extending or providing the waiver of the Antideficiency Act
was to avoid an increase in the contribution factor and lo and
behold 2 months later the contribution factor is increased any
ways.
So I have heard some practical arguments for extending the
waiver, that is, arguments that it will make us operate a
little bit differently, force us to find ways around the
restrictions as a practical matter, but no real principaled
argument for why this program should be treated so uniquely.
And I think I'll at least begin there and perhaps it was in the
testimony and it's something I may have missed. I'll be the
first to admit. Mr. Talbott, though, why don't I begin with
you. I think in your testimony you said that you support the
application of accounting rules to USAC, just not this one.
What is it about the organization or the program that's so
unique that you should be exempted from this standard?
Mr. Talbott. Let me say that under GovGAAP accounting which
we are moving to, we are doing that. We will be under GovGAAP
accounting. What it is is whether or not the commitments or
obligations are not, and that is the point where this piece of
legislation solves the problem for us.
Senator Sununu. I recognize the fact that it solves the
problem for you. But what is it about you that's so unique that
it should be exempted from this?
Mr. Talbott. I think it's the impact on the schools and
libraries. If there is no ADA exemption, there will be
uncertainty. The poorer schools get hit first. The budget
process is impacted. Schools may have to discontinue services
which actually happened previously.
Senator Sununu. Are you suggesting that you won't be able
to spend $2.25 billion in schools and libraries in the coming
funding year.
Mr. Talbott. I have to have it on hand.
Senator Sununu. But at the end of the year, will you spend
$2.25 billion on libraries and student issues?
Mr. Talbott. Absolutely.
Senator Sununu. The year after that?
Mr. Talbott. I have to have it in the bank.
Senator Sununu. And the year after that?
Mr. Talbott. Yes.
Senator Sununu. And the year after that assuming nothing
changes?
Mr. Talbott. Yes.
Senator Sununu. I appreciate the challenge of dealing with
the restraints and I certainly appreciate the degree to which
this has provided the benefits to school districts represented
here, but the fact that we have spent money and made a
different standard does not in an of itself justify spending
$2.25 billion.
I could have $2.25 billion and waste half of it and make a
heck of a difference with the other half, but that doesn't
necessarily mean it's a well run, well administered program.
And I think a lot of efforts have been made to do better, to
allocate these moneys better and I appreciate the participation
of the school districts for whom it has made a difference.
But I think it makes it all the more important that we look
at reform in the context of Universal Service, which is another
$4 or $6 billion we provide to districts just like Ms.
Abshire's, those with a high cost profile and those with a low-
income profile and I would very much like to see them all
considered together.
Mr. Hamlen, one question for you, you're a provider,
correct?
Mr. Hamlen. Yes.
Senator Sununu. You're, I'm sure, very unique. My guess is
we cannot find an operation in New Hampshire that looks
anything like yours and that's sort of a tribute to you. But I
think the question I have applies not just to you but to
others.
Is it your contention, let's say, hypothetically the entire
schools and libraries program went away. Is it your contention
that you would not be able or willing to offer any discount to
any school or library that came to you for service? You'd be
forced to charge them the same rate that you charge any
business or consumer?
Mr. Hamlen. Yes. We would. The schools and libraries, the
health care providers receive a discount. I'll give you a good
example. We just won a contract to, under the rural health care
program to provide telemedicine services to 47 clinics that do
not have telemedicine services today.
Now, we need to build out a network that will provide that
service which will cost a substantial amount, takes a long time
to do that. What is driving the buildout of the network is the
rural health care program and the funding that is available to
the health care provider to be able to purchase that service,
and enable the telemedicine services at those clinics. So these
networks that we have in rural high cost areas are dependent on
the USF support because they cannot be built.
Senator Sununu. Thank you. I see my time is up. Thank you,
Madam Chairwoman.
Senator Snowe. Senator Pryor?
STATEMENT OF HON. MARK L. PRYOR,
U.S. SENATOR FROM ARKANSAS
Senator Pryor. Thank you, Madam Chair. I'd like to follow
up on a couple of my colleagues' questions here, first with
regard to some of Senator Rockefeller's questioning about the
watering down of the commitment letter that you all answered. I
believe that was you, Mr. Talbott, that answered that. But I'd
like to hear if I could from Ms. Abshire on that. I'd like to
know the practical ramifications of that.
