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Report to the Chairman, Committee on Energy and Commerce, House of 
Representatives: 

February 2005: 

Telecommunications: 

Greater Involvement Needed by FCC in the Management and Oversight of 
the E-Rate Program: 

GAO-05-151: 

GAO Highlights: 

Highlights of GAO-05-151, a report to the Chairman, Committee on Energy 
and Commerce, House of Representatives: 

Why GAO Did This Study: 

Since 1998, the Federal Communications Commission’s (FCC) E-rate 
program has committed more than $13 billion to help schools and 
libraries acquire Internet and telecommunications services. Recently, 
however, allegations of fraud, waste, and abuse by some E-rate program 
participants have come to light. As steward of the program, FCC must 
ensure that participants use E-rate funds appropriately and that there 
is managerial and financial accountability surrounding the funds. GAO 
reviewed (1) the effect of the current structure of the E-rate program 
on FCC’s management of the program, (2) FCC’s development and use of E-
rate performance goals and measures, and (3) the effectiveness of FCC’s 
oversight mechanisms in managing the program. 

What GAO Found: 

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

FCC has not developed useful performance goals and measures for 
assessing and managing the E-rate program. The goals established for 
fiscal years 2000 through 2002 focused on the percentage of public 
schools connected to the Internet, but the data used to measure 
performance did not isolate the impact of E-rate funding from other 
sources of funding, such as state and local government. A key 
unanswered question, therefore, is the extent to which increases in 
connectivity can be attributed to E-rate. In addition, goals for 
improving E-rate program management have not been a feature of FCC’s 
performance plans. In its 2003 assessment of the program, OMB noted 
that FCC discontinued E-rate performance measures after fiscal year 
2002 and concluded that there was no way to tell whether the program 
has resulted in the cost-effective deployment and use of advanced 
telecommunications services for schools and libraries. In response to 
OMB’s concerns, FCC is currently working on developing new E-rate 
goals. 

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

What GAO Recommends: 

To strengthen FCC’s management and oversight of the E-rate program, we 
are recommending that FCC (1) determine comprehensively which federal 
accountability requirements apply to E-rate; (2) establish E-rate 
performance goals and measures; and (3) take steps to reduce the 
backlog of beneficiary appeals. In response, FCC stated that it does 
not concur with (1) because it maintains it has done this on a case-by-
case basis. We continue to believe that major issues remain unresolved. 
FCC concurs with (2) and (3), noting that it is already taking steps on 
these issues. 

www.gao.gov/cgi-bin/getrpt?GAO-05-151. 

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

[End of section]

Contents: 

Letter: 

Results in Brief: 

Background: 

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

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

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

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: Fiscal Law Issues Involving the Universal Service Fund: 

Appendix III: Structure of the Universal Service Administrative 
Company: 

Appendix IV: FCC Staffing Levels in Support of the E-Rate Program: 

Appendix V: Comments from the Federal Communications Commission: 

GAO's Comments: 

Appendix VI: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Staff Acknowledgments: 

Tables: 

Table 1: E-Rate Program Discount Matrix: 

Table 2: Examples of E-Rate Beneficiary Audit Findings from Program 
Year 1998, Resolved in 2004: 

Table 3: Number of FCC Full-Time Equivalent (FTE)Positions Supporting E-
Rate Program, Fiscal Years 1997-2004: 

Figure: 

Figure 1: Relationship among Entities Involved in the E-Rate Program: 

Abbreviations: 

CBO: Congressional Budget Office: 

FCC: Federal Communications Commission: 

FTE: full-time equivalent: 

GovGAAP: generally accepted accounting principles for federal agencies: 

IG: inspector general: 

IPIA: Improper Payments Information Act of 2002: 

NCES: National Center for Education Statistics: 

NECA: National Exchange Carrier Association: 

OMB: Office of Management and Budget: 

PART: Program Assessment Rating Tool: 

SLD: Schools and Libraries Division: 

USAC: Universal Service Administrative Company: 

USF: Universal Service Fund: 

Letter February 9, 2005: 

The Honorable Joe Barton: 
Chairman: 
Committee on Energy and Commerce: 
House of Representatives: 

Dear Mr. Chairman: 

Since 1998, the Federal Communications Commission's (FCC) universal 
service "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 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. For example, with the help of 
E-rate funding, a school district in Alaska that lacked certified math 
teachers was able to provide students with math, algebra, and geometry 
lessons through distance learning. Similarly, the State Library of 
Louisiana has used E-rate funding to help provide Internet connections 
for use by patrons in all of Louisiana's public libraries. The E-rate 
program processes around 40,000 applications from schools and libraries 
each year, and many of these applicants rely heavily on E-rate support 
for their telecommunications needs. 

Recently, 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 December 2004, 
another service provider agreed to pay almost $9 million and plead 
guilty to charges related to a scheme to defraud the E-rate program by 
inflating bids, agreeing to submit false and fraudulent documents to 
hide the planned installation of ineligible items, and submitting false 
and fraudulent documents to defeat inquiry into the legitimacy of the 
funding request. Suspected instances of program beneficiaries not 
paying their portion of service costs and of service provider 
procurement irregularities are being investigated. In fact, FCC's 
Inspector General (IG) has devoted special attention to the E-rate 
program in his most recent reports to Congress. In his May 2004 report, 
the FCC IG stated that he continues to have numerous concerns about the 
program and believes that the program may be subject to a high risk of 
fraud, waste, and abuse through noncompliance and program 
weakness.[Footnote 1]

"Universal service" traditionally has meant providing residential 
customers with affordable nationwide access to basic telephone service. 
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 a universal service discount mechanism for schools and 
libraries. The commission, in turn, created a large and ambitious 
program that became commonly known as the E-rate program[Footnote 2] 
and gave the program a $2.25 billion annual funding cap.[Footnote 3] 
The commission designated a not-for-profit corporation, the Universal 
Service Administrative Company (USAC), to carry out the day-to-day 
operations of the program, although FCC retains responsibility for 
overseeing the program's operations and ensuring compliance with the 
commission's rules. 

The public has a vested interest in the proper management of the E-rate 
program. The program is funded through statutorily mandated payments 
into the Universal Service Fund[Footnote 4] by companies that provide 
interstate telecommunications services. The companies' "contribution 
factor" of how much they must pay into the Universal Service Fund is 
established quarterly by FCC. In practice, however, many of these 
companies pass this contribution factor along to consumers through fees 
placed on their phone bills. Also, during most of the program's 
history, the requests from schools and libraries for E-rate funding 
have greatly exceeded the annual amounts available from the program. 
Thus, any misuse of E-rate funding wastes consumers' money and deprives 
those schools and libraries whose requests for support were denied due 
to funding limitations. As the steward of this program, FCC must ensure 
that beneficiaries use the funds appropriately and that there is 
financial and managerial accountability surrounding the fund. 

Since 1998, we have issued eight reports and testimonies discussing 
various aspects of the E-rate program.[Footnote 5] In light of ongoing 
concerns about the E-rate program, you asked us in December 2003 to 
review the program. 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. To address these issues, 
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 the Office of Management and 
Budget (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. We 
conducted our work from December 2003 through December 2004 in 
accordance with generally accepted government auditing standards. See 
appendix I for a more detailed explanation of our scope and 
methodology. 

Results in Brief: 

FCC established E-rate as a multibillion-dollar program operating under 
an organizational structure unusual to the federal government, and then 
never conducted a comprehensive assessment to determine which federal 
requirements, policies, and practices apply to the program, to USAC, 
and to the Universal Service Fund itself. The E-rate program's 
structure is unusual in a couple of ways: (1) It is administered by a 
private, not-for-profit corporation that has no contract or memorandum 
of understanding with FCC and (2) although the Universal Service Fund 
is included in the federal budget, program funds are maintained outside 
of the U.S. Treasury, raising issues related to the collection, 
deposit, obligation, and disbursement of the funding. Because of this 
unusual framework, FCC has struggled with determining which fiscal and 
accountability requirements apply to the E-rate program. FCC has 
internally considered the applicability of a number of statutes on a 
case-by-case basis and has concluded that the Universal Service Fund 
constitutes an appropriation and that the fund is subject to the 
Antideficiency Act. However, the laws encompassing fiscal and 
accountability controls are not applied in isolation; rather, they are 
part of a framework that addresses issues of financial and general 
management of federal agencies and programs. FCC's conclusions 
concerning the status of the Universal Service Fund raise further 
issues concerning the applicability of other fiscal control and 
accountability statutes (e.g., the Miscellaneous Receipts Statute, the 
Single Audit Act, and the Cash Management Improvement Act) and the 
extent to which FCC has delegated certain functions for the E-rate 
program to USAC--issues that FCC needs to explore and resolve. Timely 
resolution of these issues in a comprehensive fashion is necessary to 
ensure that the appropriate governmental accountability safeguards are 
fully in place to help protect the E-rate program and the Universal 
Service Fund from fraud, waste, and abuse. 

Although $13 billion in E-rate funding has been committed during the 
past 7 years, FCC did not develop performance goals and measures that 
could be used to assess the specific impact of these funds and improve 
the management of the program. For fiscal years 2000 through 2002, 
FCC's goals focused on achieving certain percentage levels of Internet 
access for schools, public school instructional classrooms, and 
libraries. However, the data that FCC used to report on its progress 
was limited to public schools (rather than including 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. Consequently, a fundamental performance 
question that remains unanswered is how much of the increase in public 
schools' access to the Internet can be attributed to the E-rate 
program. This, in turn, makes it difficult to address other questions 
about the program, such as its efficiency and cost-effectiveness in 
supporting the telecommunications needs of schools and libraries. In 
addition, goals for improving E-rate program management have not been a 
feature of FCC's performance plans. For example, two such goals--
related to assessing competitive bidding requirements for vendor 
services and improving participation by eligible schools and libraries 
in the program--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. OMB's own review of the program in 2003 
concluded that there was no way to tell whether the program has 
resulted in the cost-effective deployment and use of advanced 
telecommunications services for schools and libraries.[Footnote 6] In 
response, FCC staff have been working on developing new performance 
measures for the E-rate program and plan to finalize them and seek OMB 
approval in fiscal year 2005. 

FCC's three key oversight mechanisms for the E-rate program--rulemaking 
procedures, beneficiary audits, and reviews of USAC decisions (appeals 
decisions)--are not fully effective in managing the program. FCC's 
rulemakings have often lacked specificity and led to situations where 
USAC, in crafting the details needed to operate the program, has 
established administrative procedures that arguably rise to the level 
of policy decisions, even though USAC is prohibited from making program 
policies. This creates a situation where important USAC administrative 
procedures have been deemed unenforceable by FCC with regard to the 
recovery of funds for violations of those procedures. While audits have 
been conducted on E-rate beneficiaries, FCC has been slow to respond to 
audit findings in the past. Also, neither FCC nor USAC have conducted a 
large enough number of beneficiary audits to be able to statistically 
support an accurate assessment of the level of waste, fraud, and abuse 
in the program. FCC is examining a proposal by USAC for resolving audit 
findings, and the FCC IG and USAC are planning to conduct a larger 
number of audits that will allow for an estimation of the annual amount 
of improper payments by the E-rate program. According to FCC officials, 
FCC's oversight through appeals decisions suffers from a significant 
appeals backlog due in part to a shortage of FCC staff and staff 
turnover. Thus, issues raised on appeal may not be addressed in a 
timely manner. Because appeals decisions are used as precedent, this 
slowness adds uncertainty to the program and impacts beneficiaries. 

To address the management and oversight problems we have identified, we 
recommend 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 ensuring that 
adequate staffing resources are devoted to E-rate appeals. 

We provided a draft of this 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. 

Background: 

The concept of "universal service" has traditionally meant providing 
residential telephone subscribers with nationwide access to basic 
telephone services at reasonable rates. Universal service programs 
traditionally targeted support to low-income customers and customers in 
rural and other areas where the costs of providing basic telephone 
service were high. The Telecommunications Act of 1996 broadened the 
scope of universal service to include, among other things, support for 
schools and libraries. The act instructed FCC to establish a universal 
service support mechanism to ensure that eligible schools and libraries 
have affordable access to and use of certain telecommunications 
services for educational purposes.[Footnote 7] In addition, Congress 
authorized FCC to "establish competitively neutral rules to enhance, to 
the extent technically feasible and economically reasonable, access to 
advanced telecommunications and information services for all public and 
nonprofit elementary and secondary school classrooms... and libraries. 
. . ."[Footnote 8] Based on this direction, and following the 
recommendations of the Federal-State Joint Board on Universal 
Service,[Footnote 9] FCC established the schools and libraries 
universal service mechanism that is commonly referred to as the E-rate 
program. The program is funded through statutorily mandated payments by 
companies that provide interstate telecommunications services.[Footnote 
10] Many of these companies, in turn, pass their contribution costs on 
to their subscribers through a line item on subscribers' phone 
bills.[Footnote 11] FCC capped funding for the E-rate program at $2.25 
billion per year, although funding requests by schools and libraries 
can greatly exceed the cap. For example, schools and libraries 
requested more than $4.2 billion in E-rate funding for the 2004 funding 
year. 

In 1998, FCC appointed USAC as the program's permanent 
administrator,[Footnote 12] although FCC retains responsibility for 
overseeing the program's operations and ensuring compliance with the 
commission's rules. In response to congressional conference committee 
direction,[Footnote 13] FCC has specified that USAC "may not make 
policy, interpret unclear provisions of the statute or rules, or 
interpret the intent of Congress."[Footnote 14] 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. The FCC IG has noted that program participants generally 
consider USAC the primary source for guidance on the rules governing 
the E-rate program. See appendix III for a more detailed explanation of 
the structure of USAC. 

Under the E-rate program, eligible schools, libraries, and consortia 
that include eligible schools and libraries[Footnote 15] 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. Schools and libraries in 
areas with higher percentages of students eligible for free or reduced-
price lunches through the National School Lunch Program (or a federally 
approved alternative mechanism) qualify for higher discounts on 
eligible services. Schools and libraries located in rural 
areas[Footnote 16] also receive greater discounts in most cases, as 
shown in table 1. 

Table 1: E-Rate Program Discount Matrix: 

Percent. 

Students eligible for school lunch program: less than 1; 
Urban discount: 20%; 
Rural discount: 25%. 

Students eligible for school lunch program: 1-19; 
Urban discount: 40%; 
Rural discount: 50%. 

Students eligible for school lunch program: 20-34; 
Urban discount: 50%; 
Rural discount: 60%. 

Students eligible for school lunch program: 35-49; 
Urban discount: 60%; 
Rural discount: 70%. 

Students eligible for school lunch program: 50-74; 
Urban discount: 80%; 
Rural discount: 80%. 

Students eligible for school lunch program: 75-100; 
Urban discount: 90%; 
Rural discount: 90%. 

Source: 47 C.F.R. § 54.505(c). 

