REGIONAL -- Buried among the charges on every phone bill are a fewdollars to fund a massive federal program that for seven years hasbeen wracked with fraud, waste and abuse.
Intended to connect schools and libraries in low-income areas tothe Internet, the E-Rate program has been the subject ofinvestigations by the media, Federal Communications Commission,Department of Justice and both houses of Congress.
"Indeed, if one were to design a program to pour money out thewindow, this would be the way to do it," said Pennsylvania RepublicanRep. James Greenwood during an E-Rate hearing:
Of nearly $16 billion in federal E-Rate funds disbursed since1998, the FCC, which administers the program, admits it can't evenestimate how much has been misused.
"From the limited work we've done, we've found almost 50 percenthave done something wrong with the rules," said FCC Inspector GeneralWalker Feaster of E-Rate recipients.
High-profile, dramatic cases of graft, fraud and corruption havesurfaced time and again in places like San Francisco, El Paso,Houston, Puerto Rico and Atlanta, and in some cases, investigationshave led to indictments and convictions.
PAVED WITH GOOD INTENTIONS
In 1996, the first major overhaul of telecommunications law inmore than six decades established E-Rate as a 21st-century update toa Depression-era telephone subsidy.
The idea was simple: Provide Internet access to schools in poorand rural areas. But its flaws are complex: An ill-conceivedorganizational structure, no measuring mechanism for programeffectiveness and weak oversight, according to a March 2005 report bythe U.S. Government Accountability Office.
"I fear that the waste, fraud and abuse we have seen so far may bejust the tip of the iceberg," said Energy and Commerce Chairman JoeBarton, R-Texas, in a statement.
Section 254 of the Telecommunications Act of 1996 established E-Rate, which began operating Jan. 1, 1998. It is one of four programssupported by the Universal Service Fund, which also includes a ruralhealth care program, a program to discount phone service to low-income users, and a subsidy for telecom companies delivering servicesto remote areas.
E-Rate funds account for up to $2.25 billion annually; combined,the four Universal Service Fund programs add up to about $5.5 billioneach year.
E-Rate, which is used to subsidize actual line charges and theinternal connections needed to support a computer network, isadministered by the Schools and Libraries division of the UniversalService Administrative Corp., or USAC, a nonprofit corporation.
USAC, which is tasked with collecting and disbursing fundcontributions - typically from and to telecom companies - is a whollyowned subsidiary of the National Exchange Carrier Association, analliance of those same companies.
"At the very minimum its "fox inside the henhouse' appearance ismore than a little disconcerting," Greenwood said.
Although the FCC does not require telecom companies to chargecustomers for their fund contributions, most do.
A new rate is determined each quarter, based on how much money thefour programs need. For the third quarter of 2005, carriers must pay10.2 percent of their end-user service revenues to the fund.
LEGACY OF SHAME
Reports of E-Rate fraud began surfacing several years ago,prompting inquiries and investigations, indictments and convictions.
The catalyst for scrutiny: alarming reports quietly released byFeaster's Office of Inspector General in 2002 stating "a great dealof concern" about "fraud, waste,((cq)) and abuse" of E- Rate.
"Ninety-nine percent of what we talk about now is E-Rate," saidTom Bennett, FCC assistant inspector general. "We focused on itbecause, in our view, that's where we have the most risk."
Only 18 of about 30,000 E-Rate applications were audited in 2000.The inspector general's office found $8 million in "inappropriatefunding," and the FBI began a "major investigation," according to thereport.
OIG, which had two auditors in 2002, said its efforts are stillhampered by personnel limitations. With three more auditors thisyear, it has just five to review a $5.5-billion program with tens ofthousands of transactions.
In OIG's April report, it acknowledged involvement with 37investigations.
"We constantly say we need more resources to do more work to findout what's happened," Feaster said.
Subsequent media reports detailing abuse caught congressionalattention, prompting an inquiry by the Oversight and InvestigationsSubcommittee, said committee spokesman Terry Lane.
For every E-Rate horror story, however, supporters say there aremany more successes, and that the program succeeds in its mission.
