October 4, 2004
Internet Grants to Schools Halted as the F.C.C. Tightens the Rules
By STEPHEN LABATON, NY TIMES

WASHINGTON, Oct. 3 - Public libraries and schools around the nation have suddenly stopped receiving any new grants from a federal program that is wrestling with new rules on how it spends $2.25 billion each year to provide high-speed Internet and telephone service.

The moratorium at what is known as the E-Rate program began two months ago, with no notice, and may last for months, causing significant hardships at schools and libraries, say state officials and executives at the company that runs the program.

The suspension came after the Federal Communications Commission, in consultation with the White House, imposed tighter spending rules that commission officials say will make it easier to detect fraud and waste in the program.

As much as $1 billion in grants the states say they expected to receive by the end of the year may be affected, one official estimate says. That has led state administrators to either take money from other educational programs or postpone paying their phone and Internet companies.

"We are fearful that they could shut down our service," said Curt Wolfe, chief information officer for North Dakota. The federal program contributes more than 60 percent of the money, or about $1.7 million a year, that pays for Internet services and to link video services for the state's 100,000 students, he said.

"If this isn't resolved this month, we're going to be in very serious trouble," he said. "We don't have extra funds to get us through this, and this is a major issue for every state."

Robert Boucher, who works for the Wisconsin education agency that arranges for the financing of the state's schools and libraries, said the state had not received commitments for about $22 million, or about two-thirds of the amount necessary for Internet and telephone services for the state's 426 school districts and 387 public libraries.

The tighter spending rules also forced the Universal Service Administrative Company, the nonprofit group that runs the program under the commission's oversight, to hastily liquidate more than $3 billion in investments last week. The sale generated a loss, but officials said they had not yet calculated the amount.

And the changes are expected to lead to higher charge imposed on telephone companies - and passed on to consumers - later this year or early next year. The increase may be necessary, senior officials at the universal service company said, because of a cash squeeze created by the tighter spending rules and an F.C.C. decision over the last nine months to reduce the phone companies' contributions to the E-rate program.

Although commission officials said they had made the decisions leading the moratorium in close consultation with the White House Office of Management and Budget, administration officials sought on Friday to distance themselves from the F.C.C.'s moves and said that the budget office had never issued a formal legal opinion on the appropriateness of some of the changes. Commission officials say the changes were crucial for better monitoring of the program.

"The E-Rate program is vital for America, but we must insist that it complies strictly with the highest government accounting and auditing standards," Michael K. Powell, chairman of the commission, said. "Any delays are temporary while we place the program on sounder footing. We are committed to ensuring these funds flow responsibly to America's classrooms and libraries as soon as possible."

The E-Rate program was created by the Telecommunications Act of 1996 as a way to finance telephone and Internet services for the states. The program expanded an earlier universal service program to include public schools and libraries and the Internet, giving money both for equipment and for service.

Derided by its opponents as the "Gore Tax" because it was advanced by Vice President Al Gore, the program has occasionally been attacked in Congress by some Republicans. In recent interviews, administration and commission officials denied that the changes were intended to hinder the program. But some officials have said that in tightening the rules, the government may have made unintentional mistakes.

The changes have created significant tension between the F.C.C. and the Universal Service Administrative Company. Executives say they have felt whip-sawed by the commission. For instance, the executives say, top officials in Mr. Powell's office approved in July a set of investment guidelines for the more than $3 billion held by the company. Two months later, the commission ordered the immediate liquidation of those investments to comply with the new budget restrictions.

Senator Olympia J. Snow, the Maine Republican who co-sponsored the provision that led to the creation of the program in 1996, expressed concern that the moratorium could jeopardize its longer-term prospects.

"This has the potential to imperil the program by leaving it in a state of such uncertainty," she said in an interview. "It raises questions about why these decisions were made."

She and Senator John D. Rockefeller IV, Democrat of West Virginia, sent a letter on Friday to Mr. Powel, seeking an explanation.

The Universal Service Administrative Company was set up to provide money to the states for phone and Internet services in four areas - schools and libraries; rural health care; remote or underserved areas that are more expensive for phone carriers to service; and low-income customers.

Officials say the spending restrictions have been applied only to the schools and libraries and to relatively small rural health care programs.