[End of table]

FCC has defined four classes of services that are eligible for E-rate 
support: 

* telecommunications services, such as local, long-distance, and 
international telephone service as well as high-speed data links (e.g., 
T-1 lines);

* Internet access services, such as broadband Internet access and e-
mail services;

* internal connections, such as telecommunications wiring, routers, 
switches, and network servers that are necessary to transport 
information to individual classrooms; and: 

* basic maintenance on internal connections. 

The list of specific eligible services within each class is updated 
annually and posted on USAC's Web site. FCC's rules provide that 
requests for telecommunications services and Internet access for all 
discount categories shall receive first priority for the available 
funding (Priority One services). The remaining funds are allocated to 
requests for support for internal connections and basic maintenance 
(Priority Two services), beginning with the most economically 
disadvantaged schools and libraries, as determined by the discount 
matrix. Because of this prioritization, not all requests for internal 
connections necessarily receive funding.[Footnote 17]

Prior to applying for discounted services, an applicant must conduct a 
technology assessment and develop a technology plan to ensure that any 
services it purchases will be used effectively.[Footnote 18] The 
applicant submits a form to USAC setting forth its technological needs. 
Once the school or library has complied with the commission's 
competitive bidding requirements and entered into agreements with 
service providers for eligible services, it must file a second form 
with USAC that details 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 (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 
[Footnote 19]). Generally, it is the service provider that seeks 
reimbursement from USAC for the discounted portion of the 
service.[Footnote 20]

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

FCC established an unusual structure for the E-rate program but has 
never conducted a comprehensive assessment of which federal 
requirements, policies, and practices apply to the program, to USAC, or 
to the Universal Service Fund itself. FCC recently began to address a 
few of these issues, concluding that as a permanent indefinite 
appropriation, the Universal Service Fund is subject to the 
Antideficiency Act and its issuance of commitment letters constitutes 
obligations for purposes of the act. We agree with FCC's determinations 
on these issues, as explained in detail in appendix II. However, FCC's 
conclusions concerning the status of the Universal Service Fund raise 
further issues relating to the collection, deposit, obligation, and 
disbursement of those funds--issues that FCC needs to explore and 
resolve comprehensively rather than in an ad hoc fashion as problems 
arise. 

The Telecommunications Act of 1996 neither specified how FCC was to 
administer universal service to schools and libraries nor prescribed 
the structure and legal parameters of the universal service mechanisms 
to be created. 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: 

* FCC appointed USAC as the permanent administrator of the Universal 
Service Fund,[Footnote 21] and FCC's Chairman has final approval over 
USAC's Board of Directors. USAC is responsible for administering the 
program under FCC orders, rules, and directives. However, USAC is not 
part of FCC or any other government entity; it is not a government 
corporation established by Congress; and no contract or memorandum of 
understanding exists between FCC and USAC for the administration of the 
E-rate program. Thus, USAC operates and disburses funds under less 
explicit federal ties than many other federal programs. 

* Questions as to whether the monies in the Universal Service Fund 
should be treated as federal funds have troubled the program from the 
start. Even though the fund has been listed in the budget of the United 
States and, since fiscal year 2004, has been subject to an annual 
apportionment from OMB, the monies are maintained outside of Treasury 
accounts by USAC and some of the monies have been invested.[Footnote 
22] The United States Treasury implements the statutory controls and 
restrictions involving the proper collection and deposit of 
appropriated funds, including the financial accounting and reporting of 
all receipts and disbursements, the security of appropriated funds, and 
agencies' responsibilities for those funds.[Footnote 23]

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, 
[Footnote 24] which govern fiscal activities relating to the 
management, collection, and distribution of public money. 

Since the inception of the E-rate program, FCC has struggled with 
identifying the nature of the Universal Service Fund and the 
managerial, fiscal, and accountability requirements that apply to the 
fund. FCC's Office of Inspector General first looked at the Universal 
Service Fund in 1999 as part of its audit of the commission's fiscal 
year 1999 financial statement because FCC had determined that the 
Universal Service Fund was a component of FCC for financial reporting 
purposes. During that audit, the FCC IG questioned commission staff 
regarding the nature of the fund and, specifically, whether it was 
subject to the statutory and regulatory requirements for federal funds. 
In the next year's audit, the FCC IG noted that the commission could 
not ensure that Universal Service Fund activities were in compliance 
with all laws and regulations because the issue of which laws and 
regulations were applicable to the fund was still unresolved at the end 
of the audit. 

FCC officials told us that the commission has substantially resolved 
the IG's concerns through recent orders, including FCC's 2003 order 
that USAC begin preparing Universal Service Fund financial statements 
consistent with generally accepted accounting principles for federal 
agencies (GovGAAP) and keep the fund in accordance with the United 
States Government Standard General Ledger. While it is true that these 
steps and other FCC determinations discussed below should provide 
greater protections for universal service funding, FCC has addressed 
only a few of the issues that need to be resolved. In fact, staff from 
the FCC's IG's office told us that they do not believe the commission's 
GovGAAP order adequately addressed their concerns because the order did 
not comprehensively detail which fiscal requirements apply to the 
Universal Service Fund and which do not. 

FCC has, however, made some determinations concerning the status of the 
Universal Service Fund and the fiscal controls that apply. FCC's 
determinations, and our analysis, in brief, are discussed below. (See 
app. II for our more thorough legal analysis of fiscal law issues 
involving the Universal Service Fund.)

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.[Footnote 25] 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.[Footnote 26] 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. 

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.[Footnote 27] 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[Footnote 28] to 
provide budgetary authority sufficient to satisfy the Antideficiency 
Act. As a result, USAC suspended funding commitments in August 2004 
while waiting for a commission decision on how to proceed. At the end 
of September 2004--facing the end of the fiscal year--FCC decided that 
commitment letters were obligations, that the Antideficiency Act did 
apply to the program, and that USAC would need to immediately liquidate 
some of its investments to come into compliance with the Antideficiency 
Act. According to USAC officials, the liquidations cost the fund 
approximately $4.6 million in immediate losses and could potentially 
result in millions in foregone annual interest income. 

FCC was slow to recognize and address the issue of the applicability of 
the Antideficiency Act, resulting in the abrupt decision to suspend 
funding commitment decision letters and liquidate investments. In 
response to these events, in December 2004, Congress passed a bill 
granting the Universal Service Fund a one-year exemption from the 
Antideficiency Act.[Footnote 29] Nevertheless, FCC's conclusion on this 
issue was correct: Absent a statutory exemption, the Universal Service 
Fund is subject to the Antideficiency Act, and its funding commitment 
decision letters constitute obligations for purposes of the act. 

The Antidefiency 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. § 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. . . 
."[Footnote 30]

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. 

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, 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. § 3302, which requires that 
money received for the use of the United States be deposited in the 
Treasury unless otherwise authorized by law.[Footnote 31] FCC also 
needs to assess the applicability of other fiscal control and 
accountability statutes (e.g., the Single Audit Act and the Cash 
Management Improvement Act).[Footnote 32]

Another major issue that remains to be resolved involves the extent to 
which FCC has delegated some functions for the E-rate program to USAC. 
For example, are the disbursement policies and practices for the E-rate 
program consistent with statutory and regulatory requirements for the 
disbursement of public funds?[Footnote 33] Are some of the functions 
carried out by USAC, even though they have been characterized as 
administrative or ministerial, arguably inherently governmental 
activities[Footnote 34] 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. 

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. 

FCC's Performance Goals and Measures Were Not Useful in Assessing the 
Impact of E-Rate Funds: 

One of the management tasks facing FCC is to establish strategic goals 
for the E-rate program, as well as annual goals linked to them. The 
Telecommunications Act of 1996 did not include specific goals for 
supporting schools and libraries, but instead used general language 
directing FCC to establish competitively neutral rules for enhancing 
access to advanced telecommunications and information services for all 
public and nonprofit private elementary and secondary school classrooms 
and libraries.[Footnote 35] As the agency accountable for the E-rate 
program, FCC is responsible under the Government Performance and 
Results Act of 1993 (Results Act) for establishing the program's long-
term strategic goals and annual goals, measuring its own performance in 
meeting these goals, and reporting publicly on how well it is 
doing.[Footnote 36]

In testimony before the Senate Committee on Commerce, Science, and 
Transportation in July 1998, we stated that the E-rate program was 
beginning its first funding year without clear and specific goals and 
measures. FCC simply noted in its performance plan for fiscal year 1999 
that it would "work to improve the connections of classrooms, 
libraries, and rural health care facilities to the Internet by the end 
of [fiscal year] 1999." This type of general statement, with no 
specific goals and measures for agency accountability, is not in accord 
with the Results Act. We recommended in our testimony that FCC develop 
specific E-rate goals and measures before the end of fiscal year 1998, 
in time to gauge the effect of the program's first year of 
operations.[Footnote 37] As we stated at that time, performance 
measurement is critical to determining a program's progress in meeting 
its intended outcomes. Without clearly articulated goals and reliable 
performance data, Congress, FCC, and USAC would have a difficult time 
assessing the effectiveness of the program and determining whether 
operational changes were needed. Although FCC responded that our 
recommendation was "reasonable," we noted in our subsequent March 1999 
report on the program that FCC had not acted on our recommendation and 
again stressed the importance of implementing it.[Footnote 38] FCC 
began including specific E-rate goals and measures in its fiscal year 
2000 budget estimate submission to Congress and continued to set annual 
E-rate goals for fiscal years 2001 and 2002. No annual goals for fiscal 
years 2003 or 2004 were included in FCC's performance reports, 
however.[Footnote 39]

The goals and measures that FCC set for fiscal years 2000 through 2002 
were not useful in assessing the impact of E-rate program funding. The 
goals focused on achieving certain percentage levels of Internet 
connectivity during a given fiscal year for schools, public school 
instructional classrooms, and libraries. For example, FCC set a fiscal 
year 2001 goal of having 90 percent of public school instructional 
classrooms connected to the Internet. FCC measured its performance in 
meeting these goals using nationwide survey data from the Department of 
Education's National Center for Education Statistics (NCES) on the 
percentages of public schools and public school instructional 
classrooms that are connected to the Internet. The percentages are 
based on a nationally representative sample of approximately 1,000 
public schools that are surveyed about Internet access and Internet-
related topics. A fundamental problem with using these NCES percentages 
is that a nationally representative sample covers both public schools 
that received E-rate funding for internal connections and those that 
did not. The percentages, therefore, do not directly measure the impact 
of E-rate funds, as opposed to other sources of funding, on increases 
in the percentage of schools connected to the Internet. This is a 
significant problem because the applicants' requests for E-rate funds 
for internal connections have exceeded the amounts available for that 
purpose by billions of dollars. As a result, while E-rate funds for 
internal connections have been provided on a priority basis to 
applicants eligible for very high discounts (generally 70 percent to 80 
percent or higher), funding has typically not been available to meet 
the internal connections requests of the other applicants. Only in the 
second funding year (1999) were funds sufficient to cover eligible 
internal connections requests for applicants in all of the discount 
bands. The applicants who were denied E-rate support for internal 
connections have had to rely on other funding sources for their 
internal connections needs, such as state and local government. 

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 
NCES data, 89 percent of all public schools and 51 percent of public 
school instructional classrooms already had Internet access. By 2002, 
99 percent of public schools and 92 percent of public school 
instructional classrooms had Internet access.[Footnote 40] 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?

Another problem is that FCC did not consistently set annual goals for 
the two other major groups of E-rate beneficiaries--libraries and 
private schools. For example, FCC's budget submission to Congress in 
February 2000 included a fiscal year 2001 goal of having 90 percent of 
libraries connected to the Internet. But this goal was dropped from 
FCC's subsequent performance reports and budget estimate submissions, 
and no other library connectivity goal was set. As for private schools, 
no specific Internet connectivity goal was set for them until early 
2002, when FCC included a fiscal year 2003 goal of having 85 percent of 
private school instructional classrooms connected to the Internet in 
both its fiscal year 2003 budget estimate to Congress (dated February 
2002) and its 2001 annual performance report (dated March 2002). But 
these were the only instances where this goal appeared. It was dropped 
from FCC's subsequent budget estimate submissions and annual 
performance reports. In addition to these goal-setting shortcomings, no 
performance measurement data for either libraries' or private schools' 
Internet connectivity levels have been included in any of FCC's annual 
budget estimate submissions or performance reports. 

The failure to measure the program's impact on public and private 
schools and libraries over the past 7 years undercuts one of the 
fundamental purposes 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. 

E-Rate Management Improvement Goals Not Featured in FCC Performance 
Plans: 

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.[Footnote 41] Under the Results Act, managers 
should use performance data to identify performance gaps and determine 
where to target their resources to improve overall mission 
accomplishment. 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, E-rate 
applicants' technology needs are posted on USAC's Web site to allow 
service providers an opportunity to bid on them. FCC has maintained 
that absent competitive bidding, the prices charged by service 
providers could be needlessly high, unnecessarily depleting the 
program's funds and limiting its ability to support other applicants. 
In the commission's fiscal year 2000 budget estimate submission, FCC 
included a goal for ensuring that the program's competitive bidding 
process led to bids by two or more service providers for the majority 
of applicants. However, this goal was dropped from FCC's subsequent 
budget submissions and annual performance reports. No other goal was 
developed in its place to assess how well the competitive bidding 
process is working. 

In another example, FCC found that the E-rate participation rates for 
urban low-income school districts and rural school districts fell below 
the average participation rate for all eligible schools. In preparing 
our December 2000 report on the E-rate program, FCC officials told us 
they had finalized a new performance plan for the E-rate program that 
included tactical goals targeted at increasing participation by both of 
these groups, as well as rural libraries and libraries serving small 
areas.[Footnote 42] During our current review, when we asked FCC 
officials about the plan, we were told that it had not been implemented 
and that none of the FCC staff currently working on E-rate was familiar 
with the plan. 

Another ongoing program management issue is that a significant amount 
of funds committed annually go unused by the applicants that requested 
them. This is troubling because, as noted earlier, the demand for 
funding is high and there is typically not enough money each year to 
meet all funding requests for internal connections. In December 2000, 
we recommended that FCC ascertain and address the difficulties that 
applicants may be having in this regard. FCC responded that it would 
undertake an analysis, with USAC, of the factors leading to funds being 
committed to applicants but not used; and USAC responded that it would 
develop and pursue options for narrowing the gap between commitments 
and disbursements, and discuss the options with FCC. Here again was an 
opportunity to develop a performance goal and measure to address this 
program management problem, but none was developed.[Footnote 43] 
Similarly, no performance goals and measures have been included in 
FCC's performance reports related to the management responsibility of 
identifying and mitigating fraud, waste, and abuse of program funds. 

