E-Rate in 'financial disarray'

Center for Public Integrity

A $2.25 billion federal program created six years ago to help connect schools and libraries to the Internet is "honeycombed with fraud and financial shenanigans," according to a report the Center for Public Integrity released Jan. 9.

The center based its conclusions on two reports by the Federal Communications Commission inspector general's office last year and subsequent interviews. The nonprofit, nonpartisan group said that the E-Rate program is in "financial disarray," with problems ranging from "simple paperwork and reporting errors to false billing and other fraud potentially involving hundreds of millions of dollars."

E-Rate, created as part of the Telecommunications Act of 1996, provides schools and libraries with discounts of 20 percent to 90 percent for Internet access and telecommunications infrastructure and for internal connections. The program, which is overseen by the FCC but administered contractually by a nonprofit group called the Universal Service Administrative Company (USAC), is funded by the telecommunications industry through taxes on individual telephone bills.

About 86 percent of public schools, 21 percent of private schools and 65 percent of libraries have received discounted services since the program's inception.

According to the report's author, Bob Williams, the FCC inspector general's office and USAC are "also concerned about the whole competitive bidding process. They're not sure...it's going on as competitive bidding." The report said program officials began "denying or delaying applications" involving IBM Corp., the top recipient of E-Rate funding to the tune of $350 million, because "schools, libraries and/or IBM had not followed proper competitive bidding procedures."

But the report said USAC doesn't believe the financial mismanagement is as widespread as the inspector general suspects. Williams said he was surprised to see an inspector general's report to be "so frank and open about potential problems within an agency." He also said the FCC wants USAC to provide more money to hire auditors, but USAC doesn't want to.

Williams said it's likely that Congress will examine the issue further — particularly Sen. John McCain (R-Ariz.), who is expected to be chairman of the Commerce Committee and who has "never been a huge fan" of the E-Rate program.