The Clinton administration decided to list the money held in the universal service accounts on the federal budget, which had the effect of reducing the deficit by billions of dollars. But after considerable debate, former officials recalled, the Clinton administration decided not to apply a series of restrictions that are imposed on money considered part of the public Treasury. As late as April 2000, William E. Kennard, the chairman of the F.C.C. at the time, issued an opinion that the fund should be maintained outside the Treasury, and by implication, not be subject to the rules that are now being applied to it.

Some lawmakers have recently criticized the E-Rate program as laden with fraud and waste, and the F.C.C. has given it more scrutiny. Last October, the F.C.C. in consultation with the White House budget office ordered the company to begin applying generally accepted accounting principles for federal agencies by Oct. 1, 2004.

But officials said it was only last summer when they began to realize that the change would have consequences that would sharply limit the program's ability to spend and manage its money. The problems have been made worse, some officials said, by the decision of the F.C.C. over the last nine months to reduce the level of contributions made to the library and school program by telephone companies by $550 million.

"There was a lot of pressure to keep the contribution factor down until the election passes, after which it will then have to rise again," said Anne L. Bryant, a member of the board of the universal services company and executive director of the National School Boards Association, which represents 95,000 school board members in 15,000 school districts.

F.C.C. officials say they reduced the contribution level because it appeared that the universal service company had been holding more than $3 billion, and they were concerned that it would be criticized for sitting on so much idle cash.

"It was the right decision to draw down, based on what we knew at the time," said Jeffrey Carlisle, chief of the Wireline Competition Bureau at the F.C.C. "But under what we know now, I'm not sure we would have made the same decision." He and other commission officials denied that this was a move to keep the rates down until after the election.

In recent weeks, officials from the company have had discussions with the F.C.C. and the budget office. Interviews with officials and correspondences between the parties reflect deep frustration between them.

In a Sept. 16 letter to Mr. Powell, Frank Gumper, the chairman of the Universal Service Administrative Company, predicted that the changes in the accounting and spending rules could delay "meaningful cash outlays" into 2006 and could delay more than $1 billion in financing commitments that would be ready to be sent by the end of the year. He also predicted that "a significant increase in the contribution factor in future quarters is likely."

The immediate cause of the crisis is the application of a federal budget law, the Anti-Deficiency Act, to the E-Rate program. The company had issued financial commitment letters to the states for amounts whose total exceeded the company's budget, because the schools and libraries as a whole spend less than 80 percent of the money they requested, company officials said. But F.C.C. officials say the Anti-Deficiency Act prohibits the company from making commitments greater than its cash on hand.

The Anti-Deficiency Act created a second problem. With the F.C.C.'s permission, the company had placed more than $3 billion in bonds and bond mutual funds to earn annual interest of more than $25 million. But under the act, those investments count as part of the company's total spending and offset the amount available for the states.

On Sept. 27, the F.C.C. instructed the company to "liquidate any such investments by Sept. 30." A few weeks earlier, Mr. Gumper said he expected that liquidation, which has been completed, would result in "an immediate loss" of $2 million and the forgoing of at least $25 million to $30 million in annual interest income.

See also:

E-Rate Fraud: 40 Cases So Far in the Corruption Scandal

Another E-Rate Fraud, This Time In Atlanta

Computer Technology Does Not Work in Most Schools: the Story of the E-rate Fraud

eRate chaos looms for nation's schools
By Cara Branigan, Associate Editor, eSchool News
October 6, 2004

Complete story at eSchool News:

http://www.eschoolnews.com/news/showStoryRSS.cfm?ArticleID=5313

Most schools and libraries won't find out how much eRate funding they are getting for the 2004 funding year--which began July 1--until the end of November at the earliest, eRate officials told eSchool News immediately following a Senate hearing on the eRate Oct. 5.

The Senate Committee on Commerce, Science, and Transportation convened the hearing to address highly publicized instances of waste, fraud, and abuse of the $2.25 billion-a-year program, which gives schools and libraries discounts of up to 90 percent on their internet and telephone service and wiring.

Much of the hearing's focus, however, centered on why eRate officials stopped mailing funding commitments to applicants right before the school year began with virtually no warning.