FCC Is Currently Considering E-Rate Goals in Response to OMB's 
Concerns: 

OMB also has raised concerns about FCC's lack of E-rate performance 
goals and measures. In its 2003 assessment of the E-rate program, OMB, 
using its Program Assessment Rating Tool (PART), noted that FCC 
discontinued specific E-rate program measures after fiscal year 
2002.[Footnote 44] OMB's overall PART rating for the E-rate program was 
"results not demonstrated." This does not necessarily mean that the 
program is ineffective, but rather that its effectiveness is 
unknown.[Footnote 45] OMB observed that the program lacked long-term, 
outcome-oriented performance goals and efficiency measures against 
which to measure the program's success in promoting connectivity and to 
improve and refine the program going forward. Because of this, OMB 
stated that it is not clear what the end goal of the E-rate program is 
or how to measure its effectiveness other than incremental increases in 
the number of classrooms and libraries connected to the Internet. While 
recognizing that E-rate funding is generally going to the intended 
beneficiaries of the program, OMB concluded that there was no way to 
tell whether the program has resulted in cost-effective deployment and 
use of advanced telecommunications services for schools and libraries. 
OMB also noted that there was little oversight to ensure that the 
program beneficiaries were using the funding appropriately and 
effectively. Among other things, OMB's report recommended that for 
fiscal year 2005, FCC should develop a long-term outcome goal for the 
program, and consider reinstituting a connectivity measure and 
developing an efficiency measure. 

FCC officials told us they have been working with OMB to respond to the 
concerns raised in its PART assessment and that several FCC staff have 
recently received training in the development of performance measures. 
At the time of our review, FCC was considering goals that involve 
classroom connectivity and program efficiency. As we discussed earlier, 
any meaningful goals on connectivity would need to have associated 
measurement data that could isolate the impact of E-rate funding on 
changes in connectivity in order to assess the program's impact. It 
should be noted that with 99 percent of public schools and 92 percent 
of public school instructional classrooms connected to the Internet in 
2002 (according to the most current NCES report on public school 
connectivity at the time of our review), applicants are moving past 
achieving initial connectivity to maintaining and upgrading existing 
connections over the long term. As a result, simple measures of 
Internet connectivity will be much less useful indicators of the 
program's performance than in past years. 

As for the program's efficiency in providing support for 
telecommunications services, FCC staff told us they are considering a 
measure that would calculate and track the E-rate disbursements for 
each school (or school system) divided by the number of students, 
further broken down by the eligible services categories. An efficiency 
measure would be valuable, as there has been a long-standing concern 
about some applicants requesting funding for technology that greatly 
exceeds their needs (sometimes referred to as "goldplating"). While "E-
rate dollars-per-student" ratios might be interesting data to assess in 
this regard, a performance measure needs to have a goal associated with 
it in order to be a meaningful tool for performance management. 
Currently, the program rules do not expressly establish a clear test 
for cost-effectiveness that could be used as a measurable goal, 
although in late 2003, FCC asked for comment on whether it would be 
beneficial or administratively feasible to develop such a 
test.[Footnote 46] At the time we concluded our review, FCC planned to 
finalize performance measures for the E-rate program and seek OMB 
approval in fiscal year 2005. 

As noted above, OMB's PART assessment recommended that FCC develop a 
long-term outcome goal for the program. "Outcomes" are the results or 
benefits of the products or services provided by the program. A basic 
policy issue associated with the E-rate program involves assessing the 
extent to which the billions of dollars of support for 
telecommunications services are providing the sought-after return on 
investment: improvement in the quality of education. As we noted in our 
2000 report on the program, the complex issue of measuring educational 
outcomes lies outside FCC's expertise and comes under the purview of 
the Department of Education.[Footnote 47] FCC officials told us they 
have made initial contact with staff at the Department of Education to 
discuss the development of a long-term E-rate outcome measure. 
According to FCC's current timetable, the collection and analysis of 
data for outcome measures would start with funding year 2006. 

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 and making changes 
to existing rules, as well as for 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 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 from making policy, some USAC 
procedures arguably rise to the level of policy decisions. 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 
administrative procedures. 

Throughout the history of the program, USAC has found it necessary to 
create additional procedures to effectively and efficiently process 
more than 40,000 applications annually. However, these procedures 
sometimes deal with more than just ministerial details. For example, 
procedures that affect funding decisions arguably rise to the level of 
policy decisions. 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 FCC IG stated 
in May 2004 in his Semiannual Report to Congress that he believes the 
distinction between FCC rules and USAC administrative procedures 
represents a weakness in program design, fails to give program 
participants a clear understanding of the rules and the consequences 
associated with rule violations, and complicates the design and 
implementation of effective program oversight. 

The critical nature of USAC's administrative procedures is further 
illustrated by FCC's repeated codification of them throughout the 
history of the program. For example, in 1999, USAC implemented a 
procedure known as "the 30-percent policy."[Footnote 48] This procedure 
sought to avoid blanket denials of funding requests because of minor 
errors in the eligibility of the services requested, while at the same 
time prompting applicants to prepare their applications carefully and 
make a conscientious effort to exclude ineligible items. If more than 
30 percent of the services for which discounts were requested were 
ineligible, USAC denied the funding request rather than undertake the 
administratively burdensome task of correcting the request and 
refiguring the amount based only on the eligible services requested. In 
April 2003, in the commission's Second Report and Order in its E-rate 
docket, FCC codified USAC's 30-percent policy, stating that the 
commission found the procedure "improves program operation and is 
important in reducing the administrative costs of the 
program."[Footnote 49] In fact, the procedures put in place by USAC 
generally appear to be sensible and represent thoughtful administration 
of the E-rate program. Nonetheless, USAC is prohibited from making 
program rules. 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."[Footnote 50] 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. 

The other problem with USAC administrative procedures is the question 
of enforcement of those procedures through recovery of funds for 
procedural violations. FCC has generally held that funds can be 
recovered from a beneficiary or service provider only if an FCC rule 
was violated. In its August 2004 order, after several years of E-rate 
audits by USAC and the FCC IG, the commission attempted to clarify the 
rules of the program with relation to recovery of funds. In the order, 
the commission describes nine overall categories of statutory 
violations or FCC rule violations that would result in fund recovery 
being sought, in whole or in part, from beneficiaries or service 
providers. With respect to violations of USAC operating procedures, FCC 
said in its August 2004 order that it intends to evaluate whether there 
are USAC procedures that should be codified into the commission's rules 
and whether violation of any of these codified procedures should also 
be a basis for recovery of funding.[Footnote 51] The commission noted 
that recovery of funds may not be appropriate for violations of 
procedural rules codified to enhance operations. Nevertheless, the 
commission stated that applicants will be required to comply with 
procedural rules and that applications that do not comply will be 
rejected. The commission noted, however, that if the codified 
procedural rule violation "is inadvertently overlooked during the 
application phase and funds are disbursed, the commission will not 
require that they be recovered, except to the extent that such rules 
are essential to the financial integrity of the program, as designated 
by the agency, or that circumstances suggest the possibility of waste, 
fraud, or abuse, which will be evaluated on a case-by-case 
basis."[Footnote 52]

Thus, even under the August 2004 FCC order, the commission did not 
clearly address the treatment of beneficiaries who violate a USAC 
administrative procedure that has not been codified. This creates a 
potentially unfair situation when the procedure is one that can lead to 
denial of an application. That is, if violation of the procedure is 
caught in the application process, funding will be denied. However, if 
the violation slips by in the application process, funding is granted, 
and the violation is later caught during a beneficiary audit, no 
recovery of funding can be attempted since there was no actual rule 
violation by the beneficiary. Also, as noted earlier, the FCC order 
also leaves to USAC the initial determination of which procedures 
should be codified rather than having FCC make that determination. 
Lastly, FCC did not establish a time frame for its review of USAC 
procedures. 

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. In December 2000, we recommended that USAC establish 
a quality assurance function responsible for ensuring that its funding 
decisions adhere to FCC's program eligibility rules.[Footnote 53] In 
response to our recommendation, USAC increased both its in-house audit 
staff and the number of beneficiary audits conducted by outside 
accounting firms.[Footnote 54] Since 2000, there have been 122 
beneficiary audits conducted by outside firms, 57 by USAC staff, and 14 
by the FCC IG (2 of which were performed under agreement with the 
Inspector General of the Department of the Interior). 

Beneficiary audits are the most robust mechanism available to the 
commission in the oversight of the E-rate program, yet FCC generally 
has been slow to respond to audit findings and has not made full use of 
the audit findings as a means to understand and resolve problems within 
the program. First, audit findings can indicate that a beneficiary or 
service provider has violated existing E-rate program rules. In these 
cases, USAC or FCC can seek recovery of E-rate funds, if 
justified.[Footnote 55] 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. The IG notes that in some 
cases the delay is caused by USAC and, in other cases, the delay is 
caused because USAC is not receiving timely guidance from the 
commission (USAC must seek guidance from the commission when an audit 
finding is not a clear violation of an FCC rule or when policy 
questions are raised). Regardless, the recovery of inappropriately 
disbursed funds is important to the integrity of the program and needs 
to occur in a timely fashion. 

Second, under GAO's Standards for Internal Controls in the Federal 
Government,[Footnote 56] 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, table 2 below 
shows audit findings from the 1998 program year that were only recently 
resolved by FCC's August 2004 rulemaking. 

Table 2: Examples of E-Rate Beneficiary Audit Findings from Program 
Year 1998, Resolved in 2004: 

Issue: Record retention--competitive bidding; 
Types of audit findings included in beneficiary audits: Copies of 
contracts could not be provided upon request. In addition, evidence 
could not be provided of compliance with competitive bidding 
requirements. 

Issue: Services provided within funding year; 
Types of audit findings included in beneficiary audits: Services 
delivered after the last date to receive services. 

Issue: Record retention--equipment and services; 
Types of audit findings included in beneficiary audits: E-rate 
equipment could not be identified because fixed asset details were 
insufficient to identify specific equipment. 

Issue: Technology plans; 
Types of audit findings included in beneficiary audits: Beneficiary was 
not monitoring its technology plan implementation. 

Source: GAO analysis of USAC audit reports. 

[End of table]

As table 2 illustrates, audit findings related to the lack of record 
retention by beneficiaries were a problem. Given that the E-rate 
program operates similarly in some ways to a grant program, FCC should 
have had in place a record retention policy at the start of the program 
as a basic accountability measure since record retention is fundamental 
to an audit trail. In fact, early in the program, FCC did create rules 
on beneficiary and service provider document retention, but the rules 
contained a potentially enormous loophole. Under FCC's rules, program 
participants were required only to maintain "the kind of procurement 
records that they maintain for other purchases."[Footnote 57] Thus, if 
a school or library had no record retention policy for other purchases, 
they did not need to retain records related to E-rate purchases. FCC 
proposed a more comprehensive record retention policy in December 2003 
and released it for comment. In August 2004--7 years into the existence 
of the E-rate program--FCC adopted record retention rules that call for 
beneficiaries and service providers to retain E-rate program-related 
records for at least five years. 

In its August 2004 order, the commission concluded that a standardized, 
uniform process for resolving audit findings was necessary, and 
directed USAC to submit to FCC a proposal for resolving audit findings. 
FCC also instructed USAC to specify deadlines in its proposal "to 
ensure audit findings are resolved in a timely manner."[Footnote 58] 
USAC submitted its Proposed Audit Resolution Plan to FCC on October 28, 
2004. The plan memorializes much of the current audit process and 
provides deadlines for the various stages of the audit process. FCC 
released the proposed audit plan for public comment in December 
2004.[Footnote 59]

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 waivers 
of rules warranting recovery of funds.[Footnote 60] These actions could 
help ensure, on a prospective basis, that audit findings are more 
thoroughly and quickly addressed. However, much still depends on timely 
action being taken by FCC, particularly if audit findings suggest the 
need for a rulemaking. 

In addition to problems with responding to audit findings, the audits 
conducted to date have been of limited use because neither FCC nor USAC 
have conducted an audit using a statistical approach that would allow 
them to project the audit results to all E-rate beneficiaries. Thus, at 
present, no one involved with the E-rate program has a basis for making 
a definitive statement about the amount of waste, fraud, and abuse in 
the program.[Footnote 61] 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. FCC's IG and 
USAC are currently working to address this problem by following OMB's 
guidance on the Improper Payments Information Act of 2002 (IPIA). IPIA 
requires that agencies annually estimate the amount of improper 
payments for programs and activities susceptible to significant 
improper payments. In response to IPIA, FCC and USAC are currently in 
the process of soliciting and evaluating responses to a Request for 
Proposals issued to procure the services of an independent auditor to 
conduct approximately 250 beneficiary audits in the E-rate program. 

We examined the methodology used by FCC's IG and USAC for arriving at a 
sample size of 250, and it appears that they properly used OMB guidance 
under IPIA in determining the sample size. However, because the effort 
is still in the beginning stages, they were not able to provide 
additional information on the sample design, such as the method of 
sample selection, stratification criteria, and estimation methods. 
Sample design will be critical in determining the value of the 
information gained from the audits. In addition, FCC IG officials 
estimated the cost at approximately $50,000 per audit. With an 
anticipated total cost of $12.5 million (250 audits at $50,000 per 
audit), this is an expensive effort. If the cost of the 250 audits 
varies by the size of the grant, the sample design could be optimized 
based on variable cost, which may either yield a tighter precision of 
the estimate of the amount of improper payments or reduce the total 
cost of the audit. It should also be noted that because this represents 
a sizable increase from prior audits, FCC may face an even greater 
challenge in resolving the audit findings in a timely manner. 

Lastly, we were told by USAC officials that they have recently 
contracted with a consulting firm to conduct approximately 1,000 site 
visits a year to program beneficiaries beginning in mid-January 2005. 
Although these are not audits, USAC testified in June 2004 that the 
site visits will allow USAC to assess more fully, in real time, how E-
rate funds are being used, to learn about and publicize best practices 
in education technology and program compliance, and to help ensure that 
products and services have in fact been delivered and are being used 
effectively. For each visit, the selected vendor will, among other 
things, conduct a physical inspection of equipment and services 
purchased with E-rate funds. A checklist, outlining the steps for 
review, is to be followed for each visit to ensure consistency. The 
deliverables will include a formal report on each beneficiary visited, 
a monthly report on best practices observed and outreach suggestions, 
and immediate notification to USAC in instances where significant 
noncompliance is discovered. 

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

Under FCC's rules, program participants can seek review of USAC's 
decisions,[Footnote 62] 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. There is currently 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 
approximately 458 (25 percent) are backlog appeals.[Footnote 63]

Perhaps of most concern are the subset of appeals dealing with recovery 
of funding erroneously committed to schools and libraries.[Footnote 64] 
According to USAC, recovery has been slowed, in part, because FCC has 
not been timely in resolving these types of appeals from beneficiaries. 
In fact, through October 2004, of the approximately $36 million in E-
rate funding for which USAC has brought recovery actions since the 
beginning of the program, only $3.2 million has been recovered and 
approximately $14.4 million is tied up in appeals with FCC.[Footnote 
65] This is money that might be placed back into the E-rate program for 
disbursement to applicants. 

