Funds For Learning's Comments on Petition Calling for FCC to Roll Over Undisbursed E-rate Funds
Federal Communications Commission
Washington, D.C. 20554
In the Matter of )
Federal-State Joint Board on Universal Service ) CC Docket No. 96-45
Magalie Roman Salas
Office of the Secretary
Federal Communications Commission
445 12th Street SW
Washington, DC 20554
RE: Comments on the Petitioner Request for Carryover of Unused Funds in the Federal Universal Service Support Mechanism for Schools and Libraries, Released April 19, 2001
Funds For Learning, LLC is an educational technology consulting firm that has focused on the E-rate program since the company's inception in 1997. We work with both schools and libraries to help them understand the E-rate process, to complete applications and to comply with all of the program's rules. We also work with companies that want to support their customers that participate in the program.
We support the petitions at issue here, but are disappointed that the Commission did not solicit comments on them until 16 months after the first one was filed. Consequently, the important issues raised in the petition, are, in effect, moot, for the Funding Year One. As the Universal Service Administrative Company noted in February 2001, over several quarters, the FCC used some $448 million of undisbursed funds—or approximately one-quarter of the funds it had committed or held in reserve for appeals—to reduce the contributions that telecommunications companies had to make to the Universal Service Fund. In computing the contribution factors for the First Quarter of 2001, USAC explained, 'the FCC reduced the collection requirement for 1Q2001 by the remaining balance of $0.620 million." 
Sadly, that $448 million represented more than the internal connections support provided for applicants at any one of the 90 percent, 80 percent, or 70 percent discount bands in Year One, suggesting that USAC could have, in fact, funded the requests for internal connections support among applicants in at least the 60 percent discount band, if not lower.
From the start of the E-rate program, the positions of the Federal-State Joint Board on Universal Service and the Commission itself were clear: that undisbursed funds should be rolled over. In its Report and Order adopted May 17, 1997, the Commission wrote:
We also adopt the Joint Board's determination that, if the annual cap is not reached due to limited demand from eligible schools and libraries, the unspent funds will be available to support discounts for schools and libraries in subsequent years. . . . Furthermore, if less than $2.25 billion is spent in calendar year 1998, then no more than half of the unused portion of the funding authority for calendar year 1998 shall be spent in calendar year 1999. Similarly, if the amount allocated in calendar years 1998 and 1999 is not spent, no more than half of the unused portion of the funding authority for these two years shall be spent in calendar year 2000. 
Similarly, in June 1998, when the Commission adjusted the Schools and Libraries funding mechanism, the Commission asserted:
To the extent that funds are collected but not disbursed in the funding period January 1, 1998 through June 30, 1999, however, those collected funds would be carried over to the next funding period.
Thus, it certainly appears that the question whether and in what manner to roll over funds from one year to the next is one that the Commission answered long ago.
However, before taking steps to roll over funds that have not been committed or disbursed by March 31 of the year after the close of the funding year, we believe that USAC should first be instructed to take steps to ensure that it commits the full $2.25 billion before rolling over excess funds. As we argued in a recent appeal on behalf of the Houston Independent School District, the Commission's rules on this are also clear:
. . .where demand for discounts for internal connections exceeds available support, funds are allocated first to applicants at the 90 percent discount level, and then at each descending single percentage until there are no remaining funds. (Emphasis added.)
In addition, in cases where the fund administrator does not have sufficient funding to support all of the requests from applicants at that particular discount rate, the rules are clear:
'We also clarify that, to the extent sufficient funds do not exist to fund all requests within a single discount percentage, the Administrator shall allocate the remaining support on a pro rata basis over that single discount percentage level, as provided in section 54.505(g)(1)(iv) of the Commission's rules." (Emphasis added.)
Thus the question of how much should be rolled over should not be considered until after the fund administrator has committed the full $2.25 billion in the first place.
At the April 23, 2001 meeting of the Schools and Libraries Committee it was reported that despite the efforts of the Schools and Libraries Division to encourage applicants to file their Forms 486 and collect their committed funds in Year Two, there will still be about $450 million left over in undisbursed funds. That is roughly the same proportion of committed, but undisbursed funds, that the Schools and Libraries program experienced in Year One, suggesting that the problem is not simply a matter of applicants' unfamiliarity with the program, but something more systemic.
From our own experience with the E-rate program, we can identify these issues that contribute to the wide gap between commitments and disbursements:
· Because there is still a substantial time lag between the deadline for E-rate applications in January, and the start of the next school year in September, the realities of school district budgeting may force a particular project to be postponed. School district spending plans may be subject to review by higher governmental authorities or even, in some cases, voter approval.
· As long as there is no incentive for an applicant to complete a Form 500 to signal that it will not be using the rest of a funding commitment—or the full commitment—already overburdened applicants will probably not take the time to submit the form. Permitting the unspent funds to be used by the same applicant in another funding year, or perhaps by other applicants in the same state, would create more of an incentive for applicants to identify funds they will not need that could be freed up for another applicant.
