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Back to Mar. Ed Reporter

Education Reporter
NUMBER 242 THE NEWSPAPER OF EDUCATION RIGHTS MARCH 2006

E-Rate Fraud: Connectivity at What Cost?
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Discounts for telecommunications services, internet access, and internal connections (network infrastructure and cables) have been available to schools and libraries nationwide through the education rate or E-rate program, resulting in total commitments of $15.5 billion and disbursements of more than $10 billion. However, serious problems have persisted, resulting in allegations, investigations, hearings, arrests, and criminal convictions.

The Universal Service Fund (USF) originated in 1983 to provide subsidies in low-income and rural communities for telephone service. In the 1996 Telecommunications Act, Congress expanded USF to provide internet access equipment at public schools and libraries.

USF is funded by fees levied by the FCC on all local, long distance, wireless, and paging companies, as well as payphone providers. The fees are generally added to phone bills for all consumers. When USF fees were increased to pay for schools and libraries, the extra phone charges were dubbed the "Gore tax" because of then-Vice President Al Gore's role in establishing the E-rate program.

Fresh from supposedly inventing the internet, Gore envisioned that public schools and libraries would be "wired" as centers for public access to the internet. A Gore fundraiser, Ira Fishman, became the well-paid first president of the Schools and Libraries Corporation (SLC) with the power to distribute this new flow of money.

After Fishman resigned in 1998, the multi-billion dollar E-rate program was transferred to the Universal Service Administrative Company (USAC), a private, non-profit corporation. USAC was created as a subsidiary of the National Exchange Carrier Association (NECA), whose membership consists of approximately 900 U.S. telephone companies. FCC had outsourced responsibility for the Universal Service Fund to USAC.

According to Bob Williams of the Center for Public Integrity, the very structure and the corporations involved constitute "almost a formula for fraud and abuse." As former Rep. Jim Greenwood (R-PA) told the New York Times (6-17-04), "You couldn't invent a way to throw money down the drain that would work any better than this."

The FCC's Inspector General, in an October 31, 2002 semi-annual report to Congress, described numerous concerns and noted that the Department of Justice had created a special E-rate task force. The Government Accountability Office (GAO), after a year's study, concluded in December 2004 that "the FCC long ago sowed the seeds for gross mismanagement of the program."

After the GAO report was issued, U.S. Rep. Joe Barton (R-TX), Chairman of the Committee on Energy and Commerce, said, "The government mismanagement of the E-rate program seems to know few bounds," and added: "Unscrupulous vendors also fleeced the program while underserved communities and telephone customers pay the price. The Federal Communications Commission, these merchants and certain schools all must share in the blame for this disgrace."

A bipartisan report, "Waste, Fraud, and Abuse Concerns in the E-rate Program," was adopted unanimously by the Subcommittee on Oversight and Investigations on October 18, 2005, and transmitted to the Energy and Commerce Committee on November 2. Referring to the GAO study, the subcommittee states: "The report finds an astounding degree of managerial neglect of the E-rate program."

The subcommittee report cites numerous problems, details case studies, and makes recommendations. It questions "(a) whether the FCC is the proper agency to manage and oversee the E-rate program; (b) whether the largely arbitrary $2.25 billion annual price tag is appropriately set; (c) whether control and management of this large sum is appropriately delegated to a non-governmental entity."

Greater accountability is urged for all program participants, including consultants, vendors, schools, USAC, and the FCC Wireline Competition Bureau. The report states: "The FCC must acquire and promptly provide to Congress, some tangible measure of the extent and scope of program waste, fraud, and abuse, i.e., statistically significant auditing must be undertaken immediately . . ."

The report documents a "substantial waste of more than $100 million" in Puerto Rico, where the former secretary of education was sentenced to three years in prison and fined $4 million. Almost $23 million in equipment had not been installed. Only nine of 1500 schools had been wired.

In Chicago Public Schools, "improper stockpiling of $8.5 million in internal connections equipment, much of which included expensive electronic switches that never left distribution warehouses," was exposed, and the Subcommittee investigation further found: "The CPS and the E-rate program would essentially pay twice for equipment that had never been installed in the school district's networks."

SBC Telecommunications and Cisco informed CPS that the warehoused switches were "obsolete," and arranged a switch of the switches, so to speak. By turning in the warehoused switches, the schools could obtain a discount off the price of new switches. "CPS would essentially be wasting nearly $3.6 million," since the original switches shipped could still be used. SBC was required to return $8.8 million to USAC.

Payment of $20.7 million in fines and restitution from the NEC Business Network Solutions was required in the case of San Francisco Unified School Dist., where the Superintendent was a whistleblower.

"In sum, the Subcommittee's investigative work reveals a well-intentioned program that nonetheless is extremely vulnerable to waste, fraud, and abuse, is poorly managed by the FCC, and completely lacks tangible measures of either effectiveness or impact."

The number for the USAC Whistleblower Hotline is: (888) 203-8100. Complaints can be made anonymously.


 
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