Lawmakers query FCC about ‘troubling’ eRate abuse

Two Republican lawmakers have asked the nation’s top communications regulator to explain what his agency is doing to prevent fraud in a $2.25 billion program that helps connect schools and libraries to the internet—and at least five other GOP lawmakers have signed onto a bill that would eliminate the program altogether.

Reps. Billy Tauzin, R-La., and James Greenwood, R-Pa., want the Federal Communications Commission (FCC) to turn over documents on the operation and oversight of the federal eRate program. Tauzin is chairman of the House Energy and Commerce Committee, and Greenwood heads that committee’s oversight and investigations subcommittee.

“We write because of the potential size of waste, fraud, and abuse in this program,” the lawmakers said in a March 13 letter to FCC Chairman Michael Powell. A copy of the letter also was sent to Cheryl Parrino, chief executive officer of the Universal Service Administrative Co. (USAC), which oversees administration of the program under the FCC’s guidance.

FCC spokesman Michael Balmoris said his agency had no immediate comment on the letter.

The eRate is part of a government effort to underwrite communications services for rural areas and the poor by charging phone companies. Most carriers recover these costs by billing customers a line-item charge for “universal service” on monthly statements.

Up to $2.25 billion is available from the fund each year to provide schools and libraries with discounts for telecommunications services, internet access, and the internal connections required to deliver internet access into classrooms.

Tauzin and Greenwood said there are at least 30 federal and state investigations involving the questionable use of some $200 million in eRate funds. They said congressional auditors and the FCC’s own internal investigations have raised concerns that there is not enough oversight of the program.

“The emerging evidence of fraud and abuse around the country may be just the tip of the iceberg,” the lawmakers said.

In a September 2002 report from the FCC’s inspector general, investigators said that because of a lack of funding to watch over the program they were unable to give “any level of assurance that the program is protected from fraud, waste, and abuse.”

In January, these suspected abuses received further attention when the Center for Public Integrity (CPI) released a report based on the FCC’s investigations. The CPI report called the eRate “honeycombed with fraud and financial shenanigans.”

It was in response to these reports that Tauzin first expressed interest in launching a congressional investigation of the program (see “Old foes target eRate,”

Tauzin’s and Greenwood’s letter comes just three days after the Schools and Libraries Division (SLD) of USAC denied nearly $590 million in 2002 applications because of alleged competitive-bidding violations. About $470 million of these applications reportedly listed IBM Corp. as the primary service provider. (See “SLD denies $590 million in 2002 eRate requests,”

The letter asks Powell to hand over all records pertaining to which products and services are eligible for eRate funding; the number of bankruptcy cases that involve eRate funds; all decisions the FCC has issued on appeals; and all changes the agency has made in eRate administration, policy, and eligibility of services. In addition, the letter asks Powell how the FCC plans to increase oversight of the eRate in 2003.

The full text of the lawmakers’ letter appears below.

More bad news

The letter also comes just one day after Rep. Thomas Tancredo, a Colorado Republican, reintroduced a bill (H.R. 1252) to kill the eRate. Tancredo originally introduced the same bill—dubbed the “eRate Termination Act”—in 1999 during the 106th Congress, but it never went anywhere.

Tancredo was motivated to reintroduce his bill in light of the recent eRate investigations into waste, fraud, and abuse, as well as the war in Iraq and the lagging economy.

“Given declining revenues and the increasing fiscal demands presented by the impending war in Iraq, eliminating this punitive tax on consumers is a revenue-neutral way to put more money in the pockets of taxpayers,” Tancredo said in a statement March 21.

He added: “If states and telecommunications companies believe that a program to subsidize internet capabilities is still necessary, they should fund it themselves rather than passing the cost along to hard-working, over-taxed Americans.”

The bill, which has been referred to the House Energy and Commerce Committee, currently has four cosponsors: Rep. John T. Doolittle, R-Calif., Rep. Marilyn N. Musgrave, R-Colo., Rep. Ron Paul, R-Texas, and Rep. Charles H. Taylor, R-N.C.

The bill would simply strike any reference to schools or libraries from the section of the Telecommunications Act of 1996 that currently authorizes the program.

In view of these lawmakers’ actions, school leaders should make sure their representatives in Congress understand what the eRate program has helped them accomplish in the past and why they continue to need it in the future, especially considering how tight federal, state, and local budgets are, said Sara Fitzgerald, vice president of communications for the eRate consulting firm Funds for Learning LLC.

“Unfortunately, wherever there is a substantial pot of federal money, there is a danger that bad actors will follow,” Fitzgerald said. “However, the fact that criminal investigations are under way, that vendors are getting arrested, and that some applications are getting rejected tells me that the system is working: the [SLD] is enforcing the rules.”

