Eroding E-rate

Fraud threatens an FCC program for U.S. schools, libraries. House committee hears reform arguments Thursday.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
8 min read

Fraud threatens Internet program for U.S. schools

By Marguerite Reardon
Staff Writer, CNET News.com
June 17, 2004, 4:00AM PT

Most Americans probably don't realize that the 8.7 percent tax on their monthly phone bills for something called the Universal Service Fund has been used to line the pockets of some unscrupulous school officials and company executives.

The money was intended to fund the government's E-rate program, which was designed to help schools and libraries in poor and rural areas get affordable telecommunications and Internet services through subsidized discounts. The program, which began in 1998 as part of the 1996 Telecommunications Act, is overseen by the Federal Communications Commission and administered by the Universal Service Administrative Company, a private, nonprofit organization better known as USAC.

The program has achieved its main objective of wiring schools for access to the Internet but in the process has allowed fraud and waste to run rampant. About 40 fraud cases are being investigated by the FCC, the Department of Justice and the FBI.

"E-rate is the classic example of a program that was begun with good intentions and has found itself suffering from corruption, because there wasn't sufficient oversight," said Bob Williams, senior writer at The Center for Public Integrity, a nonprofit investigative research organization.


The Universal Service Program should be: Eliminated

Charges of E-rate shortcomings are not new, but criticism arising from the fraud issue could extend beyond the program at a crucial time for other government Internet initiatives. The latest revelations coincide with multibillion-dollar proposals to extend the availability of high-speed Internet access equally throughout the country before the end of the decade--measures that face particularly tough sledding in an election year.

Moreover, any major telecommunications projects are destined to draw unusually rigorous scrutiny following the massive financial scandals of recent years involving such industry leaders as WorldCom, Nortel Networks and Enron. Those cases, which have culiminated in criminal charges against some top executives, have portrayed a culture of corruption in the telecommunications business unrivaled in any other sector of the technology industry.

As a result, the future of the 8-year-old E-rate program could be in jeopardy . Some members of Congress are already talking about revising the Telecom Act, and the House Committee on Energy and Commerce has scheduled a Thursday hearing to consider reforms in the program.


"The number of cases involving outright fraud have been few," said Sara Fitzgerald, vice president at consultancy Funds For Learning, who participated in a task force last summer that investigated fraud and waste in the E-rate program. "Most of the abuse happened in 1999 and 2000. Program administrators have gained more experience. Improvements still need to be made, but for the most part, participants want to follow the rules."

Still, those cases of abuse that have been uncovered are difficult to ignore. The largest scandal involving E-rate erupted in 2000, after officials discovered that Victor Fajardo-Velez, the former secretary of education for Puerto Rico, had mismanaged nearly $100 million in E-rate subsidies.

Funding fraud
Fajardo-Velez was eventually sentenced to three years in prison and fined $4 million for irregularities associated with the use of U.S. Education Department funds. The E-rate discounts allocated between 1998 and 2000 were supposed to be used to wire 1,500 of Puerto Rico's schools for the Internet. In 2001, only nine schools had been wired.

Auditors also found nearly $23 million in equipment that had never been installed in the schools, along with $3 million per month spent on high-speed Internet connections in schools that didn't even have PCs. Since 2001, Puerto Rico hasn't received any E-rate funding.

Puerto Rican officials have worked hard to rectify the situation. Cesar Rey-Hernandez, the new secretary of education, said Puerto Rico has been installing gear previously purchased with E-rate subsidies. By the end of August, he expects 1,000 schools to be connected to the Internet through satellite technology. The FCC seems confident about Puerto Rico's reforms and is allowing it to compete for E-rate funds in 2004.

"We are trying to go back to square one to build credibility and trust," Rey-Hernandez said. "I hope we get the support we need. You can't have real education without these technologies."

But Puerto Rico is only one jurisdiction that has been investigated for fraud. In May, a subsidiary of computer maker NEC pleaded guilty to wire fraud and antitrust violation involving its participation in the E-rate program. NEC Business Network Solutions, renamed NEC Unified Solutions, was accused of rigging bids and bribing officials in the San Francisco Unified School District and several other school districts around the country.

The company was also supposedly involved in a scheme to get school districts to purchase more equipment than they needed. It agreed to pay $20.6 million to settle the criminal charges and $15 million in fines and restitution.

In Chicago, about $8 million worth of equipment provided by telecommunications carrier SBC Communications was never deployed in the city's public schools. One E-rate funding requirement is that equipment be purchased, delivered and installed in the same year that it is funded by the program.

Some cases stem from what investigators believe is the aggressive marketing of unnecessary equipment. In Atlanta, for example, officials say Cisco Systems and other companies led that city's public school system to purchase expensive equipment that it did not need.

Cisco denies any wrongdoing. "For the Atlanta Public School System, all Cisco networking equipment was sold to the integrators in accordance with their particular reseller agreement with Cisco. In all cases, the price of the equipment sold to the integrators was below the state's standard purchasing contract price," the company said in a statement.

