Order Code IB98040
CRS Issue Brief for Congress
Received through the CRS Web
Telecommunications Discounts
for Schools and Libraries:
The “E-Rate” Program and Controversies
Updated November 10, 2004
Angele A. Gilroy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Administrative Structure
Restructuring — from SLC to SLD
Scope and Funding
FCC Funding Modifications
Restructuring and Funding Alternatives
Need for the Program
Eligible Services and Application Integrity
Program Status
Activities in the 108th Congress
Relevant Laws
LEGISLATION
FOR ADDITIONAL READING

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Telecommunications Discounts for Schools and Libraries:
The “E-Rate” Program and Controversies
SUMMARY
Passage of the Telecommunications Act
decision by various telecommunications
of 1996 (P.L. 104-104) codified the long
service providers to pass through and itemize
standing policy commitment to ensure univer-
universal service contributions on subscribers’
sal service in the provision of telecommunica-
bills focused further attention on this issue.
tions services. The 1996 Act also expanded
Concerns focus on : the administrative struc-
the concept to include, among other princi-
ture designed to implement the program; the
ples, that elementary schools and classrooms,
scope and funding level of the program; and
and libraries should have access to telecom-
the potential for application fraud, waste and
munications services for educational purposes
abuse.
at discounted rates. The Federal Communica-
tions Commission (FCC) was tasked with
Since its implementation the E-rate
implementing the universal provisions of the
program has been the subject of Congressional
act and on May 7, 1997, adopted its order
scrutiny, and while legislative measures to
detailing its guidelines.
modify the program have been introduced,
since the 105th Congress, none have been
Included within that order was the estab-
enacted. To date two measures, H.R. 1252,
lishment of the schools and libraries, or E-
which seeks to eliminate the program and S.
rate, program. Under this program telecom-
1264, which provides for funding for recurring
munications services, Internet access, and
FCC audits of the E-rate program, have been
internal connections will be provided at dis-
introduced in the 108th Congress. A series of
counts ranging from 20% to 90 % to eligible
reports, issued by the FCC’s Office of Inspec-
schools and libraries. The FCC established the
tor General, raising concerns about the finan-
Schools and Libraries Corporation (SLC), an
cial oversight of the program has, once again,
independent, not-for-profit corporation to
prompted scrutiny on a number of fronts. The
administer the program. As the result of a
House Energy and Commerce Committee has
January 1, 1999 reorganization, however, the
begun a “preliminary investigation” into the
SLC became the Schools and Libraries Divi-
oversight and compliance of the program and
sion of the Universal Service Administrative
has held two hearings on this issue. The FCC
Company (USAC) and ceased to exist as a
as well as the USAC have also initiated ac-
separate corporate entity. The program re-
tions to examine and strengthen the program
ceives no federal funds but is funded by man-
and the Department of Justice has taken action
datory contributions from interstate telecom-
to investigate and prosecute E-rate fraud.
munications service providers. Many of these

providers have chosen to pass through univer-
The yearly program funding level, which
sal service charges directly to consumers and
was established by the FCC in May 1999,
earmark a universal service charge on subscrib-
remains at $2.25 billion. For the first six years
ers’ bills.
of the program almost $12.9 billion in funds
have been committed.
Although most support the concept, the
FCC’s implementation of the schools and
libraries provisions of the 1996 Act generated
significant and diverse controversy. The
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
Since its inception the FCC implementation of the schools and libraries, or E-rate
program, has come under significant congressional scrutiny. Despite this oversight and the
introduction, since the 105th Congress, of a range of bills to modify the program no
legislation has been enacted. To date, two measures (H.R.1252 and S. 1264) specific to the
E-rate program have been introduced in the 108th Congress. However, a series of semi-
annual audit reports issued since October 2002 by the FCC’s Office of Inspector General
(OIG), stating that the E-rate and other universal service programs were lacking adequate
financial oversight, has, once again, focused attention on the program. The House Energy and
Commerce Committee has begun a “preliminary investigation” into these charges petitioning
the USAC and the FCC as well as selected companies active in the program for information.
The Committee also requested that the GAO reexamine the E-rate program. A series of
hearings to address alleged incidents of fraud, waste, and abuse were held by the House
Commerce Committee’s Subcommittee on Oversight and Investigations on June 17, July 22
and September 22, 2004. Similarly the Senate Commerce Committee held a hearing on
October 5,2004 examining E-rate waste, fraud, and abuse allegations.
Senate Commerce Committee Chairman McCain introduced S. 1264, which contains
among its provisions those that authorize funds for recurring FCC audits of the E-rate
program. S. 1264 was reported out of the full committee on September 3, 2003. The FCC
as well as the USAC have also initiated actions to examine and strengthen the program and
the Department of Justice has convened a task force and grand jury to investigate and
prosecute E-rate fraud.
Over the first six years of the E- rate program, almost $12.9 billion in funds have been
committed. Funding commitments for Year 2004, the seventh and current year of the
program, totaled $764.3 million as of July 29, 2004. E-rate funding commitments were
suspended in early August to enable the program to comply with a new accounting standard.
According to USAC it is anticipated that funding commitments will resume by the end of
November.
BACKGROUND AND ANALYSIS
Passage of the Telecommunications Act of 1996 (P.L.104-104) codified the long-
standing commitment by U.S. policymakers to ensure universal service in the provision of
telecommunications services. The universal service concept, as originally designed, called
for the establishment of policies to ensure that local telephone service is available to all
Americans by ensuring that rates for residential consumers as well as consumers in high cost
areas were kept reasonable. Congress, through the 1996 Act, not only codified this concept,
but also expanded the concept of universal service to include, among other principles, that
elementary and secondary schools and classrooms, and libraries should have access to
telecommunications services for educational purposes at discounted rates. (See Sections
254(b)(6) and 254(h)of the 1996 Telecommunications Act.)
