Washington insiders wonder what the impact will be of the most recent succession of fraud-and-abuse allegations involving the eRate and school systems in Atlanta, San Francisco, and Puerto Rico–a succession that follows hard on the heels of highly publicized eRate problems in the Chicago Public Schools and elsewhere.

Amid all the negative news reports surrounding the eRate, the only bright spot was in San Francisco, where due diligence by Superintendent Arlene Ackerman ultimately halted an eRate scam in its tracks.

The rest of the news has been unrelievedly bleak, and it serves as a backdrop for a series of congressional hearings intended to take a hard look at the waste and mismanagement critics say riddle the federal eRate program.

At press time, the latest abuse allegation centered on a warehouse near San Juan, where, according to USA Today, “row upon row of new internet gear sits in shrink-wrapped purgatory.

“The pallets of cables, wireless adaptors, and video cards have languished for three years, remnants of an aborted scheme to wire the island’s more than 1,500 public schools to the internet. In fact, its school district spent $101 million” in eRate funds “but that money paid for connecting just nine schools.”

A congressional hearing was scheduled to kick off late in June to probe the situation in Puerto Rico. But the eRate’s troubled waters were hardly limited to that southern island.

A recent Atlanta Journal-Constitution report alleged that the Atlanta Public Schools mismanaged $73 million on building one of the nation’s most elaborate computer networks, often choosing the most costly electronic gear on the market and buying far more than the district needed.

Shortly after that newspaper’s eRate investigation came to light, NEC Business Network Solutions Inc. agreed to pay $20.6 million after pleading guilty to defrauding the eRate program in dealings centering mostly around the San Francisco Unified School District.

“Everything that seems to be coming out is negative,” said Bob Bocher, technology consultant and state eRate coordinator for the Wisconsin Department of Public Instruction. “Anyone in Congress, even if you’re a supporter, doesn’t want to hear bad news. That hurts us all.”

eRate advocates hope the increased congressional and media attention on the eRate program will spur much needed reforms–and not lead to the program’s elimination.

“It worries me because [the news reports] taint the whole program as riddled with waste, fraud, and abuse, but if you look at those cases, they just concern the internal connections part of the program,” said Ricardo Tostado, eRate coordinator for the Illinois State Department of Education.

“We have been pushing for reforms on internal connections for the last three years,” Tostado said, referencing recommendations he and others have submitted to the Federal Communications Commission (FCC), the agency with overall eRate responsibility. “The most recent light cast on NEC, Atlanta, and others will hopefully bring about reform for this portion of the program.”

Bocher concurred. “I find it exceedingly frustrating that a number of recommendations are floating out there, for a number of years now, and no one ever acts on them,” he said. “These issues could be addressed, but they aren’t.”

In the wake of the negative news reports, the Schools and Libraries Division (SLD) of Universial Services Administrative Co. (USAC), which directly administers the eRate, has stepped up its scrutiny of eRate applications. Last year, the SLD denied more than $1 billion in funding requests from suspicious applications. They also formed a task force with the goal of reducing waste, fraud, and abuse. The SLD task force also has submitted recommendations to the FCC.

In recent months, the SLD has also been busy fulfilling congressional requests for information.

“We have been working with them for a while, and we believe it’s time well spent,” said Robert Haga, USAC’s vice president of strategic planning. “Over the past year and a half, we have provided them with thousands of pages of documents at their request.”

Congress to probe Atlanta schools’ network costs

Following allegations of abuse in the Atlanta school system, school officials there have been asked to turn over documents explaining how the district spent–and allegedly mismanaged–$73 million on building what is described as “a lavish computer network.”

“It certainly wouldn’t surprise me if certain members of that school district find themselves at a table facing a panel of congressmen in Washington,” said James Greenwood, R.-Pa., a congressional investigator

The Atlanta Journal-Constitution reported May 23 that school officials built one of the nation’s most elaborate computer networks, often choosing the most costly electronics gear on the market and buying far more than the district needed. The newspaper found more than $4.5 million worth of idle electronics sitting in storage.

It also claimed that the school district, which used both local and federal funds, routinely paid too much, because it did not seek competitive bids.

Greenwood characterized the newspaper’s findings in Atlanta, compared with other school districts, as “pretty darn bad.”

“We will have examples of school districts at our hearings who have done this right and school districts who have done it wrong,” he said. “I don’t think Atlanta is likely to be on the did-it-right panel.”

Among the allegations made by the Journal-Constitution:

  • At one elementary school, equipment reportedly powerful enough to operate a small school district runs just 20 computers. At another, Atlanta billed the program for electronics for twice as many classrooms as the school has.
  • At three Atlanta elementary schools, the cost of bringing high-speed internet access to classrooms reached about $1 million. Nearby Forsyth County, Ga., by contrast, paid about $200,000 for the same result at much larger schools.
  • Price played little role when Atlanta chose vendors, so the district routinely paid them too much. Vendors charged widely different prices for similar equipment. Hundreds of invoices indicate full price when education discounts of up to 45 percent are common.