Ms. Abshire. Yes, Senator. When that first was considered
last year, it was met with dismay by people in my position.
Senator Pryor. Why is that?
Ms. Abshire. In order for me to be able to seek budget
funds for a non-discounted portion, I have to have a commitment
to be able to give to my board that tells them that we are
contracting only for the non-discounted portions. And so when
that first came up, there are many of us around the country
that explored that and spoke to legal counsel in our districts.
And we were informed that unless we had a firm funding
commitment that enabled us to go to that board and say that the
discounted portion would be covered by E-rate, and our board
needed to approve the non-discounted portion, that we were
really left in a very unclear area, and that we were very
reluctant to do so. We did explore that when that concept was
put forth last year.
Senator Pryor. As I understand it, I think it's consistent
with what Mr. Talbott said is that in effect the watering down
makes it basically unworkable for you. Is that fair to say?
Ms. Abshire. Yes, sir. That's fair.
Senator Pryor. Mr. Talbott, in connection with Senator
Sununu's questions a few moments ago, basically as I understand
your answers, you said you needed the cash on hand before you
could distribute funds, is that right?
Mr. Talbott. Right now. Not right now because the
Antideficiency Act--because of the exemption we got. We would
have to have those funds and I did misspeak when I supported
the change because we administer the program. And through my
enthusiasm to get dollars out the door to applicants and
vendors, I overstated the support because we are not in a
position to say support. Not support. I just wanted to clarify
that for the record.
Senator Pryor. In other words, you were talking about the
possible need for cash on hand that you actually had to have
the money in the account before you could distribute it?
Mr. Talbott. Had to have the money in the account before we
could distribute it. We needed the money there in the accounts
at the time the obligation was made, the cash has to be on
hand.
Senator Pryor. And I guess what Senator Sununu was asking
was, what is the problem with that? Why is that a problem?
Mr. Talbott. It's a problem because we have with the cash,
when we say we have $3 billion on hand, that's committed but
it's committed out over a period of time. So we would have to
raise that to $6 billion in order to take care of all of the
obligations that we have, rather than paying it out as it comes
in.
Senator Pryor. And I guess, Ms. Abshire, maybe this is best
for you, is timing important with these requests? I mean, are
these time sensitive requests?
Ms. Abshire. Well, they are really critical in terms of
educational opportunities. One of the things that was such a
derailing piece of our planning was when we had planned the
infrastructure upgrades and put educational programs in place
to support the upgrades and we were not approved.
The real key is that 471 process that has all the due
diligence involved in it to make sure that we have properly
contracted services, that they are eligible. And that that
pristine 471 process gives us the approval, and then allows me
to move forward with engineering work and deployment across a
very large and diverse district, and put education programs in
place that are going to meet educational needs.
So the timing is everything in planning because that's what
we have been asked to do is to plan wisely, strategically use
resources and deploy them for increased educational
opportunities. Yes, sir.
Senator Pryor. Let's talk about the educational needs
because now we have No Child Left Behind. Did the E-rate
program, does it help your schools, does it help schools make
the annual yearly progress requirement in No Child Left Behind?
Ms. Abshire. For us it has, yes, sir. We have been able
to--again, it's the strategy of using all the different
resources that we are provided to be able to have the
connectivity. And then we have used other funds to train
teachers and administrators how to use that connectivity.
That's been the key piece.
So that students then, when they are engaged in these types
of activities in classrooms using the connections and using the
vast resources on the worldwide web, that they are used for
highly skilled educational endeavors.
And our communities, our business and industry and folks
that are involved in economic development tell us over and over
again, we need students that leave our schools that know how to
work in these collaborative environments and that are really
information literate. And if we don't have the connectivity to
model these types of lessons and engage students in these types
of activities, we will provide substandard opportunities for
them.
Senator Pryor. Mr. Schlick, let me see if I can change
gears and ask you again, if I may, and again touching on
something Senator Sununu mentioned a few moments ago or he
basically talked about some misuse of funds or he used the term
gold plating. I'm concerned about fraud and I think you
mentioned that as well. In your opinion, does subjecting USF to
the ADA, does that help prevent fraud?