Consistent with provisions contained in the 1996 Act the FCC, guided by the
recommendations of a federal-state joint board, was assigned the responsibility for
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implementing these universal service guidelines. On May 7,1997, the FCC adopted its order
implementing the universal service provisions and principles set forth in the act. Included
within that order was the establishment of the schools and libraries, or E(education) - rate,
program. Under this program telecommunications services, Internet access, and internal
connections are to be provided at discounts ranging from 20% to 90 % to eligible schools and
libraries. Therefore schools and libraries do not receive direct funding from the program but
monies from the fund are used to reimburse the vendors who supply the services to the
program’s participants.
This issue brief does not attempt to explain the specifics of the E-rate program. It solely
addresses the controversial issues surrounding the program’s implementation and subsequent
legislative measures introduced to address these issues. An additional issue, concern that
minors may gain access to “inappropriate” material through the Internet has also had an
impact on the E-rate program. This issue goes beyond the scope of this issue brief, but is
addressed in CRS Report RS21328, Internet: Status Report on Legislative Attempts To
Protect Children from Unsuitable Material on the Web, by Marcia Smith and Amanda
Jacobs.
Although most policymakers support the universal service concept, the FCC’s
implementation of the schools and libraries provisions of the 1996 Act has generated
significant controversy. The decision by various telecommunications service providers to
pass through and itemize universal service contributions on subscribers’ bills has focused
further attention on this issue. Oversight of the schools and libraries program by the 105th
Congress became intense with congressional comments ranging from those who called for
the abolishment of the program, to those who supported of the program but felt it needed
major revisions, to those who continued to support the program as funded and designed.
Concerns regarding the schools and libraries program focus on: the administrative structure
designed to implement the program; the scope and funding level of the program; and the
potential for fraud, waste, and abuse.
Administrative Structure
The FCC established the Schools and Libraries Corporation (SLC), an independent not-
for- profit corporation, to administer the universal service program for schools and libraries.
Since its inception, however, the SLC became the focus of a wide range of concerns which
eventually led to the reorganization of the administrative structure of the E-rate program.
(See Restructuring — from SLC to SLD, below.) Some questioned the need for the SLC
and expressed concern that it only adds “new levels of bureaucracy” and siphons away
money that could be used to fund universal service objectives. Concerns have also been
expressed over the size of the SLC’s first year operating budget ($18.8 million) as well as
employee compensation levels. Of greater significance was the debate over whether the FCC
had exceeded its authority when it directed the establishment of the corporation.
The General Accounting Office (GAO) in response to a November 1997 request from
Senator Stevens, reviewed the FCC’s action establishing the SLC. The GAO concluded, in
its February 10, 1998 response, that the FCC had exceeded its authority when it directed the
creation of the SLC, in violation of the Government Corporation Control Act (P.L. 97-258).
FCC Chairman Kennard disagreed with the GAO’s conclusion and stated that the FCC was
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within its authority, based on its general authority under Section 4(i) of the Communications
Act, to establish this corporation. However, continued controversy over the legality of and
the need for the SLC led to congressional action to modify the administrative structure of the
E-rate program.
An amendment added to the Senate’s 1998 supplemental appropriations bill (S. 1768),
by Senator Stevens, addressed the administration of the schools and libraries and rural health
care portion of the universal service fund. This amendment, which was approved by the
Senate by voice vote on March 24, 1998, would have required the FCC to abolish the SLC
and its rural health care counterpart, consolidate them into a single entity, and cap the
compensation given to its officers and employees. The FCC was required to submit to
Congress by May 8, 1998, a report detailing the revised structure for this entity, and
additional information on the contributions to, and requests for funding from the schools and
libraries program. These provisions were not included in the text of the final bill (H.R. 3579),
which was signed into law on May 1, 1998 (P.L. 105-174). However, the conference
committee’s “joint explanatory statement” did make mention of these provisions and stated
that “while the conference agreement does not include” the provisions relating to universal
service contained in S. 1768 the conferees “expect that the FCC will comply with the
reporting requirements in the Senate bill, respond to inquiries regarding the universal service
contribution mechanisms, access charges, and cost data, and propose a new structure for the
implementation of the universal service programs.” The joint statement also concurs with
the provisions relating to a compensation cap for employees administering the program. The
FCC complied with the provisions contained in S. 1768 and submitted its report to Congress
on May 8, 1998.
Restructuring — from SLC to SLD. In its May 8 Report to Congress (FCC 98-85),
and a subsequent action of June 12, 1998 (CC Docket No. 96-45), the FCC: proposed the
elimination of the SLC as a separate entity; lowered the compensation level of officers and
employees of the SLC; and requested that Congress grant specific statutory authority for the
newly proposed restructuring. The FCC requested that the administrative entities affected
by this proposal submit a reorganization plan to implement these changes for FCC approval.
The restructuring plan was submitted to the FCC on July 1, 1998 and after receiving
public comment was approved, with modifications, by the FCC on November 19, 1998. The
approved plan, which went into effect on January 1, 1999, calls for the administration of all
forms of federal universal service support to be consolidated in a single entity, the Universal
Service Administrative Company (USAC). The USAC, the entity that among other duties
currently administers the high cost and low income portions of the universal service
program, was to become the permanent, sole administrator of all universal service programs,
subject to FCC determination, after one year, that the USAC is administering support in an
“efficient, effective, and competitively neutral manner.” The SLC would become the Schools
and Libraries Division (SLD), one of three divisions within the USAC. The USAC CEO
would manage all three divisions. The USAC will continue to function as a subsidiary of the
National Exchange Carrier Association (NECA), and the FCC will review, after one year,
whether the USAC should be divested from the NECA. This reorganization plan, became
effective as of January 1, 1999 and the independent SLC ceased to exist. (A copy of the
approved reorganization plan can be found on the FCC’s web page at [http://www.fcc.gov/
wcb/universal_service/usacjuly.pdf].)
