By Fritz Edelstein and Ashley Bradley
November 22, 2004

On August 3, the Federal Communications Commission (FCC) told the Universal Service Administrative Company (USAC) to suspend funding commitments under the E-Rate program and cease to send out any commitment letters to school districts and public libraries. As a result, USAC is holding up more than $300 million in E-rate program funding commitments and it estimates that the accounting and spending rule changes required by the FCC could delay more than $1 billion in E-rate program financing commitments by the end of 2004.

The USAC was designed by the FCC to facilitate the distribution of the Universal Service Fund through the four programs established in the Telecommunications Act of 1996. These programs are

(1) Low-Income to provide service discounts to qualifying low-income consumers;

(2) High-Cost to provide financial support to companies providing telecom services to high-cost areas in America;

(3) Schools and Libraries (also known as E-rate) to provide support for linking classrooms and libraries to the telecom network and the Internet; and

(4) Rural Health Care to support the linking of rural health care providers to urban medical centers to enable patients living in rural areas access to advanced diagnostic and other medical services available in urban communities.

The E-rate program provides discounts ranging from 20 percent to 90 percent to eligible schools and libraries to acquire telecommunications services, Internet access, internal connections and technical support. The USAC has not treated its letters of commitment to libraries and schools as an obligation and therefore has often not had largest enough investments to cover the commitments. According to the FCC General Counsel this is a violation of the Anti-Deficiency Act. The impact of this ruling has had significant impact on the E-rate program as described above as well as forcing USAC to sell $3.6 billion in fixed-income investments for a one-time loss of approximately $4 million and an estimated annual loss of $25 to $40 million in interest income. Also, the consequences of the accounting and spending rule changes have been amplified by the FCC's decision over the last nine months to reduce contributions by telephone companies paying into the E-rate program by approximately $550 million.

The impact of this policy decision hits hardest at schools. School systems across the country that expected to receive funding commitment letters that include the amount of the discount for telecommunication and technology services have not nor have the systems included in their budgets funds to pay 100 percent of their phone and Internet bills. Numerous districts are faced with having their Internet service discontinued unless they can find funds to pay the full bill and others have delayed improvements and upgrades to their networks. More than 100 cities were surveyed by the Conference. Surprisingly, 33 percent of the cities were in a dire situation where their budget could not cover the full cost until this issue is resolved. Many will be forced to have some type of curtailment or reduction of Internet and related technological services to schools. Two-thirds of the cities were not sure how long they would be able to fully fund the services unless an understanding could be reached with their telecom provider or the FCC and Congress find a solution.

Presently, a coalition of companies, organizations and associations are working together with Senators Jay Rockefeller (WV) and Olympia Snowe (ME) to develop language that would be incorporated into appropriations legislation being addressed during the upcoming lame duck session. FCC Chairman Powell has written to Congress in support of exempting USAC from the statute and the groups are drafting letters to the Congressional leadership on the matter. The intent of the language is to exempt the USAC from the Anti-Deficiency Act and revert back to the old accounting approach that did not count commitment letters as obligations. In this way, the USAC would not have to raise significant amounts of funds to have on hand. If not addressed, it is anticipated that the Universal Service Fund Fee on telecom bills will increase initially to 25 percent and then going down to 12 or 13 percent rather than the current 8.7 percent.

The expectation is that this issue will be addressed during the lame duck session of Congress. There are several options for a solution including a one year exemption included in the Omnibus Appropriations Bill, addressed in a separate bill sponsor by Senator John McCain (AZ) or included in the reauthorization of the Telecommunications Act. If there is no fix, people should be seeing an increase in the fee and a continued delay in receipt of commitment letters until enough money can be collected and be on hand to obligate funds.

Based on these concerns and the importance of the Internet and technology as a resource for teaching and learning, the Conference has sent a letter to Congressional leaders in support of exempting the USAC from the Anti-Deficiency Act before it ends the current session.