She added, “If Congress decides that it is not satisfied with the job that the SLD is doing, then it should let the SLD devote more resources to administering the complex rules that were put in place.”


Rep. Billy Tauzin, R-La.

Rep. James Greenwood, R-Pa.

Federal Communications Commission

Schools and Libraries Division

March 13, 2003
The Honorable Michael K. Powell, Chairman
Federal Communications Commission
445 Twelfth Street, SW
Washington, DC 20554

Dear Chairman Powell:

The Energy and Commerce Committee is investigating the potential for and troubling reports of waste, fraud and abuse in the Schools and Libraries universal service support mechanism of the Universal Service Fund (USF), otherwise known as the eRate program. We write because of the potential size of waste, fraud, and abuse in this program and concerns we have that oversight of what is now a $2.25 billion annual funding program may not be adequate to curb improper and illegal activity.

As you know, problems of waste, fraud, and abuse have trailed eRate throughout its first five years of funding. Targeted audits of funding beneficiaries over the first two years identified more than $10 million in inappropriate funding disbursements. Recently, we learned there are at least 30 active federal and state investigations of either vendors or recipients of eRate funds around the United States—involving, in aggregate, more than $200 million of questionable funding.

Moreover, we are aware of ongoing and ensuing work by the Federal Communications Commission’s Inspector General (IG) and concerns raised by both the IG and U.S. General Accounting Office (GAO) concerning what appears to be an inadequate system of oversight of the eRate program. The IG estimates that the eRate program, given the size of its funding levels, may face up to $180 million in improper and fraudulent disbursements annually, based on GAO analysis of similar sized programs. This also suggests that the emerging evidence of fraud and abuse around the country may be just the tip of the iceberg.

Although the FCC and the Universal Service Administrative Company (USAC), which administers the USF under FCC’s direction, appear to have been taking positive steps to improve program oversight and auditing of fund disbursements, we are concerned that such efforts may not address the full extent of any problems. We come to this conclusion because we have learned that, to date, there has not been a systematic audit of the full program since its inception six years ago.

Accordingly, we seek additional information from the FCC regarding USAC management and oversight of the Schools and Library mechanism of the USF, as well as information related to waste, fraud, and abuse of program funds.

Pursuant to Rules X and XI of the U.S. House of Representatives, please provide the following documents and answers to questions detailed below on or before Friday, April 4, 2003:

1. Documents and public commentary relating to the FCC’s current review of rules governing the schools and library universal service support mechanism (eRate), as detailed in the Notice of Proposed Rulemaking released on January 25, 2002.

2. All records relating to determination of what products and services are eligible for eRate funding, including, but not limited to, wide area networks, wireless service, and voice mail.

3. All records relating to purchase of equipment or services eligible for funding by one school in a district and then transferred to another school that would not have been eligible for the funding.

4. All records relating to, and a detailed explanation of, the genesis of USAC as the administrator of USF.

5. All records relating to FCC’s review of adequacy of USAC operations and procedures, including, but not limited to, procedures to address waste, fraud, and abuse related to disbursement of eRate funds.

6. All records relating to analysis of USAC administrative budgets and funding.

7. Identify the number of bankruptcy cases that involve eRate funds, the size of the funds, and the entities undergoing bankruptcy proceedings.

8. Explain how the FCC sets the quarterly USF contribution amount based on “projected USF expenditures,” including, but not limited to, description of how these projections are made, and a detailed explanation of the disbursement of funds among the High Cost, Low Income, Rural Health Care, and Schools and Libraries support mechanisms.

9. All FCC decisions on all beneficiary appeals of USAC funding-request rejections.

10. All FCC orders concerning changes in eRate program administration, policy, and eligibility of services.

11. Explain how FCC plans to increase oversight of the USF and eRate in 2003.

12. The FCC’s FY 2004 budget estimate to Congress includes $3 million “to support the agency efforts to prevent waste, fraud, and abuse within Commission programs.” With regard to this request, explain how much of this increased funding will be applied to oversight of USF and eRate, and how the money will be utilized.

13. Identify all agreements with other government agencies relating to assistance with oversight and audits of the USF and eRate, including any schedule of anticipated reviews.

Please note that, for the purpose of responding to this request, the applicable time period is 1997 to present. The terms “records” and “relating” should be interpreted in accordance with the attachment to this letter.

Thank you for your prompt attention to this request. If you have any questions, please contact Michael Geffroy, Majority Counsel, at (202) 226-2424.

W.J. “Billy” Tauzin
James C. Greenwood, Chairman
Subcommittee on Oversight and Investigations

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