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As a result of the reorganization a single entity, the USAC, is now responsible for
administering all the telecommunications universal service programs for the FCC, including
the schools and libraries or E-rate program. The USAC, a not-for-profit subsidiary of the
National Exchange Carrier Association, is governed by a Board of Directors composed of
a broad range of industry and non-industry interests. Committees of the USAC Board govern
each division and each committee of the USAC Board oversees the budget of its respective
Division and reports to the overall USAC Board. The USAC Board has the authority to
review any action taken by a committee. The SLC no longer exists and has become one of
three divisions of the USAC known as the Schools and Libraries Division (SLD). Although
no longer a separate entity , the SLD essentially carries out the same functions as the former
SLC.
While continuing to uphold its legal right to create a separate entity to administer the
schools and libraries fund, a position contrary to a February 10, 1998 GAO opinion, the
FCC has requested that the Congress provide specific statutory authority for the restructuring
to eliminate any question concerning the USAC’s legal status and authority.
The FCC also directed that effective July 1, 1998, the level of compensation be lowered
for the officers and employees of the SLC. Compensation cannot exceed the rate of basic
pay for level I of the Federal Executive schedule, which is currently $151, 800 a year. (The
May 8, 1998 Report to Congress, and the subsequent June 12, 1998 order are available at
the FCC’s website at [http://www.fcc.gov].
Scope and Funding
Although federally mandated, the E-rate program, as designed by Congress, is funded
by telecommunications service providers. All interstate telecommunications providers, as
defined by the FCC, are required to contribute to the program. Contributions are based on
a percentage of both interstate and international revenues. This percentage or “contribution
factor” is calculated by the FCC’s Common Carrier Bureau on a quarterly basis and varies
depending on the anticipated funding needs for the program. Many telecommunications
service providers have chosen to pass through these costs directly to their subscribers
ultimately making consumers of telecommunications services bare the costs of the program.
Congressional concerns regarding funding rest on both the scope of the services
included in the program and the funding level established to meet the program’s needs. The
$2.25 billion per year funding ceiling established by the FCC to implement the schools and
libraries discount and the range of services included in the program have generated
significant concern.
While most support the basic concept of the program, many have questioned the need
for a multi-billion dollar funding level and have expressed concern that the range of services
included in the program goes beyond congressional intent. Critics feel that the program, as
implemented by the FCC, is too extensive and will result in the funding of “gold plated”
systems. Coverage of sophisticated equipment such as routers, hubs, and network file
servers, as well as the inclusion of internal connections (i.e., wiring to connect classrooms
within a school), has been criticized. Opponents claim that the extensive scope of the
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program goes beyond the program’s intent and has resulted in an unnecessarily high funding
level. Those critical of the program as implemented support a more modest approach.
Opinions have also been expressed that the FCC’s time frame for accomplishing the program
is too short and overly ambitious and should be lengthened, thereby reducing the amount of
funding needed yearly.
On the other hand, many supporters of the E-rate program feel that the range of services
covered and the funding level should remain or, if anything, be expanded. A decrease in
funding levels or scope is viewed as a retreat to the commitment Congress made to schools
and children. Furthermore, the $2.25 billion funding ceiling is not considered unreasonable,
they state, given the revenue stream of the industry. The inclusion of internal wiring they
note is consistent with the intent of Congress and critical to the program’s success. They cite
specific reference in the universal service provisions to access by “school classrooms” to
advanced telecommunications services to bolster their claim. Some also support expansion
of the program to include funding for time of use on the Internet. This they feel is
particularly critical for economically disadvantaged schools since connection is of little
value, they claim, if there is no funding for usage time. Proposals to expand the
organizations covered by the program have also been discussed.
Concern has also been expressed that the FCC has given priority to the schools and
libraries facet of the program at the expense of other, more primary aspects of the universal
service mandate, such as the “high cost” fund. The primary cornerstone of universal service
has been to ensure that telephone rates remain reasonable by assisting telephone providers
in high cost, typically rural, areas. The emphasis on the schools and libraries some claim,
has skewed the intent of Congress and diverted attention away from high cost concerns. The
“high cost” program could suffer, they state, if contributors are forced to shift resources to
the E-rate program. Some favor suspending the E-rate program and addressing all aspects of
universal service simultaneously in an integrated proceeding.

FCC Funding Modifications. Concerns over the direction the FCC is taking in
implementing and funding the universal service provisions of the 1996 Act in general, and
the schools and libraries program in particular, prompted the FCC to reconsider its actions
regarding universal service support for schools and libraries. The FCC released a public
notice (CC Docket No. 96-45) on May 13, 1998, seeking comment on a proposal to phase-in
funding for the schools and libraries portion of the Universal Service Fund. After
examination of the comments, the FCC adopted an order on June 12, 1998, that modified
funding aspects of the E- rate program. Among other actions the FCC adjusted downward
the amounts that would be collected to fund the E-rate program through June 30, 1999.
More specifically the FCC, in its June 12, 1998 order (CC docket No. 96-45), made the
following modifications to the funding level and disbursement rules of the E- rate program:

! revised the funding year from a calendar year (January 1 - December 31) to
a fiscal year (July 1 - June 30) cycle. This is accomplished by extending the
first year funding cycle by six months through June 30, 1999. This
modification, according to the FCC, will synchronize the program with the
budgetary and planning cycles of most schools and libraries as well as align
changes in universal service contribution levels with local exchange carrier
annual access tariff filing schedules.