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, adding some 
delay to appeals decisions because new staff necessarily take time to 
learn about the program and the issues. (See app. IV for additional 
information on FCC staffing levels in support of the E-rate program.) 
Additionally, we were told that another factor contributing to the 
backlog is that the appeals have become more complicated as the program 
has matured. For example, applicants are increasingly appealing 
decisions concerning eligible services. These appeals can be difficult 
to resolve because the technology needs of participants in the program 
can be complex. 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. 

Conclusions: 

FCC has not done enough to proactively manage and provide a framework 
of government accountability for the multibillion-dollar E-rate 
program. 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. FCC has recently begun to address a few 
of these issues, concluding that the Universal Service Fund constitutes 
an appropriation and that the Fund is subject to the Antideficiency 
Act. Nevertheless, fundamental issues affecting the E-rate program 
remain to be resolved. Resolving these issues in a comprehensive 
fashion is key to ensuring that FCC applies the appropriate government 
accountability standards and safeguards to the E-rate program and to 
the Universal Service Fund. 

In managing the program, FCC has not developed specific and meaningful 
goals and measures to assess the impact of E-rate funding, address 
mission critical management problems, and establish the direction of 
the program as schools and libraries move beyond initial Internet 
connectivity to long-term maintenance concerns. Moreover, FCC has 
consistently shifted many important responsibilities onto USAC, such as 
identifying which administrative procedures should be adopted as 
commission rules and handling resolutions of audit findings. Combined 
with the weaknesses in FCC's oversight mechanisms, these problems 
create barriers to enforcement, uncertainty about what the program's 
requirements really are, and questions about the soundness of the 
program's structure and accountability amid recent cases of fraud, 
waste, and abuse. This mixture of E-rate problems--related both to the 
structure of the program and to FCC's shortcomings in carrying out key 
E-rate management responsibilities--indicates the need for corrective 
actions by FCC. 

Finally, regardless of the problems with the E-rate program, schools 
and libraries across the country use E-rate funds for their purchases 
of telecommunications services. Any reassessment of the program must 
take the needs of the beneficiaries into account. It is particularly 
important that efforts to protect the program from fraud, waste, and 
abuse do not result in a program that is excessively burdensome on 
program participants. 

Recommendations for Executive Action: 

Given the critical importance of telecommunications technologies to 
schools and libraries, we recommend that the Chairman of the Federal 
Communications Commission direct FCC staff to take the following three 
actions: 

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 
program and the funding. The assessment should include, but not be 
limited to: 

* the implications of FCC's determination that the Universal Service 
Fund constitutes an appropriation by identifying the fiscal controls 
that apply and do not apply to the Universal Service Fund, including 
the collection, deposit, obligation, and disbursement of funds; and: 

* an evaluation of the legal authority for the organizational structure 
for carrying out the E-rate program, including the relationship between 
FCC and USAC and their respective authorities and roles in implementing 
the E-rate program. 

Because of the complexities posed by FCC's arrangements with USAC and 
the questions that flow from these arrangements, FCC may want to 
request an advance decision from the Comptroller General under 31 
U.S.C. § 3529. Section 3529 provides the heads of agencies and 
certifying and disbursing officers of the government an opportunity to 
request decisions from the Comptroller General on matters of 
appropriations law in order to ensure compliance with fiscal law. 

2. Establish performance goals and measures for the E-rate program that 
are consistent with the Government Performance and Results Act. FCC 
should use the resulting performance data to develop analyses of the 
actual impact of E-rate funding and to determine areas for improved 
program operations. 

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 resolution. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to FCC for review and comment. In 
its comments, which are reprinted in appendix V, FCC noted that it took 
a number of steps during 2004 to improve its management and oversight 
of the E-rate program. These included the adoption of new rules 
regarding the recovery of improperly disbursed funds; the 
implementation of new accounting requirements related to the Universal 
Service Fund; new efforts to deter waste, fraud, and abuse; and work 
with the FCC IG to develop a plan for conducting hundreds of additional 
beneficiary audits. FCC commented that it has strengthened its 
oversight and management of USAC through the establishment of a high-
level working group to coordinate oversight and has adopted rules 
codifying certain USAC procedures. FCC also noted that it is currently 
evaluating USAC's existing operations and administrative procedures to 
determine which should be codified into FCC rules. 

FCC reaffirmed its belief that the current structure of USAC is 
consistent with congressional intent and guidance, adding that it 
nevertheless intends to consider whether to modify the manner in which 
the Universal Service Fund is administered. During the coming year, FCC 
anticipates examining whether and how to modify its existing 
administrative structure and processes as they apply to the E-rate 
program. FCC intends to consider other administrative structures and 
their implications, including those relying on contractual 
arrangements. Other actions under consideration include initiating a 
notice-and-comment rulemaking proceeding to assess the management of 
the E-rate program and the Universal Service Fund; retaining an outside 
contractor to evaluate the program and make recommendations for 
improving its administration; and requiring certain beneficiaries to 
obtain an independent audit of their compliance with FCC rules. 

Regarding our recommendations, FCC officials told us they did not 
concur with our recommendation to conduct a comprehensive assessment 
concerning the applicability of government accountability requirements, 
policies, and practices. FCC maintains that it has conducted timely and 
extensive analysis of significant legal issues related to the status of 
the fund on a case-by-case basis, and provided examples. Although we 
recognize that FCC has engaged in internal deliberations and external 
consultations and analyses of a number of statutes, we do not believe 
this has been done in a timely manner or that it is appropriate to do 
so on a case-by-case basis. A definitive determination on the entire 
framework of laws that apply or do not apply to this program and to the 
Universal Service Fund itself would enable FCC to make proactive 
operational decisions on what steps it should take and what internal 
controls it should have in place. As noted in our report, we continue 
to believe that major issues remain unresolved such as defining the 
relationship between FCC and USAC and their respective authorities and 
roles in implementing the E-rate program and identifying whether other 
actions taken in the universal service programs constitute obligations 
and ensuring that those are properly recorded. FCC officials told us 
that they concurred with our recommendations for establishing 
performance goals and measures and developing a strategy for reducing 
the backlog of appeals, noting that the commission is already taking 
steps to address these recommendations. 

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
after the date of this letter. At that time, we will send copies to 
interested congressional committees; the Chairman, FCC; the Chief 
Executive Officer, USAC; and other interested parties. We also will 
make copies available to others upon request. In addition, this report 
will be available at no cost on the GAO Web site at [Hyperlink, 
http://www.gao.gov]. If you have any questions about this report, 
please contact me at (202) 512-2834 or [Hyperlink, goldsteinm@gao.gov]. 
Key contributors to this report are listed in appendix VI. 

Sincerely yours,

Signed by: 
Mark L. Goldstein Director, Physical Infrastructure Issues: 

[End of section]

Appendixes: 

Appendix I: Scope and Methodology: 

Our objectives were to review and evaluate: (1) the effect of the 
current structure of the E-rate program on the Federal Communications 
Commission's (FCC) management of the program, (2) FCC's establishment 
of and use of goals and performance measures in managing the program, 
and (3) the effectiveness of FCC's oversight mechanisms--rulemaking 
proceedings, beneficiary audits, and reviews of the Universal Service 
Administrative Company's (USAC) decisions (appeals)--in managing the 
program. 

To provide information on the effect of the current structure of the E-
rate program, we reviewed provisions of the Telecommunications Act, as 
well as documents and records used by FCC to implement and administer 
the E-rate program. We also assessed the extent to which FCC had 
established managerial and financial government accountability 
standards, safeguards, and legal relationships for the E-rate program 
and the Universal Service Fund. Additionally, we interviewed officials 
from FCC's Wireline Competition Bureau, Office of General Counsel, 
Office of Managing Director, and Office of Inspector General. We also 
interviewed officials from the Office of Management and Budget (OMB) 
and USAC, the not-for-profit corporation that administers the E-rate 
program under FCC oversight. 

To respond to the second objective on FCC's use of goals and 
performance measures in managing the program, we reviewed provisions of 
the Government Performance and Results Act of 1993, as well as 
documents and records used by FCC to establish goals and performance 
measures--budget justifications, performance plans, and strategic 
plans. We also reviewed OMB's Program Assessment Rating Tool that 
assessed FCC's performance goals and related measures for the E-rate 
program. In addition, we discussed this issue with officials from FCC's 
Wireline Competition Bureau, Office of Managing Director, Office of 
Strategic Planning and Policy Analysis, and Office of Inspector 
General. We also interviewed officials from the Office of Management 
and Budget and Department of Education. 

Finally, to evaluate FCC's oversight mechanisms for managing the 
program, we reviewed relevant documents relating to all three oversight 
mechanisms: (1) rulemaking proceedings, (2) beneficiary audits, and (3) 
fact-specific adjudicatory decisions (i.e., appeals decisions). 
Specifically, we reviewed FCC orders and provisions of the Code of 
Federal Regulations, which sets forth FCC's rulemaking process. In 
addition, we reviewed relevant USAC documents and policies, including 
its procedures that are in place to aid in the administration of the 
program. To assess FCC's oversight mechanism of auditing, we reviewed 
the FCC Inspector General's (IG) Semi-Annual Reports to Congress, GAO's 
Standards for Internal Controls in the Federal Government, recent FCC 
orders, and beneficiary audits used to assess program compliance. Our 
statistician also examined the methodology (based on interviews with 
and documentation provided by FCC and USAC) that the FCC IG and USAC 
have proposed for the next round of beneficiary audits. To gain an 
understanding of how FCC manages appeals, we reviewed relevant 
documents and gathered data from FCC and USAC regarding the number of 
outstanding appeals and USAC recovery actions tied up in FCC appeals. 

To assess the reliability of the FCC appeals data and USAC recovery 
actions tied up in FCC appeals, we (1) reviewed related documentation, 
(2) conducted electronic testing of the source databases, and (3) 
interviewed knowledgeable agency officials about the quality of the 
data.[Footnote 66] We found that one database was limited in producing 
reports that track historical trends. However, this limitation was 
minor in the context of our engagement. As a result, we determined that 
the data were sufficiently reliable for the purposes of this report. 
Finally, we discussed this issue with officials from FCC's Wireline 
Competition Bureau, Office of General Counsel, Office of Managing 
Director, Office of Inspector General, and USAC. 

We also reviewed internal memorandums provided by FCC's Office of 
General Counsel to determine how FCC has applied federal requirements, 
policies, and practices to the E-rate program and to the Universal 
Service Fund. We interviewed FCC officials to obtain their views 
concerning whether monies in the Universal Service Fund should be 
treated as federal funds and the effect of using government accounting 
standards on the fund. 

Funding commitments since the inception of the program, the number of 
USAC appeals, and USAC recoveries tied up in appeals to USAC were used 
only as background information in the report to provide context for our 
findings; therefore, the data were not verified for data reliability 
purposes. However, to assess the reliability of funding for which USAC 
has brought recovery actions, we (1) reviewed related documentation, 
(2) conducted electronic testing of the source databases, and (3) 
interviewed knowledgeable agency officials about the quality of the 
data. As a result, we determined that the data were sufficiently 
reliable for the purposes of this report. We also determined that other 
relevant documents and records that we gathered were sufficiently 
reliable for the purposes of our review. 

Our review was performed from December 2003 through December 2004 in 
accordance with generally accepted government auditing standards. 

[End of section]

Appendix II: 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.[Footnote 67] However, FCC has never confronted or assessed 
these issues in a comprehensive fashion and has only recently begun to 
address a few of these issues. In particular, FCC has recently 
concluded that as a permanent indefinite appropriation, USF is subject 
to the Antideficiency Act and its funding commitment decision letters 
constitute obligations for purposes of the Antideficiency Act. As 
explained below, we agree with FCC's determination. However, FCC's 
conclusions concerning the status of USF raise further issues related 
to the collection, deposit, obligation, and disbursement of those 
funds--issues that FCC needs to explore and resolve. 

Background: 

Universal service has been a basic goal of telecommunications 
regulation since the 1950s, when FCC focused on increasing the 
availability of reasonably priced, basic telephone service. See Texas 
Office of Public Utility Counsel v. FCC, 183 F.3d 393, 405-406 (5TH 
Cir., 1999), cert. denied sub nom; Celpage Inc. v. FCC, 530 U.S. 1210 
(2000). FCC has not relied solely on market forces, but has used a 
combination of explicit and implicit subsidies to achieve this goal. 
Id. Prior to 1983, FCC used the regulation of AT&T's internal rate 
structure to garner funds to support universal service. With the 
breakup of AT&T in 1983, FCC established a Universal Service Fund 
administered by the National Exchange Carrier Association (NECA). NECA 
is an association of incumbent local telephone companies, also 
established at the direction of 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, § 254, 110 Stat. 56 (1996) (classified at 47 
U.S.C. § 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. § 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., §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 Service Administrative Company (USAC), a 
nonprofit corporation that is a wholly owned subsidiary of NECA, as the 
administrator of the universal service mechanisms.[Footnote 68] 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.[Footnote 69] 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. 

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.[Footnote 70] 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. 

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. § 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.[Footnote 71] Indeed, our decisions and those of the courts so 
recognize. 

Thus, a statute that contains a specific direction to pay, and a 
designation of funds to be used, constitutes an appropriation. 63 Comp. 
Gen. 331 (1984); 13 Comp. Gen. 77 (1933). In these statutes, Congress 
(1) authorizes the collection of fees and their deposit into a 
particular fund, and (2) makes the fund available for expenditure for a 
specified purpose without further action by Congress. This authority to 
obligate or expend collections without further congressional action 
constitutes a continuing appropriation or a permanent appropriation of 
the collections. E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 
(D.C. Cir. 1965), cert. denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 
262 (1990); 73 Comp. Gen. 321 (1994). Our decisions are replete with 
examples of permanent appropriations, such as revolving funds and 
various special deposit funds, including mobile home inspection fees 
collected by the Secretary of Housing and Urban Development,[Footnote 
72] licensing revenues received by the Commission on the 
Bicentennial,[Footnote 73] tolls and other receipts deposited in the 
Panama Canal Revolving Fund,[Footnote 74] user fees collected by the 
Saint Lawrence Seaway Development Corporation,[Footnote 75] user fees 
collected from tobacco producers to provide tobacco inspection, 
certification and other services,[Footnote 76] and user fees collected 
from firms using the Department of Agriculture's meat grading 
services.[Footnote 77] 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.[Footnote 78] 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. § 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. § 
1422b(c) (the Office of Federal Housing Enterprise Oversight levies 
assessments upon the Federal Home Loan Banks and from other sources to 
pay its expenses, but such funds "shall not be construed to be 
government funds or appropriated monies, or subject to apportionment 
for the purposes of chapter 15 of title 31, or any other authority"). 