Mr. Schlick. No. The waste, fraud and abuse issue is a
different one than this question.
Senator Pryor. So in other words, it's not connected, the
two are not connected in your view?
Mr. Schlick. That is correct.
Senator Pryor. I guess that's a little bit counterintuitive
to me. Could you walk through that, please?
Mr. Schlick. The waste, fraud and abuse issues that we are
acting very aggressively against concerned the requests for
money and the uses of money. That's essentially the
relationship between USAC as the administrator and the
recipients of the funds--the schools and libraries. And we are
talking about providers that are providing their services.
If it would help, I can give some examples of the kinds of
things we are doing to address those problems. Five things in
particular. We are working very hard with the Department of
Justice to have aggressive civil and criminal enforcement
against those who abuse the program, to enforce the laws and
protect the program.
We have expanded our own FCC audit program for the E-rate
program under the direction of the FCC Inspector General. We
have added additional FCC staff to oversee the program, and I
know that's directly responsive to one of the recommendations
of GAO in their report that was released last March.
We are working now with OMB to develop performance measures
for the E-rate program to measure the effectiveness of the
dollars we are spending. Again, that's directly responsive to
one of GAO's recommendations and we are providing USAC
additional guidance concerning the operational issues of the
program and details of the implementation we think can protect
the program funds.
Senator Pryor. Thank you, Madam Chair.
Senator Snowe. Senator Rockefeller?
Senator Rockefeller. Thank you, Madam Chair. I just want to
follow on a little bit of what Senator Pryor was questioning.
I'm going to wander a bit in making this point which is very
unusual for me.
I joined the Peace Corps when it was first started up in
1961 and 1962. And I think most people would agree these days
that one of the great things that's happening in this country
has been the United States Peace Corps, what it's done for our
country's understanding of ourselves and our understanding of
ourselves as individuals.
I cannot possibly underestimate to you, however, the amount
of waste, not necessarily fraud and abuse because that was not
the intention, but I was at that point the director of the
Peace Corps program in the Philippines which was the largest
one. Had 400 teachers going to 400 Philippine schools with the
exception of the fact that when the 400 got there, there are
about 100 schools missing.
Now, one can draw conclusions from that philosophically.
One can say, well, there goes the U.S. Government messing up
again. Or one can say, well, there is an entirely new program
we were sitting around on the floor basically with a lot of
paper trying to figure out what to do to startup something that
should never have taken place in this country before, and it
did not start easily. It did not start easily and we made
mistakes and we continue to make mistakes.
I can take you through 35 different mistakes that we have
made that were corrected as the program matured. For example,
we used to say the rule used to be that anybody, in order--
everybody went to training camp. It was the Philippines. It was
out in Hawaii, which was similar in some respects to what they
would expect to live in.
And the rule then was you have to show that you're--you
have to show that you cannot do the job in order not to qualify
to be a Peace Corps volunteer. Very low disqualification rates.
All kinds of people were getting in all kinds of trouble,
extreme moments of extreme happy, wrong people marrying the
wrong people. All kinds of bad things.
So we just said you have to show that you can handle being
a Peace Corps volunteer, or else you'll be eliminated from the
program which then eliminated 44 percent of all trainees. Those
are lessons learned from the program that is just beginning,
these two that I reflect on having in the first two years.
You know, Medicare, boy, I'd love to do a study on waste,
fraud and abuse on Medicare, and I say this with all due
respect to Senator Sununu, who I greatly respect for many
reasons, that there it's systemic. There are CDs that are sent
around to physicians saying how you could take advantage of
Medicare rates and get more for your money, et cetera. I think
that would be a little harder to do these days but
nevertheless, that was endemic.
And yes, it is true I can remember as can Senator Snowe
when the first head of USAC had to resign because the Congress
in our infinite wisdom and then carried by some real examples
where there was vendor waste, fraud and abuse, et cetera. These
stories caught on and this poor fellow who was absolutely
terrific had to resign. He just flat-out had to resign and he
was very good at doing his best. And you remember that, and it
was a tragic circumstance.
I would then say that the coverage of classrooms has gone
from in 1996 and 1997, probably when the program began or maybe
1998 when it was actually put into effect, from 14 percent of
classrooms to 93 percent of classrooms, in just over 6 or 7
years. This is absolutely phenomenal.