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! froze the amount of funding at current rates. Program administrators were
directed to collect and disperse no more than $325 million per quarter for
the third and fourth quarters of 1998 and the first and second quarters of
1999. Although the cap for the program remains unchanged, at $2.25
billion, when added to the $625 million collected in the first half of 1998,
the available funding for the first 18 months of the program will total no
more than $1.925 billion.
! revised disbursement rules to insure that the most disadvantaged schools
and libraries get priority for support. Based on a preliminary review of
pending applications demand for discounts is estimated at $2.02 billion, an
amount exceeding the ceiling of $1.925 billion for disbursements. Since
funding will be less than demand, the FCC has adopted rules to prioritize
distributions. When demand exceeds the level of funding all eligible
schools and libraries will receive support for recurring services such as
telecommunications services and Internet access, but only the most
economically disadvantaged applicants will receive support for internal
connections.
! changed the second year application cycle to begin no later than October 1,
1998, rather than July 1, 1998. Note, the application window for the second
funding year (July 1, 1999 - June 30, 2000) was delayed. It opened on
December 1, 1998 and closed on April 6, 1999.
The FCC’s May 27, 1999 decision to fully fund the second year of program at the $2.25
billion cap generated significant controversy. In a 3-2 split decision the FCC Commissioners
decided that, given the level of demand as determined by a review of pending applications,
the second year of the program should be funded at its maximum level. This is in contrast
to the annual funding level of $1.3 billion for the first year of the program. This significant
increase reignited the debate which occurred in the 105th Congress regarding the need for,
the administration of, and the funding source and level of, the program. The FCC, in May
1999, established and continues to maintain, a yearly funding level cap of $2.25 billion.
Restructuring and Funding Alternatives. Changes in the administrative structure
of the program, while welcomed by many, have not satisfied a number of critics. An
alternative administrative structure was offered in legislative initiatives (H.R. 1746 and S.
1004) introduced in the 106th Congress by Representative Tauzin and Senator Burns. These
bills, (which also contain provisions addressing funding) called for the elimination of the E-
rate program and the transfer of authority for the program from the FCC. The E-rate program
would be replaced by a Telecommunications Technology Trust Fund and would be designed
as a state block grant program. The Department of Commerce’s National
Telecommunications and Information Administration (NTIA) would become its
administrative entity.
This approach, according to its supporters, would alleviate the present legal questions
regarding FCC authority to establish entities and would give the program to an agency
familiar with the process of administrating grant programs. Supporters of the presently
designed E-rate program have expressed concerns that this approach would remove the goals
of the schools and libraries program from the universal service concept. Furthermore, they
claim, it would have a severe disruptive impact on the existing program, would result in a
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more burdensome application process, and would make the program dependent on
appropriated funds.
Debate over funding issues has also focused on what the appropriate funding
mechanism for the E-rate program should be. One suggested source for funding for the E-
rate program is the revenues collected from the 3% federal telephone excise tax. The federal
telephone excise tax, which is currently assessed on consumers’ local and long distance
telephone service, generates approximately $5 billion in yearly revenues. The revenue, while
collected from consumers by telephone companies, is forwarded to the U.S. Treasury and
added to general revenues. Three measures, H.R. 727, S. 1004, and H.R. 1746 to use
revenues generated from that tax to address the funding issue were introduced in the 106th
Congress.
This approach, sponsors claim, would eliminate concerns over the legality of the present
funding mechanism and would result in funding for the program without adding new upward
pressures on consumers’ telephone bills. Furthermore, sponsors state, expenditures for the
program would be made explicit through a capped tax that is currently listed on telephone
bills. While interest has been expressed in examining this proposal, a number of questions
and concerns regarding the funding aspects of the measures remain. Included among these
are: concern that it would, at a minimum, cause disruption of a presently functioning
program; concern that the funding source for the program is not permanent; questions
whether money generated by taxes can be used to support private or parochial schools; and
the potential negative impact of use of general funds on other government outlays.
Need for the Program. Despite the changes made to funding levels and
administrative structure a more fundamental question rests with the debate over whether the
E-rate program, as implemented, is needed. Those who question the need for such a program
claim that voluntary private sector initiatives such as “Net Days” as well as other federal
programs alleviate the need for the E-rate program as designed. Some also question whether
the alleged benefits that such access to technology has on education can be substantiated.
However, supporters of the E-rate program cite its high level of demand (39,785 applications
and an estimated funding request of $4.3 billion for program year 2004) as proof that existing
federal programs and private sector initiatives are not meeting the needs of schools and
libraries. Citing statistics contained in a Commerce Department study, A Nation on Line:
How Americans are Expanding Their Use of the Internet, that show a decreasing but
continuing disparity in access to computers and online services by race and income,
supporters also claim that this program is needed to help bridge the divide between
information “haves and have nots” and ensure access to communities that may otherwise be
left behind. Access to computers and on line services is vital, they claim, to ensure that the
upcoming generation is prepared to fill the growing number of computer-related jobs. (For
background on technology in education see CRS Report 96-178.)
Some question whether the E-rate program as designed duplicates or overlaps existing
federal programs. In an attempt to address this concern then House Commerce Committee
Chairman Bliley (106th Congress) and House Education Committee Chairman
Goodling(106th Congress) asked the General Accounting Office (GAO) to undertake an
examination of federal programs, previously identified by the GAO at the request of Senator
Stevens, that may in some way be duplicative. The report was directed to examine a number
of areas including the potential for duplication and potential problems associated with fraud,
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waste, and abuse. The GAO report (Telecommunications Technology: Federal Funding for
Schools and Libraries), which was released in August 1999, identified 35 federal programs
that could be used as a source of support for telecommunications and information technology
by libraries or elementary or secondary schools in FY1998; ten programs specifically
targeted technology while the remaining 25 included technology as a possible use of funds.
