E-Rate Inspection

School technology funding program gets a closer look.

by / October 4, 2004
Recent publicity over fraud and waste in the federal E-Rate program -- which allows schools and libraries to purchase telecommunications and Internet access at discounted rates -- is causing officials to take another look. The FCC ordered a number of changes to program rules, and more could be on the way.

Created by the Telecommunications Act of 1996, the Schools and Libraries Universal Service Support Mechanism, better known as E-Rate, is aimed at ensuring schools and libraries across the country -- especially those in rural or poor areas -- have access to advanced telecommunications technologies. Using the Universal Service Fund -- a pot of money fed by mandatory contributions from telecommunications providers -- the program provides 20 percent to 90 percent discounts to schools for eligible technologies by reimbursing providers for the discounted amount.

Many say E-Rate, which is overseen by the FCC, has been vital to bringing classrooms into the 21st century. In 2002, 99 percent of public schools had Internet access, and 92 percent of public school classrooms had Internet access, according to Internet Access in U.S. Public Schools and Classrooms: 1994--2002, a survey conducted by the U.S. Department of Education's National Center for Education Statistics.

Todd Russ, director of technology for the Public Schools of Robeson County (PSRC), N.C., said when E-Rate began, his district still used dial-up access. "Now we have a 90 meg connection to our school district. It's made a world of difference in our abilities to connect to the Internet and do different types of Web page access, as well as subscribing to different programs that have video streaming and things like that," he said. "There's no way we could have put in that kind of technology without E-Rate funding."

But some contend the E-Rate program is an invitation for waste, fraud and abuse. In one of several high-profile cases, NEC Business Network Solutions pled guilty in May 2004 to bid-rigging and wire fraud in E-Rate projects at five different school districts. The company was ordered to pay a total of $20.6 million in restitution and criminal fines.

In March 2003, Rep. Tom Tancredo of Colorado introduced the E-Rate Termination Act in the House of Representatives, and the House Energy and Commerce Subcommittee on Oversight and Investigations has investigated the program for more than a year and a half. Although the FCC this year issued a slew of new program rules aimed at tightening loopholes, the FCC said fraud incidents being reported in the media are minimal, and overall, the program has served schools and libraries as intended.

PSRC's Russ said the intent of E-Rate is clear.

"If you stick with not only what it says, but knowing what they mean, I think you're pretty safe," he said. "I think the ones getting in trouble were trying to make the gray areas, and trying to find the gray areas, to get as much as they could."

Russ, whose school district was found compliant in a 2002 audit, said more audits would deter program misuse. "They look at every single bid you received. They verify you have your matching funds, where it's coming out of, etc. -- all of that up front. I think it takes a lot of the opportunity away for any type of fraud, waste or abuse."

The Universal Service Administrative Company (USAC), the nonprofit that administers the E-Rate program for the FCC, so far has conducted approximately 100 audits per year. Additionally the FCC Inspector General's Office conducts some audits and has made agreements with several other federal entities to do the same.

When funds are disbursed contrary to program rules, the USAC seeks to recoup the funds, and those convicted of crimes in relation to E-Rate can be debarred from the program. But in most cases where fund recovery is sought, said an FCC spokesperson, honest mistakes are to blame.

Soon the USAC will visit 1,000 recipients per year to educate applicants on program rule compliance and check for indicators that may lead to a full-scale audit, said Mel Blackwell, the USAC's vice president of external communications. "We have embarked on this other program of site visits -- that they're going to do 1,000," he said, "because we think 100 audits just isn't enough."

He said the site visits would not be full audits, but would give the USAC an opportunity to check for things that warrant further inquiry.

E-Rate Matures
In a series of orders released December 2003 through August 2004, the FCC took steps to protect the Universal Service Fund from abuse and waste. These steps include limiting funding for internal network connections to twice every five years, defining eligible maintenance for internal connections that can still be funded annually and disallowing equipment transfers among schools in most circumstances.

The rules could prevent districts from using schools that are eligible for higher discounts to purchase equipment for other schools with lower discount rates, PSRC's Russ observed. "In our case, almost all of our schools are eligible at high rates," he said, "so it's never been too much of an issue for us. But I think that's just one of the ways they are trying to eliminate fraud, waste or abuse."

New rules released in July and August 2004 hold schools more accountable for spending and record-keeping.

In its Order on Reconsideration and Fourth Report and Order, released in July 2004, the FCC implemented a policy to recover funds from parties responsible for infractions, rather than from the provider, as was done previously. The argument in doing so is that applicants often are in the best position to avoid infractions. Further, the FCC implemented a "red light rule" halting additional funding to parties that owe money to the commission.

The new rules also require providers to make several certifications, which should aid in prosecuting those who hinder the competitive bidding process.

It's been difficult for auditors to ensure E-Rate applicants follow program rules because bookkeeping practices vary from applicant to applicant. E-Rate recipients previously were required to keep related paperwork only as long as their own record retention plans required, according to FCC Inspector General H. Walker Feaster III's report before the congressional subcommittee. "In effect," he stated in the report, "Commission staff have taken the position that if no record retention plan exists, there is no requirement for the applicant to maintain records."

The new rules require recipients to maintain all related paperwork for five years and mandate that audits be carried out within five years of service completion.

The FCC also outlined expected content for technology plans that applicants must submit.

More to Come
Even as schools and libraries settle in with the new regulations, more changes are anticipated.

The House Energy and Commerce Subcommittee on Oversight and Investigations has been examining the E-Rate program for more than a year, and began a series of hearings in June 2004.

"Once that exploration is finished, an assessment will be made by members of the subcommittee and then the full committee as to whether some legislation is required," said Larry Neal, deputy staff director for communications for the House Energy and Commerce Committee. "Certainly the regulatory agencies who administer the program and oversee it have long since been on notice, and they have been actively looking into it."

Neal said the hearings would continue despite many changes already made to the program.

And the FCC says it will continue to take steps to abate fraud, waste and abuse.

One proposed change is adjusting the discount matrix and requiring schools to pay a bigger portion. Some say doing so would encourage schools and libraries to spend reasonably, and discourage vendors from forgiving the portion schools and libraries are required to pay. Annual funding limits for schools have also been discussed.

PSRC's Russ said his district has done a lot with the E-Rate funds so far, and wouldn't be happy to see new caps on funding. "But at the same time, I think most districts -- including ourselves -- have been able to get a lot of our priorities taken care of in these first few years, and limiting in future years wouldn't have as big an impact as it would have initially when we were trying to catch up to a lot of other districts."

Another possible change for schools is self-auditing, and Russ said more auditing of any kind would add credibility to the program. "I think the idea that you at least give them some kind of guidance -- that these are the things you have to do, whether it's the selective review where they're auditing everyone or its some type of required self-audit where they have to do steps 'x,' 'y' and 'z,' I think is very similar," he said. "If we don't do those types of steps, we'll eventually end up losing the program because there are people out there going across the line. So to me, the more secure it is, the more they're making sure there is no fraud and waste and abuse out there, then the more stable the program is for all of us."
Emily Montandon Staff Writer/Copy Editor