In a May 25 column in the Journal-Constitution, Atlanta school Superintendent Beverly Hall acknowledged problems with the district’s eRate program, including poor record-keeping and contracting procedures. She blamed most of the shortcomings on former employees and said she has beefed up eRate oversight.

“I am not especially proud of our system’s management of eRate, but I am proud of the results,” Hall wrote. “Children who would not otherwise have even basic internet access are utilizing state-of-the-art technology to learn.”

The Atlanta school board called the network a “state-of-the-art” system that can handle the district’s technology needs for years to come.

But congressional critics of the eRate believe the Atlanta schools got too much money.

Most school systems in Georgia and across the nation don’t get all the eRate funding they apply for, because the demand is so high. The poorest districts must chip in only between 10 percent and 20 percent of the cost of eRate-eligible projects, and until now they could ask for as much money as they wanted.

“It strikes me that if the Atlanta school board had decided to build this system with its own money, it probably could have built a good reliable Chevrolet,” Greenwood said. “If it had been using federal monies, it might have opted for the Cadillac. But since these were free dollars from telephone subscribers, anonymous telephone subscribers all over the country, they went for the gold-plated Rolls-Royce.”

eRate subsidies derive from taxes once paid by telephone companies but diverted, under the eRate, from government coffers to school system and library budgets. As in the days before the eRate, the telephone companies pass these payments along to their customers.

NEC pleads guilty to eRate scams

Four days after an Atlanta Journal-Constitution report charged Atlanta city school officials with widespread waste and mismanagement of eRate funds, the NEC Business Network Solutions Inc. (BNS)–part of Japanese electronics giant NEC Corp.–agreed to pay $20.6 million after pleading guilty to defrauding the eRate program.

More than $3 million of that amount will go to San Francisco schools as a result of Superintendent Ackerman’s diligence in reporting the scam, federal officials said.

The settlement isn’t the first decision reached against a company for trying to defraud the eRate, but it’s by far the largest in terms of a dollar amount–and U.S. Justice Department officials hinted there could be more to come.

BNS was charged in U.S. District Court with allocating contracts and rigging bids for the eRate. Prosecutors said the Irving, Texas-based company inflated bids and submitted false and fraudulent documents for reimbursement to the federal government for school projects in California, Michigan, Wisconsin, Arkansas, and South Carolina.

“This conduct deprived the eRate program of fair and competitive prices, caused the program to pay for unnecessary and ineligible items, and as a result, prevented the funding of projects at other needy schools,” said R. Hewitt Pate, assistant attorney general in charge of the U.S. Department of Justice’s antitrust division.

Besides a $4.7 million fine, the company will provide $15.9 million in cash and goods as part of the agreement.

The San Francisco Unified School District will get $3.3 million of the fine as the whistleblower in the case.

“We made mistakes with eRate,” said Gerald P. Kenney, general counsel of NEC America, the unit’s parent company in Dallas. “We’ve acknowledged and accepted responsibility for those mistakes … and taken action to ensure that these problems can’t happen again.”

Desmond McQuoid, former custodial supervisor for the San Francisco school district, had applied to the eRate in January 2000 and reportedly was approved for more than $49 million in funding to build a computer network with video conferencing capabilities.

But Superintendent Ackerman refused to accept the money because of questions about the bidding process. She reported her suspicions to the FBI and to the city attorney’s office, according to the San Francisco Chronicle.

City investigator George Cothran sifted through thousands of documents and uncovered evidence to suggest that BNS–and at least one other company involved in the district’s wiring project–charged more money than was actually needed and provided kickbacks to McQuoid for choosing them, the Chronicle reported. Cothran reportedly found similar corruption on the part of BNS near Detroit, Chicago, and Milwaukee, as well as in Arkansas, Mississippi, and South Carolina. Specific school districts were not immediately identified in those cases, however.

In May 2002, City Attorney Dennis Herrera filed a false-claims suit on behalf of the San Francisco school district and the state of California. He also turned the office’s findings over to the U.S. Justice Department, which started a nationwide investigation, the Chronicle reported.

In addition to the BNS plea on May 27, the investigation has resulted in guilty pleas by McQuoid, who was sentenced to 21 months in prison, and U.S. Machinery, a California company doing business as USM Distributors, which was ordered to pay $200,000 to the San Francisco school district, the newspaper said.

“This is a big deal–a nationwide scam that had been running three years by the time we caught up with it,” Cothran told the Chronicle. “It looks like we’re going to put an end to this.”

In San Francisco, thanks to Superintendent Ackerman’s savvy management, there might be a happy ending. But for the thousands of other school systems that rely on continued eRate funding, the ultimate outlook has become decidedly gloomier.

See these related links:

Federal Communications Commission

Schools and Libraries Division

FCC’s Office of Inspector General (OIG) Semi-annual Report, Oct. 1, 2003 to March 31, 2004

Rep. James Greenwood, R-Pa.

Atlanta Public Schools

Atlanta Journal-Constitution

NEC Business Network Solutions Inc.

U.S. Justice Department

San Francisco Unified School District