Based on the GAO’s review it found that there are “similarities” among the programs, but
the GAO “... did not identify instances where two programs were designed to provide
identical services to identical recipients.” Furthermore, the GAO did not “identify
information that indicates that fraud, waste, and abuse are systemic or widespread problems”
but did find instances of such problems with individual guarantees. The GAO noted that
action was taken against these individual guarantees and to prevent reoccurrence of such
problems. The GAO did not examine the implementation of each program or conduct its
own audits but relied on interviews, agency program documents, and reports to reach its
conclusions.
Eligible Services and Application Integrity
Directly related to the funding issue are concerns over the potential for possible fraud,
waste, or abuse of the program. The ability to ensure that only eligible services are funded
and that funding is dispersed at the proper level of discount has been questioned.

One concern has focused on possible confusion by applicants over the range of services
considered eligible for the program and the fear expressed by some that pending applications
contain requests for ineligible services. Confusion over what services and related expenses
are covered by the program prompted the FCC to issue a public notice clarifying this issue.
The FCC, in a June 11, 1998 order (CC Docket No. 96-45), stated that services eligible for
discounts include “...All telecommunications services, Internet access, and internal
connections provided by telecommunications carriers, as well as Internet access and internal
connects provided by non-telecommunications carriers.” The FCC also clarified what
services are not eligible for discounts. Services not eligible for discounts include purchases
of personal computers, fax machines, modems, telephone handsets, as well as teacher
training, and expenses related to the installation of wiring (such as removing asbestos, tearing
down walls, repairing carpets, or repainting). The FCC reiterated that schools and libraries
are required to select “the most cost effective bid” when examining competing bids and that
“price should be the primary factor.” However other relevant factors that can be considered
include “prior experience; personnel qualifications, including technical excellence;
management capability, including schedule compliance; and environmental objectives.”
Concern that only eligible services be funded also brought up issues relating to
application integrity. Critics of the program, as well as some supporters, questioned whether
the necessary mechanisms are in place to ensure that only eligible services receive funding
and that such funding is given at the proper level of discount. Although the FCC’s
clarification order has helped to resolve confusion over eligibility criteria, critics said it had
come too late for the 30,000 application that had already been filed. Concern was also
expressed that the FCC’s decision to allow other “relevant factors” to be considered in the
selection process, not solely cost, could result in inflated costs for the program as the lowest
bidder may not necessarily be chosen. These other factors are ambiguous at best, critics
claim, and could be used to manipulate the selection process.
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Concerns about fraud and abuse are shared by both critics and supporters of the
program. Some critics of the program claim that the program as devised is fraught with
problems and at a minimum should be suspended until additional safeguards are in place.
Supporters also want to ensure integrity of the program since the funding of ineligible
services or unreasonable administrative costs will only decrease available funding to meet
the program’s goals. Many supporters, however, do not view this as a major problem and
feel that the program as devised is basically sound. They point to the willingness of the SLD
and the FCC to take further steps to ensure program integrity such as the establishment of
a program integrity hotline (888-203-8100) to report potential instances of waste, fraud, or
abuse of program rules as well as the creation of a Year 3 Task Force to evaluate and make
recommendations to improve the program. (See [http://www.ala.org/cfapps
/archive.cfm?path=oitp/year3.html] for an executive summary of the task force’s
recommendations.)
In an attempt to ensure the integrity of the E-rate program and assess the ability to
properly audit applications Senator McCain, requested that the GAO initiate a formal
investigation and audit of the Schools and Libraries program. Results of the GAO assessment
were released at a Senate Commerce Committee hearing held on July 16, 1998. Based on
its review the GAO recommended that prior to making any funding commitments, the SLC
should: conduct a statistically valid random sample of applications to assess the effectiveness
of its procedures, and if needed take corrective action; finalize procedures, automated
systems, and internal controls for the post-commitment phase of the program’s funding cycle;
obtain a report from its independent auditor verifying that the SLC has developed an
appropriate set of internal controls to mitigate against waste, fraud, and abuse; and conduct
a review of the technology plans of applications identified as “high risk” to determine
whether applicants have the resources to effectively use the services requested and are in
compliance with eligibility criteria.
The E-rate program administrator announced that it would comply with all of the
GAO’s recommendations prior to the commitment of any funds and incorporate other
recommendations based on an FCC-required independent audit of its procedures conducted
by an independent accounting firm. A follow-up report, conducted by the GAO at the request
of Senator McCain, assessing the program’s progress in implementing the GAO’s
recommendations was released in March 1999 (Schools and Libraries Program: Actions
Taken to Improve Operational Procedures Prior to Committing Funds). According to the
GAO assessment the SLD “...has taken actions to implement the key recommendations that
we believe are needed to be completed prior to issuing any funding commitment letters to
applicants.” However, the GAO did express concern over the adequacy of the procedures
used to ensure applicants’ self certified discount levels are accurate. It also noted that “... the
program still faces major challenges as it moves into new operational areas” and
recommended that “... close oversight by the FCC will be especially important...” In addition
the GAO noted that the FCC has yet to implement the earlier GAO recommendation “... to
develop adequate goals, performance targets, and measures for the program.” The president
of the SLD stated that based on the experienced gained after the first year of the program and
in response to the FCC Chairman’s direction the SLD “ ...will implement new, tighter
procedures for evaluating discounts.” Furthermore, the FCC, according to the GAO report,
acknowledged the importance of and intent to address the recommendation to establish
adequate performance goals and measures for the program, but did not indicate a time frame
for such action.