California started off with 15 percent of their classrooms
covered and they are now up to--Houston had zero through
wireless, they are now up to 100 percent. And so the story on
the good side is so much better than virtually any other
government program that I can even think of. I'm forced to look
at the public good as well as the problems.
You, Mr. Schlick, have detailed and I was going to ask you
this question, some of the things that the FCC and USAC and you
have made rule changes. And you are doing things, both of you,
to make major changes that are ongoing. They have been ongoing.
They continue to be ongoing. When your funding continues to be
terminated, I would think you would tend to ongo with it.
Then I would make the final point, Madam Chair, that waste,
fraud and abuse is not accomplished or found in the U.S.
Government. The money sits in the government and then it's sent
out to the schools. And sure, there was a period of time and
there may still be like some examples of where schools that
have not handled this before, little schools in rural parts of
Alaska or Louisiana or West Virginia, where they are not used
to handling the paperwork, where it's like you are going to get
a grant from the government you better have somebody that can
write a grant. And nobody ever does in rural communities.
And the same thing when you're starting up a program. You
make a mistake or a vendor takes advantage of the fact that you
cannot do it properly, and those things do occur. Nobody is
denying that. But if you're correcting them virtually all of
these areas are now covered, and the benefit to the United
States is I think immeasurable. And once again, as you said,
Mr. Schlick, that the nonpassage of the ADA or the passage of
the ADA, either way, would have absolutely nothing to do with
waste, fraud and abuse.
Mr. Schlick. That is correct, Senator. The Antideficiency
Act is essentially a budget mechanism, the purpose of which is
to prevent Federal agencies from coming to Congress in need of
additional money because they have overobligated. Here, of
course, contributions are made by the industry rather than by
direct congressional appropriation, and that's the thrust of
the Act, which is different from the focus on how the moneys
are used once they are made available.
Senator Rockefeller. Thank you, Madam Chair.
Senator Snowe. Thank you, Senator Rockefeller.
Just to followup on a couple of issues because I think it
is important to clarify to some extent, and I know that it's
somewhat understood. On the issue of the appropriations because
it's a big difference between an appropriation and getting
periodically throughout the year the revenues from a surcharge.
Is not that the way it is funded, Mr. Talbott, in this
instance, the Universal Service Fund? It's the surcharges that
are applied?
Mr. Talbott. Yes.
Senator Snowe. So you don't have the funds in hand
consistently throughout the year in order to honor those letter
of commitments, is that correct?
Mr. Talbott. They are ongoing.
Senator Snowe. The courts have recognized it's a unique way
of financing the programs so it's not dependent like other
programs on a one-time appropriation for the full cost of the
program. It's ongoing throughout the year, depending on how the
surcharges are collected, is that correct?
Mr. Talbott. That is correct.
Senator Snowe. That answers the problem. Now the question
is why OMB's directive has wreaked such havoc because it's
making the same, drawing the same correlation between a one-
time appropriation and ongoing surcharge. You're not going to
have all the money for those commitments there at any one time
but that you always have the money for that purpose at the time
in which you're honoring the commitments, is that correct?
Mr. Talbott. That is correct. Through the quarterly
contribution.
Senator Snowe. Right. So it seems to me that it just
doesn't make practical sense to be requiring the Fund to adhere
to the same standard as those agencies that receive a one-time
appropriation. Not to mention the fact that it's not a tax
revenue. I mean, it's not considered as taxes at least in the
court mandates. That's OMB originally. I understand it's a
different administration but the fact of the matter is it did
apply it.
The question is what is the net result? And that's the
issue here because ultimately it's had a net effect of placing
enormous uncertainty in the program. It has cost the program a
great deal of money and yes, we are to resolve the issues for
the long term, but there is a way in which to do all this.
It's not as if the FCC does not have broad legal
authority--and I'd like to follow that, Mr. Schlick, about what
you are doing to establish orderly audits, to make sure we are
not encountering any potential abuses. And I know, Ms. Dalton,
you have done a very good job in your analysis and as Senator
Rockefeller indicated, where there are problems, many of them
have been resolved.
