Internet Grants to Schools Halted as the F.C.C. Tightens the Rules

[David Farber <dave () farber net>]

[ In many many cases these e-rate grants have ended up as a perk for 
corproate america with little or no bevefit to the aims of the E-Rate 
system. I agree with the need to tighten the rules a LOY.  djf]

From the New York Times --
http://www.nytimes.com/2004/10/04/business/media/04fcc.html?hp

Internet Grants to Schools Halted as the F.C.C. Tightens the Rules
By STEPHEN LABATON

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.

Copyright 2004 The New York Times Company
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