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The GAO continued to express concerns regarding the administration of the program
in its report, Schools and Libraries Program: Application and Invoice Review Procedures
Need Strengthening, issued in December 2000. According to the GAO their audit (which
covered the first two years of the program) identified “millions of dollars of funds
incorrectly committed to ineligible products and services” and despite the extension of
deadlines for eligible applicants and vendors “a significant amount” of eligible committed
funds have yet to be paid out. The GAO report cited a total of $1.3 billion (35 percent) of
funds that while committed, were not dispersed as of the end of August 2000. The GAO also
cited “weaknesses in the SLD’s e-rate application review process [which] resulted in
commitments of funds for ineligible products and services.” According to the FCC/USAC
only 10 percent of the commitments for GAO-identified ineligible services have been
dispersed and that any that have been dispersed will be recovered. While the reasons why
committed funds remain unused are likely to vary with each applicant the FCC/USAC “will
undertake an analysis of the factors leading to funds being committed to applicants, but not
ultimately disbursed.” While acknowledging that the SLD has taken steps to alleviate some
of these problems the GAO has made a number of suggestions for corrective procedures and
recommended that they be enacted prior to the award and distribution of funds for Year 4 of
the program. According to the GAO report the FCC and the USAC, after reviewing the draft
of the report, have begun to implement, and in some cases have already completed action on,
the recommendations. The GAO’s most recent follow-up report, Schools and Libraries
Program: Update on E-Rate Funding, issued in May 2001, shows that the amount of
undistributed funds is declining. According to data from January 2001 the amount of
uncommitted funds for the first two years of the program has decreased to $880 million (24
percent) of the $3.7 billion committed to applicants compared to the earlier $1.3 million (35
percent) in unused funds. Furthermore the FCC stated that more recent data, as of April
2001, showed that the amount of unused funds decreased further to $774 million. (See
Program Status, below, regarding the FCC’s June 13, 2002 decision on what to do with
undistributed funds.) Representatives Tauzin and Greenwood requested on December 2,
2003 that the GAO initiate another review of the E-rate program to examine the program’s
current status.
Despite these favorable trends, an audit report issued by the FCC’s Office of Inspector
General (OIG) stating that the E-rate and other universal service programs were lacking
adequate financial oversight has focused attention on the program. (OIG Semiannual Report
issued October 31, 2002. According to the report the OIG cited three concerns regarding
the program: lack of resources for adequate oversight; inadequate competitive bidding
requirements; and no suspension or debarment process. The OIG is seeking additional
resources to focus more attention on the E-rate and other universal service programs and
announced creation of a new position, assistant inspector general for USF oversight. That
position was filled by Thomas D.Bennett on March 10,2003. The OIG’s follow-up semi-
annual report released June 3, 2003, covering the period October 1, 2002-March 31, 2003,
while citing some progress, continued to express concerns that “...the [E-rate] program may
be subject to an unacceptably high risk of fraud, waste, and abuse through noncompliance
and program weaknesses.” The December 2003 OIG report, covering April 1 through
September 30, 2003, continued to express concern that additional resources and funding are
needed to provide the assurance that the program is protected from fraud, waste and abuse.
The most recent OIG report, released on June 8, 2004, which covers the period from October
1, 2003 through March 31, 2004, continued to express “... numerous concerns” about the E-
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Rate program. Copies of audit reports are available at the OIG web page at
[http://www.fcc.gov/oig/].)
The OIG reports have prompted scrutiny of the E-rate program on a number of fronts
including the USAC , the FCC, the Department of Justice, and the Congress.1 The USAC’s
School and Libraries Division established a Task Force on the Prevention of Waste, Fraud,
and Abuse to identify areas where improvements can be made in the administration of the
program. The Task Force, composed of 14 members of the applicant and service provider
communities, issued a final report, in September 2003, containing its recommendations and
forwarded them to the FCC for consideration.
The FCC in a April 23, 2003 action (CC Docket 02-6) adopted new rules to improve
the E-rate program. These rules seek to improve program administration and oversight and
create a more efficient application process. The measures adopted include barring, for three
years or if warranted for a longer period, persons convicted of criminal violations or held
civilly liable for misconduct in conjunction with the program; clarified that requests for
duplicative services will not be funded; adding voice mail as an eligible service; making
wireless services eligible for support in the same manner as wireline services; developing a
pilot program to create an online list of eligible equipment to wire schools; and allowing
applicants the option of either paying their service provider the full discounted cost of
services received or pay the full price and then receive reimbursements. (See Federal
Register, vol 68, no.119 (June 20, 2003), p.36931.) In its first action related to these rules
the FCC, in a December 2003, debarred three individuals from participating in the E-rate
program for three years. The FCC also adopted a further notice of proposed rulemaking (FCC
03-101) seeking comment on measures to further strength and improve the operation of the
program. Issues to be examined include procedures to carry forward unused program funds
to subsequent funding years; the feasability of establishing an online computerized eligible
services list for telecommunications services and Internet access; rules pertaining to when
applicants file a technology plan; and whether to further expand upon the circumstances
under which persons may be barred from the program. (See Federal Register, vol 68, no. 119
(June 20, 2003), p. 36961.)