Like the above examples, USF's current authority stems from a 
statutorily authorized collection of fees from telecommunications 
carriers, and expenditures for a specified purpose--that is, the 
various types of universal service.[Footnote 79] Thus, USF meets both 
elements of the definition of a permanent appropriation. 

We recognize that prior to the passage of the Telecommunications Act of 
1996, there existed an administratively sanctioned universal service 
fund. With the Telecommunications Act of 1996, Congress specifically 
expanded the contribution base of the fund, statutorily mandated 
contributions into the fund, and designated the purposes for which the 
monies could be expended. These congressional actions established USF 
in a manner that meets the elements for a permanent appropriation and 
Congress did not specify that USF should be considered anything other 
than an appropriation.[Footnote 80]

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[Footnote 81] has been termed "the cornerstone of congressional 
efforts to bind the executive branch of government to the limits on 
expenditure of appropriated funds."[Footnote 82] 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. § 1341(a)(1). FCC has 
determined that the Antideficiency Act applies to USF, and as explained 
below, we agree with FCC's conclusion. 

The Antideficiency Act applies to "officer[s] or employee[s] of the 
United States Government... mak[ing] or authoriz[ing] an expenditure or 
obligation... from an appropriation or fund." 31 U.S.C. § 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.[Footnote 83]

Where entities operate with funds that are regarded as appropriated 
funds, such as some government corporations, they, too, are subject to 
the Antideficiency Act. See e.g., B-223857, Feb. 27, 1987 (funds 
available to Commodity Credit Corporation pursuant to borrowing 
authority are subject to Antideficiency Act); B-135075-O.M., Feb. 14, 
1975 (Inter-American Foundation). The Antideficiency Act applies to 
permanent appropriations such as revolving funds[Footnote 84] and 
special funds. 72 Comp. Gen. 59 (1992) (Corps of Engineers Civil Works 
Revolving Fund subject to Antideficiency Act); B-120480, Sep. 6, 1967, 
B-247348, June 22, 1992, and 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). 

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. § 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.[Footnote 85] B-300480, 
Apr. 9, 2003. We have defined an "obligation" as a "definite commitment 
that creates a legal liability of the government for the payment of 
goods and services ordered or received." Id. A legal liability is 
generally any duty, obligation or responsibility established by a 
statute, regulation, or court decision, or where the agency has agreed 
to assume responsibility in an interagency agreement, settlement 
agreement or similar legally binding document. Id. citing to Black's 
Law Dictionary 925 (7TH ed. 1999). The definition of "obligation" also 
extends to "[a] legal duty on the part of the United States which 
constitutes a legal liability or which could mature into a legal 
liability by virtue of actions on the part of the other party beyond 
the control of the United States. . . ." Id. citing to 42 Comp. Gen. 
733 (1963); see also McDonnell Douglas Corp. v. United States, 37 Fed. 
Cl. 295, 301 (1997). 

The funding commitment decision letters provided to applicant schools 
and libraries notify them of the decisions regarding their E-rate 
discounts. In other words, it notifies them whether their funding is 
approved and in what amounts. The funding commitment decision letters 
also notify schools and libraries that the information on the approved 
E-rate discounts is sent to the providers so that "preparations can be 
made to begin implementing... E-rate discount(s) upon the filing [by 
applicants] of... Form 486." The applicant files FCC Form 486 to notify 
USAC that services have started and USAC can pay service provider 
invoices. At the time a school or library receives a funding commitment 
decision letter, the FCC has taken an action that accepts a "legal 
duty... which could mature into a legal liability by virtue of actions 
on the part of the grantee beyond the control of the United States." 
Id. citing 42 Comp. Gen. 733, 734 (1963). In this instance, the funding 
commitment decision letter provides the school or library with the 
authority to obtain services from a provider with the commitment that 
it will receive a discount and the provider will be reimbursed for the 
discount provided. While the school or library could decide not to seek 
the services or the discount, so long as the funding commitment 
decision letter remains valid and outstanding, USAC and FCC no longer 
control USF's liability; it is dependent on the actions taken by 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. 

[End of section]

Appendix III: Structure of the Universal Service Administrative 
Company: 

Various policies to promote universal service--providing residential 
customers with affordable, nationwide access to basic telephone 
service--have generally been around since the 1950s. Congress codified 
and made significant changes to universal service policy in the 
Telecommunications Act of 1996. However, Congress did not prescribe a 
structure for administering the universal service programs and instead 
called for a Federal-State Joint Board on Universal Service (Joint 
Board) to make recommendations to FCC.[Footnote 86]

At the time of the act, the National Exchange Carrier Association 
(NECA) was responsible for administering the existing universal service 
mechanisms providing support for high-cost areas and low-income 
individuals. NECA is an association of incumbent local telephone 
companies that was established at FCC's direction in 1983 (in 
anticipation of the breakup of the Bell System) to administer 
interstate access tariffs and the revenue distribution process for the 
nation's nearly 1,000 local telephone companies. In November 1996, the 
Joint Board recommended that, in the interest of providing services to 
schools and libraries and health care providers quickly, FCC should 
appoint NECA as the temporary administrator of universal service to 
these groups, subject to changes in NECA's governance to make NECA more 
representative of the telecommunications industry as a whole. Under the 
Joint Board's recommendation, NECA would continue this role until a 
permanent administrator was appointed. The Joint Board recommended that 
FCC establish an advisory board to select and oversee a neutral third-
party administrator for all universal service programs and suggested 
criteria to be used in that selection. The Joint Board further 
recommended that FCC allow NECA to change its membership and governance 
in a manner that would allow it to compete for the role of permanent 
administrator in the advisory board's selection process. 

On the basis of the Joint Board's recommendations, FCC agreed in a May 
1997 order to appoint NECA as the temporary administrator, subject to 
changes in NECA's governance. It also agreed to create a federal 
advisory committee, whose sole responsibility would be to recommend an 
administrator, and directed that the administrator should select a 
contractor to manage the application process for schools and libraries. 
NECA later determined that developing a satisfactory board structure to 
be able to bid for the permanent administrator role might not be 
possible. Thus, NECA proposed to FCC in January 1997 that it be allowed 
to establish a separate subsidiary to administer universal service. 

In July 1997, FCC issued an order directing NECA to create two 
independent nonprofit corporations--one to administer the program for 
schools and libraries (the Schools and Libraries Corporation) and one 
to administer the program for rural health care providers (the Rural 
Health Care Corporation). FCC's order further specified that these 
corporations would continue to administer the programs even after the 
appointment of a permanent administrator. To carry out billing, 
collecting, and disbursement activities for these programs, FCC 
directed NECA to create a nonprofit subsidiary. FCC further directed 
that the subsidiary create a special committee of its board of 
directors to administer the universal service programs for high-cost 
areas and low-income individuals. NECA created the Universal Service 
Administrative Company (USAC) as the subsidiary. 

In November 1998, FCC changed the universal service structure in 
response to legal concerns about FCC's authority to create the two 
independent corporations and Congress's directive that a single entity 
administer universal service support.[Footnote 87] FCC appointed an 
existing body, USAC, as the permanent administrator of the program and 
directed the Schools and Libraries Corporation and the Rural Health 
Care Corporation to merge with USAC by January 1, 1999. Under this 
merger, the staff of the Schools and Libraries Corporation became part 
of a new Schools and Libraries Division (SLD) within USAC, carrying out 
essentially the same functions as before, such as processing and 
reviewing E-rate applications. However, SLD contracts out most of its 
billing, collecting, and disbursement activities to USAC. In addition, 
in 2000 NECA formed an unaffiliated, for-profit corporation, NECA 
Services Inc., to pursue new business opportunities. USAC later 
contracted most of its application processing, client support, and 
review functions to NECA Services Inc. See figure 1. 

Figure 1: Relationship among Entities Involved in the E-Rate Program: 

[See PDF for image] 

[End of figure] 

[End of section]

Appendix IV: FCC Staffing Levels in Support of the E-Rate Program: 

Table 3: Number of FCC Full-Time Equivalent (FTE)A Positions Supporting 
E-Rate Program, Fiscal Years 1997-2004: 

FCC bureau/office: Enforcement Bureau[B]: Professional; 
Fiscal year 1997: N/A; 
Fiscal year 1998: N/A; 
Fiscal year 1999: N/A; 
Fiscal year 2000: N/A; 
Fiscal year 2001: N/A; 
Fiscal year 2002: N/A; 
Fiscal year 2003: 0.50; 
Fiscal year 2004: 0.75. 

FCC bureau/office: Enforcement Bureau[B]: Managerial; 
Fiscal year 1997: N/A; 
Fiscal year 1998: N/A; 
Fiscal year 1999: N/A; 
Fiscal year 2000: N/A; 
Fiscal year 2001: N/A; 
Fiscal year 2002: N/A; 
Fiscal year 2003: 0.20; 
Fiscal year 2004: 0.50. 

FCC bureau/office: Enforcement Bureau[B]: Administrative; 
Fiscal year 1997: N/A; 
Fiscal year 1998: N/A; 
Fiscal year 1999: N/A; 
Fiscal year 2000: N/A; 
Fiscal year 2001: N/A; 
Fiscal year 2002: N/A; 
Fiscal year 2003: 0.20; 
Fiscal year 2004: 0.30. 

FCC bureau/office: Enforcement Bureau[B]: Subtotal; 
Fiscal year 2003: 0.90; 
Fiscal year 2004: 1.55. 

FCC bureau/office: Office of General Counsel: Professional; 
Fiscal year 1997: 0.65-0.70; 
Fiscal year 1998: 0.30-0.40; 
Fiscal year 1999: 0.80-0.90; 
Fiscal year 2000: 0.55-0.60; 
Fiscal year 2001: 0.30-0.35; 
Fiscal year 2002: 0.35-0.40; 
Fiscal year 2003: 0.30-0.40; 
Fiscal year 2004: 0.30-0.40. 

FCC bureau/office: Office of General Counsel: Managerial; 
Fiscal year 1997: 0.65; 
Fiscal year 1998: 0.10-0.15; 
Fiscal year 1999: 0.40; 
Fiscal year 2000: 0.40; 
Fiscal year 2001: 0.20-0.23; 
Fiscal year 2002: 0.20-0.25; 
Fiscal year 2003: 0.25-0.30; 
Fiscal year 2004: 0.10-0.15. 

FCC bureau/office: Office of General Counsel: Subtotal; 
Fiscal year 1997: 1.30-1.35; 
Fiscal year 1998: 0.40-0.55; 
Fiscal year 1999: 1.20-1.30; 
Fiscal year 2000: 0.95-1; 
Fiscal year 2001: 0.50-0.58; 
Fiscal year 2002: 0.55-0.65; 
Fiscal year 2003: 0.55-0.70; 
Fiscal year 2004: 0.40-0.55. 

FCC bureau/office: Office of Managing Director: Professional; 
Fiscal year 1997: 0.00; 
Fiscal year 1998: 0.00; 
Fiscal year 1999: 0.25; 
Fiscal year 2000: 0.50; 
Fiscal year 2001: 0.50; 
Fiscal year 2002: 1.00; 
Fiscal year 2003: 1.00; 
Fiscal year 2004: 1.10. 

FCC bureau/office: Office of Managing Director: Managerial; 
Fiscal year 1997: 0.00; 
Fiscal year 1998: 0.00; 
Fiscal year 1999: 0.25; 
Fiscal year 2000: 0.25; 
Fiscal year 2001: 0.25; 
Fiscal year 2002: 0.30; 
Fiscal year 2003: 0.30; 
Fiscal year 2004: 0.30. 

FCC bureau/office: Office of Managing Director: Subtotal; 
Fiscal year 1997: 0.00; 
Fiscal year 1998: 0.00; 
Fiscal year 1999: 0.50; 
Fiscal year 2000: 0.75; 
Fiscal year 2001: 0.75; 
Fiscal year 2002: 1.30; 
Fiscal year 2003: 1.30; 
Fiscal year 2004: 1.40. 

FCC bureau/office: Office of Strategic Planning: Professional; 
Fiscal year 1997: 1.50[C]; 
Fiscal year 1998: 0.10; 
Fiscal year 1999: 0.10; 
Fiscal year 2000: 0.10; 
Fiscal year 2001: 0.10; 
Fiscal year 2002: 0.10; 
Fiscal year 2003: 0.50; 
Fiscal year 2004: 0.50. 

FCC bureau/office: Office of Strategic Planning: Subtotal; 
Fiscal year 1997: 1.50; 
Fiscal year 1998: 0.10; 
Fiscal year 1999: 0.10; 
Fiscal year 2000: 0.10; 
Fiscal year 2001: 0.10; 
Fiscal year 2002: 0.10; 
Fiscal year 2003: 0.50; 
Fiscal year 2004: 0.50. 

FCC bureau/office: Wireline Competition Bureau: Professional; 
Fiscal year 1997: 4.00; 
Fiscal year 1998: 6.00; 
Fiscal year 1999: 10.00; 
Fiscal year 2000: 13.00; 
Fiscal year 2001: 10.00; 
Fiscal year 2002: 9.00; 
Fiscal year 2003: 8.00; 
Fiscal year 2004: 5.80. 

FCC bureau/office: Wireline Competition Bureau: Managerial; 
Fiscal year 1997: 0.30; 
Fiscal year 1998: 0.30; 
Fiscal year 1999: 0.30; 
Fiscal year 2000: 1.30; 
Fiscal year 2001: 2.00; 
Fiscal year 2002: 1.00; 
Fiscal year 2003: 1.00; 
Fiscal year 2004: 1.00. 

FCC bureau/office: Wireline Competition Bureau: Administrative; 
Fiscal year 1997: 1.20; 
Fiscal year 1998: 1.60; 
Fiscal year 1999: 2.20; 
Fiscal year 2000: 2.50; 
Fiscal year 2001: 2.80; 
Fiscal year 2002: 2.80; 
Fiscal year 2003: 2.20; 
Fiscal year 2004: 2.20. 

FCC bureau/office: Wireline Competition Bureau: Front office 
managerial; 
Fiscal year 1997: 0.50; 
Fiscal year 1998: 0.50; 
Fiscal year 1999: 0.50; 
Fiscal year 2000: 0.50; 
Fiscal year 2001: 0.50; 
Fiscal year 2002: 1.00; 
Fiscal year 2003: 0.83; 
Fiscal year 2004: 1.33. 

FCC bureau/office: Wireline Competition Bureau: Subtotal; 
Fiscal year 1997: 6.00; 
Fiscal year 1998: 8.40; 
Fiscal year 1999: 13.00; 
Fiscal year 2000: 17.30; 
Fiscal year 2001: 15.30; 
Fiscal year 2002: 13.80; 
Fiscal year 2003: 12.03; 
Fiscal year 2004: 10.33. 