And I think it's as a result of the FCC's high profile
cases in trying to ferret out the abuses is what got the
attention of OMB. Mr. Schlick, do you have broad authority
under the law, under the Telecommunications Act of 1996, to
administer the USF and do anything you need to do in order to
be sure that these moneys are being appropriately administered?
Mr. Schlick. We do have broad authority and to that I'd add
the statutes that the Department of Justice can enforce,
antitrust and other, to bring actions against those who would
abuse the program.
Senator Snowe. Are you using them?
Mr. Schlick. We are attempting to. I have outlined some of
the ways and let me just highlight those again. We are working
on criminal enforcement in many cases through the Department of
Justice, as well as civil. We are recovering funds and securing
criminal prosecutions. We have expanded our audit program. We
have an expansive audit program now, which Ms. Gelb can give
you further details if you're interested.
We have extended additional resources to oversight of the
program, performance measurements to be sure that the program
is doing what it is intended to do, and attempting to work with
USAC to develop procedures that are as tight as possible.
Mr. Talbott. We cooperate with USAC, with law enforcement
and have a close working relationship with the FCC in this
area. In fact, working with the FCC-IG, we are beginning to
launch a program for 700 beneficiary audits across all four
mechanisms. And I think the work that we are doing
cooperatively is addressing this issue, and we will continue to
address the issue because we want to solve the problem.
Senator Snowe. If this--if the ADA is back to the full USF
and I gather you are thinking it would once it expires at the
end of this year, would you have to suspend the high cost
program?
Mr. Talbott. We would have to raise----
Senator Snowe. Or double----
Mr. Talbott. Raise the contribution factor or suspend it.
Senator Snowe. 21, 25 percent?
Mr. Talbott. 21, 22 percent based on today's contribution.
Senator Snowe. What would be the net effect of that?
Mr. Talbott. Significant.
Mr. Schlick. Senator Snowe, I would expect that USAC would
follow our direction on that. And the direction we gave them in
September is the way the Fund is now being operated and is
consistent with the Antideficiency Act. So based on our view at
this point, we don't think that those sorts of modifications
will be necessary.
Senator Snowe. Mr. Talbott?
Mr. Talbott. We have that question in writing and we are
still waiting for a result on that.
Senator Snowe. Question you are providing to whom?
Mr. Talbott. To the FCC.
Senator Snowe. So you're not convinced that this--you want
to see their explanation?
Mr. Talbott. I'm not convinced at this point. Just need
clarification.
Senator Snowe. That's important. We know that OMB has not
responded, is that correct? Now, how does OMB feel about that?
Do they feel that it consistently applies to the ADA at this
point?
Mr. Schlick. Yes. The Antideficiency Act applies.
Senator Snowe. Do they think that it does? Do they think
currently the high cost low cost program does?
Mr. Schlick. You are correct. We are awaiting OMB's view on
that.
Senator Snowe. So you don't know whether or not they agreed
with your assessment?
Mr. Schlick. Yes. The response that Mr.----
Mr. Talbott. It refers to what was provided by the FCC on
October 2004 to the USF.
Senator Snowe. Ms. Dalton, in your report, I'd be
interested, Congress could give the FCC broad authority back in
the Telecommunications Act in 1996 when we were drafting all
this legislation to oversee the Universal Service Fund. You
understand all these issues obviously.
I think the question is, is there another way, I mean does
the ADA really fit in this case. I mean, in terms of being
applicable to the exigencies of this program, when you consider
how they get their funds, and whether or not it takes either a
period of adjustment for several years or whatever the case may
be, I really don't know, but what I do know is the net effect
of what has occurred.
And so again, it gets back to common sense and practicality
here. Not that we all disagree with the ultimate goal, but the
question is, can you achieve that goal in another way. And you
know, all I can say is somebody once said government does more
harm inadvertently than it does by design. And so I think
that's the bottom line of what has happened here with respect
to this program and the directive from OMB.
Ms. Dalton. With ADA, basically it's saying that you have
to have the resources available for the obligations that you're
committing to. But I think when you look at it, it was
designed--and the way it's interpreted at this point--for your
typical government program. And so it doesn't take into account
in many ways the uniqueness of this program in terms of the
resources it has available and how the money comes into the
program, as well as how it goes out. So there may in fact be
some other alternatives on how to address this issue.