Experts say the E-rate program in general was ripe for abuse from the beginning. In the early days, USAC had only one auditor to deal with roughly 35,000 applicants per year.

"At the early stages, we didn't have all the pieces in place to do robust audits," said Mel Blackwell, vice president of external communications at the administrating organization.

Universally better?
Blackwell and others insist that the situation has changed dramatically in recent years. USAC has hired more full-time auditors, investigators and lawyers, in addition to starting a whistle-blower hotline and planning to increase the number of site visits. The FCC's Office of the Inspector General has created an assistant general position and also hired more auditors to monitor the program.

The Universal Service Program's rapid growth alone appears to justify the expanded oversight. Since 1998, nearly $13 billion in E-rate discounts have been granted to schools and libraries across the country. As of 2001, 87 percent of all classrooms in public schools have Internet access, including 81 percent of all classrooms in schools with minority enrollment of 50 percent or more. And as of 2002, about 95 percent of all public libraries provide Internet access.

It is difficult to estimate the average individual contribution toward the Universal Service Fund, because it is based on long-distance and wireless cell phone usage. But the median is probably about $1.04 per month, according to the Telecommunications Research & Action Center, a consumer advocacy group in Washington, D.C. Given that 90 percent of Americans have stationary or portable phones, the fund translates to about $2.5 billion every year.

"Ten years ago, most classrooms didn't even have phone lines, much less Internet connectivity," said Sam Simon, chairman of TRAC. "That?s changed, and I don't think the country would have gotten there without E-rate."

E-rate administrators say they have always tried to keep operational costs low. Only about 1 percent of the money collected through the fund is used for administration, Blackwell said.

But others say the effort to save costs may have unintentionally compromised oversight. Even though it would take away from money that could directly help schools and libraries, Tom Bennett, assistant inspector general for the Universal Services Fund, said more money needs to be spent on supervision.

"We still don't feel like we know what the level of fraud, waste and abuse is," he said.

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Despite all the problems facing E-rate, however, supporters claim that its successes far outweigh its failures.

Without E-rate funding, they say, many schools and libraries would not have basic Internet service and other more advanced technologies in place. On average, the federal government only provides about 7 percent of overall funding for elementary and secondary schools. Poorer areas may receive more funding through block grants and federal programs such as Title I, but the bulk of funding comes from local and state governments.

Under the program, telecommunications companies or contractors provide equipment and services to schools and libraries at a discount. The difference comes from the E-rate fund. More than 30,000 schools and libraries apply for discounts every year. And about 90 percent receive some funding, according to program administrators.

A study published by the E-rate advocacy group Education and Library Networks Coalition last summer showed that many local governments have cut funding for technology to schools and libraries because of the poor economy. These municipalities are relying more on E-rate discounts to provide the basics.

Technology made possible through E-rate discounts has been instrumental in poor urban and rural areas, where unemployed people use the Internet in libraries to search for jobs or learn new skills, proponents argue. Schools in rural areas are using the program to provide distance learning for students and teachers.

In Arizona and New Mexico, E-rate discounts were used to buy equipment and services to provide advanced placement courses to students in areas with teacher shortages. In Maryland's Anne Arundel County Public Schools, many certification classes for teachers that were given at night are now being offered online.

Program supporters also note that E-rate funding has helped students and teachers at the Rochester School for the Deaf in New York use e-mail to communicate with each other and the hearing world. E-mail services have enabled parents of these children, who are often also deaf, to communicate with teachers and administrators.

Such projects encompass why E-rate proponents are so passionate in their defense of the program. Supporters are particularly worried that their concerns will fall victim to cost-cutting politics in this election year.

But at least one congressional staff member said it is too early to write off E-rate for good.

"There has been substantial discussion about dealing with macro telecommunication issues next year," said Larry Neal, spokesman for the House Committee on Energy and Commerce. "While E-rate could come up, changes to the program are not necessarily a logical consequence of these discussions."  

Libraries get a break on Net filters

Netizens, prepare to pay more

FCC votes to revamp E-rate program

Inquiry of school Net funding deepens

Democrats counter Bush on tech

FCC: Nearly all schools connected to Net

E-rate wins praise for 1998

Irate over E-rate

Schools finally getting E-rate funds

New E-rate plan in store

FCC cuts E-rate funding

Lessons of a virtual timetable

The Economist Congress presses for E-rate details
The Atlanta Journal-Constitution (registration required)

Fraud, waste mar plan to wire schools to Net
USA Today

Guilty plea in school grant fraud
The San Francisco Chronicle

New administration worries some E-rate proponents
The New York Times (registration required)

E-rate's enormous growing pains
Wired News

Fighting over the kids
Wired Magazine


Mike Yamamoto, Zoë Barton
Design: Ellen Ng
Production: Meghan McDowell