FCC bureau/office: Total; 
Fiscal year 1997: 8.80-8.85; 
Fiscal year 1998: 8.90-9.05; 
Fiscal year 1999: 14.80-14.90; 
Fiscal year 2000: 19.10-19.15; 
Fiscal year 2001: 16.65-16.73; 
Fiscal year 2002: 15.75-15.85; 
Fiscal year 2003: 15.28-15.43; 
Fiscal year 2004: 14.18-14.33. 

Source: FCC. 

Notes: N/A = not applicable. 

[A] Full-time equivalent (FTE) is a measure of federal civilian 
employment. One FTE is equal to 1 work-year of 2,080 hours. 

[B] All E-rate related investigation and audit work performed by FCC's 
Enforcement Bureau is contained in the figures for 2003 and 2004. The 
Enforcement Bureau was established in 1999 and first assigned an audit 
function in the commission's 2002 reorganization. 

[C] This estimate is for all universal service programs. 

[End of table]

[End of section]

Appendix V: Comments from the Federal Communications Commission: 

Federal Communications Commission: 
Washington, D.C. 20554:

January 14, 2005:

Mr. Mark Goldstein: 
Director:
Physical Infrastructure Issues:
U.S. Government Accountability Office: 
Washington, DC 20548:

Dear Mr. Goldstein:

Thank you for the opportunity to review and comment on the Government 
Accountability Office's (GAO) Draft Report Greater Involvement Needed 
by FCC in the Management and Oversight of the E-Rate Program (GAO Draft 
Report). This letter provides the Federal Communication Commission's 
(FCC) response to the GAO conclusions and recommendations contained in 
the Draft Report.

Since its inception, the E-rate program has been a success in 
connecting schools and libraries to the Internet and promoting the 
deployment of advanced telecommunications services and broadband 
capability to program stakeholders. Over the years, approximately 
100,000 public schools, private schools, and libraries have 
participated in the E-rate program. The FCC recognizes that the $2.25 
billion E-rate program continues to experience operational and 
management challenges, some of which have been addressed in past GAO 
reports. We continue to strive to improve the management and oversight 
of the program, and we continue to devote resources to improve all 
aspects of the program and detect and deter the misconduct of bad 
actors seeking to gain at the public's expense.

In the Draft Report, the GAO draws several conclusions about the FCC's 
management and oversight of the E-rate program. In particular, the GAO 
concludes that the FCC has not done enough to manage the E-rate program 
proactively; established an unusual structure for the E-rate program 
without conducting a comprehensive assessment of the applicability of 
federal requirements, laws, and policies; not developed specific and 
meaningful goals and measures to assess the impact of E-rate funding; 
and shifted many important responsibilities onto the Universal Service 
Administrative Company (USAC). See GAO Draft Report at 46-47. We 
respond to those conclusions below.

The GAO Draft Report notes that any reassessment of the E-rate program 
must take the needs of beneficiaries into account, and cautions that 
any efforts to protect the Universal Service Fund (USF) from waste, 
fraud, and abuse should not result in excessive burdens on program 
participants. Id. at 47. We agree that the administration of USF must 
carefully balance the need for accountability and efficiency with the 
desire not to impose unnecessary burdens on the intended beneficiaries 
of the programs.

Finally, the GAO makes three recommendations for executive action. 
First, it recommends that the FCC 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 program. The GAO recommends that this 
assessment include both the implications of the FCC's determination 
that the USF constitutes an appropriation by identifying the fiscal 
controls that apply as well as those that do not apply to the USF, 
including the collection, deposit, obligation, and disbursement of USF 
monies, and an evaluation of the legal authority for the organizational 
structure for carrying out the program, including the relationship 
between the FCC and USAC and their respective authorities and roles in 
implementing the E-rate program. Id. at 47-48. Second, the GAO 
recommends that the FCC establish performance goals and measures for 
the E-rate program that are consistent with the Government Performance 
and Results Act. Third, the GAO recommends that the FCC develop a 
strategy for reducing the backlog of E-rate appeals, including ensuring 
that adequate staffing resources are devoted to E-rate appeals. Id. at 
48. Our responses below first address the management of the program, 
then the three specific recommendations.

FCC Management of the E-Rate Program:

This past year, the FCC took a number of steps to improve its 
management and oversight of the E-rate program. In particular, the FCC 
adopted new rules to revise the FCC's recovery of improperly disbursed 
funds, strengthen audit and investigation processes, and apply federal 
government accountability requirements to the USF, including compliance 
with government accounting standards and the Debt Collection 
Improvement Act (DCIA).[NOTE 1] The FCC also took steps to ensure that 
the Universal Service Administrative Company (USAC) improved its 
efforts to deter waste, fraud, and abuse. For example, the FCC directed 
USAC to develop a comprehensive plan to promote awareness of program 
rules in the E-rate community, engage an independent auditor to conduct 
100 audits of E-rate program beneficiaries, work with the FCC's Office 
of Inspector General (OIG) to develop a plan for conducting hundreds 
more beneficiary audits [NOTE 2] and improve its review and processing 
of E- rate applications. [NOTE 3] In addition, the FCC improved 
oversight efforts by dedicating additional staff to USF audit and 
oversight issues, providing written instructions to USAC on these 
issues, and revising the annual independent audit of USAC's operations. 
[NOTE 4] The FCC also strengthened its oversight and management of USAC 
by establishing a high-level staff working group to coordinate 
oversight issues affecting USAC and the E-rate program, requiring 
additional reports from USAC concerning its financial and operating 
data, directing USAC to enhance its audit and oversight efforts, and 
providing guidance to USAC's written requests concerning the 
applicability of Federal budgetary requirements. [NOTE 5] With respect 
to the roles of the FCC and USAC, the FCC adopted rules codifying 
certain USAC procedures that had formed the basis for audit findings in 
the past. [NOTE 6] The FCC is currently evaluating USAC's existing 
operations and administrative procedures to determine which additional 
USAC procedures should be codified in the FCC's rules in order to 
improve the effectiveness of the program or facilitate the recovery of 
improperly disbursed funds.

We believe that the current USAC structure is consistent with 
congressional intent and conforms with congressional guidance. The FCC 
anticipates taking additional steps to strengthen management and 
oversight of the E-rate program in the coming year. We are examining 
whether and how to modify our administrative structure and processes as 
they apply to the program. For the upcoming year, the FCC is 
considering, among other things, initiating a notice-and-comment 
rulemaking proceeding to assess management of the E-rate program and 
the USF and, contemporaneously, retaining an outside contractor to 
evaluate the program and make recommendations for revising and 
improving its administration. In addition, we are currently considering 
expanding the audit coverage of the USF by requiring certain E-rate 
beneficiaries - both schools and libraries and service providers - to 
obtain an independent audit of their compliance with FCC rules. These 
audits would focus on entities receiving the largest financial benefit 
from the E-rate program. We are also seeking additional resources to 
hire more staff to address management and oversight of the E-rate 
program, and we are redirecting existing staff to these areas.

The Draft Report references the "unusual" administrative structure of 
the fund. It recommends that we evaluate the legal authority for the 
organizational structure for carrying out the E-rate program, including 
the relationships between the FCC and USAC and their respective roles 
and authority in implementing the E-rate program. We believe that the 
current structure is consistent with congressional intent, and conforms 
to guidance that Congress provided in a 1998 conference report. As the 
Draft Report acknowledges, the Telecommunications Act of 1996 "did not 
specify how the FCC was to administer" the program, "nor did it 
prescribe the structure and legal parameters of the universal service 
mechanisms to be created." (Draft Report at 14). The administrative 
structure is consistent with the Commission's historical practice of 
using private organizations, such as the National Exchange Carrier 
Association (NECA), to help administer universal service programs. 
Congress was well aware of that practice when it enacted the 
Telecommunications Act of 1996. The Commission's establishment of the 
current structure is also consistent with the recommendations of the 
Federal-State Joint Board, as provided in the statutory provisions 
authorizing the E-rate program. As noted above, the current structure 
of the program also follows the specific guidance set out in a 1998 
congressional conference report, Conference Report to Accompany H.R. 
3579, H.R. Rep. No. 504, 105TH Cong., 2d Sess. 87 (1998). The 
Conference Report states that, although the specific provisions of the 
earlier Senate bill (S. 1768) addressing the structure for the 
administration of the program were not ultimately incorporated in the 
conference agreement, "the conferees expect that the FCC will comply 
with the reporting requirement in the Senate bill ... and propose a new 
structure for the implementation of universal service programs." Id. 
Section 2004(b)(2) of 5.1768 required that the Commission's report "... 
propose a revised structure for the administration of the programs 
established under section 254(b) ... The revised structure shall 
consist of a single entity." The Commission reported to Congress on its 
implementation of that guidance. Report to Congress in Response to 
Senate Bill 1768 and Conference Report on H.R. 3579, 13 FCC Rcd 11810 
(1998).

Nevertheless, we intend to consider whether to modify the manner in 
which the USF is administered, including possible changes to the 
underlying administrative structure. Among other things, we intend to 
consider examining other administrative structures, including those 
relying on contractual arrangements. We also expect to examine the 
implications of alternative administrative structures, such as any need 
for increased appropriations to implement a contractual arrangement.

Analysis of the Applicability of Federal Requirements, Laws, and 
Policies:

The draft report indicates that the FCC "has never conducted a 
comprehensive assessment of which federal requirements, policies, and 
practices apply to the program, to USAC, or the Universal Service Fund 
itself." (Draft Report at 13). To the contrary, the FCC has undertaken 
timely and extensive analysis of the significant legal issues related 
to the status of the fund. To determine whether and how statutory 
provisions should be applied, the specific language of any relevant 
statutes must be examined to determine whether the provisions apply to 
the fund, to the fund's administrator, or to the FCC itself. Thus, the 
FCC has generally addressed these issues on a case-by-case basis. As 
set forth below, the FCC has examined the significant, relevant 
financial management statutes that potentially apply to the fund and 
has otherwise sought expert advice where appropriate:

* Nearly five years ago, the FCC confronted the central issue of 
whether the fund is "public money" subject to the requirements of the 
Miscellaneous Receipts Act and related laws and regulations that apply 
to public money. Because of the importance of this question and its 
implications for the E-rate program, in early 2000 the FCC's General 
Counsel, after discussions with the FCC Commissioners on this issue, 
sought expert guidance from the Office of Management and Budget (OMB). 
As the Draft Report also notes, OMB's General Counsel provided advice 
to the FCC on this issue in April 2000, concluding that the fund was 
not public money subject to the Miscellaneous Receipts Act. See Letter 
from Robert G. Damus, General Counsel, Office of Management and Budget 
to Christopher Wright, General Counsel, Federal Communications 
Commission (Apr. 28, 2000). Moreover, the Commission has long 
recognized that the fund is a permanent indefinite appropriation, 
classified as a special fund in the United States budget. See, e.g., 
Letter from William E. Kennard, Chairman, FCC, to Michael R. Volpe, 
Assistant General Counsel, GAO, April 28, 2000; Letter from Jane E. 
Mago, General Counsel, FCC to Robert D. McCallum, Jr. Assistant 
Attorney General, U.S. Department of Justice, June 3, 2002.

* As the GAO is aware from its investigation, in January 2001, the 
FCC's Office of General Counsel (OGC) reviewed relevant statutes and 
provided specific guidance to the FCC's Managing Director concerning 
the applicability to the fund of significant federal financial 
management statutes, including the Federal Financial Management 
Improvement Act of 1996, the Federal Managers Financial Integrity Act 
of 1982, the Government Management Reform Act of 1994, the Information 
Technology Management Reform Act of 1996, the Federal Credit Reform Act 
of 1990, the Government Performance and Results Act of 1993, and the 
Federal Acquisition Regulations.

* After examining the specific language of relevant statutes, the FCC 
has also assessed the applicability of many other statutes. It has 
determined that the Freedom of Information Act (FOIA) applies to 
records of the fund, but that all FOIA requests should be filed with 
the FCC and not with the fund's administrator. Inter-Tel Technologies, 
Inc., 19 FCC Rcd 5204, 5204 n.3 (2004); also see the USAC Web site 
http://www.universalservice.org/hc/privacypolicy.asp. The FCC has also 
determined that the Debt Collection Act applies to the fund, 47 C.F.R. 
§ 1.1901(b); see Changes to the Board of Directors of the National 
Exchange Carrier Association, Inc., Federal-State Joint Board on 
Universal Service, Order, FCC 99-291 (rel. Oct. 8, 1999). The FCC also 
applies relevant provisions of Title 31 of the United States Code, 
including the Recording Statute, 31 U.S.C. § 501, the Purpose Statute, 
31 U.S.C. §1301(a), 31 U.S.C. §3512(c), (d), and the Treasury Financial 
Manual. Because the FCC is required to prepare audited financial 
statements under the Accountability for Tax Dollars Act of 2002, P.L. 
107-289, the FCC has made clear that the fund's administrator must 
maintain the USF's accounts in accordance with the United States 
Government Standard General Ledger (USGGSL). See GovGAAP Order, 18 FCC 
Rcd 19911.

The Draft Report also suggests that the FCC has not resolved whether 
certain specific statutes apply to the fund, and mentions in particular 
the Improper Payments Information Act, the Single Audit Act, the 
Miscellaneous Receipts Act, and the Cash Management Improvement Act. 
(Draft Report at 21-22). These conclusions are in error.

* The FCC addressed the applicability of the Improper Payments 
Information Act to the fund and specifically included the fund in its 
first report required under that statute. Federal Communications 
Commission, Report to Congress on Improper Payments, March 31, 2004. As 
noted above, the FCC will soon initiate several hundred audits intended 
to assist in identifying potential improper payments of USF monies.

* Because OMB is the expert agency responsible for implementation of 
the Single Audit Act, 31 U.S.C. §§7504, 7505, the FCC previously sought 
guidance concerning the applicability of the Single Audit Act to the 
USE OMB staff informed FCC staff that they do not believe the Single 
Audit Act applies to the fund.

* The Secretary of the Treasury is charged with prescribing regulations 
to implement the Cash Management Improvement Act, and the relevant 
Treasury regulations state that the rules apply only to programs that 
are listed in the "Catalogue of Federal Domestic Assistance." 31 C.F.R. 
§205.1 (c). Because the fund is not listed in the Catalogue, it is not 
covered by regulations implementing the Cash Management Improvement Act.

* As described above, over five years ago the FCC sought guidance from 
OMB concerning the applicability of the Miscellaneous Receipts Act, and 
OMB advised that the fund was not public money subject to the 
Miscellaneous Receipts Act.

* After consideration of the applicable law by FCC staff, the 
Commission, in accordance with 31 U.S.C. §1532, has declined to 
transfer funds from the USF account to the FCC's account for salaries 
and expenses in the absence of statutory authority, and hence does not 
use Universal Service funds to cover the expenses of administration by 
the FCC or an FCC contractor. In contrast, the Commission's rules 
provide that USAC's expenses of administering the fund may be paid from 
the appropriation for the fund as an expense reasonably necessary to 
proper execution of the appropriation and not otherwise precluded.