Further action was taken by the FCC in December 2003 when it adopted additional
steps to improve the administration of the E-rate fund. Steps taken include prohibits, with
limited exceptions, the transfer of equipment purchased with E-rate funds to other locations
for three years after purchase; formalizes and clarifies the process for the annual update of
the list of services eligible for support; and limits the support for upgrading or replacing
internal connections to no more than twice every five years, but exempts basic maintenance
services. The FCC also released approximately $420 million in unused funds from prior
years for disbursement in funding year 2003. (See Federal Register, vol 69, no. 27 (February
10, 2004), p. 6181.) In a further order released in August 2004, which takes effect October
13, 2004, the FCC, among other actions: set a five-year deadline to complete FCC
investigations into alleged violations; directs the USAC to fully recover funds disbursed to
beneficiaries that do not comply with program rules, unless the administrative costs outweigh
the cost of recovery; bars beneficiaries or service providers from receiving additional benefits
if they have outstanding obligations to repay monies into the fund; eliminates the current rule
1 See Activities in the 108th Congress, below, for a review of Congressional action.
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that permits the offset of amounts disbursed in violation of the program against other funding
commitments; modifies current requirements regarding the timing, content and approval of
technology plans; and amends beneficiary certification requirements. (See Federal Register,
vol. 69, no. 176 [September 13, 2004], p.55097.).
In addition the FCC also adopted a further rulemaking seeking comment on additional
measures including changing the current discount matrix; placing a ceiling on the total
funding an applicant can request on an annual basis; strengthening requirements for
technology plans; and additional record keeping requirements. (See Federal Register, vol 69,
no.27 (February 10, 2004), p. 6229.).
The antitrust Division of the Department of Justice (DOJ) has established a task force
and grand jury to investigate E-rate program fraud and has indicted a former contractor for
bid-rigging; in an earlier separate incident a contractor was convicted of program fraud. In
further action, in March 2004, the DOJ indicted five people on charges of fraud alleging that
they falsely claimed to have provided E-rate services to schools in Milwaukee and Chicago
collecting $1.2 million from the program. More recently the Justice Department announced
on May 27,2004 that a subsidiary of NEC pleaded guilty to defrauding the program and
agreed to pay a $20.6 million fine.
Program Status
During the first five years of the program(covering funding years from January 1998
through June 30, 2003), $10.3 billion of funds have been committed. (For more detailed
statistics on the breakdown of funding, including data by state, see the program’s website
[http://www.sl.universalservice.org].)
The Year 2003 filing window, covering July 1, 2003 through June 30, 2004, closed on
February 6, 2003. Initial analysis of the 41,146 applications filed during the open window
estimate demand at $4.7 billion. The program funding level remains at $2.25 billion,
however, the FCC directed that unused funds from prior years be rolled over into FY2003.
As a result, as of July 22, 2004, $2.6 billion has been committed to 33,887 applicants.
The filing window for Year 2004, covering July 1, 2004 through June 30, 2005, closed
on February 4, 2004. Demand, based on 39,785 requests received in the filing window, is
estimated at $4.3 billion. According to the FCC an estimated $150 million of unused funds
from Program Year 2001 will be added to the yearly $2.25 billion funding cap. Funding
commitments for Year 2004, the seventh and current year of the program, totaled $ 764.3
million to 22,109 applicants, as of July 29, 2004. FCC-required program compliance with
a new accounting standard resulted in the suspension of funding commitment letters in early
August. According to USAC it is anticipated that funding commitments will resume by the
end of November.
The FCC initiated a proposed rulemaking to seek comments on a proposal to revise its
method of distributing e-rate funds under certain circumstances. Under the proposal, when
there is insufficient funding to fulfill all requests for internal connections, those entities who
did not receive funding commitments for internal connections for the previous year would
be given priority, in order of discount level. Funding for telecommunications services and
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Internet access would not be affected by this proposal. The FCC also sought comment on
proposed administrative rules to provide additional time for recipients to implement contracts
or agreements with service providers for non-recurring services. (See Federal Register,
vol.66, no.89 (May 8, 2001), pp. 23204-232048.) The FCC concluded, in a June 27, 2001
decision, that it would not change funding priority rules for Year 4, but will continue to
reserve the right to make modifications for future years of the program. The FCC, however,
did modify the rules to extend the deadline for the receipt of non-recurring services from
June 30 to September 30 following the close of a funding year.
In a further action the FCC, on January 25, 2002, released a notice of proposed
rulemaking (NPRM) (CC Docket 02-6) to review certain rules relating to the schools and
libraries program. (See Federal Register, vol.67, no.33 (February 19, 2002), pp.7327-7341.)
According to the FCC the goals of this proceeding are to: consider changes to fine-tune the
rules to improve program operation; ensure that the benefits of the program are distributed
in a manner that is fair and equitable; and improve FCC oversight to ensure that the goals are
met without waste, fraud, or abuse. Among the issues considered was what to do with
schools and libraries program funds that were committed but never used. The FCC, in a June
13, 2002 order, addressed this issue. The Commission concluded that unused funds, that is
funds awarded to applicants through the schools and libraries program but unclaimed, will
be applied to the general universal service fund, to help stabilize the amount of contributions,
for no more than the next 3 quarters, ending March 2003. After that date all schools and
libraries program funds unclaimed by approved applicants will be solely distributed to the
schools and libraries program for disbursement in subsequent years, thereby increasing the
amount of available funds for the program. Other issues, including those relating to the
strengthening of financial oversight measures, were also considered. ( See Eligible Services
and Application Integrity, above, for a discussion of FCC action related to those issues.)
Activities in the 108th Congress
To date, two bills (H.R. 1252 and S. 1264) specific to the E-rate program have been
introduced in the 108th Congress. H.R. 1252, introduced by Representative Tancredo, seeks
to eliminate the E-rate program. This is accomplished by removing those universal service
provisions contained in the 1996 Telecommunications Act, and subsequently incorporated
as Section 254 of the Communications Act of 1934, which provide for discounts for schools
and libraries for telecommunications services; no action has been taken on this measure.