For example, using a targeted approach, the anticipated
revenues coming into the program could be included as a
budgetary resource. Similarly, on the other side in the
commitments, USAC has had the experience over the last 7 years
of sending out commitment letters, but obviously not all of
those commitments are realized over the course of time. There
may be 20 percent unexpended. I don't know exactly what the
number is that the schools and libraries have not been able to
use because they have had savings out there.
So there is a way on the commitment side that hopefully
with some guidance from Congress, they may be able to say that
we are committing $100 million, but we recognize from
experience that only $80 million of that will actually be
spent.
Senator Snowe. Mr. Talbott, how would you respond to that?
Would you respond to what Ms. Dalton just said?
Mr. Talbott. FCC has allowed those funds to be rolled over
into the next year. If we have unused funds this year, they
apply to the next year. So we are only a year behind with those
funds.
Senator Snowe. You are only a year behind, is that what
you're saying?
Mr. Talbott. Yes. Behind.
Senator Snowe. Did you want, Ms. Gelb----
Ms. Gelb. There is a rollover rule that we created a couple
of years ago. If the question is every year the $2.2 billion
being spent, I think the answer is no. But there is an increase
potentially because of this rollover procedure that we have.
Senator Snowe. So the commitment is they may be higher,
they may not go up to the $2.2 billion. I see. But the
commitments are greater than that?
Mr. Talbott. Commitments are there. Then you adjust it.
Senator Snowe. I appreciate that. Senator Sununu?
Senator Sununu. Thank you. Couple of points of
clarification. First, it's my opinion or my concern is much
less for rural districts cited by Senator Rockefeller, rural
Alaska, rural Maine for that matter, much less with their
actions to effectively request and allocate and apply this
money than it is for, say, large urban districts and suburban
districts that don't necessarily need the resources as much as
those rural districts.
So I just want to be clear about where my concerns lie. I
want to make sure all of them are using it efficiently, but I
don't think anywhere in my remarks I suggested that I thought
rural districts did a poorer job than others in performing in
the use of these funds.
Second, with regard to Mr. Schlick, you made the
observation that the Antideficiency Act--in and of itself,
applying the Antideficiency Act did not address the issues of
waste, fraud and abuse. And I think that point is technically
correct and from your position, but from a practical matter let
us all be honest about what is happening here. We have
legislation that proponents of the E-rate program in its
current form want to see passed.
We see concerns for reform that I and many others I would
assume have. We see discussion about a telecommunications bill
and Universal Service reform that is also taking place. And
what is really the question is if the proponents want to exempt
this program from the ADA, then we have an opportunity to force
and require additional reforms to move perhaps in conjunction
with that legislation, or as part of a telecommunications bill.
So exemption from the ADA in and of itself may not address
these reform issues, but from a practical matter they are
absolutely, I think, should be on the table, part of this
discussion and considered as part of this discussion because
proponents of the program are obviously pursuing an exemption
from these accounting standards.
That's why I think it's important. But in and of itself,
the application of the ADA or lack of application, is not going
to address fraud and abuse, but this is an opportunity to make
sure the program works as well as it possibly can.
Mr. Talbott, a couple of final technical questions. I think
you were asked before, but I did not hear the specific
response. How much do you have on hand, does the corporation
have on hand now?
Mr. Talbott. Right about $3 billion. About $3.1 billion.
Senator Sununu. How much of that has been committed? I have
to ask that question.
Mr. Talbott. $2.5 billion is committed.
Senator Sununu. So you have already committed more than you
are allowed to spend?
Mr. Talbott. We are going back--that's how we get to that
number.
Senator Sununu. How much of that previous--is for previous
funding years and how much is for current funding years?
Mr. Talbott. I will get you that information. I do not have
those numbers with me.
Senator Sununu. Nobody back there has that number? It
actually seems like a both simple and important number.
Mr. Talbott. We will get it to you.
Senator Snowe. Thank you all very much for being here this
afternoon not to resolve these issues today, but hopefully we
will resolve it this year, so we can provide it and it's
essential. And also address the other issues that have been
discussed. This hearing is adjourned.
(Whereupon, at 3:55 p.m., the hearing was adjourned.)
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