To the extent that the GAO disagrees with these or any of the prior 
determinations that have been made, we urge the GAO to make those views 
known in this report or in a supplemental report. It would also be 
consistent with the overall scope and purpose of the Report for GAO to 
provide the legal analysis in its Report, just as the Report provides 
conclusions concerning the Antideficiency Act. We also welcome the 
GAO's expert guidance and note that GAO's legal determinations, either 
in this report or a supplemental report, would also help to resolve any 
subsidiary issues concerning the applicability of Title 31 of the U.S. 
Code and relevant Treasury regulations, including those pertaining to 
disbursements.

To the extent that the GAO opines on the applicability of any statutory 
provisions, it would assist legislative and executive policymaking to 
identify the likely impact of its legal conclusions on the fund. For 
example, if the GAO were to conclude that the Miscellaneous Receipts 
Act applies to the USF, it would be useful to include an analysis of 
the impact that determination, including any lost interest income, 
would have on the fund, program beneficiaries, and consumers.

Establishing Goals and Performance Measures:

As the Draft Report notes, the FCC had established some performance 
measures, but determined that it needed to establish better and more 
comprehensive ways of measuring E-rate performance. (Draft Report at 
23, 31). We are actively working to reestablish performance goals and 
measures that are consistent with the Government Performance and 
Results Act (GPRA). [NOTE 7] As noted in the Draft Report, the 
Telecommunications Act of 1996 did not include specific goals for 
supporting schools and libraries, but instead used general language 
directing the FCC to establish the program. (Draft Report at 23). The 
Draft Report also notes that "the complex issue of measuring 
educational outcomes lies outside FCC's expertise and comes under the 
purview of the Department of Education." (Draft Report at 32). These 
factors have contributed to the FCC's difficulties in establishing 
final performance measurements for the E-rate program. To address these 
challenges, we have assigned additional staff to revise the performance 
measures used for the E-rate program and anticipate including revised 
performance measures in the FCC's FY 2007 budget submission as part of 
the Office of Management and Budget's (OMB) Program Assessment Rating 
Tool (PART) process. However, a complete set of performance measures 
that are consistent with the GPRA may not be implemented until the 
FCC's next fiscal year budget submission because of the need to seek 
comment from program stakeholders, the notice-and-comment requirements 
of the Administrative Procedure Act, and the need to modify or adopt 
any necessary information collections.

Reducing Backlog of E-Rate Appeals:

We have made progress in reducing the backlog of E-rate appeals (i.e., 
appeals pending at the FCC for longer than 90 days). Since 1998, 
approximately 1,865 appeals have been filed with the FCC, and 
approximately 527 are currently pending, of which approximately 458 are 
backlog appeals. After devoting the better part of the past year to 
addressing various issues with the program, such as resolving key 
rulemakings to address the recovery of improperly disbursed USF monies, 
we have redirected staffing resources and hired additional attorneys to 
USF oversight and program management, including the resolution of E- 
rate appeals. We also are working to resolve all backlogged E-rate 
appeals by the end of calendar year 2005. To accomplish this, the FCC 
staff has prioritized the pending cases, assigned attorneys and other 
professionals to resolving pending appeals, hired new attorneys devoted 
to resolving E-rate appeals, and requested and obtained temporary 
assistance by detailing attorneys from bureaus and offices in the FCC 
to this effort.

Recognizing, however, that much more could be done with appropriate 
additional resources, the FCC has requested direct appropriations in 
prior years to conduct greater oversight of the universal service 
programs. For example, in both FY 2004 and FY 2005, the FCC requested 
several million dollars so that the FCC's Office of Inspector General 
could conduct additional USF program audits. These requests were 
denied. We expect to continue to request additional resources from 
Congress to improve USF oversight, resolve E-rate appeals, and handle 
related matters.

We appreciate the opportunity to review and comment on your draft 
report. We thank you for your continued contributions to the program's 
success.

Sincerely,

Signed by: 

Andrew S. Fishel: 
Managing Director:

Enclosures:

NOTES: 

[1] See, e.g., Schools and Libraries Universal Service Support 
Mechanism, Fifth Report and Order and Order, 19 FCC Rcd 15808 (2004) 
(Fifth Report and Order) (strengthening audit and investigation 
processes applicable to the E-rate program); Federal-State Joint Board 
on Universal Service, Changes to the Board of Directors for the 
National Exchange Carriers Association, Inc., Schools and Libraries 
Universal Service Support Mechanism, Order on Reconsideration and 
Fourth Report and Order, 19 FCC Rcd 15252 (2004) (revising rules for 
recovery of E-rate funds); Amendment of Parts 0 and 1 of the 
Commission's Rules; Implementation of the Debt Collection Improvement 
Act of 1996 and Adoption of Rules Governing Applications or Requests 
for Benefits by Delinquent Debtors, Report and Order, 19 FCC Rcd 6540 
(2004); Application of Generally Accepted Accounting Principles For 
Federal Agencies And Generally Accepted Government Auditing Standards 
to the Universal Service Fund, Application of Generally Accepted 
Accounting Principles For Federal Agencies and Generally Accepted 
Government Auditing Standards to the Telecommunications Relay Services 
Fund, Order, 18 FCC 19911 (2003) (GovGAAP Order) (applying government 
accounting and auditing standards to the USF).

[2] As of the date of this letter, the FCC and USAC are currently in 
the process of soliciting and evaluating responses to a Request for 
Proposal issued to procure the services of an independent auditor. See 
Universal Service Administrative Company, Request for Proposals for 
Audit Services-in Support of Oversight Program for the Universal 
Service Fund (Nov. 12, 2004) (seeking proposals for audit services to 
conduct USF beneficiary audits). We expect to complete this process 
during the first quarter of calendar year 2005.

[3] See, e.g., Letter from Richard Lerner, Associate Chief, Wireline 
Competition Bureau, FCC to George McDonald, Vice President-Schools and 
Libraries Division, Universal Service Administrative Company (Nov. 10, 
2004) (providing instructions to USAC concerning its E-rate outreach 
and education efforts); Letter from Richard Lerner, Associate Chief, 
Wireline Competition Bureau, FCC to Wayne Scott, Vice President - 
Internal Audits, Universal Service Administrative Company (Sept. 29, 
2004) (providing instructions to USAC concerning its internal audit 
efforts).

[4] See, e.g., Letter from Richard Lerner, Associate Chief, Wireline 
Competition Bureau, FCC to Wayne Scott, Vice President - Internal 
Audits, Universal Service Administrative Company (Sept. 30, 2004) 
(providing guidance concerning the planned revisions to the annual 
independent audit of USAC's operations); Letter from Jeffrey Carlisle, 
Chief, Wireline Competition Bureau, FCC to Lisa Zaina, Chief Executive 
Officer, Universal Service Administrative Company (Oct. 13, 2004) 
(requiring USAC to submit a plan for processing of E-rate funding 
commitment decision letters); Letter from Jeffrey Carlisle, Chief, 
Wireline Competition Bureau, FCC to Lisa Zaina, Chief Executive 
Officer, Universal Service Administrative Company (Oct. 22, 2004) 
(approving plan for processing of E-rate funding commitment decision 
letters).

[5] See, e.g., Letter from Jeffrey Carlisle, Chief, Wireline 
Competition Bureau, FCC and Andrew S. Fishel, Managing Director, FCC to 
Frank Gumper, Chairman of the Board, Universal Service Administrative 
Company (Sept. 27, 2004) (providing guidance concerning Federal 
budgetary requirements).

[6] See, e.g., Fifth Report and Order at paras. 45-63 (adopting rules 
pertaining to technology plan requirements and document retention 
requirements).

[7] As the GAO Draft Report notes, the FCC used to measure the number 
of public schools connected to the Internet, but stopped doing so 
because, among other reasons, the measure was no longer a useful 
indicator of the impact of E-rate funds. (Draft Report at 24-25). 

The following are GAO's comments on the Federal Communications 
Commission's letter dated January 14, 2005. 

GAO's Comments: 

1. As stated in our report, we have not addressed FCC's authority to 
establish the current organizational structure. We recognize that FCC 
has reported to Congress on its implementation of the current 
organizational structure and it believes that structure is consistent 
with congressional intent and conforms to congressional guidance. 
However, at the time this structure was established by FCC, numerous 
issues such as the status of the Universal Service Fund as federal 
funds--specifically a permanent indefinite appropriation--and the 
applicability of fiscal statutes such as the Antideficiency Act had not 
been resolved. It is critical to the management of federal funds that 
the funds be properly collected, deposited, obligated, and expended by 
authorized parties in accordance with those determinations regarding 
the status of the funds. Thus, we believe FCC should consider whether 
the current organizational structure and roles and responsibilities of 
FCC and USAC are consistent with law and comply with fiscal and 
accountability requirements for federal funds. FCC states that it 
intends to consider whether to modify the manner in which the Universal 
Service Fund is administered, including possible changes to the 
underlying administrative structure. We believe this would be a 
positive step toward carrying out our recommendation. 

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

Addressing the applicability of the statutes on a case-by-case basis, 
as issues have arisen, has put FCC and the program in the position of 
reacting to problems as they occur rather than setting up an 
organization and internal controls designed to ensure compliance with 
applicable laws. The laws encompassing fiscal and accountability 
controls are not applied in isolation; rather, they are part of a 
framework that addresses issues of financial and general management of 
federal agencies and programs. The E-rate program was established over 
seven years ago, yet FCC is still analyzing whether certain statutes or 
requirements apply to the program and what actions it must take to 
implement those statutes and ensure compliance with them. The recent 
issues involving the Antideficiency Act best illustrate the problem 
with this case-by-case approach. As explained in our report, it was not 
until the fall of 2004 that the applicability and consequences of the 
Antideficiency Act were resolved. Moreover, this was not the first time 
issues regarding the Antideficiency Act had been raised. In July 1998, 
a question had been raised regarding USAC's authority to commecially 
borrow funds. At that time, USAC was instructed to refrain from 
commercial borrowing while FCC was examining the applicability of the 
Antideficiency Act to USAC's operations. While FCC determined that USAC 
should not borrow commercially in 1998, the question of whether there 
were other consequences for the E-rate program regarding the 
applicability of the Antideficiency Act was not addressed. Had FCC 
taken a comprehensive approach to the application of fiscal and 
accountability statutes such as the Antideficiency Act when the program 
was created or soon thereafter, FCC would have been in a position to 
determine what steps they should have taken and what internal controls 
they should have had in place to ensure compliance with those statutes. 
For example, with respect to the Antideficiency Act, they could have 
determined whether actions they were taking were obligations that 
needed to be recorded and, if so, made any necessary changes to the 
program to ensure that they had sufficient amounts in the Universal 
Service Fund to cover those obligations. 

Furthermore, while certain determinations may have been made 
internally, they have neither been analyzed nor definitively determined 
in FCC's orders on the E-rate program. In addition, USAC has not always 
received instruction on how to carry out all of these requirements. For 
example, as noted in our report, in its October 2003 order applying 
GovGAAP to the Universal Service Fund, 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. 

3. In our report, we list several examples of fiscal control and 
accountability statutes. FCC states in its letter that it has already 
made a determination of each statute's applicability to the Universal 
Service Fund. We agree that FCC has made a determination involving the 
applicability of the Improper Payments Information Act, and we 
therefore deleted our references to this act. We recognize that FCC has 
consulted with other agencies such as OMB and Treasury regarding the 
applicability of the Miscellaneous Receipts Act, the Single Audit Act, 
and the Cash Management Improvement Act. However, 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. Such a 
reconsideration is particularly important in the case of the 
Miscellaneous Receipts Act, where OMB and FCC determined in 2000 that 
the act did not apply because the funds were not public monies for the 
use of the United States. 

Our recommendation focuses on a proactive, comprehensive analysis and 
determination of legal requirements rather than a continued approach of 
reactive case-by-case determinations. A definitive determination on the 
entire framework of laws that apply or do not apply to this program 
would enable FCC to make operational decisions on what steps they 
should take and what internal controls they should have in place to 
ensure compliance with applicable laws. 

4. As stated in our report, due to the complexities posed by these 
issues, GAO remains available to provide an advance decision to FCC 
under 31 U.S.C. § 3529. 

5. Our report does not note that "FCC had established some performance 
measures, but determined that it needed to establish better and more 
comprehensive ways of measuring E-rate performance." It also does not 
note that the reason FCC stopped using the number of public schools 
connected to the Internet was that it was no longer a useful measure of 
the program. Our report states that prior to fiscal year 2000, FCC had 
no specific goals and measures for the program; that for fiscal years 
2000 through 2002, the goals and measures set by FCC were not useful 
for assessing the impact of E-rate program funding because the measures 
used did not directly measure the impact of E-rate funding; and that 
since fiscal year 2002 there have been no E-rate performance goals and 
measures at all. In its letter, FCC states that it is actively working 
to re-establish performance goals and measures that are consistent with 
the Government Performance and Results Act. Our finding is that FCC 
never established E-rate goals and measures that were consistent with 
the act in the first place, despite our recommendation in 1998 (and 
reiterated in 1999) to do so. In a multibillion-dollar program now 
entering its eighth funding year, this is a serious management 
deficiency. 

In its letter, FCC notes that it needs to seek comment from 
stakeholders regarding performance measures. GAO's guidance on 
implementing the Results Act supports this approach: Stakeholder 
involvement in defining goals is particularly important in a political 
environment, and the involvement of Congress is indispensable. While we 
understand the time involved in crafting useful performance goals and 
measures and complying with the notice-and-comment requirements of the 
Administrative Procedure Act, we urge FCC to move as quickly as 
possible in its efforts. 

6. Our draft report included appeals numbers that were different from 
those in FCC's letter. It appears that our numbers included waiver 
requests as well as appeals. We have changed our report to reflect the 
numbers included in FCC's letter, which, according to FCC, are current 
as of January 1, 2005. This numerical difference does not reflect any 
material change. 

7. We are encouraged that FCC has begun redirecting staff and hiring 
additional attorneys to Universal Service Fund oversight and program 
management, including the resolution of E-rate appeals. It is a 
particularly positive step that FCC has established a measurable goal 
of resolving all backlogged E-rate appeals by the end of calendar year 
2005. 

[End of section]

Appendix VI: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

John Finedore, (202) 512-6248; 
Teresa Russell, (214) 777-5604; 
Faye Morrison, (202) 512-6448: 

Staff Acknowledgments: 

In addition to those named above, Carol Anderson-Guthrie, Andy Clinton, 
Derrick Collins, Sandra DePaulis, Edda Emmanuelli-Perez, Chad Factor, 
Moses Garcia, Lynn Gibson, Karen O'Conor, Mindi Weisenbloom, and 
Alwynne Wilbur made key contributions to this report. 

(543089): 

FOOTNOTES

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

[2] The term "E-rate" evolved from some individuals referring to the 
program as the "Education" rate. 