Senate Commerce Committee Chairman McCain introduced S. 1264, an FCC
reauthorization measure, which includes provisions specific to the E-rate program. Section
3 of the bill specifically authorizes the FCC to allocate sufficient funds for the FCC to
conduct a yearly review and audit, over the next four years, of the E-rate program to look for
possible fraud and abuse. Furthermore, the FCC is required to transmit a yearly report, from
fiscal years 2004 through 2007, to the Senate Commerce and House Energy and Commerce
Committees detailing the findings of these examinations. The measure passed the Senate
Commerce Committee, as amended, on June 26, 2003 and was reported out of Committee
(S.Rept. 108-140) on September 3, 2003.
An audit report issued in October 2002 by the FCC’s Office of Inspector General (OIG)
stating that the E-rate and other universal service programs were lacking adequate financial
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oversight has, once again, focused attention on the program. The House Energy and
Commerce Committee and Commerce subcommittee on Oversight and Investigations have
begun a “preliminary investigation” into these charges. The FCC and USAC has been asked
for extensive records relating to the program and 15 companies have received letters from
the Committee requesting information regarding their participation in the E-rate program.
Specific incidents being examined by the House Commerce Committee include why $5
million worth of equipment, purchased as early as 1999 by the Chicago public school system
through the E- rate program, remains uninstalled; waste of more than $100 million of funds
in Puerto Rico; as well as attempts by a company to defraud the school district in San
Francisco of $50 million in E-rate funds. Representative Barton, the Chairman of the House
and Energy and Commerce Committee, specifically mentioned the E-rate program as one of
the many programs under his jurisdiction that will be under active review. The Committee’s
Oversight and Investigation Subcommittee has held three hearings, June 17, July 22, and
September 22,2004, examining alleged incidents of fraud, waste, and abuse. The Committee
also requested ,on December 2, 2003, that the GAO undertake another examination of the
program to assess its current status. The Senate Commerce committee held a hearing on
October 5, 2004 examining E-rate program fraud ,waste and abuse and the August 2004
suspension of funding commitments.
The FCC’s decision to require the E-rate program to switch its accounting methodology
to comply with a federal government accounting methodology resulted in the suspension of
funding commitments effective August 2004. Under the government accounting
methodology funds are subject to the Anti-Deficiency Act thereby precluding the government
from incurring obligations prior to the funds being available. As a result of complying with
this requirement USAC changed the timing of its funds distribution leading to a temporary
disruption in its distribution of funds. The disruption of E-rate funding commitments, and
the potential for the application of this methodology to other USF programs to not only
disrupt funding but result in a significant increase in needed USF revenues, has prompted
some members of Congress and industry groups to explore the development of legislation
to exempt the USF from this government accounting standard. Although no proposals have
been introduced to date, it is possible that some measure could be attached as a rider to
another vehicle during the lame-duck session.
Relevant Laws
P.L. 104-104 provides for a pro-competitive, de-regulatory national policy framework
designed to accelerate rapidly private sector deployment of advanced telecommunications
and information technologies and services to all Americans by opening up all
telecommunications markets to competition; the measure also contains provisions for other
purposes.
P.L. 105-119. The 1998 appropriations legislation for the Departments of Commerce,
Justice, and State. Contains provisions that require the FCC to undertake a review of the
implementation of the provisions in the 1996 Telecommunications Act pertaining to
universal service and to submit a report to Congress no later than April 10, 1998.
P.L. 105-174. Emergency supplemental appropriations for the fiscal year ending
September 30, 1998. Contains within the conference committee’s “joint explanatory
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statement” language that the conferees “expect that the FCC will comply with reporting
requirements” contained in S. 1768, regarding universal service.
P.L. 108-199. The 2004 omnibus appropriations legislation includes, by reference,
language in the Senate report (108-144) directing the FCC to utilize funds in the USF ( not
the OIG) to pay for costs associated with the auditing of the USF, including the E-rate
program.
LEGISLATION
H.R. 1252 (Tancredo)
A bill to terminate the E-rate program of the Federal Communications Commission that
requires providers of telecommunications and information services to provide such services
for schools and libraries at a discounted rate. Introduced March 12, 2003; referred to
Committee on Energy and Commerce.
S. 1264 (McCain)
A bill to reauthorize the Federal Communications Commission and for other purposes.
Introduced June 13, 2003; referred to the Committee on Commerce, Science, and
Transportation. Passed the Senate Commerce Committee, as amended, June 26, 2003.
Reported out of Committee (S.Rept. 108-140) September 3, 2003.
FOR ADDITIONAL READING
The E-Rate Program: Universal Service Fund Telecommunications Discounts for Schools
by Charmaine Jackson. CRS Report RL32018. July 23, 2003.
Education and Library Networks Coalition. E-Rate : A Vision of Opportunity and Innovation.
July 8, 2003. Available at [http://www.edlinc.org].
Federal Communications Commission education website [http://www.fcc.gov/learnnet/].
Schools and Libraries Division website [http://www.sl.universalservice.org].
United States Department of Commerce. National Telecommunications and Information
Administration. A Nation on Line: How Americans are Expanding Their Use of the
Internet. February 2002. At [http://www.ntia.doc.gov].
United States Department of Education. Office of the Under Secretary, Planning and
Evaluation Service, Elementary and Secondary Education Division. E-Rate and the
Digital Divide: A Preliminary Analysis From the Integrated Studies of Educational
Technology. September, 2000. At [http://www.ed.gov/Technology/erate_findings.html].
United States Department of Education. National Center for Education Statistics. Internet
Access in U.S. Public Schools and Classrooms: 1994-2002. October 2003. At
[http://nces.ed.gov].
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