eRate chaos looms for nation’s schools

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.

“The policy, process, and impact leading up to this decision is unclear and needs to be resolved,” said Sen. Jay. Rockefeller, D-W.V. “I heard from schools that this suspension of funding is causing significant disruption to their operations, and it’s inconceivable to me that funding was stopped just as the school year was beginning.”

“I share your concern, particularly since no one was notified, including the Congress or members of this committee. It’s very disturbing,” said Sen. John McCain, R-Ariz., committee chairman.

Sen. Conrad Burns, R-Mont., called the funding freeze a “drastic reaction” that has cost the nation money and prevented schools and libraries from getting the funds they need. “I’ve got 33 or 34 [schools] in my state that I’ve got phone calls from already, and these are all rural schools,” Burns said. “These funds are vital … for communicating with the outside world.”

Frank Gumper, chairman of the board of directors for the Universal Service Administrative Co. (USAC), the agency charged with administering the program, explained that the funding stopped because new government accounting procedures, which the Federal Communications Commission (FCC) directed USAC to adopt by Oct. 1 of this year, require USAC to have the money in hand before promising it to schools and libraries.

Previously, USAC would promise eRate discounts to applicants–by mailing them funding commitment letters–long before it had collected that money from telecommunication companies. USAC currently collects the money by billing telecoms each month for about 8.9 percent of their sales that month.

The long-term implications of this accounting change are still unknown, but Gumper said it seems the move will permanently change when funding commitment letters are issued for each year going forward.

“The new commitments will start once we’ve collected enough money,” Gumper said. “Right now, we anticipate … that by the end of November we should be able to start to make commitments. However, we will have more commitments available than we will have funds on hand.”

Undoubtedly, this will leave schools and libraries nationwide without any funding decisions in the near future.

“These are people who are paying these bills now, and there’s uncertainty whether they are going to get reimbursed for them,” George McDonald, vice president of USAC’s Schools and Libraries Division, told eSchool News in an interview.

Besides leaving schools in the lurch for the current program year, the change also impacts schools’ ability to apply for 2005 funding.

“If we move to the filing window as normal, opening in November and closing in early February, some of these folks won’t know what’s happening to their 2004 requests when they are being asked to [apply for] 2005. That’s always been a problem,” McDonald said.

It’s already uncertain when the next application window will open, McDonald added. According to the program’s rules, the window is supposed to open 60 days after the final eligible services list is published in the Federal Register, which had not happened yet at press time. Unless the FCC waives this rule, the window–which has customarily opened at the beginning of November–won’t open until at least December.

“Now with this other stuff, there are so many pieces. Who knows?” McDonald said. “I’m not predicting [the window will change]–there’s just so much uncertainty.”

Additionally, USAC recently lost millions of dollars from the eRate fund because of the switchover to government accounting procedures. USAC had invested about $3 billion in government bond and money market funds, generating an extra $25 million in interest, which in turn would lower the amount required from telecoms. But the new government accounting procedures require all government funds to be invested in U.S. Treasuries or cash. As a result, USAC officials were forced, over a two-day period, to liquidate the agency’s investment portfolio and convert the funds to U.S. Treasuries at an estimated loss of nearly $5 million in face value–not to mention the amount of potential earnings lost from interest.

“We thought having money invested with very reliable corporations, funds that were backed 100 percent by government securities, was reasonable,” Gumper told eSchool News. “They [the FCC] come along and say, ‘No, those are obligations of the government.'”

He added: “If we had held [the investments] to maturity, we would have gotten the full value.”

“I just think this is a whole series of unintended consequences. People made decisions that were maybe appropriate decisions for accounting purposes, but no one looked at the consequences for the administration of the program,” McDonald said.

McCain said the Oct. 5 Senate hearing “is just the beginning.” The hearing was brief compared with those held by the House Energy and Commerce Committee’s Subcommittee on Oversight and Investigations, but it’s apparent the Senate has been paying close attention to the eRate scandals.

In his opening statement, McCain noted the many reported e-Rate abuses from Atlanta to Puerto Rico, including the alleged roles that IBM and NEC have played. (See “eRate Update: Panel hears more alleged eRate abuses,”

“Unscrupulous vendors are not the only problem. There is enough blame to go around,” McCain said. He said the FCC’s rule changes have been “reactive and too gentle,” and USAC’s audits have been “too few, too late, and too forgiving.”

He added: “Congress is also responsible. We created the program, and despite its endemic problems, its popularity makes it clear that it is not going away. It is incumbent upon us to ensure, with thorough oversight or legislation, if necessary, that the eRate functions as intended.”

The FCC declined the Senate committee’s invitation to participate in the hearing.


Senate Committee on Commerce, Science, and Transportation

Schools and Libraries Division

eSchool News Staff

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