[3] Because there was no historical record of what it would cost to 
provide support to schools and libraries, FCC based the funding cap on 
data from McKinsey and Company, the U.S. National Committee on 
Libraries and Information Services, and others that sought to estimate 
the cost of deploying and supporting the ongoing costs of a 
communications network for public schools and libraries. The cap has 
remained the same since it was established in May 1997. 

[4] Contributions from companies providing interstate 
telecommunications services are deposited into the federal Universal 
Service Fund, from which disbursements are made for the various federal 
universal service programs, including E-rate. 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. For more information on the various universal service 
programs see GAO, Telecommunications: Federal and State Universal 
Service Programs and Challenges to Funding, GAO-02-187 (Washington, 
D.C.: Feb. 4, 2002). 

[5] See GAO, Telecommunications: FCC Lacked Authority to Create 
Corporations to Administer Universal Service Programs, GAO/T-RCED/OGC-
98-84 (Washington, D.C.: Mar. 31, 1998); Telecommunications: Court 
Challenges to FCC's Universal Service Order and Federal Support for 
Telecommunications for Schools and Libraries, GAO/RCED/OGC-98-172R 
(Washington, D.C.: May 7, 1998); Schools and Libraries Corporation: 
Actions Needed to Strengthen Program Integrity Operations before 
Committing Funds, GAO/T-RCED-98-243 (Washington, D.C.: July 16, 1998); 
Telecommunications and Information Technology: Federal Programs That 
Can Be Used to Fund Technology for Schools and Libraries, GAO/T-HEHS-98-
246 (Washington, D.C.: Sept. 16, 1998); Schools and Libraries Program: 
Actions Taken to Improve Operational Procedures Prior to Committing 
Funds, GAO/RCED-99-51 (Washington, D.C.: Mar. 5, 1999); Schools and 
Libraries Program: Application and Invoice Review Procedures Need 
Strengthening, GAO-01-105 (Washington, D.C.: Dec. 15, 2000); Schools 
and Libraries Program: Update on E-rate Funding, GAO-01-672 
(Washington, D.C.: May 11, 2001); and Schools and Libraries Program: 
Update on State-Level Funding by Category of Service, GAO-01-673 
(Washington, D.C.: May 11, 2001). In addition, we touched upon the E-
rate program in Telecommunications Technology: Federal Funding for 
Schools and Libraries, GAO/HEHS-99-133 (Washington, D.C.: Aug. 20, 
1999). 

[6] 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. 

[7] 47 U.S.C. § 254(h)(1)(B). 

[8] 47 U.S.C. § 254(h)(2). 

[9] 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. 

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

[11] 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. 

[12] 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 program. Under the 
Government Corporation Control Act, an agency must have specific 
statutory authority to establish a corporation. 31 U.S.C. § 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. We have not addressed FCC's authority to 
establish the current organizational structure. In 1998, in view of the 
questions surrounding the establishment of USAC itself, the commission 
requested statutory authorization from Congress. No legislation was 
enacted. FCC has not sought any further congressional authorization or 
direction on the nature of the Universal Service Fund or the 
establishment of USAC. 

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

[14] 47 C.F.R. § 54.702(c). 

[15] Eligibility of schools and libraries is defined at 47 U.S.C. § 
254. Generally, educational institutions that meet the definition of 
"schools" in the Elementary and Secondary Education Act of 1965 are 
eligible to participate, as are libraries that are eligible to receive 
assistance from a state's library administrative agency under the 
Library Services and Technology Act. Examples of entities not eligible 
for support are home school programs, private vocational programs, and 
institutions of higher education. In addition, neither private schools 
with endowments of more than $50 million nor libraries whose budgets 
are part of a school's budget are eligible to participate. 20 U.S.C. § 
9122. 

[16] An applicant is classified as rural based on the definition 
adopted by the U.S. Department of Health and Human Services' Office of 
Rural Health Policy. 

[17] Starting in funding year 2005, eligible entities will only be able 
to receive support for internal connections in two out of every five 
funding years. All requests for Priority One services that have been 
found consistent with FCC rules through the Program Integrity Assurance 
review process have been funded since the beginning of the program. 

[18] Applicants do not actually have to submit any proof of having an 
approved technology plan until much later in the process. Applicants 
that seek discounts only for basic, long distance, or cellular 
telephone services are not required to prepare a technology plan. 

[19] The program relies on applicants to self-certify important 
information. For example, in addition to calculating their own discount 
categories based on USAC's formula, applicants must certify that they: 
(1) based their requests on approved technology plans (if it was 
required); (2) have sufficient funding to pay for the nondiscounted 
portion of eligible costs and for ineligible resources, such as 
computers and software, that are necessary to use the requested 
services; and (3) complied with all applicable state and local laws or 
rules regarding procurement. 

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

[21] USAC was appointed the permanent administrator subject to a review 
after one year by FCC to determine that the universal service programs 
were being administered in an efficient, effective, and competitively 
neutral manner. 47 C.F.R. § 54.701(a). This review was never conducted. 

[22] The Universal Service Fund is included in the federal budget as a 
special fund. OMB concluded that the fund does not constitute public 
money subject to the Miscellaneous Receipts Statute, 31 U.S.C. § 3302, 
and therefore can be maintained outside the Treasury by a 
nongovernmental manager. Letter from Mr. Robert G. Damus, OMB General 
Counsel to Mr. Christopher Wright, FCC General Counsel, dated April 28, 
2000. 

[23] See 31 U.S.C. §§ 331, 3301-3305 and the Treasury Financial Manual, 
vol. I, which instructs federal agencies in areas of central accounting 
and reporting, disbursing, deposit regulations, and other fiscal 
matters necessary for the financial accounting and reporting of all 
receipts and disbursements of the federal government. 

[24] As set forth in part 31 of the Code of Federal Regulations or the 
Treasury Financial Manual. 

[25] 63 Comp. Gen. 331 (1984); 13 Comp. Gen. 77 (1933). 

[26] E.g., United Biscuit Co. v. Wirtz, 359 F.2d 206, 212 (D.C. Cir. 
1965), cert. denied, 384 U.S. 971 (1966); 69 Comp. Gen. 260, 262 
(1990); 73 Comp. Gen. 321 (1994). 

[27] 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. 

[28] 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. 

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

[30] See B-300480, April 9, 2003. 

[31] 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. 

[32] 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 they were 
uncertain whether procurement requirements such as the Federal 
Acquisition Regulation (FAR) applied to arrangements between FCC and 
USAC, but they recommended that those requirements be followed as a 
matter of policy. 

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

[34] 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. 

[35] 47 U.S.C. § 254(h)(2)(A). 

[36] For additional details on the Results Act and its requirements, 
see GAO, Executive Guide: Effectively Implementing the Government 
Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June 
1996). 

[37] See GAO, Schools and Libraries Corporation: Actions Needed to 
Strengthen Program Integrity Operations before Committing Funds, GAO/T-
RCED-98-243 (Washington, D.C.: July 16, 1998). 

[38] See GAO, Schools and Libraries Program: Actions Taken to Improve 
Operational Procedures Prior to Committing Funds, GAO/RCED-99-51 
(Washington, D.C.: Mar. 5, 1999). 

[39] FCC's fiscal year 2003 budget estimate to Congress (dated February 
2002) and its 2001 annual performance report (dated March 2002) 
included E-rate goals for fiscal year 2003 of connecting 100 percent of 
public school instructional classrooms and 85 percent of private school 
instructional classrooms to the Internet. However, these goals for 
fiscal year 2003 were dropped from subsequent budget submissions and 
annual performance reports. FCC's last connectivity goal to be carried 
forward into subsequent budget submissions and annual performance 
reports--that 93 percent of public school instructional classrooms have 
Internet access--was for fiscal year 2002. 

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

[41] See, GAO, Agency Performance Plans: Examples of Practices That Can 
Improve Usefulness to Decisionmakers, GAO/GGD/AIMD-99-69 (Washington, 
D.C.: Feb. 26, 1999). 

[42] See GAO, Schools and Libraries Program: Application and Invoice 
Review Procedures Need Strengthening, GAO-01-105 (Washington, D.C.: 
Dec. 15, 2000). 

[43] See GAO, Schools and Libraries Program: Application and Invoice 
Review Procedures Need Strengthening, GAO-01-105 (Washington, D.C.: 
Dec. 15, 2000). FCC now allows unused E-rate funds to be carried over 
into a subsequent funding year. For example, in June 2004, FCC 
announced that $150 million in unused funds would be carried forward 
from funding year 2001 to increase funds for funding year 2004 in 
excess of the annual cap. However, neither FCC nor USAC have dealt with 
identifying the underlying causes of why millions of dollars in 
committed funds go unused and determining whether changes in program 
rules and procedures are needed to address difficulties that applicants 
may be having in using the funds committed to them. 

[44] OMB developed PART as a diagnostic tool to provide a consistent 
approach to evaluating federal programs as part of the executive budget 
formulation process. The goal of PART is to evaluate program 
performance, determine the causes for strong or weak performance, and 
take action to remedy deficiencies and achieve better results. OMB 
chose to review the E-rate program because of the large amount of 
dollars involved. 

[45] For a discussion of the PART assessment process, see GAO, 
Performance Budgeting: Observations on the Use of OMB's Program 
Assessment Rating Tool for Fiscal Year 2004 Budget, GAO-04-174 
(Washington, D.C.: Jan. 30, 2004). 

[46] See FCC, Third Report and Order and Second Further Notice of 
Proposed Rulemaking, FCC 03-323 (Washington, D.C; Dec. 23, 2003), 
paragraph 87. 

[47] See GAO, Schools and Libraries Program: Application and Invoice 
Review Procedures Need Strengthening, GAO-01-105 (Washington, D.C.: 
Dec. 15, 2000). 

[48] Although FCC rules prohibit USAC from making policy, even the 
commission referred to USAC's procedure as the 30-percent "policy." 
According to a USAC official, USAC originally thought that it had to 
deny any application that contained a request for an ineligible service 
or item. To avoid this, USAC suggested a 10-percent threshold. During 
1998, FCC staff suggested that the threshold be set at 50 percent. In 
1999, the threshold was changed to 30 percent and later codified at 
that level. 

[49] FCC, Second Report and Order and Further Notice of Proposed 
Rulemaking, In the Matter of Schools and Libraries Universal Service 
Support Mechanism, FCC 03-101 (Washington, D.C; Apr. 30, 2003), 
paragraph 40. 

[50] FCC, Fifth Report and Order, In the Matter of Schools and 
Libraries Universal Service Support Mechanism, FCC-04-190 (Washington, 
D.C; Aug. 13, 2004), paragraph 78. 

[51] In its August 2004 E-rate order, FCC directed USAC to submit to 
the commission a list summarizing all current USAC administrative 
procedures identifying, where appropriate, the specific rules or 
statutory requirements that such procedures further, and those 
procedures that serve to protect against waste, fraud, and abuse (FCC 
04-190 at paragraph 80). On October 29, 2004, USAC submitted to FCC a 
52-page document listing the USAC procedures that were currently used 
in making E-rate funding decisions, but that were not explicitly stated 
in a commission rule. Under the August 2004 FCC order, USAC is to 
produce such a document annually. 

[52] FCC 04-190, paragraph 19. The commission's actual sentence only 
referred to "the procedural violation," but read in the context of the 
entire paragraph, the commission appears to be discussing procedures 
that have been codified into its rules. 

[53] See GAO-01-105, 37. 

[54] USAC also maintains a whistleblower hotline to provide the public 
with a means of reporting activities that may violate E-rate program 
rules. USAC's Special Investigations Team investigates every call to 
determine if further action is required. Since 2001, USAC has received 
and followed up on over 100 calls per year. In addition to the 
whistleblower hotline, USAC, with support from FCC, created in May 2003 
a 14-member Task Force on the Prevention of Waste, Fraud and Abuse to 
share their perspectives on where the program could be susceptible to 
waste, fraud, and abuse and what specific steps could be taken to 
address those areas. The task force released its report on September 
22, 2003. Most of the task force's recommendations have been 
implemented or are under consideration by USAC or FCC. 

[55] 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. 

[56] GAO/AIMD-00-21.3.1

[57] At the same time, however, applicants had to certify on FCC Form 
471 that they would retain for 5 years any and all worksheets and other 
records that they relied upon to fill out their applications and, if 
audited, would make such records available to USAC. We were told by FCC 
that the form does not carry the force of a rule. 

[58] FCC 04-190, paragraph 74. 

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

[60] FCC 04-190, paragraph 75. 

[61] 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 saying that FCC had "enabled 
implementation of the [E-rate] statutory goals with a minimum of fraud, 
waste, and abuse."

[62] 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. 

[63] 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. 

[64] When USAC finds that funds were disbursed to a beneficiary or 
service provider in error or that fraud, waste, or abuse has taken 
place, USAC must seek to recover the funds through cash payments. 

[65] Approximately $8.9 million in recoveries is tied up in appeals 
with USAC, $8.7 million is in various stages of the improperly 
dispersed funds recovery process, and $800,000 has been referred to 
FCC. 

[66] We also cross-walked the number of FCC appeals and FCC commitment 
adjustment appeals back to the respective source databases. 

[67] 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. 

[68] 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. § 
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. 

[69] The term "E-rate" evolved from some individuals referring to the 
program as the "Education" rate. 

[70] 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. 

[71] 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. § 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. § 701(2)(C) 
(appropriations include "other authority making amounts available for 
obligation or expenditure"). 

[72] 59 Comp. Gen. 215 (1980). 

[73] B-228777, Aug. 26, 1988. 

[74] B-204078.2, May 6, 1988 and B-257525, Nov. 30, 1994. 

[75] B-193573, Jan. 8, 1979; B-193573, Dec. 19, 1979; B-217578, Oct. 
16, 1986. 

[76] 63 Comp. Gen. 285 (1984). 

[77] B-191761, Sept. 22, 1978. 

[78] B-193573, Dec. 19, 1979. 

[79] 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. 

[80] 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. 

[81] 31 U.S.C. §§ 1341, 1342 and 1517. 

[82] Hopkins & Nutt, The Anti-Deficiency Act (Revised Statutes 3679) 
and Funding Federal Contracts: An Analysis, 80 Mil. L. Rev. 51, 56 
(1978). 

[83] 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 C.F.R. § 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. 

[84] 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). 

[85] Legal liability for obligational accounting and to comply with the 
Antideficiency Act and the Recording Statute, 31 U.S.C. § 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. 

[86] GAO, Telecommunications: FCC Lacked Authority to Create 
Corporations to Administer Universal Service Programs, GAO/T-RCED/OGC-
98-84 (Washington, D.C.: Mar. 31, 1998). 

[87] GAO, Schools and Libraries Program: Actions Taken to Improve 
Operational Procedures Prior to Committing Funds, GAO/RCED-99-51 
(Washington, D.C.: Mar. 5, 1999). 

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