12/18/2000 - The General Accounting Office Dec. 15 released a 70-page review of the E-rate program, concluding that the Schools and Libraries Division should improve its review of the eligibility of funding requests and of the invoicing process.

The General Accounting Office Dec. 15 released a 70-page review of the E-rate program, concluding that the Schools and Libraries Division should improve its review of the eligibility of funding requests and of the invoicing process.

Officials with the Federal Communications Commission and the Universal Service Administrative Company responded by saying that they have already implemented some of the GAO's recommendations on the application review and that USAC would hire a consultant to study and improve the process of reviewing invoices.

The GAO also expressed concern that as of Aug 31, 2000, at least 35 percent of the $3.7 billion in funds that had been committed in the first and second program years had not yet been paid out. USAC staff said they would work with the FCC to address this issue. The SLD recently announced it will send letters to every applicant who has not yet filed a Form 486 application to authorize funding for an approved Year 2 funding commitment.

The GAO review has led to at least two changes that are already visible to E-rate applicants-a revised list of eligible services that was made available on Nov. 16 and new instructions for the Form 471 application's "Description of Services," directing applicants to provide more specific details to back up their funding requests. In addition, USAC said it would increase from one to three the number of full-time staff dedicated to quality assurance.

The GAO focused its review of SLD procedures on 44 year-two applications with more than 2,300 separate funding requests for internal connections. It noted that after weeding out $20 million worth of requests, the SLD had approved $285 million in funding commitments. The GAO said it had found that the SLD had improperly committed at least $6 million for ineligible items. For another $86 million worth of requests, the GAO said it appeared ineligible items had been included or it could not determine if the services were eligible because not enough information was provided.

USAC officials said the results could not be extrapolated to the entire population of applications because the GAO had selected internal connections requests, with an emphasis on "complex, high-dollar requests." The GAO, however, noted that while it had not selected a random sample of applications, 12 of the 44 applications it reviewed were for less than $250,000 and seven were for amounts between $250,000 and $500,000.

The GAO said that while some mistakes were the result of human error, others were the result of problems in the application and review processes. It said applicants did not always describe their services in enough detail, and SLD reviewers "did not always contact applicants for additional information needed to make informed decisions." In addition, it said that the program's policies and guidance "do not always effectively define which services are eligible for funding support."

Specifically, the GAO noted that FCC rules state that Wide Area Networks are not eligible for funding, but "do not provide clear guidance on what should be considered a WAN." As a result, it said, the SLD reviewed Year 2 applications "under a policy that rejected any item specifically identified as part of a WAN, such as components with the acronym "WAN" in their description." however, it said, similar items that did not use the name "WAN" were approved. The GAO said that when it pointed out this inconsistency, the SLD, with the FCC's approval, changed its procedures for dealing with WANs and now "all types of networking equipment located within school and library facilities are considered eligible, regardless of how they are labeled. Only the actual wires that carry data across public rights-of-way are considered ineligible WAN components."

In discussing other eligibility determinations, the GAO noted that the FCC staff has concluded that "basic instruction in using eligible equipment is eligible, provided it is 'reasonable.' " But it said that the FCC has provided no guidance on how these costs should be reviewed. Similarly, the GAO said that the FCC had not provided guidance on what would be considered reasonable room design costs or contingency fees, noting that the SLD had approved a $3 million request that included more than $621,000 in design costs and almost $200,000 in contingency fees.

The GAO also expressed concern about the program's invoicing process, noting that USAC gathered virtually no details of what was being purchased when it approved a payment. It acknowledged that some invoices are given a special review when they are considered "high risk," because the applicant or vendor previously violated program rules. And it noted that the results of at least one post-commitment review of an applicant has turned up evidence that funds could have been intentionally misused; the case, it said, is currently under investigation by the FCC's Office of Inspector General.

The GAO compared the cost of running the E-rate program with 34 other federal educational technology programs and concluded that at 2.4 percent, the E-rate program's administrative costs remain a comparatively small percentage of the program's total costs.

Congress had asked the GAO to evaluate to what extent applicants chose the lowest bidder, but the watchdog agency concluded that neither the FCC nor the SLD had such data, because applicants were not required to report the number of bids they received or whether they chose the lowest one. It noted, however, that in 1999, the FCC established a performance goal related to vendor participation, hoping to ensure that every request posted to the SLD Web site received at least two bids. However, without data to evaluate that, the FCC has now dropped that as a performance goal. In addition, it said that the SLD or FCC had received only four appeals involving the competitive bidding issues.

In response, FCC Managing Director Andrew Fishel noted that only 10.3 percent of the commitments that the GAO said the SLD had made in error had actually been disbursed. In addition, he pointed to the $700 million worth of funding commitments that the SLD did reject in Year 2.

"It deserves noting," he said in conclusion, "that this program is unique. It serves over two-thirds of the nation's public schools and half the nation's public libraries. It requires up-to-date knowledge of the rapidly and ever-changing field of information technology, by both program staff and applicants. Equipment that did not exist in 1996 is now eligible for support, and each year new, better and cheaper equipment and services are available to meet their communications needs. We are committed to keeping administrative costs low, and, in fact, as the report demonstrates have clearly been successful."

The full report is available at http://www.gao.gov.