· There is no disincentive for applicants to over-estimate their funding needs. Applicants who are subjected to a review by the SLD's Program Integrity Assurance may, of course, get their requests trimmed when they are asked to produce documentation to justify them, but applicants are not penalized when their requests turn out to be much larger than their needs. With the increased demands for funding that USAC experienced in Years Three and Four, it is all the more critical that applicants correctly estimate what their real needs will be. An inflated estimate from one applicant may now mean that another applicant, with only slightly less need, will not get funded at all. Consequently, the Commission and USAC should evaluate whether penalties are appropriate if applicants do not release their approved funding commitments, or use only a small proportion of them without notifying USAC that they will not need the full commitment.
· As members of the Schools and Libraries Committee have suggested, funding requests and technology plans are inter-related. If an applicant does not receive internal connections support on a timely basis, or cannot complete the work until the summer months at the end of the funding year, it may not need all of the months worth of advanced telecommunications services it requested in its Form 471 application. Further, if, upon review, it turns out that an applicant will not be able to use advanced telecommunications services until a network gets built, and the applicant will not be able to build the network without E-rate support, and the applicant will not qualify for support in the funding year, then the SLD should reconsider whether it should make a commitment for advanced telecommunications services that will never be used by an applicant.
· In Year Two, because of the lag in approving funding commitments for Year One, many applicants were required to file their Form 471 applications for Year Two before they knew the fate of their Year One applications. At the time, the SLD advised applicants to go ahead and apply again if they did not know whether they would get their Year One discounts. It's possible that if the funds were ultimately approved in Year One, the applicants did not have to use their Year Two commitments. (The same situation could exist in Year Three if an applicant had an appeal pending or had applied for the same services during the Year Two out-of-window period.) Undoubtedly, most conscientious applicants will notify the SLD if they have received approval for the same item in more than one year, but currently there is no requirement that one of the commitments be cancelled to free up money for other applicants.
Although in an ideal world undisbursed funds would be rolled over to the following year, that is probably impossible, or at least impractical, considering the realities of the E-rate calendar and the regulations now in place. Thus, if the commission is unwilling to let the fund administrator commit more than $2.25 billion a year, we believe that rolling over undisbursed funds to the funding year that is two years away is a sensible solution. Under this scenario, as we understand it, the estimated $450 million that was undisbursed from the original Year Two commitments, plus the $49 million that may still remain following the awarding of out-of-window commitments, could be rolled over to increase the available funding for Year Four to approximately $2.75 billion. Based on the Year Three experience, we believe it can be argued that that should provide enough funding to support all Priority One requests in Year Four, as well as all requests for Priority Two services at the 90 percent discount band, without changing the rules of priority in the middle of a funding year.
We hope that the Commission will quickly announce that it will roll over unspent Year Two funds to provide the program with a much-needed shot in the arm at a time when some applicants are beginning to despair that they will never see any support for their much-needed projects. At the same time, we encourage the Commission to move cautiously before deciding to 'change the rules of the game" on priority rules in the middle of Year Four after applicants have submitted requests, and service providers have signed contracts, based on rules that were in place on January 18, 2001.
Submitted on behalf of:
Funds For Learning
2111 Wilson Blvd. #700
Arlington, VA 22201
 See Petitions for Reconsideration of Proposed First, Second and Third Quarter 2000 Universal Service Contribution Factor by Greg Weisiger, filed December 20, 1999, June 12, 2000 and September 18, 2000 respectively.
 Universal Service Administrative Company, Universal Service Support Mechanisms Second Quarter 2001: Fund Size Projections and Contribution Base, p. 28.
 Federal Communications Commission, Report and Order, CC Docket No. 96-45, released May 8, 1997 at Paragraph 529.
 Federal Communications Commission, Fifth Order on Reconsideration and Fourth Report and Order in CC Docket No. 96-45, released June 22, 1998, at Paragraph 30.
 Request for Review of the Decision of the Universal Service Administrator by Houston Independent School District, filed April 28, 2001.
 Administrator's Decision on Appeal, Houston Independent School District, dated March 19, 2001, citing the Commission's rules.
 Fifth Order on Reconsideration in CC Docket No. 97-21, Eleventh Order on Reconsideration in CC Docket No. 96-45 and Further Notice of Proposed Rulemaking, released May 28, 1999 at Paragraph 6.
 USAC officials say this figure may drop some, once it finishes processing waivers from its March 30, 2001 invoicing deadline. However, on April 23, 2001, USAC officials said they anticipate that an additional $49 million will be left over after they distribute eligible funding commitments for Year Two 'out-of-window" applications.
 In Year Three, the SLD eventually committed only about 64 percent of its demand projection for telecommunications services, only about 55 percent of its demand projection for Internet access, and only about 76 percent of its demand projection for internal connections requests at the 90 percent discount band. (These numbers are based on the Year Three demand projection submitted to the Commission last year, and Year Three funding commitments through December 1, 2000, as reported on the SLD's Web site.) Applying those same percentages to the Year Four demand projection suggests that once the SLD finishes reviewing applications, it is conceivable that it will commit only $1.127 billion for Priority One services and $1.291 billion for internal connections for applicants at the 90 percent discount band, for a total requirement of $2.413 billion. We understand that the SLD recently reduced its demand projection by more than $300 million, based on the failure of certain online applicants to file their paper certifications on a timely basis. However, we have not yet had the opportunity to adjust these estimates based on those numbers.