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House Committee Holds Third Hearing on E-rate Abuse

The House Energy and Commerce Subcommittee on Oversight and Investigations September 22 held the third in a series of hearings focused on the potential for waste, fraud and abuse in the E-rate program, this time focusing its attention on a partnership between the National Alliance of Black School Educators and three E-rate vendors and school districts that had engaged IBM as a "strategic technology partner" before submitting their funding requests for the 2002 funding year.

Committee Chairman Joe Barton, R-TX, mused at one point whether the E-rate program should suspend making funding commitments "until we can get it right." But representatives of the Federal Communications Commission and the Universal Service Administrative Company, including some that have been critical of the program, said that that would be "a very radical decision" that would have a negative impact on schools and libraries that had come to depend on the program.

Jeffrey Carlisle, newly appointed chief of the FCC's Wireline Competition Bureau, said his staff was recommending to the full Commission that it revise the program's discount matrix so that applicants would be required to increase their contribution toward purchases. There were no specifics provided, and the Commission could still reject that proposal. During the hearing, the Democratic side of the panel solicited statements from representatives of poor school districts that a potential revision of the discount matrix might have on them.

USAC Vice President George McDonald acknowledged that reducing the top discount percentage from 90 percent to 80 percent would have the effect of "doubling" the amount that the poorest applicants would have to pay.

Barton said at the outset that he had "remained very troubled by the performance of the FCC and USAC," and that the "pace of reforms has been too little, too late." He said he had concerns about why the FCC had set up the program the way it did and suggested that it needed "a wholesale restructuring."

Carlisle said that "a review of the level of funding may be in order," to which Barton replied, "As long as money is available, they will seek it."

Two panels of witnesses in the afternoon testified about their experiences with the program.

Early in the day, the committee publicized a memo that suggested that NABSE would receive a 1.5 percent commission on sales that three partner companies achieved with its member districts. Committee staff later showed a video promoting a partnership between NABSE and NEC-Business Network Solutions, Video Network Communications Inc. (VNCI) and IBM. The activities of VNCI and NEC in the San Francisco Unified School District were the focus of the committee's second hearing. Carl Muscari, former president and CEO of VNCI, Judy Green, an E-rate consultant, and Quentin Lawson, executive director of NABSE, exercised their 5th Amendment rights against self-incrimination and declined to testify at this hearing. In the video, school districts were encouraged to work with the vendors "at no cost to you" to obtain "the maximum amount of funding allowable." In the video, Lawson said that the E-rate program "was not going to last forever" and unless inner city schools moved quickly, they would not get wired. Later in the day, IBM representatives said they had never seen the video and the person who had signed a memo of understanding with NABSE was not authorized to do so and no longer worked for the company.

The superintendents of the Ecorse School District in Michigan and the Jasper County School District in South Carolina did testify about their interactions with the companies as part of the NABSE partnership. In Ecorse, the committee seemed to suggest that NEC had supplied the district with a free television production facility for one high school. Dr. Emma Epps, the superintendent and president-elect of NABSE, asserted that "we followed the rules of the E-rate program," and said that the television studio was viewed as a donation. School district representatives and NEC representatives disputed the nature of the transaction.

In Jasper County, Supt. William Singleton described a $3 million "bonus package" of ineligible equipment that was provided and that he had been advised that could be counted as the district's "matching portion." Barton replied, "That makes no sense at all."

Barton later asked, "Doesn't it strike you as too good to be true?"

Singleton replied, "We know now that it is." Singleton said that his district was a poor, rural district that had relied on "NABSE's involvement with these people from reputable organizations."

When Singleton was asked what would happen if Congress required applicants to pay 20 percent of the cost of their equipment, he replied, "It would be detrimental to districts like ours that can't afford to pay."

The last panel of the day focused on IBM's marketing practices in the 2002 funding year, and included representatives of the El Paso, Ysleta and Dallas school districts in Texas. That year, a few dozen applicants sought more than $1 billion in funding requests in the name of IBM. The SLD rejected a substantial amount of those, but the FCC later permitted most of the districts to conduct new bidding processes and reapply for the funding.

SLD officials pointed to the fact that the IBM funding requests in question had not been supported as evidence of their improved application review procedures. McDonald said the SLD had recently notified IBM that it was reviewing about $55 million that had been disbursed to the El Paso Independent School District in the 2001 funding year to determine whether some of that had been provided for ineligible services.

McDonald said that when the El Paso application was approved, the SLD was not employing some of the review procedures that it is using now. He said that there had been "no protocol within USAC to ‘red-flag' " funding requests that were substantially higher than in previous years, but that these steps are now "automatic."

Christopher Caine, vice president of governmental programs for IBM, repeatedly asserted that IBM had simply followed the school districts' own technology goals in developing the projects that were submitted. He pointed to the FCC's "unanimous" decision in the appeals brought by the school districts, and called it a "fair and balanced" decision because it gave the districts a chance to re-apply, and IBM a chance to rebid on the projects.

Earlier in the hearing, H. Walker Feaster, the FCC's inspector general, revealed that in February 2002, USAC had contacted his office after receiving a letter from a "Concerned Tax Payer," alleging wrongdoing by IBM related to its involvement in providing E-rate support to the El Paso district. When asked if he had agreed with the FCC's position in the subsequent IBM appeals decision, Feaster replied, "We thought the schools had played a role in the misdeeds and thought action should have been taken against the schools and IBM."

The panel of witnesses presented differing views of who was in the driver's seat in reviewing several districts' application plans. Caine said that the Dallas Independent School District had been the major force behind a request for more than $200 million in E-rate discounts. However, Ruben Bohuchot of the school district, said he had viewed the request as excessive and had quickly moved to contact the SLD staff to submit an amended request. He said that he had been advised by Alpha Inc., IBM's E-rate consultant, "You never get everything you ask for; the SLD always reduces the scope of work."

Paula Glogovac, a former employee and contractor who had managed E-rate issues for Sun Microsystems, also testified that IBM had sought to control the El Paso school district's decision-making regarding an e-mail solution. Caine disputed Glogovac's account of the discussions between the school district and the companies and noted that the contract, in the end, had been awarded to Novell.

The committee staff produced additional documents in which IBM representatives had asserted that "former SLD attorneys work with [the company's] program," and that as a result, the company "knew all the loopholes." In another e-mail, an employee wrote, "The customer knows that the pricing is inflated," and expressed concern that "our pricing methodology would be undefendible in a public forum."

At the end of the day-long hearing, Barton returned to address the IBM representatives, saying, "IBM is one of the icons of corporate America and I'm very disappointed. We expect companies of your nature to honor the public trust." Caine assured the committee that "the program is important to us," and the company would continue to work with the committee and the commission to address the issues that had been raised.

Rep. Greg Walden, R-OR, who chaired the hearing for most of the day, concluded by saying, "Our kids need access, but in a way that we can look at taxpayers and ratepayers with a straight face."

Witness Statements


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