Lack of Funding Hurting E-rate Oversight

WASHINGTON — Problems of waste, fraud and abuse in the federal E-rate
program are likely to continue unless more resources are dedicated to
oversight, the Inspector General for the Federal Communications Commission
(FCC) told Congress Thursday.

Added to consumer telephone bills in 1997, the E-Rate charge is the nation’s $2.25
billion initiative to help schools and libraries connect to the Internet.
Nearly 90 percent of U.S. schools and libraries receive subsidies from the

The fund has also allegedly been subject to abuses ranging from bid-rigging
to lack of meaningful competition. The House Subcommittee on
Oversight and Investigations on Thursday began a series of hearings on problems with the

“We have found that the program’s current structure and administration
invites scams — both simple and sophisticated — and wastes serious amounts
of money,” subcommittee Chairman Jim Greenwood (R-Penn.) said in his
introductory remarks.

Greenwood called the E-rate program “well intentioned” but an “invitation to
disaster. Indeed, if one were to design a program to pour money out the
window, this would be the way to do it.”

Under the program, telecom companies or contractors provide
equipment and services to schools and libraries at a discount, and the
federal government covers the difference through the E-Rate fund.

FCC Inspector General H. Walker Feaster III told the committee audits of the
program have revealed procurement irregularities, false claims, ineligible
items being funded and beneficiaries not paying their local share. Feaster
also said there were “potential kickback issues.”

Feaster said of 122 audits conducted over the past year, approximately a
third showed substantial violations. Currently another 22 investigations are
underway and the Inspector General Office’s is monitoring an additional 18

“Unfortunately, several obstacles have impeded our ability to implement
effective, independent oversight of the program,” Feaster said. “The primary
obstacle has been a lack of adequate resources to conduct audits and provide
audit support to investigations.”

According to Feaster, the Office of the Inspector General asked for $2
million last year to conduct E-rate audits and investigations, a request
that was upped to $3 million by the Bush administration.

“Unfortunately, this funding was not included in the FCC’s final budget,” he
said. “Until resources and funding are available to provide adequate
oversight for the program, the Office of the Inspector General is unable to
provide assurance that the program is protected from waste, fraud and

Frequently called the “Gore tax” for former Vice President Al Gore’s
enthusiastic support, the E-rate program has long been a favorite target of
Republicans. The House and Energy and Commerce Committee began investigating
the program last year following a January 2003 report by the Center for
Public Integrity, a nonprofit “public service journalism” organization,
that claimed the E-Rate program was “honeycombed” with fraud.

The FCC oversees the program, but outsources administration to the Universal
Service Administrative Company (USAC), a private, nonprofit owned by an
alliance of telecommunications service providers.

“This management structure is troublesome and at the very minimum its ‘fox
inside the henhouse’ appearance is more than a little disconcerting,”
Greenwood said. “The program’s rules and the process by which the FCC
creates them are, to say the least, complicated and troublesome.”

Since Greenwood’s subcommittee began investigating the program early last
year, a subsidiary of NEC America agreed to pay $20.6 million to settle
criminal charges involving the company’s participation in the program and
SBC agreed to pay $8.8 million back to the program for stockpiled switches
and equipment.

In Puerto Rico, the investigation found $23 million worth of improperly
stockpiled equipment and a rarely used $58 million computer network built
from E-rate funds.

“We have discovered that most of the equipment and services have never been
used — and will never will be — put to effective use for Puerto Rico’s
children,” Greenwood said. “The subcommittee – found telecommunications
equipment — wireless access cards and related gear — still shrink-wrapped
and sitting on storage pallets in a government warehouse.”

Added Greenwood, “While the equipment has sat there, E-rate funds were paid
out for this equipment’s purchase and its installation.”

Greenwood said the FCC and USAC have a “lot to answer for” but Congress also
bears some blame.

“We should also acknowledge that Congress must shoulder some responsibility
as well. Perhaps more time and certainly more debate and discussion should
have been spent in carefully crafting this program to achieve its admirable
goal,” he said.

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