GAO Report Attacks FCC Management Of USF, E-Rate

Telecom Policy Report, March 23, 2005

Congress Scrutinizes 'Fraud, Waste & Abuse'

The Universal Service Fund's scandal-ridden schools-and-libraries Internet access subsidy program known as "E-Rate" - currently handled by the third party Universal Service Administrative Co. (USAC) - clearly needs more hands-on control and internal process improvements by the Federal Communications Commission, according to the Government Accountability Office (GAO)(formerly known as the General Accounting Office).

In a report made to the U.S. Congress and formally released last week, the GAO advocates greater involvement by the FCC in the E-Rate program, and it made a series of recommendations - only a few disputed by the FCC - to effectively strengthen the management and oversight in order to deal with high- profile concerns and open cases surrounding fraud, waste and abuse (including inquiries by the U.S. Department of Justice and by the Federal Bureau of Investigation).

E-Rate, USAC, the FCC's role and the GAO study all came under scrutiny during a public hearing of the House Energy and Commerce Subcommittee on Oversight and Investigations, where Committee chairman Joe Barton (R-Texas) and Subcommittee Chairman Ed Whitfield (R-Ky.) led a withering session on the alleged mismanagement along with instances of criminal activity that have hit E- Rate in recent years (TPR, Feb. 9, Jan. 12).

During the hearing, the congressional body heard from Mark L. Goldstein, GAO's director of physical infrastructure issues (responsible for the most recent and about 10 previous E-Rate reports) plus it grilled at length two FCC officials: Jeffrey Carlisle, chief of the Wireline Competition Bureau (WCB, which ultimately has USF and, therefore, E-Rate accountability) and Thomas D. Bennett, the assistant inspector general for USF oversight (who has been looking into E-Rate's troubles).

The E-Rate program, which began in 1998, is said to have committed more than $14.6 billion to American schools and libraries as of March 2005, with $9.2 billion actually being disbursed. In light of the monies involved and the recent allegations, the GAO report said, "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."

The GAO report - underscored by Goldstein's testimony - reviewed the effect of the current structure of the E-Rate program on the FCC's management, the FCC's development and use of E-Rate performance goals and measures, the effectiveness of FCC's program oversight mechanisms, and the apparent confusion over the statutes and accounting principals governing the E-Rate program.

In its report, the GAO recommended the FCC determine which federal accountability requirements apply to E-Rate, establish meaningful E-Rate performance goals/measures and then take steps to reduce its appeals backlog. The FCC seems to disagree with the GAO on the accountability issue because it reviews such requirements on a case-by-case basis, but the agency seems to concur with the GAO that there are major issues that remain unresolved regarding meaningful performance metrics and the backlog (although the FCC claims it is already taking steps on both of these matters).

The GAO also maintains the FCC established E-Rate using an unusual government organizational structure (handing off supervision to the independent USAC entity) "without conducting a comprehensive assessment to determine which federal requirements, policies, and practices apply to it. USAC is a private, not-for-profit corporation with no contract or memorandum of understanding with the FCC, and program funds are maintained outside of the U.S. Treasury, according to GAO, "raising issues related to the collection, deposit, obligation and disbursement of the funding."

More Fiscal Controls Needed

While the FCC recently concluded that USF appropriations are subject to the federal Anti-Deficiency Act (which essentially prevents government agencies from spending or promising money if it's unavailable in official coffers), the GAO claims this also raises further issues concerning applicability of other fiscal control/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," it writes. An FCC auditing inquiry last year, for instance, also determined that USAC should stop using generally accepted accounting practices (GAAP) and conform to U.S. government accounting practices (GovGAAP).

"[The] FCC has not developed useful performance goals and measures for assessing and managing the E-rate program," GAO adds. The goals established for fiscal years 2000 through 2002 focused on the percentage of public schools connected the Internet, but the data used to measure performance did not isolate the impact of E-Rate from other funding sources, such as states and local governments. "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," the report points out.