"There are a few bad apples that are high profile and haveintentionally defrauded and wasted the government's money," saidPeter Kaplan, director of regulatory affairs for Funds for Learning,a technology consulting firm. "But it's not indicative of how theprogram really does operate."
Kaplan cited examples like the Philadelphia school system, whichhe said was audited five years ago and received "a clean bill ofhealth."
Yet in the past three years, newspapers have reported numerousmajor instances of abuse.
One of the most egregious scandals took place in 2000.
After burning through $100 million of E-Rate money intended forthe island's 1,500 schools, only nine schools were connected to theInternet by 2001.
The problem was the equipment bought with E-Rate money wasuseless: The schools had no computers to connect, and E-Rate moneycould not be used to purchase them.
In May, NEC's Business Network Solutions pleaded guilty toantitrust violations and wire fraud for rigging bids and bribingofficials in San Francisco.
All of Puerto Rico was ultimately banned from participating in theprogram.
In California, San Francisco Unified Schol District'sSuperintendent Arlene Ackerman blew the whistle when questionable useof the money came to her attention in 2000.
"I knew I had to call in the FBI and local authorities andthankfully, it paid off in the end," Ackerman said.
NEC settled and agreed to pay $20.6 million in fines, a portion ofwhich went to the district.
Atlanta schools are still under investigation a year after theAtlanta Journal-Constitution reported on widespread abuse there.
Between 1998 and 2002, Atlanta's E-Rate spending topped $60million.
According to the newspaper, the district couldn't account forproducts totaling millions of dollars and misused $5 million to buythings ineligible under E-Rate rules. Some $23 million worth ofequipment sat unused in a warehouse.
"I've said to Congress, "Every time we pick up a rock, we findsomething,' " Feaster said.
Although schools are sometimes involved in misconduct, manyinvestigations have faulted unscrupulous vendors, Walker said.
"Where there's money, there's bad guys. The sheer attraction ofbig money attracts them," he said. "They cut deals with privateequipment providers and the school pays top dollar for things theyshouldn't have."
CHANGE EXPECTED
Within months of E-Rate's inception came numerous legislativeefforts to change or kill it.
In 1998, former Energy and Commerce Committee Chairman BillyTauzin, R-LA., and Sen. Conrad Burns, R-Mont. , introduced identicalbills that would have transfered authority for E-Rate away from theFCC and changed the funding process to block grants distributed tothe states.
The bills failed.
In 2003, Tauzin, then chairman of the House Committee on Energyand Commerce, requested the General Accounting Office again reviewthe program because of the "commitment of millions of dollars forineligible products and services."
Hearings by the Oversight and Investigations subcommittee began inJune 2004. In March of this year, GAO issued a critical reportfaulting the FCC and USAC for their handling of the program.
Sources with the House Committee on Energy and Commerce say theyhave concluded their investigation and will soon release the finalreport.
"I'm not prepared to detail official findings before they arecomplete, but I expect them to be comprehensive," Lane said.
Barton has made clear his interest in outright abolishing E- Rate.Other remedies put on the table have included taking it away from theFCC, limiting funds to only equipment. Several politicians havequestioned if the program has outlived its usefulness.
In June, the FCC began its own review of USAC and E-Rate.
In a published notice, the commission indicated its intent toreview USAC's efficiency, effectiveness and neutrality, and otherfundamental structural isues.
Several commissioners have expressed a reluctance to fundamentallyrestructure the program.
"To ensure continued success, we must remain committed tomonitoring, auditing, reviewing and reinforcing this program," saidFCC Commissioner Jonathan Adelstein in a statement. "Part of thatprocess is being responsive to criticisms of the Commission'smanagement, and ... (seek) comment on a wide-ranging set ofproposals, some of which I find more attractive than others."
But Congress may yet move to take the matter out of their hands.
Although Energy and Commerce spokesman Lane said it would be sometime before the committee does take action, it will not be to makerecommendations.
"We are definitely eyeing reform of E-Rate," he said. "Ourrecommendations will come in legislative form."
Kenneth Todd Ruiz can be reached by e-mailattodd.ruiz@dailybulletin.com or by phone at (909) 483-8555.
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